Corporate Board of Directors is a Vestigial Entity Structurally Unable to Achieve– Time to Rethink Corporate Governance

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Corporate governance in the modern public corporation has marginalized the ‘board of directors’ function in favor of powers exercised by the corporation’s investors, senior officers… Has board of directors outlived its purpose? The ‘law’ of corporate governance places the board of directors at the top of the corporate decision-making structure; and the accountability for major corporate decisions rests primarily on the shoulders of these part-time directors who often lack the time, thorough knowledge… that’s necessary to perform the board’s duties effectively. According to Kelli A. Alces; the time has come to envision a world beyond the board of directors… While the board structure may be the product of prior market choice; it’s the ‘law’ not the market that preserves the vestigial board of directors’ role at the top of the corporate hierarchy… Eliminating the board of directors would mark a fundamental shift in the understanding of corporate governance, but at the same time, it would realign the law of corporate governance with natural evolution that markets have already initiated. In recent years there have been many discussions about ‘board of directors’ reform, including; function, composition, duties… with the main focus being the ‘monitoring’ role of the board. The argument is that better monitoring will facilitate the integrity of the fiduciary relationship between– directors, shareholders, other stakeholders… In an effort to improve the board’s effectiveness in its monitoring function, boards have been encouraged to have greater, in-depth director participation and greater independence… The typical ‘director’ of largest multi-national corporations devote about 17 hours per month to governance of the corporation. This means that the responsibility for the success or failure of corporations lies with a group of people, i.e., board of directors, who work part-time to monitor the corporation’s business, management… and who receive almost all of their information, second-hand… Certainly the board of directors monitors corporate officers, particularly the CEO, and makes significant business decisions for the corporation, but the board of directors relies heavily on senior corporate officers– who it’s supposed to monitor… also, often these directors lacks– the time, knowledge, expertise… to effectively challenge these senior officers in order to contribute valuable independent business judgment…

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According to a McKinsey & Co report, less than 50% of the 186 board members surveyed say their boards reacted effectively to the global economic turmoil. Many of the board of directors; did not know what to do, or how to do it, which has kept them from being proactive in helping their companies deal with the crisis… There are no cut and dried formulas and few black or white choices for boards to follow. In today’s pace of global business means boards have to respond quicker, and the luxury of time to mull it over or decide next quarter is no longer available. So how can the CEO and Chairman guarantee that the board is fully functioning and effective? The selection of board members is one of the key routes to building effective boards and will always remain important. But selecting the most experienced players doesn’t mean the team will be effective… A board position is hard work and requires a serious commitment; but many see it as just a perk for elder statesman or as reward for family, friends, colleagues… it’s a great status symbol. But, in order for board members to be effective and fulfill their fiduciary duties, they must be good corporate citizens having– relevant information and knowledge, relevant experience, relevant industry expertise, passionate about the product, employees, company… and proactively involved in corporate affairs… Board members cannot just be place-holders to fulfill diversity objectives…

In the article Rules for Corporate Governance Success in the Social Age by Barry Libert writes: It’s time for directors to think anew about the meaning of corporate governance in the social age. In addition to their existing roles, boards now have the added responsibility of shepherding their leaders and organizations into today’s digital world. Boards that avoid this obligation risk having their organizations fall prey to the speed and force of today’s social networks, as they seek corporate reform and accountability… So how does a corporate director think anew about his or her role? Consider the following: Rethink Strategy: Boards need to align their strategy with where value is found today. In the industrial age, value was based on the amount of an organization’s physical assets and manufacturing capabilities. In the social age, value is a function of the size and vitality of an organization’s network and how well it is connected both inside and outside company… Rethink People: As corporate directors, board members need to fully understand that an organization’s next big idea may come from anywhere and anyone. As such, corporate directors must engage their management team, employees… and act as the catalyst for leveraging the collective wisdom for innovation… Rethink Process: Yesterday, companies focused on their internal processes to maximize execution and improve efficiency. That ‘inside-out’ focus worked in a supply constrained world in which customers had few choices. But today, consumers can buy from anyone and everyone, both online and off. As such, boards must engage management and shift their focus from ‘inside-out’ to ‘outside-in’ to drive growth… Rethink Technology: Technology is not just about IT policies; it is also a strategic asset that can be leveraged for success. Boards must play a prodding, if not active, role in ensuring that management think anew about its technology strategy and how it can add value and minimize risks by actively integrating today’s social, mobile, cloud, and big-data technologies into everything it does…

