New report highlights the damaging impact on UK boards

A report, launched jointly by the Corporate Research Forum (CRF) and the Performance and Reward Centre (PARC) has revealed that chairmen and other board members are under pressure to devote greater time to investor relations and meeting regulatory requirements. The findings highlight their concerns about the effect this diversion is having on the role of the board in exercising strategic leadership.

The report titled, ëThe Role of the Board in Creating a high-performing Businessí explores the state of UK boards two years on from The Higgs report. It has been written by Dr John Roberts, reader in organisational analysis at the Judge Business School University of Cambridge, and Don Young, consultant, author and a former plc board director.

The authors say that the focus on checks and controls to prevent fraud and malpractice has been heightened by reactions to recent scandals and abuses of executive power, such as Enron and Worldcom. But far greater losses arise through strategic and people mismanagement, they warn. This means that diversion of the board from developing a strategic, involved role in the business actually heightens the risk of corporate failure.

The authors interviewed senior business people from some of Europeís most successful companies, who said that successful boards and organisations need to be multidimensional. For board members, it is not just about understanding the business and the bottom line but about utilising soft skills and working as a team. They recognise the need for stronger inter-personal skills, better succession planning and more thorough selection processes.

Dr John Roberts argues: ìIn some instances rewards can produce unintended and negative consequences. High levels of executive pay, and in particular share-options, can be seen to have created rather than merely aligned executive self interest. Equally seriously, the policing version of the NED role, under some circumstances, can weaken rather than strengthen the boardís capacity to create high performance. The danger here is that the board becomes distracted from focusing on strategy, divisions are created between executive and non-executive directors, and the board become divorced from the business.î

Don Young comments: ìThere are a number of levers that will connect the work of the board to the performance of the enterprise. For instance, appropriate executive remuneration systems which reward genuine long-term company performance and value creation as well as effective leadership should be considered. These do not create collusive relationships between executives and fund managers in share price management. Also performance metrics that shift from purely financial and short-term share-price measures to measures of company health could be implemented.î

Within the report, the authorís categorise boards into two: ëinvestor-drivení and ëstrategy-led.í The former is highly reactive to often conflicting shareholder pressures and casts non-executive directors in a policing role; the latter operates as a unified team, is knowledgeable of the business and deploys all its talents to develop the business.

The research shows that generating high performance is best done under a strategy-led board. Compliance, while necessary, is seldom sufficient to generate sustainable value. Part of the reason why boards struggle to create high performance is that they are caught up with responding to relentless demands from investors. This can force boards into a narrow compliance role. The research suggests that sustainable high performance comes from a broader, strategy-led approach, and the report contains guidance on how to effect this transformation.

Key features of the report:
Offers a guide on how board roles and relationships should be shaped to contribute to organisational performance.

Gives a range of practical advice on how to achieve productive board discussions and decisions, illuminated by quotes from interviewees.

Demonstrates how to use non-executives as a source of experience rather than control.

In total, almost 40 individuals were interviewed, many of whom hold several directorships; chairmen and chief executives as well as executive and non-executive directors. Company secretaries and a variety of advisers and consultants who could offer some insight into the current state of development of the boards of UK listed companies were also interviewed. For contrast, some top business leaders whose experience spanned a number of countries and directors of large private family-owned companies also participated in the study. The sample included many companies whose performance could be characterised as ’good’ - for example directors of 10 of the top 30 FTSE 100 performers as rated by Total Shareholder Returns over the last three years were interviewed.