Boards of directors: less oversight, more foresight?

Boards of directors: less oversight, more foresight?

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With the revelation of each new failure caused by  "strategic short-sightedness," as illustrated by the recent Kodak, HP, RIM and Blockbuster failures, companies must rethink their governance systems and in particular the role of the board of directors.

This article is a translation of my original article, published here in the Huffington Post in France on February 15, 2012.

Indeed, for the last ten years, most of the reform initiatives of companies' governance systems have focused on reinforcing their oversight mechanisms: setting up audit and risk committees and seeking board members with extensive financial backgrounds or strong operational experience. In doing this, we wrongly assume that focusing on the past is the best way to prepare the future of our companies.

But what emerges from these crises -- missed technological breakthroughs, risks perceived too late, bifurcation of the business model -- is the striking need for boards of directors to be more involved in all phases of the company's strategy: in its design, in supporting its implementation, and in its supervision. Furthermore, many companies and entrepreneurs realize that their board is often the last safeguard against strategic blindspots.

Strategic blindspots can include risks that the company has not seen or didn't know how to integrate into its decision-making process, as well as opportunities missed by the company. These can be a new technology, a sudden change in the preferences of consumers, or a competitor who forces an industry conversion. For example, Claire Gaymard, the president of GE in France, during a symposium this month, rightly mentioned that it was ironic that in 2008, while all corporate executives were looking to emerging countries as the main threat, the most significant crisis affecting the corporate world started in Wall Street, the heart of capitalism, where people are supposed to be the most educated and informed. And in terms of missed opportunities, by redefining its market as "well-being," Nestle now encroaches on the territory of its neighbors, the pharmaceutical companies who failed to see this coming.

Blindspots are due to three main factors. First the competitive blindspots, when the industry has been defined in a way that is too limiting or when a company systematically underestimates competitors. Second, historical bias: a reference framework of managers and the company leaders that is too homogeneous (big telecommunication companies are now just waking up to the potentials of cloud, while this week, Microsoft and Google both announced their massive entry into this segment). Historical bias is also seen when companies underestimate future trends based on being overly-wedded to the past or when they are restrained by ccorporate taboos that are irrationally entrenched in their historic roots. And lastly, blindspots come from cognitive errors: poor thinking and maintaining illogical assumptions that are challenged (who said that banks were the only ones that could lend or transfer payments between individuals?)

Potential solutions are slowly emerging

As long as boards of directors remain homogeneous, they will, by definition, be biased. One of the solutions is to force diversity among board members in order to bring in the external expertise necessary for the future of the company. This diversity might be geographical, such as including on the board an independent board member who, for example, knows China well. Diversity might also be linked to bringing in new skills (such as including a board member who understands the issues related to social media) or even match more closely the segmentation of the customers. Facebook, for example, is currently in the middle of turmoil: while 58% of its users are women, no woman sits on its board of directors.

The debate on the age of board members also still remains widely ignored: while some companies took the plunge (in 2011, in the United States, more than 100 people under 30 joined the boards of directors of public companies), some nominations of younger directors produced an outcry, the most visible one being that of Chelsea Clinton who, last September, joined the board of Diller IAC, a company listed on the New York Stock Exchange.

The boards' structure must also evolve. Last month, Georges Colony, the CEO of Forrester advised attendees at Davos to set up a technological committee in each board of directors in order to prepare for an eventual technology disruption. Many companies, from Carrefour in France, to Telefonica en Spain, to Unicredit in Italy and Arcelor Mittal in Belgium, have set up strategic committees aimed at allowing their board to be more involved in strategic thinking. Others, such as Air France, dismantled their strategic committee in 2009. Ironically, this company is one of those that made the headlines in a recent analysis of potential future bankruptcies.

Strategic committee or not, the board's schedule should include unstructured time for thinking and debating about long-term trends that will affect the company. Today, it is not uncommon for boards of directors to dedicate a full day to this type of reflection each year and ban any PowerPoint presentations during the debate!

Finally, many companies bring in an independent strategic intelligence source that prevents filtering by the executive committee. This intelligence is shared increasingly on a continuing basis (for example, daily media feeds at Hydro-Quebec, in Canada) and is no longer limited to a long presentation during the board's annual meeting.

It is time for French boards of directors to catch up so that French CEOs and their teams will consider their board of directors less as a necessary evil than as a key discussion partner.

 

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  • Posted by John Kyriazoglou said:

    28/02/2012 2:25am (6 years ago) Most interesting article. Please also see my blog as I am touching on your points. More details on board's performance (see 'Performance Audit Questionnaire for a Board of Directors', in my blog) will also be included in my forthcoming new book 'BUSINESS MANAGEMENT CONTROLS'.
    Sincerely,
    John Kyriazoglou (jkyriazoglou@hotmail.com)

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