The Conference Board Governance Center Blog

Apr
25
2017

What causes corporate directors to overreach their fiduciary responsibilities?

By Patrick R. Dailey, Ph.D.

Present-day corporate directors are being equipped by governance educators, driven by regulators, and pressured by activists to be more actively engaged in pursuing their fiduciary and governance responsibilities. They are encouraged not to be simply fiduciary custodians of the interests of shareholders but active leaders with specialized knowledge of risks and visionary opportunists.

Directors have responded. They have increased their attention and time commitment to their responsibilities: strategic transformation, compliance oversight, succession, and governance duties. They are more alert in protecting their enterprise from risks and more inclined toward increased transparency expected by their shareholders and the media.

With the corporate landscape increasingly filled with “watch dogs,” astute directors clearly recognize that errors in their judgment and/or timing are not casually overlooked by stakeholders these days. As the job has become more demanding, it certainly has become less forgiving. With the increasing scrutiny and expectations, what are directors inclined to do to guide their companies and protect their reputations, if not their wealth?

Overreach defined

Reacting to pressure and intensified examination, directors are inclined to be more hands on and more intrusive. They overreach the boundaries of their fiduciary responsibilities. They cross over the imaginary line that has historically separated board governance from enterprise management to see more, probe more, do more. Most often, they act in conscientious ways to pursue shareholders’ best interests and keep themselves and their companies out of harm’s way.

But with overreach, the distinction between the governance behavior of directors and the operating behavior of management is blurred and board/management dynamics are put at risk. Additionally, intrusions by these well-meaning directors can trigger personal liability issues for the directors, themselves. As they become more hands on, they risk losing their “business judgment” protection. Certainly, this won’t happen in the near term, but conceivably in the future as directors become more expert and intrusive.

There are significant consequences to increased overreach by directors. These practices undermine the very idea of a board of directors as wise and loyal fiduciaries in charge of oversight, not a board of controlling super-managers. It can be argued that the pendulum is swinging toward boards being more involved in the business. Time will tell whether this is an evolutionary trend in corporate governance or a temporary dysfunction.

Overreach triggers

Boards are faced with changing cultural conditions that impact board governance policy and practices; heightened expectations for transparency with stakeholders, and enhanced standards for director competency and clearer accountability for their work. From our clients’ experiences, we see board/management relations in a state of flux. Below, the primary causes of board overreach are described:

  1.  Failure to keep the spotlight on strategic matters

It is incumbent on board leadership to keep the board focused on strategic and “pivotal” matters. When a chair defaults to laissez-faire control, the board agenda is opened to dealing with implementation and operational matters–topics that many board members have made a distinguished career in managing as executives. Overreach creeps in when a board’s focus becomes short term or even retrospective, and board leadership allows directors to default to their operational instincts and experiences.

  1. Genuine care by conscientious directors

Yes, duty of loyalty principles may trigger directors to overreach their responsibilities to accelerate decisions and actions to protect the company and shareholders’ best interest. Management might quietly say, “they meddle, muddle, and micromanage” but directors’ conscientiousness may cause them to stray from their governance role. Can boards care too much?

  1. Abundant resources supporting the board

Directors serving as recently as ten years ago would probably be stunned at the size and number of people serving at the behest of the directors who do not report through the management chain. Financial and data security experts, independent, investigative legal staff, compensation consultants, succession experts, internal control professionals, PR/crisis management resources and sustainability experts all may be retained by the board and participate in board meetings. Most investment bankers and corporate lawyers practicing over the past 15 years will tell you that the board meetings couldn’t be held in the old corporate conference rooms (not enough chairs). These days, boards have keener “eyes and ears” and a heightened sense of urgency which can trigger unilateral action by the board with management tagging along much to their displeasure.

  1. “Active” money in the boardroom

Present day owners are increasingly coming from vast pools of private money that have approached their board governance responsibility with greater “hands-on” motives and skill. These active investors arrive in public companies with considerable insight into the business environment, have deeply studied the business for a considerable time from both an operation and strategic perspective and bring clear ideas as to how to maximize unrealized value from the company’s assets. In this type of environment, it is almost inconceivable that a director representing an owner would sit back and defer to management. Constituency directors’ allegiance and information sharing should be a matter for discussion during recruitment and periodically along the way.

  1. Increasing Subject Matter Expertise among Directors.

Fewer general managers sit on boards. Their companies wish them not to serve on outside boards and board seats are increasingly populated by subject matter experts–cyber experts, emerging market experts, financial and audit experts, e-commerce experts, etc. These directors bring fresh functional wisdom and knowledge to board service and match up more than adequately to the subject matter experts with in the management ranks. These experts know the issues, the challenges and the questions to ask. They can overreach their governance duties with directives into the organization’s functional operations and essentially “co-manage” a function alongside the functional executive.

  1. “Tight” time clock

The “time clock” is increasingly tight and tracked by many stakeholders, media, as well as plaintiff counsel. Reaction time between an event and a stakeholder declaring board mismanagement is compressed. Directors step in and across the imaginary line in order to take corrective action. Second-guessing is a fashionable sport of many.

The tight time clock tends to demand urgency if not create a crisis orientation by the board where most any issue of significance rises to that of “board level” attention.

  1. Leadership “churn”

New leadership by the CEO, chair and/or board members brings different expectations into the board/management relationship. New directors appointed with a change mandate or during a time of board refreshment almost always trigger a reset of priorities, reconsideration of cultural norms and relationship dynamics that test board focus and level of oversight. There is always a time when the imaginary line separating governance from executive operations is implicitly or explicitly reexamined and reset. An astute chair is alert to these dynamics and proactively addresses these matters.

Confidence by directors may be lacking in the capability and execution by the executive team regarding a specific matter or generally. Board members may assume they have keener insight and better skills in dealing with daily or crisis-level matters than those serving on the executive team. They may assume that if they don’t get involved, a matter either won’t get done or it won’t be done right.

These are no longer times that allow directors to “sit back and take it all in for a while.”

Antidote for overreach.

Board overreach is a symptom of uncertain or hands-off chair leadership. When board governance education errantly encourages a board to micromanage and cross the governance line, the board chair must address board/management roles and responsibilities with tailored policy and practices, not school solutions taught in “governance schools.” When the media or activists threaten, or bully a board toward rapid “take charge” behavior that leads a board over the line and a sound management team to the curb, the chair must assert board responsibilities and reassure management of the board’s support. Astute coaching of the CEO by the chair must be both proactive and reactive and be regular for the benefit of management but also for reassuring the board. Board chairs are encouraged to periodically jointly address board/management practices to clarify who does what or who decides what. Early attention to a lack of clarity or consensus between directors and management is an important intervention for harmony and effectiveness.

Boards must accept that they are monitors of the business in the best interest of shareholders, and not primarily advisers or consultants to management.

Patrick Dailey, Ph.D. is an industrial psychologist. He co-founded BoardQuest, a board governance and C-Suite management consultancy. He has been a corporate officer and senior human resources executive for Herbalife, Hewlett-Packard and PepsiCo.

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.



You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply