Introduction

Would your board like to transform your social business from average to highly successful? Are you unclear what this means in practice?

First, some quick definitions and caveats

This paper is aimed at boards that wish to build an enduring business for the long-term. By considering research which scans decades rather than years, it looks for the innate characteristics that drive long-term, sustainable out-performance rather than luck or just good timing.

This paper does not seek to provide an A-Z of setting up a business – with topics like product, pricing, timing and strategy. Rather, it summarizes the characteristics which mark highly successful businesses as different to companies which are merely good or average.

An additional challenge – Riding Two Horses

Social businesses are a relatively new phenomenon. Unlike businesses that seek to provide a socially beneficial product or service at scale (ethical businesses or low-cost providers), social businesses are expected to ride two horses at once.

Typically, up to half their budget comes from grants or donations. From this they are expected to give away products and services for free, or at a highly discounted rate. The balance of their budget – potentially in excess of 75% – needs to come from selling goods and services with a commercial return and in a commercially competitive environment. Not surprisingly social businesses are more complicated and harder to manage. A study by McKinsey¹ shows that that although they are less likely to fail in early years, they are significantly less profitable, grow less quickly and are less scale-able than commercial businesses. Furthermore, approximately half do not collect data on social impact for their grant funders and investors – principally because they don’t know how to collect data or because they have no money to pay for it.

Does this mean that social businesses cannot become great? Are they are condemned to a future of low growth, low performance and mediocrity?

Seven identified characteristics

This paper attempts to outline a potential way forward. It synthesizes what we know about the performance of social businesses from the McKinsey report and other sources, together with the characteristics of what exists within truly great commercial companies².

Intriguingly the results are very similar.

Being great is not for the cautious. It takes leadership, focus and clear decisions. If you want your social business to be great, these are the characteristics your board will need to adopt.

1. Your level of Ambition

‘Greatness means you stand out above the crowd. Do you want this?’

Good is the enemy of great. For example, why are there plenty of good schools but so few truly great schools? Ultimately being great is about being the best in your sector. It means showing ingenuity, being willing to take risks, doings things differently, wanting to go the extra mile. If you don’t aspire to this leadership, you won’t get there.

Research shows that whilst its statistically rare for organization to achieve greatness, it does not require more work or suffering than achieving mediocrity.

Indeed, the beauty of research shows that it requires potentially less work and can radically simplify our lives whilst increasing our effectiveness.

1.1 Set the aspiration

If you wish to your business to become high performing it needs to start with a conscious decision; ‘Yes, we want to go down this road’.

Once the decision has been taken at board level, then the pursuit of excellence has to permeate every aspect of interaction, decision making and action at every level of the organization. Everyone is united in the common aim.

1.2 Define your ambitious social impact metrics

What metric makes you better than others?

If social businesses are about creating a social impact then this ultimately needs to be measured. To qualify as a great social business your results need to be better than peer institutions.

For example, the metrics for a school might be higher exam pass rates, perhaps even more impressive by demonstrating that the children predominantly come from poor families. For a green energy producer it might be higher carbon offsets than rival providers. For a museum it might be higher visitor numbers.

Good impact data can help secure additional contracts and grant income, fueling further growth. Increased visibility also helps attract more entrepreneurial and technical talent. Everyone wants to work for a winner.

1.3 Maintain an equal focus on high profitability and growth

Avoid the perils of ‘friendly but lazy money’

Great social businesses also need to be explicit about aiming for superior profitability and growth. After all, this will pay for achieving your above-average social impact targets. In the long-term it is also necessary for you to sustain excellence – retaining competent staff, continual product development and further growth.

An example is a UK chain of schools. It achieves above average profitability by highly inventive and cost-effective use of classroom space, staffing schedules as well as other cost efficiencies. The cash savings enable it to acquire better and more teachers. Combined with a joint approach of improved classroom discipline this leads to improved academic results and higher student satisfaction – a virtuous cycle.

