High-profile corporate scandals at the likes of Enron and Worldcom have led many non-executive directors to become increasingly focused on the policing of management teams to the detriment of strategic planning, according to new research from the Corporate Research Forum and the Performance and Reward Centre.
 
Co-written by Dr John Roberts – an expert in organisational analysis at the Judge Business School in Cambridge – the study concluded that, to some extent, the Higgs report has actually been counter-productive.
 
In the wake of aforementioned infamous corporate scandals, the UK government commissioned Derek Higgs to investigate the role of non-executive directors. In particular this report emphasised the importance of non-execs in holding a company’s executive team to account, yet, argues Roberts, ‘reports like Higgs’ tend to arise at a time of crisis, so by their very nature they tend to be defensive. We wanted to look at the high performance of boards, which is something far more positive.’
 
Dangers of division
‘If you look at most boards from the outside they look fairly homogenous,’ Roberts asserts, ‘but there are very different internal cultures and the biggest disparities relate to the relationships between executives and non-executives.’
 
The biggest problem appears to be that non-executive directors are increasingly being perceived as a shareholders’ board representative. ‘There can be tension between the executives and the non-execs as soon as a company’s chief executive starts to see the latter group as the investor’s policeman,’ Roberts continues.
 
One side effect of this can be that executive teams bind together and rehearse their board meeting contributions in advance. This merely compounds divisions. ‘It can develop into a real barrier between the executives and non-executives and that means the board isn’t as effective as it might be in terms of developing strategy,’ Roberts contests. ‘Bad strategy has destroyed far more businesses, in terms of value, than fraudulent activity ever has.’
 
So what can growing firms do?
To report co-author Don Young, a company’s chairman holds the key to avoiding this tension. ‘The chairman is the key figure as he/she can just turn up and chair board meetings or take a more proactive role,’ contests Young. ‘And the relationship between the chief executive and chairman is particularly important. Of course the chairman needs to place an emphasis on governance, but if they focus on this at the expense of business strategy the company will really be missing out. Remember that one of the main roles of a board is actually to protect a company from its investors.’
 
On a more practical note the report has several recommendations for growing firms.
 
First and foremost, as many expanding businesses grow their boards with their operations, it is important to appoint non-execs who bring something new to the boardroom, for example, skills in a certain area like accounting or sales. ‘The challenge is always to bring in non-execs entrepreneurs are prepared to listen to,’ says Roberts.
 
Three other processes worth considering are arranging strategy away days (at which all directors can discuss plans for the future of a company), scheduling in time for a strategic discussion at every board meeting and making a conscious effort to utilise the strengths of non-executive directors, so that they don’t merely act as policemen.