Fidelio Table Talk – The Value Equation for Boards

The scrutiny of Boards has seldom been greater. As such, Corporate Governance is often seen purely as a regulatory and compliance overlay, and the Board/Supervisory Board as a form of insurance against undesirable outcomes.

And yet Corporate Governance Codes are more ambitious in the value contribution they expect from Boards:

“A successful company is led by an effective and entrepreneurial Board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.” (UK Corporate Governance Code, 2018)

“[The Board agenda should focus on] creation of shareholder value, with a focus on the long term. This means encouraging the sort of long-term thinking owners of a private company might bring to their strategic discussions, including investments that may not pay off in the short run.” (Commonsense Corporate Governance)

While risk mitigation is clearly important, in this Table Talk Fidelio argues Boards have a broader role focusing on the upside as well as the downside and contributing to a long-term sustainable increase in the value of the organisation.

Our Search and Evaluation assignments certainly ensure that Boards have the requisite checks and balances in place, but also critically, that Boards can drive performance. This entails long-term value generation for both shareholders and stakeholders, including customers and employees.

For Boards to succeed, composition and effectiveness must be aligned to increase the value of the organisation; if this is not the case, shareholders and stakeholders should be asking why.

Checks and Balances: Boards and Corporate Crises

Corporate Governance and Board accountability invariably attract attention when things go wrong. High-profile corporate crises such as BP’s Deepwater Horizon disaster; Volkswagen’s “Dieselgate”; TSB’s technology meltdown; Facebook’s political woes; Tesla’s twitter bombshell and Boeing’s tragic 737-Max crashes shine a spotlight on the functioning of the Board. In such crises, governance failings are usually identified which in turn claim a number of scalps among the top team, with the Chair and CEO mostly likely to bear the consequences.

Averting corporate crisis is clearly a vital governance function, and a key objective for a capable Board led by an effective Chair. As Fidelio highlighted in our recent Chair Masterclass, there are warning signals to alert Boards and the pathology of some corporate failures is now well understood:

  • The overweening CEO who views the Board as a hindrance
  • Aggressive sales targets linked to financial rewards without a focus on revenue quality or behavioral implications
  • The lack of a strong health and safety culture driven from the top
  • Unethical behaviour tacitly condoned by senior management
  • Failure to act on reports from whistleblowers
  • Deafness to changes in the public mood representing a business model challenge

Regulators are increasingly taking Boards to task for failing to pick up on the above. In Financial Services, opaque pricing and unclear product benefits too often created a tension between shareholder returns and value for customers, resulting in numerous cases of mis-selling of financial products in various countries leading to legal or regulatory measures to provide compensation.

This is behind the UK Financial Conduct Authority’s current focus on value for money, a metric that is closely monitored across a number of regulated industries including utilities and social housing. Even the German rental sector, for a long time the home of public landlords and reasonably priced accommodation, is facing calls for rent controls due to rising prices in cities such Berlin. Boards ignore such political and regulatory trends at their peril.

Boards Driving Value

But the Board is much more than a goalkeeper keeping the ball out of the net and the executive under tight control. Fidelio advocates and supports Boards to be more ambitious, proactive and focused on creating long-term benefits. This value contribution takes a number of forms:

  • Challenging management to fearless, objective examination of the business and its issues
  • Developing and approving a robust and genuinely forward-looking strategy
  • Aligning skills, experience and perspective at both Board and Executive level with strategy and corporate goals
  • Promoting a culture of innovation, as explored at Fidelio’s recent Board Breakfast with Xavier Rolet
  • Contributing diversity of experience and perspective and being alert to weak signals that may have a profound impact on the business model

Such a Board comprises:

  • A highly effective Chair able to both lead the Board and support and challenge the CEO
  • A Board manifestly aligned to the goals of the business and effective in engaging with shareholders and stakeholders

Good Governance: An Intangible Source of Value

We talk of high-performing businesses. There are also high-performing Boards. The metrics of their success may be more multifaceted and long-term than the media or shareholders are accustomed to. But a narrow focus on the Board’s responsibility for regulatory box-ticking or providing insurance against corporate misadventure is misguided.

Fidelio’s experience is a high performing Board can galvanise and drive the organisation. Such a Board can provide the essence of governance – a commitment to sustainable value generation for shareholders and stakeholders.

In turn, these shareholders and stakeholders are subjecting Boards to increased scrutiny. Boards need to articulate how composition and effectiveness contribute to and align with value generation. If shareholders and stakeholders are unable to make this connection, Boards will end in a downward spiral of compliance, regulation and risk aversion.

For more information on Board Evaluation, Development and Search, please contact Gillian Karran-Cumberlege.

Right Arrow left Arrow Search Icon