The challenge of many social businesses is that they lack this drive. This is often because they start with concessionary finance such as grants, donations or soft loans. There is rarely a commercial investor pressing for a high return on investment, excess cash generation or ambitious scale growth and so they don’t plan for it or feel any need to stand out above the crowd.

The board needs to step in and ensure this attitude stops. The discipline and rigour of growth and profitability is essential³.

1.4 Create a simple dashboard

If you don’t keep a keen eye on this, you will likely fail

This is typically a one-page summary of KPIs around financial metrics and impact measurements. It provides the key data for the board on whether management is on track to achieve targets.

Like an athlete in training you need to be continually on top of all the data sets, and the drivers of data that contribute to top-level performance.

2. The company is the ultimate creation, not the product

The vast majority of companies with truly exceptional performance over the long-term do not derive their success from discovering a ‘killer product’ from inception. Instead, they build an engine which constantly turned out new killer products.

Indeed, some of the most successful companies in the world ditched their initial products and under-went a long process of trial and error to find the right one. In turn-around situations with mature businesses, the highly successful ones also typically took up to four years to discover a sustainable long-term path to greatness.

If you equate the success of your company with the success of a specific idea then you are more likely to give up if that idea fails. Or if it succeeds you are more likely to have an ‘emotional love affair’4 with that idea and stick with it too long, when you should be moving rapidly to other things.

The essence of a highly successful company which survives in the long-term is one that it is able to translate its core ideology and ambitious goals into the very fabric of the organization – its goals, strategies, tactics, policies, processes, cultural practices, job design – into everything the company does. This means there is constant innovation and improvement. To use a well-known phrase, it means you are creating a company that ‘builds clocks’ rather than one which just ‘watches clocks’⁵.

For the board this means spending less time thinking about specific product lines and strategies and more time on organizational design. Is the quality of people high enough? Is there a unifying vision? Are there systems and processes in place that continually stress test strategy and profitability as well as incentivize innovation? Do you have a system to manage KPIs and are you monitoring the correct KPIs?

Board’s don’t need a highly charismatic CEO to achieve all this. In fact, research shows that charismatic CEOs are negatively correlated with high performing businesses. But you do need exceptionally able CEO and senior management team, which brings us to the next characteristic.

3. Don’t compromise – get the right team in place

‘Do we have a management team that can drive performance and growth?’

All the literature agrees that having the right people is key. This means the board needs to ensure that not just the CEO but also an effective senior management team is in place.

3.1 Hire the right people FIRST

It is essential not to skimp on hiring the best people. Don’t compromise when hiring. If you’re not confident then keep looking.

Great companies will sometimes prioritize hiring great people even before deciding strategy.

In a business start-up, good investors will ask probing questions on the quality of the founding team. If the team is incomplete, unbalanced or clearly weak they will typically walk away.

3.2 Deal with or remove the weak performers

If you have the wrong people in place you won’t get proper execution. Expect a litany of delays, conflict, things going wrong, endless excuses. If you are constantly worrying about how to manage someone, you may have the wrong person in post. Always be willing to give someone the chance to change but if they can’t or won’t, then act quickly.

High performers are obvious and they will make a difference quickly. The CEO won’t need to spend much time motivating them or keeping them focused. Furthermore, there is no systematic data to show that specific forms of compensation are correlated to performance. If you hire the right people they will motivate themselves⁶.

3.3 Have a CEO that is collaborative, hard-working and conscientious

The majority of CEOs of companies that transformed from ‘good’ to ‘great’ were self- effacing people with a fierce resolve to do whatever was needed to make their company great. They had an incurable need to produce results. It is not that they lacked ego or self- interest, its rather that their ambition was more for their institution than themselves⁷.

Despite the stories of mega CEOs being parachuted in to transform businesses, research shows there is actually a negative correlation of larger than life CEOs taking a business from ‘good’ to ‘great’⁸.

