Investors are angry. Directors can run but they can’t hide.
The gales of creative destruction in global markets exert continuing and increasing pressure on boards to improve governance, transparency, accountability, and enterprise performance—growth, profitability, value creation and competitiveness—as the volatility, pace and scale of changes in markets accelerate in the global economy. To create sustainable value and potentially outperform the market, enterprises must be “built to perform” rather than “built to last”, balancing creativity and destruction, mastering development, being operational effective (efficiency in execution is a necessary condition of success) and ready, willing and able to change (changing creatively is a necessary and sufficient condition of success) to freshen businesses with new approaches, business models, products, people, and ideas to enhance and sustain performance.
In reaction to the many business scandals in recent years and failures and losses affecting shareholders, employees and the Community, various government agencies have increased their monitoring and enforcement activities. For example, the Sarbanes-Oxley Act mandated a number of changes potentially affecting Board structure and governance and providing for increased executive accountability for reporting. While important, a Board focusing principally on these phenomena places the more fundamental issues of risk exposure, competitiveness and performance in volatile markets, executive compensation levels, and the probity of governance, executive management and leadership for balancing the needs and interests of all stakeholders in the background—at their peril.
Research by McKinsey & Co. shows most companies cannot meet or exceed the pace and scale of market changes over time— thereby losing their competitiveness and destroying value. An entirely different mindset is required to sustain performance—emphasizing creative destruction and discontinuities—involving consciously creating new innovations and abandoning others when they are no longer economically viable and a fresh approach is called for. This presents new conditions the Board and leadership must adapt to in order to be successful going forward.
Recent research shows that institutional investors and board members are dissatisfied with both governance, executive performance and compensation. Under these conditions, Level Three thinks the winning strategy for the board is to embrace and lead changes in governance to reassess and adapt the Board and governance processes of an enterprise to the realities they now must confront consciously. Research shows the CEO is likely to be the biggest barrier to success bringing about the needed changes. Therefore, the Board has to become more self-reflective and self-directed in order to balance or reconcile the impetus of the CEO with the aspirations, values and purpose of the enterprise and the stakeholders and Community. The desired result is a leadership consciousness balancing Board and executive management at an appropriate level of involvement depending on the context, risk awareness, creative destruction, performance, and the long-term interests of all the stakeholders and the Community. In the final analysis, the Board carries the responsibility to look after the health of the whole enterprise and to intervene diagnostically when unhealthy conditions appear or approach changing the culture, leadership, strategy, risk profile and other key succeed factors to restore health.
Given these new realities, Level Three suggests the board consciously take on working collaboratively together and with executive management to strengthen and broaden its capabilities re-imagining governance and leadership to provide the possibility for new and fresh approaches to proven problems and challenges while at the same time bringing about the immediate changes needed to support sustainable performance improvements. McKinsey & Co. defines the challenge thusly: “It involves reestablishing the balance between management and the board so that the former runs the company while the latter contributes to its strategic and operational development and provides the oversight needed to satisfy shareholders. Although a minority of boards—in the United States and beyond—have struck the right balance, this delicate equilibrium has tipped too far in favor of management. The way to restore the balance is to strengthen to independence of the the board and to give it clear leadership separate from management.” Achieving a culture and ethos of change may require the CEO to accept a non-executive chairman or strong lead director. The CEO will also have to advocate and accommodate changing management-compensation plans and establishing performance criteria for C level executives and board members keeping in mind the overarching need for active, engaged and accountable director and senior leaders. Finally, there is the compelling need for the CEO and board to share a new understanding of the risks companies run and for the transparent and effective communication the principles of corporate ethics and for creating and sustaining a culture reflecting them.
Level Three is ready, willing and able to help boards bring about the changes in thinking, feeling and behavior, both individually and in executive management and the corporate culture to induce and sustain the entrepreneurial spirit of the enterprise enabling the enterprise to operate developmentally according to the vision of the Board and executive management.
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