In the Nation's Interest
Trustee Blog: NEWS FLASH: Boards Responsible for ALL Corporate Failures! Really?
A new study published in the FT finds that boards are COMPLETELY responsible for corporate financial “disasters” due to their poor-to-negligent oversight management decisions and their execution. What’s the cause for this sorry state of affairs? First and foremost, the study found that the root cause in 88% of the 41 cases they investigated was an “overwhelming lack of relevant skills on the board which, in turn, produced an inability on the part of directors to influence executive decisions”. Secondly, a board’s “blindness to risk” was cited as contributing to 85 % of the crises. Lastly, defective information flows to and from the board, and inadequate board leadership on company ethos and culture, were seen as the final “nails in the coffin” in 59 % of the cases.
For those of us who are concerned with “sustainable capitalism” and governance, this is both an interesting and alarming study. Although it may go a bit too far in placing all the blame at the feet of the board, it suggests that boards are undermining the sustainability of their own organizations when they should be helping to create value. It should be another “red flag” to boards that there is anger over corporate failures with shareholders and other stakeholders looking for someone to blame, and sue! The UK, EU and Australia are tightening rules and regulations related to board performance and this could be a North American phenomenon soon.
We know the excuses directors like to use—we work with directors and have heard them often enough. Directors argue primarily that they are simply advisors and overseers, not the management. But Boards needed to be reminded that, in law, while they can delegate their “authority” to management, they cannot delegate their fiduciary and stewardship responsibilities. Accordingly, boards need to start accepting their accountability instead of always (and conveniently) trying to slough it off onto management.
We would argue that it is time for Boards to embrace the “Next Wave” of corporate governance in which they accept OVERSIGHT responsibility not just for approving their organization’s strategy but for its execution as well. Why? Because 90% companies fail to achieve their financial objectives because of bad strategy execution while only 10% of problems arise because of having approved a bad strategy in the first place. So, amazingly, when the board is signing off on strategy, it usually is agreeing to a document that in 90% of cases will not succeed, despite the quality of the thinking that went into creating it. Because of this, strategy execution represents the greatest risk to the company’s financial success.
We know that boards need help in this regard. It is not fair to simply blame them and expect different behavior without offering suggestions and recommendations; and we’ve offered in it our new book, Achieving the Execution Edge™: 20 Essential Questions Directors Need to Have Answered About Strategy Execution (forthcoming in two weeks). We have provided 20 key questions for the board to use in probing management to gain greater assurance that the strategy brought to them by management can actually be executed.
Interestingly, we’ve talked to directors around the world about the book and our perspective and we have found great resonance amongst what we would call the “progressive” directors and CEOs. As expected, non-progressives resort to old, tired excuses and complain that we are intruding management territory. But they are missing the point. Our view is that for directors to do a better job and help reduce their greatest risk, they need to do a much better job of providing OVERSIGHT of their strategy’s execution. After all, how can good directors legitimately ignore the source of 90% of an organization’s failure?
Authored by Elliot S. Schreiber & Chris Bart, Co-Founders of The Schreiber Bart Group.
Trustee blogs are the views of an individual trustee and not the official policy of CED.