Whilst it is true that a charismatic CEO can effect a rapid change in share price and performance, all too often this will be followed in subsequent years by a disappointing decline. In Collins study, in three quarters of comparison companies, CEOs set up their successors for failure or chose weak successors or both.

The key to long-term greatness is the senior management team and the processes the CEO sets up with them, which brings us to the next key point.

3.4 Strong Generals not Weak Lieutenants

There is an old Business School adage that CEOs should hire people who are smarter than themselves.

Lively and prolonged debate between gifted senior managers invariably leads to better decision-making than and this requires strong generals not weak lieutenants. A classic example is Wells Fargo Bank in the USA. As it became clear that impending new regulation in the USA was about break up the old profitable banking models, Wells Fargo deliberately went on a hiring spree to recruit outstanding people. This was before the CEO knew what the new regulation was going to be and therefore what his new strategy ought to be. When the changes finally came the financial impact was brutal. This sector of the banking market fell 59% below the general stock market.

However, Wells Fargo outperformed the market by over three times. Why? Because the Wells Fargo team acted as equal partners, ferociously debating in the search for the best answers.

As a result, they came up with the smartest strategies. Competitors like Bank of America had weak lieutenants who would just wait for directions from on high. Strategy was ill informed and poorly thought through. As a result, their profits and share price was hit accordingly⁹.

4. Find your passion and do it exceptionally well

‘Transcending the curse of competence’

Just because something is your core business, and perhaps you’ve been doing it for years, does not make it the right thing or does not mean you can be the best in the world at it. To be truly successful your board and management need to find one thing you can do better, faster, or cheaper than anyone else.

Truly great companies do one thing exceptionally well and stick to it. They don’t waste time and money on unrelated activities and acquisitions. Jim Collins calls this the hedgehog process and it creates a virtuous cycle of profitability and growth. The hedgehog spikes protect you against constant attacks from competitors (the foxes) so that no one can actually match you on performance and passion.

For a board simply to have a strategy per se is not an indicator of greatness. Indeed, there is no evidence that great companies spend more time on long-range strategic planning than good ones.

4.1 What can you be the best at – but only within your area of passion?

Great companies do not just focus on what to do, they focus equally on what not to do and what to stop doing¹⁰.

If you cannot be the best in the world in your core business, then your core business can’t form your hedgehog concept. Once you have found this then stick to it, don’t divert. Be ruthless. Sticking to your hedgehog concept does not restrict growth, rather it ensures that growth is only within profitable spheres and that when this happens it is more likely to be exponential than incremental.

Curiously research also shows that great companies are typically not in great industries. Some are in terrible industries but they still thrive and outperform¹¹.

Finding what you are best at is likely connected to what you are passionate about. In seeking this out don’t ask ‘what should I be passionate about’ but ‘what am I passionate about’. When passion is excited you are in flow and things become easier and clear…

Another approach is to ask yourself what work makes you feel compelled ‘to try to create greatness’? If you have to ask ‘Why should we try to make it great? Isn’t success enough?” then you are probably engaged in the wrong line of work!¹²

4.2 Reach for the stars, push yourself

No athlete won a race by aiming to come second. High performing companies deliberately set ambitious goals that are unambiguously do or die.

These goals are sometimes called ‘Big Hairy Audacious Goals’ (BHAGS). They are designed to excite staff to achieve the almost impossible. They are simple but profound. People ‘get it’ right away; it takes little or no explanation’, and the purpose of the BHAG is to engage staff and drive them to go the extra mile’¹³.

Examples of BHAGs include:

• “To make a motor car affordable to the common man” (Ford, early 1900s)
• “Become the Harvard of the West” (Stanford University, 1940s)
• “To put a man on the moon” (President Kennedy, 1960s)
• “Crush Adidas” (Nike, 1980s)
• “Become number one or two in every market we serve” (GE, 1980s)¹⁴

BHAGS can be company-wide, or they can be specific to departments. However, if a board is asked by management to approve a BHAG, then it is a powerful sign that management are serious about going for greatness.