Rethink Leadership: The concept of traditional, top-down management is quickly losing steam in a world in which everyone has a voice– including; customers, employees, partners, investors… Social technologies allow people to say and publicly share whatever they want about an organization, its leadership, culture… In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors must think anew about their board composition and competencies… Rethink Finance: Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s ‘intangible’ and unmeasured sources of value, such as; social network membership, intelligence… This is especially critical given that less than 25 years ago, physical and financial assets constituted about 80% of corporate market value. Today that amount is less than 20%. As such, leaders must think anew about their capital reallocation strategies, especially given research by McKinsey that indicates that most companies continue to invest in the same things that they invested in last year… Rethink Governance: The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital real location to new sources of value and technology, business model strategies… Looking backward through the lens of financial reporting will only go so far. Today, boards require social intelligence about the future desires and needs of stakeholders. Leveraging real-time data from social technologies and mobile networks offers a more complete view on what is coming next… Bottom line: Boards must think anew about their role in the social and mobile world. For corporate directors, there is no time to waste. Directors must join the social and mobile ranks…

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In the article Rethinking Corporate Boards by M. Todd Henderson and Stephen M. Bainbridge write: Corporate boards have a daunting array of tasks, including hiring and firing the chief executive officer, setting the CEO’s compensation, monitoring the CEO’s decisions, ensuring compliance with laws, and above all, representing the interests of shareholders and other stakeholders… Critics have long complained that boards are not up to the task… There are many reasons boards fail to police corporate management or make good decisions: Directors are part-timers with weak incentives and limited information. They also are generalists, meaning the average board is unlikely to have all the experts it needs at any given time. CEOs often pick directors based on unknown or non-relevant set of factors, and shareholders have no information about how board decisions are made or how individual directors perform… Corporate governance experts have proposed many reforms, some of which ended up in the Sarbanes-Oxley Act and the Dodd-Frank Act. All the reforms share several unattractive features; ‘one-size-fits-all’ notwithstanding the huge differences across companies, industries… and many reforms rely on academics or other ‘experts’ who apparently know more about what is good for a particular companies than the management team themselves…

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So lessons learned: Corporate governance requires rethinking of its; roles, responsibility, structure, accountability… While the purpose and composition of the board have changed over time, the basic structure and institution of the board has remained constant. We currently expect the board of directors to perform two functions; monitor and manage. These functions are consistent with the notion that the board is responsible for managing or directing the management of the firm… According to Kelli A. Alces; understanding the reality of corporate decision-making and developing a governance structure that openly acknowledges it is essential to providing more efficient, effective corporate management. Board structures should be tailors to the specific needs of a company. For a growing company in developing field faced with variety of strategic decisions or an inexperienced CEO, the board’s management role may become its primary focus. Therefore the role may require board members with developed expertise who have business relationships… On other hand when a company is well established with dispersed body of shareholders, the monitoring function of the board may be more important relative to its management functions. Therefore, the board should be made up of sufficiently independent board members who are able to monitor company’s dealings and transactions… According to Sir David Walker; the principal deficiency in boards is the way directors behave: They don’t challenge the executives enough– there must be a disciplined process of challenge on corporate policy, strategy, ethics… Independence of mind is more relevant than formal independence… Leadership skill of the Chairman of the board is important, too; together with the ability to competently deal with major strategic issues… According to Kelli A. Alces; the metamorphosis of corporate governance will not happen until the 19th century concept of the limited liability company is rethought and brought in line with the reality of business in the 21st century…

 

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About Joe DePaola

Bizshifts is about business change through-- the art of creative business story telling, transformative business strategies, and framework of creative thinking, re-thinking, and forward thinking about the subtle shifts in business, strategy, leadership, management, innovation, organization... Bizshifts business transformation is based on a fundamental framework for thinking about the power of brand, secrets of business success, differentiation, disruption, strategic negotiation, global strategies, zombie companies, risk factors, yin-yang of selling... BizShifts provides the knowledge base, strategies, tactics that jump-start the business in tough time and powers it forward in good times... Bizshifts provides the latest and trusted global business research, intelligence, concepts, ideas... That identifies what constitutes value for the customer, defines the customer’s value stream and the activities that create value; and accelerates the customer’s value stream flow by innovation and ridding it of waste and redundancy... According to Joseph DePaola; Bizshifts idenities key strategic business shifts that have the most impact on business results with the least effort: They are the little hinges that swing big doors...
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