Serving on dozens of boards – both for-profit and non-profit – over three decades has provided me a unique window into organizational governance. I have seen a lot of boards succeed and many that didn’t.
Boards play an invaluable governance role for organizations but often underperform at their job. Frequently, board members serve either for prestige or résumé-building. If they do sincerely care, they often don’t fully understand their role. This all results in a lot of intelligent people spending time in board meetings and missing their opportunity to be effective.
Early in my career, while serving on one of my first boards, I had an odd experience. The directors, including me, were trying to decide a matter with all but one of us supporting a specific direction. Having one director opposed to the conclusion supported by the majority seemed to freeze the board; we couldn’t finalize our decision. As the newbie who didn’t know any better, I asked if the decision needed to be unanimous, and of course, the answer was no. So, we voted to approve the motion with one opposing vote and moved on to other things. Since then, I have seen the same thing happen many times. When it does, I always ask a similar question regarding the need for a unanimous vote, and it dependably serves as a catalyst to move the board toward a decision. A desire––or even self-inflicted pressure––for unanimity is one way boards fail.
In addition to the need for unanimity, below are some of the biggest mistakes I believe boards make.
- Lack of, or too many, deep smarts
Several years ago, I served as Chair of a for-profit board that failed to help the company achieve its potential. As I look back on that experience, one reason the board failed was that we did not have a director with deep smarts––a person who knew the industry well–– serving with us. Our Correct Craft board gets this right; we have three directors, including myself, with a total of nearly 150 years of industry experience. There isn’t much these directors haven’t experienced in our industry. However, boards need balance, and those that include too many directors with deep smarts in the company’s industry lose the benefits that come from outside perspectives. - Lack of diversity
There has been so much research validating the benefits of diversity that I am not sure why we continue to study it. - Non-experts trying to be experts
When new directors join a board, they usually work to learn what they can about the industry of the company they will be governing. However, during our company’s board orientation, I tell new directors not to try to become industry experts. It is more valuable to us if they filter what they see and hear through their own experience, which is more likely to provide a perspective we may not otherwise see. - Mismanaging succession
Arguably, a board’s most important responsibility is ensuring that leadership succession is well planned and, when necessary, an excellent new leader is selected. Our board at Correct Craft has both short-term and long-term succession plans. Additionally, we are investing heavily in our team to ensure there are internal candidates ready for consideration when I decide to step down.Another critical mistake boards make related to succession is trying too hard to find a new leader who does not have the weaknesses of the departing leader. Often, the tunnel vision that results from this leads a board to overlook ensuring the new leader also has the departing leader’s strengths.
- Mismanage risk
Most boards view risk as something to be eliminated, but that is a misguided perspective. The whole basis of our capitalistic system is to create wealth by accepting and managing risk. Boards cannot and should not work to eliminate risk, but they should help the company’s executives manage it in a way that optimizes an organization’s results.However, boards do have a responsibility to identify risks clearly. And since different types of risk are handled differently, the risks identified should be classified as either internal, external, or strategic.
- Mismanagement of capital investments
Many directors think the board’s capital investment approval process function is either an internal control to ensure the company does not spend money inappropriately or oversight to ensure that the leader knows what they are doing. While there is some benefit to both those views, the primary purpose of a board’s capital investment approval is to be engaged in the capital allocation process. Even boards of profitable companies must carefully review what they approve for capital investments. Those investments affect the company today by using cash, midterm through eliminating other investment opportunities, and long-term based on the investment return; the impact of capital allocation is material. In fact, after succession, capital allocation may be a board’s most important responsibility. - Following indicators that do not matter
It is easy for boards to focus on indicators that may not be material––a possible example, social media followers––instead of focusing on what’s important. A good board should be able to identify indicators that matter and make sure they are monitoring those items. Our company’s board follows specific industry and company indicators that we discuss at each board meeting; these indicators provide a good view of how our company is doing. - Minimal or lack of board development
I often speak about the idea of “Being a Learner,” and boards are no exception to that principle. Boards should be learning by reading and discussing books together, having special board calls or retreats to dive deep into a specific issue, or bringing outside speakers to board meetings. If board members are committed to developing themselves individually and collectively, they will function exponentially better. - Overly focused on today
Directors need to be informed about an organization’s current operations and financial results; however, their primary focus should be on the future. Where is the industry going, what are the significant forward-looking challenges, what are the opportunities, and what is the organization’s vision and strategic plan? These items, plus risk, succession, and capital allocation, are where boards should be focused.
This list is not meant to be all-inclusive. However, based on my experience, it is a great place for board members to start considering how they can be more effective. Although boards don’t run operations, they have an essential role in governing the organization. Directors should stay out of daily operations but be laser-focused on the items above.
Finally, boards should provide proper governance while also providing a tailwind for the organization. Good boards make an organization significantly better.
Written by Bill Yeargin.
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