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BOARDS AND C-LEVEL EXECUTIVES: BALANCING TRUST AND TENSION

BOARDS AND C-LEVEL EXECUTIVES: BALANCING TRUST AND TENSION

Sharath Martin, Member of Inovastra’s Expert Network

About a week ago, I was asked to give a key note speech at an Malaysian Institute of Corporate Governance forum on the subject of how Boards and C-level executives could better work together. Truth be told, the idea came about from a discussion I had earlier with Lauren Tam, MICG’s Director. And I was given the humbling task of giving the keynote speech. As I mentioned at the start of my speech, I was not a non-executive director in any board nor presently serving as a C-level executive. And I guess this is what gave me the liberty to express frank views from both sides of the ‘divide’. And while I could speak as a former C-level executive, I used this opportunity to meet with several NEDs to solicit their views on this subject (several of whom were also past CEOs or C-level executives at least).

Here is a summary of what I had to say:

What NEDs want

  • Far too often, C-level executives present Board papers as though they have thought of all the issues and have all the answers. Hence, all the Board needs to do is approve! In part, I blame this on the fact that C-level executives rise to the top on the basis of demonstrating confidence and competence by “always being in control” and “having all the answers all of the time”. C-levels fail to realize that the NEDs have been there and done that before, so they don’t buy the “Rose Gardens” you are painting. (As the lyrics of the Lynn Anderson song of similar name goes, “along with the sunshine, there’s got to be a little rain sometime).
  • Presentations by C-levels at Board meetings. Stick to the business issues. You don’t need fancy slides. The power of the presentation is not about you (Mr. or Ms. C-level executive). NEDs are wising up to the fact that when the presentations are large, elaborate, copious amounts of data and high-tech but don’t seem to address the real business issues, they won’t go along with the ride.
  • Yes, some of the NEDs may be .. ‘as old as elephants’ (proverbially speaking only) but so are their memories! Don’t run the risk of being found out. This includes verbal representations made during Board meetings.
  • They know Management are influenced by KPIs. They approved the C-level performance based compensation. That said, becareful when you (C-levels) push through the achievement of strategic and operational outcomes (never mind financials) in Q3 and Q4 of the financial year. While the success of the company, the Board and C-levels are bound up together, NEDs are more wired in the ‘art of taking the long view’.
  • Last but certainly not the least, for NEDs, their name, reputation, track record and status in the market place are their primary assets. They probably sit on more than one board and hence will not want to compromise their integrity in any way by a corporate blowout.

To be balanced, I also spoke about What C-levels want from NEDs or their Boards:

  • Firstly, and I apologize for its motherhood-ness, but not all C-levels are out to hood wink NEDs. Mistakes are made even with right intentions.
  • Sometimes, from the comments received at Board meetings, it appears that NEDs and the Board as a whole are pulling in different directions. The problem is confounded when the Chair does not pull it together and is at best ambivalent or worse, unclear. This makes it harder for C-levels to figure out which direction the Board wants to go and .. deliver!
  • C-levels actually do want NEDs to challenge strategy. But do it constructively. Be data driven. Not basing their comments on nebulous 3rd hand information (which somehow influences other Board members). NEDs are paid and thus expected to do their homework before coming to Board meetings.
  • Success requires failure. There is no other way. Yet, many Boards are reticent about failure (possibly due to the last point on what NEDs want above).

Why is it important for NEDs and C-levels to find the right balance?

  • Corporate lifetimes or relevance are getting shorter! This to my mind is the real and fundamental sustainability issue. In the 1970s, the average life span of a US public company was 60 years. Today, that’s about 30 years. Now, that might seem like a long time, especially when C-level are under pressure to deliver results on a quarterly basis. However, consider this. Today, there is a 32% chance that a US public company may get taken over or be run out of business in 5 years. That’s right. 5 years. Your child or grandchild may not even have gone to school yet. This by the way, also has deep implications for HR as notions of employee loyalty don’t make sense when the company itself is no longer in business. Now, people might say, that’s just US data. How about Malaysia?
  • Well let me ask you this. Do your own little research. Even if random. Out of the more than 900 PLCs in Malaysia, how many have their shares trading for the last one year at either below IPO price or notional par value. What does that say for the health and vitality of Malaysian PLCs and concepts of shareholder value.
  • Therefore, strategy constantly needs to adapt. Many Boards spend the bulk of their time on historical numbers during the review of quarter financial results for announcement to Bursa. Comparatively, how much time is spent on the future, the direction, the challenges, the issues and the strategies. As a result, we don’t see the fall in fundamental competitiveness until its too late.

Nokia+ Principles for Board and C-levels in working together

Roundabout 2012, Nokia went from being a household name in mobile phones to a has-been. And so many thought, that was the end of this once great company, which had in its heyday the highest % of contribution to a country’s GDP, tax-base and collective esprit than any other non-oil company.

What many don’t realize is that the Board and Management of Nokia successfully turned around this company in less than 3 years and was back in the black with net income of EUR 2.7 billion in 2014 and EUR 1.2 billion in 2015.

Amazingly, today, 99% of Nokia’s employees were not employees 3 years ago. 95% of revenues were not revenues 3 years ago as it focusses on what it calls the programmable world. This would not have been possible if the Board and Management could not work together. Indeed, it was just as important that the Board members learnt how to work with each other first.

So with that, let me put out 3 (out of the 7 – you can google the full list on Nokia’s Chairman, Risto Siilasmaa, Twitter account) principles Nokia used and a couple of my own:

  • Assume the best of intentions from each other
  • Be a data-driven Board. Leverage on deep analytics and when making your case or challenge, be ready to supply facts and numbers.
  • Board meetings are a failure if they don’t laugh out loud at least once during the meeting. This implicitly recognizes that Board meetings are highly stressful events. For Boards. For C-levels. And stress does little to stimulate creative thinking and solutions.
  • Trust but Verify. An old adage from the professional world. Yes, we trust you but that doesn’t mean we won’t ask questions and seek information to confirm or verify facts.
  • Be dogmatic in looking at your Returns on Failure (RoF). This is a relatively new concept which organizations like NASA, Tata and others are using. While many organizations talk about and do some work on learning from past mistakes, this takes it further by systematically and thoroughly analysing lessons from past mistakes. In terms of what have we learnt of our customers, the geographies we operate in, our suppliers, our employees’ skills and capability, our products, our technologies. Put values and measures to it. (I will be speaking at MICG’s Procurement conference slated for early March on this topic, so will share more in due course).

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