5. Understand what drives your economic engine

It should generate unusually high cash and profits

Great companies build superb economic engines to finance their visions because they attain a profound insight into their economics. They typically identify one denominator which drives exceptional profits over and above their competitors.

5.1 Choose one financial ratio

Think about it in this way. If you can pick just one ratio to systematically increase over time, which will have the greatest impact on your economic engine what would it be?

If you have several business lines you might need several ratios. For example, a heritage estate that combines mass visits from the public as well as renting out rooms and open spaces might choose ‘profit per visitor’ together with ‘rental income per sq foot’.

The optimal denominator can be subtle, even unobvious, but the impact on profits astronomical.

A good example is Walgreens, the US pharmacy chain. They switched from measuring profit per store to maximizing profit per customer visit. And why did this simple change make such a difference? Firstly, they realized that when they had stores clustered together they could generate economy of scale benefits. So, they closed good stores in good locations (often at great expense) and focused on opening new stores in clustered areas. For example, they ended up with nine stores within a one-mile radius in San Francisco.

To these improving stores they then added more high margin services, like one-hour photo developing. More convenience led to more customer visits, then more profit per customer, and more cash for re-investment. This hedgehog concept then gave further protection against the inevitable attacks of competition and created a virtuous cycle of protected growth.

Walgreens then went through a period of enormous growth, most of in the late 1990s, vastly outperforming the market. The following chart shows the incredible impact this simple concept had on their financial performance¹⁵.

6. Strong planning & execution architecture

Truly great companies are long in the making and the result of persistent action over a long period of time.

They often did not start with grand new pronouncements, but started modestly. The key was to employ great people. By nature, good people want to be part of a winning team. They want to contribute to producing visible, tangible results.

The key then is to have a framework for them with plan and work within.

6.1 Have a world-Class, Investment-Grade Business Plan

The best business plans avoid vague aspirational statements. They feature measurable, clear objectives and experience suggests the best way to avoid soft language is to frame a social business’ work in more concrete terms than the traditional-vision-values approach, typically:

1. What problem are we solving?
2. What does success look like for us (include hard facts, statistics contextual data)?
3. Why are we the best organization to achieve this?

The strategy is measured by milestones, KPIs, detailed financial projections for three years, organizational charts and biographies of the senior management team.

6.2 Realistically identify the initial investment needed to achieve this

‘Success, not survival’

Too many social businesses operate with low expectations and therefore fail to raise the significant intakes of revenue – commercial and grant – needed to properly scale up their ambitious social goals.

Board members in particular should be seeking rapid growth of capital and be continually asking senior management “what do we need for success” instead of “what do we need for survival”.

In the area of grant income low aspirations can be a tragic mistake. Whilst there are enormous sums available for social impact the reality is that the vast majority of this revenue is captured by a small number of organizations such as hospitals, universities and the larger not for profits¹⁶. If you want to build an enduring organization you may have to be audacious and willing to take on the big-league players.

6.3 Give senior management freedom and responsibility within a framework

‘Measure against what you said you would achieve, not just what you achieve’

Once the business plan is complete and the finance in place, the issue moves onto execution.

If the board have already ensured that only great, self-disciplined people have been hired, then the job of the board and CEO becomes much easier – it is managing the system, not the people.

Allow managers the freedom to change and adapt their departmental strategy, so long as they know they are still accountable to delivering on their annual goals. However, there are times when failures will happen. Its natural when taking risks. When they occur failures should be reviewed, lessons learnt and without negative consequences for the people involved,

6.4 Lead with a culture of discipline and rigour

When you have disciplined action, you don’t need excessive controls – and when you combine a culture of discipline with an ethic of entrepreneurship, ‘you get the magic alchemy of great performance’¹⁷.

The board should ensure that discipline, accountability and rigour is a key aspect of board and management culture. Language used by high performing businesses include ‘discipline’, ‘rigor’, ‘focus’, ‘accountable’, ‘responsible’ and a ‘fastidious attention to detail’.

