Why Board of Directors Matter

There was a time in my career when I did not truly appreciate the value of an effective board of directors. That changed when I started consulting to turn around poorly performing and, in some cases, failed businesses, largely because of an ineffective and poorly operating board. I have written several Root Cause Analysis reports for regulators and others, and a common RCA theme is ineffective board governance.

I have stood in front of many boards and rooms full of staff only to deliver the “bad news” that things were not as good as they believed. This can happen for many reasons, but here are the 5 most common reasons: 

1. The board had not implemented an effective “Board Governance Policy,” which left gaps in expertise, strategy, and oversight and rendered it vulnerable across all lines of business. Board term limits were often not in place, restricting the ability to bring updated skill sets and expertise to the board. This also created an environment of chaotic and inconsistent practices at the board level.  

2. The board was not given the critical and necessary information/data to govern the business. The board packages often provided were substantial and complete of unimportant information – thus overwhelming board members who did not ask questions.

3. The board fell in “like” (okay, sometimes love) with the CEO, and many times, they rubber-stamped their decisions and stopped asking questions because they completely trusted the information they were given.

4. The board had not obtained updated training for current issues within the industry / vertical, which made them unable to make quality decisions, quickly pivot when needed, and left the business vulnerable to changing conditions. Some board members could not read financial statements, KPI, and key ratio reporting and, as a result, could not ask important questions related to trends, risks, or financial/operational performance concerns.

5. The board was unable or unwilling to make the hard decisions required when all evidence pointed to a problem that required immediate attention and action. 

The Board of Directors matters because they are elected with the responsibility to manage the “Care and Feeding” of a healthy business. They are typically elected (by shareholders or members) and directed to provide wholesale governance to protect and prosper the business using their unique experience and skill sets. They are also responsible for maintaining a healthy working relationship with the CEO.

Boards that understand their roles and responsibilities to the organization they govern and to regulators (where required) and commit to continuous improvement are going to be more effective. Their positive efforts directly impact not only the bottom line—profitability—but equally important—the well-being of its employees, customers, business partners, and communities the business serves. 

Successful boards are active, engaged, and knowledgeable, have an effective board governance structure and strategy, and are willing to consistently review their effectiveness as a board.  They understand they have an obligation & responsibility to set the tone of ethics and compliance at the top. This should help ensure they know about potential issues well before they become a crisis. Unfortunately, as consumers, we have seen boards of large businesses who experience a colossal problem, and when looking back at “what happened”, find out that much of the problem could have been addressed and resolved well before the worst happened had the board done its job.

Strong boards believe in regularly assessing the skill sets and experience of their board members, quickly filling gaps with the necessary expertise, and committing to maintaining an awareness of current and possible emerging issues, with a laser focus on today's big three—risk Management, Technology and AI, and the new but stealth issue: Social Media.

Businesses need strong boards that are willing to do the hard work required to protect and help the business prosper today and in the future. This often requires a lot of courage to ask the hard questions, hold one another accountable, be willing to speak up if they don’t understand something, make unpopular decisions, and not become overly dependent on the voice of a single board member. 

Ultimately, boards that embrace the ideals outlined above to govern for the good of the business, its employees, business partners, and communities served will have a positive impact on its sustainability, its ability to respond quickly, responsibly, and confidently to issues before they become a crisis, its ability to act with agility when opportunities arise, and its ability to ensure appropriate leadership is in place to run the business.