Topics:   Corporate Governance

Topics:   Corporate Governance

May 17, 2022

Four Traps Boards Should Avoid

May 17, 2022

The COVID-19 pandemic required directors to immerse themselves in the weeds of day-to-day decision-making. Small decisions, such as who came into the office and how often, became big decisions as the disruption’s massive shock waves impacted almost every aspect of operations. Now that we find ourselves in a different phase of the pandemic, there seem to be a few disturbing holdover trends from the height of COVID-19 impacting many corporate boards. Here are four of them and what directors can do to maximize their boards’ effectiveness in this time of market turmoil.

1. Too many are involved in the day-to-day operations of the company. Pandemic-related or not, some boards seem to have forgotten their strategic role, inserting themselves into areas squarely owned (and for good reason) by the C-suite. This is especially apparent in cases where an executive retires and takes a seat on the board but can’t leave their former duties alone.

How can you recognize if your board is slipping into management territory? Look for instances of micromanagement, such as board members directly calling on staff to have meetings or to weigh in on issues, or cases where the board sets spending approval bars too low for capital or other expenses. I’ve seen boards require spending approval for as little as $100,000. This added layer of approval will slow speed to value, and, in extreme cases, may disincentivize executives from making smart investments in the business.

The Fix: Hold your executives accountable for decisions about operations and spending. Eliminate non-board meeting communications with them unless there’s a crisis or unexpected event. And then only do so during a called board meeting.

2. Not enough boards ensure the right C-suite is in place. Sure, the talent market has been difficult to navigate, but too many boards aren’t installing solid executive teams in an effective manner. Mishandled C-suite transitions wipe out $1 trillion annually in market value for companies in the S&P 1500, according to Harvard Business Review. Put another way, returns and valuations would have been 20 to 25 percent higher with proper oversight of these transitions.

Perhaps boards have let slip succession planning within their organizations while dealing with the disruptions from the pandemic and ensuing market challenges, but now is the time to refocus.

The Fix: The board must manage the talent pipeline, not by inserting themselves into operations, but by ensuring executives are continually developing talent from within the company. Boards should set the tone and hold management accountable for both the corporate strategy and for effective succession planning.

In the instances in which a company needs to bring external talent into the organization, boards should source and vet executive-level candidates through their own networks or through search companies. The board is also on the hook for confirming the organization has the right compensation packages in place to attract the top people.

Communicate hiring and succession planning as a priority and require regular board updates from the management team.

3. Refreshing the board has been placed on the back burner. A value-creating board is a diverse board. A board whose members have too much in common will lack the healthy tension to innovate. Value will be lost as a result. One study showed that organizations that refreshed up to four directors over a three-year period outperformed their peers.

Industries are constantly changing as they react to a dynamic global marketplace. And if a board doesn’t have the good sense to exercise self-reflection and inject value through fresh perspectives, an activist might just do it for them.

Let’s also not forget that we live in a world of nearly constant disruption. In building the right board, it’s vital to have one or more directors who bring true financial and capital acumen.

The Fix: Exercise self-reflection and identify opportunities to inject fresh perspectives. Ensure the board has adequate financial expertise to navigate the current environment.

4. Too many boards aren’t doing the hard work of scenario planning. Nobody knows how COVID-19 or the war in Ukraine will ultimately unfold, or what the next crisis will be or when it will impact businesses. But these events illustrate a critical need: every board should be doing worst-case scenario planning and the hard work to define real, operational plans for navigating the next crisis.

Consider the questions that boards were forced to answer quickly over the past two years: What would happen if people couldn’t shop at our stores? How would we continue to deliver services or products if a regional conflict disrupted our supply chain? What would we do if we couldn’t conduct our primary business? What if we suddenly had to discontinue operations in a country? What financial levers or paths will we take to survive the worst case?

The Fix: Set up a meeting expressly to scenario plan, ideally with an external party who doesn’t have a stake in your business or industry to get a true outsider’s perspective.

No one would argue that the last few years haven’t been extraordinary, and if the board has neglected its oversight role to address pressing needs, that is understandable. But now is the time to regroup, reset, and reevaluate to position your company for growth and ready it for the next inevitable crisis or disruption.

David Brown is managing director of Alvarez & Marsal and leads the firm’s Consumer and Retail Group practice for North America.

Four Traps Boards Should Avoid

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