If it is modelled by the board at the top, it is more likely to become embedded at operational level by management.

6.5 Constant re-iteration – Creating the ‘Flywheel’

Good to great transformations never happened in one fell swoop. They were all built on incremental change. No matter how dramatic the end result. Like pushing a great flywheel, it can take a lot of effort to get the thing moving at all but once it starts it will eventually reach momentum.

Elements of a vibrant flywheel will include high levels of new product development, constant and rigorous debates (but unity once a decision is made), a regular information flow to give management the right facts to manage the business effectively and finally a culture where employee’s views are heard and acted upon.

7. Underpin with a deep commitment to core values and the long-term

Creating a great business goes beyond just making money. Within the process you need to uncover your higher-level core values. These will become your leading light as well as setting your moral compass. They can become particularly invaluable when you are not sure which particular path to follow – e.g. ‘we could take either of two decisions, but which is likely to conform most to our values’?

Core values signal authenticity to your clients and inspire confidence. They mark you out as unique and special in the market place. They may even inspire others to follow your example.

Each value is unique to a company and its leadership. Some may be apparent from the onset, others may emerge from the school of hard knocks or simply over the passage of time – but it is important to avoid bland generalizations.

And finally ensure these values are embued throughout the company, from induction to regular reiteration during discussions on strategy and even everyday business.

Summary – The distinctive nature of a High Performing Social Business

¹ ‘Scaling the impact of the social enterprise sector’, McKinsey & Co, October 2016

² The main research for high performing businesses comes from two seminal studies by Jim Collins listed below.;

– ‘Good to Great. Why some companies make the leap …. And others don’t’, Jim Collins, Random House, 2001. This study examined the top 11 companies from 1,435 Fortune 500 firms. Over 15 years these 11 companies averaged cumulative returns that were 6.9x the stock market average.

– ‘Built to Last, Successful habits of visionary companies’, Jim Collins, Random House (2005). A study of 18 exceptional companies that had an average age of 100 years and which since 1926 had outperformed the stock market by 15x.

These are not the only studies or approaches. A contemporary example is ‘conscious capitalism’ – see the study of companies with a 10.5x return in excess of the S&P

³ Examples of high performing financial metrics might include 20%+ annual growth, higher than average net margins (these will be industry dependent) and low levels of debt.

⁴ Built to Last, p 29

⁵ Built to Last, p 23

⁶ Good to Great, p 11

⁷ Good to Great, p 21

⁸ Good to Great, p 10

⁹ Good to Great, p 42

¹⁰ Good to Great, p 11

¹¹ Good to Great, p 11

¹² Good to Great, p 209

¹³ Built to Last, p 94

¹⁴ Built to Last, pp 232-233

¹⁵ Good to Great, p 93

¹⁶ It is estimated that just 4% of all non-profit organisations control 85% of all non-profit assets

¹⁷ Great to Good, p 13

INTRODUCTION

Having a board of directors that is packed with well-known names sounds great in theory. It is often the icing on the cake of a stellar company and a first-class management team.

However, the corporate landscape is littered with companies with top tier boards that still underwent dramatic failure. Examples also proliferate where CEOs report mediocre board performance; ‘we have a great list of directors but they do not really pull their weight or engage with us in a meaningful way. We can’t help but feel disappointed’.

This paper is designed to give board directors and key stakeholders suggestions that might be useful to maximise the performance of their boards. The seven characteristics are drawn from published research from McKinsey Consultants and the Harvard Business Review.

1. Days per year

“A mediocre investment generates a mediocre return”

One of the most obvious distinctions between weak and strong boards is annual number of days served. Does the board meet infrequently and react to proposals brought by the CEO, or is it pro-active; commissioning reports as well as getting out on the ‘shop floor’, meeting staff, customers and stakeholders?

