Fotolia

Board members sometimes fail to step down from the role of CEO, and overstep their boundaries

Paula Loop is the leader of PwC’s Governance Insights Center, which strives to strengthen the connection between directors, executive teams and investors by helping them navigate the evolving governance landscape.

With more than 20 years of experience at PwC, Loop brings extensive knowledge in governance, technical accounting and SEC and financial reporting matters to organizations.  

Loop is a well known speaker on a variety of governance topics. She has also been quoted in publications such as the Wall Street Journal, Financial Times, Forbes and CNBC. She has twice been named to Directorship Magazine’s list of the 100 most influential people in US corporate governance.

Loop is a Certified Public Accountant (licensed in New York) and is a graduate of the University of California at Berkeley with a B.S. in Business Administration.


Christopher P. Skroupa: Management and boards often don’t see eye to eye. What are the root causes of such disconnect?

Paula Loop: Some disconnect – healthy conflict – can be a good thing. But if it interferes with either the board’s or management’s ability to perform its roles, it’s problematic. One area that causes conflict is basic miscommunication or lack of communication on key issues. For example, if management only provides the board with limited information on a key decision, the board may ask questions that otherwise would have been avoided. Or if management does not give the board notice before a potentially embarrassing event goes public, that can cause tension.

Technology has the ability to make breaking news seemingly real-time. So it can be understandable that decisions need to be made fast and that management may not always have time to provide advance warning. But there needs to be an agreed-upon protocol to help avoid conflict.

Another cause of conflict that may not be surprising could be that both sides are approaching a discussion with different priorities that aren’t acknowledged and/or discussed. Boards and management are both accountable to some of the same stakeholders. But there are nuances that could cause conflicts of interest or differing viewpoints. Boards are dealing with increased pressure from investors to provide transparency into their activities. Activism has been on the rise, and boards have to be one step ahead. This pressure inevitability trickles down, and management may not always understand where it’s coming from. Conversely, management interacts with a broader group of employees and may feel pressure or accountability to those stakeholders, stakeholders the board doesn’t typically engage with. For example, management is engaging with company employees more frequently than the board and those employees look to the C-Suite, not the board, for accountability.

 

Skroupa: Are there areas where boards differ significantly from management?

Loop: That varies from company to company. But broad themes on which the parties could differ include strategic direction and level of influence. While the board is involved in major decisions on long-term strategy, management is responsible for the day-to-day operational decisions and policies that support the strategy. The board needs to have the right level of information from management to have a robust discussion and make informed decisions. Management spends significant time working on strategy so could be sensitive to questions raised by the board. The two parties have to work together, and if they can’t, that may cause issues.

Boards will typically have a more long-term view of the company’s strategy – similar to most investors – but there will also be short-term matters that need to be addressed. Management will have both short- and long-term perspectives, but possibly for different reasons, due to the nature of their roles. Differences in perspective can lead to conflict if it’s not managed properly.

Boards and management may also differ when it comes to how much influence each thinks it has. By that, I mean the board may be trying to take on a role that more closely resembles the C-suite, which has a more granular focus than the board needs to have. Boards have more resources at their disposal than ever before, which could translate to more perceived influence. Boards have to balance how they use their skills and resources to guide and partner with management.

CEOs may view boards as a necessary evil and not as a valuable resource. Both parties could have significant experience and perspective to bring to the table – as long as boundaries are respected and the dynamic is managed.

Skroupa: When would you consider a board to be overreaching in its governance of a company?

Loop: One common situation is having a board member who acts like he or she is a member of management. For example, if a board member is a retired CEO, he or she can sometimes naturally fall back into that CEO mindset and forget that the role on the board is somewhat more elevated. In these instances, the board may micromanage and overstep its role. This extends beyond just former CEOs. Many board members may have a background that aligns with functions in management (e.g., CFO, CIO) and may have a tendency to overreach by defaulting to the role they know best. Similarly, if companies experience turnover at the C-suite level, boards may lose confidence in management and attempt to become more involved than they should.

Boards may also overreach in reaction to an event. With the increasing pressure from investors and shareholders for quicker responses, boards may feel they need to step in to make sure decisions are reached faster. Management might not believe such action is necessary and take it as a lack of trust or confidence in their abilities. It’s critical that boards and management be aligned on the process to follow when responding to an event.

 

Skroupa: Are you able to describe the best approaches for management to effectively communicate with their boards?

Loop: The best approaches are often the simplest. And while these ideas aren’t groundbreaking, if you look at top-performing companies, you’ll see them. The overall theme is to communicate – often and thoughtfully. The feedback we’ve heard from directors is that they want boardroom discussions that are less formal and more spontaneous. And this doesn’t only apply to discussions in the boardroom, but also to nearly all interactions between the board and management. This is something we’ve been looking at as part of our new Executive Coaching series on boardroom engagement for different management roles. Approaches to consider include:

 

  • Developing relationships with your board members. Management should make time for the board outside of formally-scheduled meetings – get to know them, their backgrounds, management styles and concerns. These individuals can be invaluable resources if used appropriately. The same applies to the board developing relationships with management.

 

  • Management should be prepared to bring insight into the boardroom. Don’t just regurgitate what’s in the pre-read materials or what can be gleaned from information otherwise available. The board wants to know the day-to-day operational decisions and risks that management face. Help them connect the dots or share any themes you are seeing across the company that will help them see the bigger picture.

 

  • Management should leverage the deep expertise and experience of a board – today’s boards are increasingly diverse in skill set and most have operational industry experience. Use that to your advantage. The board should likewise leverage the knowledge that management has from their day-to-day experience in the trenches.

 

  • Keep communications open and active. Management should constantly consider what information needs to be communicated to the board or the board to perform its role effectively.

 

Skroupa: How does one recognize a well-aligned board and management dynamic?

Loop: Beyond the obvious – financial or strategic success, effective boards have a healthy dialogue with management. As I’ve said, this means some level of disagreement is ok. Effective boards have an experienced non-executive chair or independent lead director who has the ability to broker productive, heated discussions and to guide parties to agreed-upon outcomes. It is important for this person to have a strong relationship with the CEO. The non-executive chair/independent lead director should be able to manage the board and coach the CEO when needed.

Well-aligned organizations are characterized by mutual respect between the management and the board. Each recognizes the strengths of the other and uses them to the company’s overall advantage. The CEO views board members as additional resources rather than hurdles. And the board members view their roles not as members of management, but as monitors and advisors.

Effective boards also understand that there are other executives who are critical to the company’s strategic and financial success beyond just the CEO. They engage with those individuals and use that time to better understand the company and how the CEO manages it through his/her direct reports.