THERE is a lot of information in the public domain on the failure of once successful companies that can be traced back to how the board of directors conducted its business. If you have not experienced failure as yet, you may need to look at how your board is structured and take corrective measures where necessary. There are seven top reasons why some of our boards are failing at delivering on their mandate.
The first reason is when the board pursues a wrong strategy. Often times, directors have pursued the wrong strategy for a long time only to realise this when a lot of resources have already been wasted. In these cases, there are always casualties: sacking of directors and bad publicity. The government recently called out to directors who cannot implement successful turnaround strategies in their parastatals to step down. This is acknowledgement that an organisation’s leadership plays a very important role in its overall organisational performance. When the board is clueless on what strategy to pursue it confuses the executive management resulting in poor performance. Choose wisely who sits on your board of directors.
The second reason is board diversity. An article written by the Harvard Business Review, which followed the conclusion of a study of the effects of diversity on company performance, said that leadership should embody and embrace the power of differences. The reasons for this are quite clear. If your directors all think alike, bad decisions will not be challenged in the name of solidarity and not wanting to “rock the boat”. Where there is diversity in leadership, there are bound to be differences of opinion. Every decision that passes to the implementation stage would have been thoroughly analysed, evaluated and criticised. As such, positive business outcomes are more likely to emerge.
The third reason is long serving members of the board. Having the same board members for a long period of time may point to a never changing approach to business in an ever changing business environment. In order to progress in today’s economy, companies need to be innovative. Young directors are generally open to new ideas. However, you should not take unnecessary risks. Older directors are more conservative. A correct mixture of young directors and those with longer tenure implies that new ideas will constantly be brought into your company’s strategy without taking unnecessary risks.
The fourth reason is the level of education of your directors. Having educated directors does not imply that you have ideal leadership for your company. Misplacement of skills in boardrooms can be a recipe for failure. Each director should be appointed to a role which matches their skills and competencies. It’s important to note that sometimes one can sit in a committee without necessarily being an expert in that area, as long as they exercise critical thinking and look at issues on the basis of facts.
The fifth reason is director independence. An efficient board of directors is not only a result of careful selection and placement of directors. Some directors lack the ability to act independently when running a company. Director independence can be compromised where the director over represents the interest of one shareholder over other shareholders. It is important that your board of directors contains enough independent directors to guarantee impartiality in the leadership of your company.
The sixth reason is director’s fees. What you pay your directors must be in line with what the company can afford and market trends. Underpaid directors are susceptible to corruption and influence from management. In some instances, board members end up having so many meetings in order to cover up for the low board fees. On the other hand, paying your directors too much takes away resources from other worthy investments. Bad publicity resulting from public scrutiny of what are perceived to be very high board fees will also tarnish the image of the company. It is imperative that you benchmark your directors’ remuneration against trends in your sector. You should take into consideration your strategic goals, company image and, most importantly, your ability to pay.
Lastly, a board of directors can fail to deliver on its mandate when board members become too close to management. While it is important to create a good relationship with management, it’s always important for the board members to maintain their independence. Board members must avoid any gifts from management that will compromise their independence. Board members must be content with the system of remuneration, that is, payment through board fees. The moment board members begin to dip into additional allowances and benefits like holiday allowances, company cars, etc., they risk compromising their independence and objective judgement.
Each year we conduct the non-executive directors’ fees and practices surveys. For more information about non-executive directors’ fees & practices or to participate in our non-executive directors fees and practices survey, you can contact me using the details provided below.
Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. Phone 04-481946-48/ 481950/ 2900276/ 2900966 or cell number 0772 356 361 or email: firstname.lastname@example.org or visit our website at www.ipcconsultants.com
Follow us on Twitter on @FingazLive and on Facebook – The Financial Gazette