Most of the literature agrees that given the importance of their responsibilities and their personal legal liabilities, the 10 to 12 days a year many board members spend on the job is not enough. Based on a survey of more than 770 directors from companies and non-profit organizations around the world, McKinsey have identified three categories of board effectiveness¹:

• Low Impact
• Moderate Impact
• High Performance

The McKinsey research suggests that the distinction between higher and lower impact turns on the breadth of issues discussed and the time dedicated to them.

In addition to the extra days, High Impact boards had a richer set of priorities. These included regular performance & talent management, as well as extended discussions on strategy, business risk and investment analysis.

TABLE 1 – Annual number of days invested by board members

The McKinsey research showed that High Performance boards are not only more effective, but also more satisfied with their work.

Addressing the issue of mission creep, and whether High Performance boards strayed beyond their remit and into management the report suggested;

“CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction. Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them.

Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management”².

2. An explicit commitment to excellence

“For commitments to be real they need to be explicit”

If the board decides to aspire to become ‘High Performing’, this aspiration will only be turned into reality if everyone agrees to consistently bring their A-team performance to the board. No one coasts or is passive. When things go wrong, no one hides behind ‘collective decision-making’ or attempts to ‘pass the buck’. Everyone owns responsibility and agrees to a culture of excellence. Once this is agreed, there should be no turning back.

Regular reviews and accountability are important to ensure the aspiration is transformed into an ongoing reality. This means annual board evaluations. An objective 360-degree review, built on personal interviews (ideally managed by an independent external assessor), is generally a much better option than a box ticking self-evaluation.

3. Increase directors’ exposure to the business

“Do you truly understand what you are managing?”

If you don’t understand your business, you are quite likely to make errors of judgement. In a survey 25% of CEOs reported that board members did not appreciate the complexity of the businesses they oversaw. Boards seeking a constructive, forward looking role must have real knowledge of their companies’ operations, markets and competitors.

Theranos, the $9 billion-dollar blood test company which infamously collapsed as a fraud in 2018 did so partly because its board, although intelligent and representing many of the senior echelons of government, finance and business, were not qualified to understand the basic essentials of blood testing technology.

Similarly in the explosion of the derivatives markets in the 1990s most directors on the boards of banks did not have mathematical skills to understand the more complex products that their huge new profits were so dependent on. One experienced international banker described them as being quite frankly ‘very amateur’ in this respect3.

If there are gaps recruit new directors with the relevant missing skills. If the board is already full, consider establishing Advisory Boards (without formal governance authority) with additional people with the relevant skills.

To supplement industry experience, a pro-active board will develop a programme throughout the year of members visiting the site, meeting key stakeholders and projects.

4. Clear delineation between the board and management

“Agree in advance who does what”

A written protocol should be created to set out the roles of the board one the one hand, and the CEO and senior management on the other. This will mitigate the risk of conflict and help engender trust and mutual respect. Some elements of this may include;

4.1 A written protocol to distinguish between board and management roles

This should clarify where decisions can be taken by management and when they should come to Board. These can include financial delegations (spending limits, contract signing rights etc) and freedom of action within overall policy constraints.

4.2 Delegation of detailed work to sub-committees / advisory groups

Rather than meeting on an adhoc basis, and with no regular reporting, there should be a clear mandate for each group, a timetable of meetings, and a reporting mechanism back to the main board. Some common committees include HR (covering board and management), Finance & Audit, and any others as the organisational requirements dictate.

4.3 Clarification of the board’s role in strategy formulation

The board’s core role is to co-create and ultimately agree strategy. This will take the majority of its time. It doesn’t want to get lost in the weeds of operational decisions or the minutiae of less mission critical projects. It is useful therefore to set the parameters of the board’s engagement in strategy.

4.3.1 The Board owns the long-term vision & mission

McKinsey say that “governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. In interviews with 25 chairmen of large public and privately held companies in Europe and Asia they found that directors ‘still spend the bulk of their time on quarterly reports, audit reviews, budgets and compliance – 70 percent is not atypical – instead of matters crucial to the future prosperity and direction of the business’⁴.

Boards need to take a long-term view on the company vision and mission, and ensure that strategy delivers on this. CEO tenures are increasingly short-term. Senior management staff can be less. Boards need to look out further than anyone else in the company.

4.3.2 The board engages in the process of strategy formulation

In many organisations the CEO will present a strategic vision once a year, the directors discuss it and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal and there is insufficient time for debate or and insufficient information to allow adequate discussion of alternatives.

The solution is a more fluid process where management prepares a menu of options with varying risks and resources. On a special strategy day, board and management debate, refine and agree a single plan.

At the onset of the annual planning process the board’s job is to help management broaden the number of strategy options. Mid-year it is to select a preferred route. Year end, it’s the job to implement.

4.3.3 The board monitors performance

This should be done regularly and systematically. This will include the product, the market, the senior management team, finance and the monitoring of key performance indicators.

Ideally key performance indicators should also be benchmarked against industry norms and rival competitors.

4.3.4 Minimize pet project syndrome

Board members generally don’t get involved in implementation. They advise, they don’t do. However, given that board members are often business leaders themselves and like to be people of action, there is always a risk is that individual directors can become too wedded to a pet scheme that may ultimately be a diversion or a drag on performance.

Sometimes their project may need to be let go, or significantly amended for the benefit of the business. Giving directors a fluid and regular change of focus helps dilute this risk.

4.4 Create an annual agenda

Just like management teams, the Chairman and board members should plan their annual activities. The following diagram is a hypothecated model from McKinsey⁵.

TABLE 2 – Example Annual Board Timetable

5. Regularly review and nurture the senior management team

“Results are only as good as the people that generate them”

Ultimately any brilliant strategy depends on the quality of execution. This means the board needs to ensure that not just the CEO, but also an effective senior management team is in place and working effectively.

5.1 The board oversees the appointment of senior managers

Has the CEO the right appointments under them? Are job roles effectively assigned? Are the senior managers effective and competent? Is the remuneration appropriate and realistic? The scoping, drafting and pricing of senior job descriptions should be a key part of the strategic plan approved by the board. Ideally board members sit in on interviews for new senior appointments.

5.2 Senior managers present and debate with the board

Many forward-looking boards will invite senior managers to present strategy and debate performance issues. According to data compiled by Kathleen Eisenhardt and L.J. Bourgeois, the highest performing companies treat no subject as undiscussable. Directors at these companies scoff at some of the devices more timid companies use to encourage dissent, such as outside directors asking management to leave while they discuss company performance. What is the point of criticizing management, they ask, if management isn’t there to answer the criticism?⁶

5.3 The board engages with talent review and management

Many forward-looking boards hold annual reviews of the top talents, always with an eye on those who might eventually be promoted to key roles.

6. Keep a strong eye on risk and risk management

“Sense and deal with problems in their smallest state, before they grow bigger and become fatal.”⁷

Risk management is typically dealt with through the audit or finance committee, but it can also be applied to strategy and performance. Key business risks should be identified up front and regularly monitored. Apart from a failure to execute a strategy, the emergence of these risks may be the most significant liabilities a company will face.

If board directors lack expertise in particular markets, products or issues they should invite outside experts to board meetings to talk about specific topics. This may even extend to product development or strategy if they are entering a new business space.

7. And the ultimate – openness, candour and respect is sacrosanct

“Communication, communication, communication”

Great companies that suffered sudden meltdowns showed no obvious board pattern of incompetence or corruption. According to an article in the Harvard Business Review⁸, they followed most of the accepted standards for board operations. Attendance was regular; directors had significant equity investments; key committees and codes of ethics were all in place; the boards weren’t too small, too big, too old or too young. And finally, the board make-up (in terms of inside and external directors) was generally the same for companies with failed boards and those with well-managed ones⁹.

It is difficult to tease out the factors that makes one board an effective team and another, equally talented board, a dysfunctional one. ‘Well-functioning, successful teams usually have chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds upon another. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difficult information; because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions’.¹⁰

The key is to effective boards is ultimately not structural – all other factors being equal, but social. What distinguishes exemplary boards is that they are robust, effective social systems.

A virtual cycle of respect, trust and candour can be broken at any point. One of the most common breaks occurs when the CEO doesn’t trust the board enough to share information, or does so only at the eleventh hour.

7.1 It is the board’s responsibility to request full reporting

The board needs to explicitly request adequate information, and potentially the format in which it requires information.

7.2 The CEO ensures controversial or issues or bad news is brought to the fore

It makes a difference when the CEO and senior management are very open with the board on performance, share genuine bad news early and give the board time to collectively brainstorm and produce solutions or mitigating strategies.

The board can encourage this process by regularly requesting information, but also making clear that it will not engage in ‘blame culture’ recriminations when difficulties arise. Healthy boards will appreciate that mistakes can happen, that management needs to be given freedom to experiment and therefore potentially to fail, and that when problems arise the approach is always ‘solutions-focused’, not ‘blame-focused’.

7.3 Avoid back channels and political factions

A sign that trust is lacking is when board members begin to develop back channels to line managers within the company. This can happen because the CEO hasn’t provided sufficient information, but it can also happen because board members are excessively political and are pursuing agendas they don’t want the CEO to know about.

Another common point of breakdown happens when political factions develop on the board – either being driven by the CEO, or by individual board members. To minimize these risks the following actions can be taken:

• The Chairman and CEO ensure that controversial issues are brought to the fore and discussed transparently and openly.
• The CEO distributes reports on time and shares difficult information openly.
• Intermittent polls of board members, ideally anonymously, to see if members are dissatisfied with the CEO or Chairman.
• Similar polls to see if board members distrust outside auditors, internal company reports or management competence.

7.4 The Chair and CEO work together closely and regularly

The board chair sets the performance culture of the board and ultimate helps the board outperform for its shareholders and stakeholders. A key component of this role is the development of a very healthy partnership with the CEO that balances focused oversight and accountability with dedicated support to the CEO so they can excel in driving the organization forward.

Chairs should meet with the CEO regularly. In high performing companies this may occur weekly (in start-up or problem-mode), fortnightly but certainly no less than monthly.

7.5 Foster a culture of open dissent

Perhaps the most important link in the virtuous cycle is the capacity to challenge one another’s assumptions and beliefs. Respect and trust do not imply endless affability or absence of agreement. Rather, they imply bonds among board members that are strong enough to withstand clashing viewpoints and challenging questions.

The CEO, Chairman and board in general need to demonstrate through their actions that they understand the difference between dissent and disloyalty.

This can’t be legislated for but has to be something that leaders believe in and model. Home Depot Chairman Bernie Marcus, for example, notes that, for one simple reason he won’t serve on a board where dissent was discouraged. When he serves on a board, his reputation and his fortune are on the line. A lost reputation can’t be regained, and director’s insurance won’t protect anyone’s fortune, because there always exemption clauses¹¹.

¹ ‘High-performing boards: What’s on their agenda?’, Chinta Bhagat & Conor Kehoe, McKinsey Quarterly, April 2014

² Ibid. p, 5.

³ ‘Bankers: from Pillars to Pariahs’, Ian Peacock, Novum Pro (2018), p. 41

⁴ ‘Building a forward looking board’, Christian Casal & Christian Caspar, McKinsey Quarterly, Feb 2014, page 2

⁵ ‘Building a forward looking board’, p. 3

⁶ ‘What Makes Great Boards Great’, Jeffrey A. Sonnenfeld, Harvard Business Review, Sep 2002, p.11

⁷ Pearl Zhu, taken from: https://www.goodreads.com/work/quotes/52388291-digitizing-boardroom-the-multifaceted-aspects-of-digital-ready-boards , accessed 25th March 2020

⁸ ‘What Makes Great Boards Great’, p.1

⁹ Ibid., p.1

¹⁰ Ibid., p.6

¹¹ What makes Great boards Great, p. 11