How Boards Work — Dambisa Moyo
Corporate boards are constantly under immense pressure. Scandals, malpractices and other illegal activities at companies like GE, WeWork and many others have raised questions among regulators, shareholders and the public about the quality of corporate governance. At this time, boards face ever louder and increasing demands to solve various mind-boggling conundrums like climate change, gender equality, data privacy and other social issues that range far beyond their traditional mandate. In this book, economist and veteran board director, Dambisa offers an insider view of corporate boards, how they work, how they adapt to the changing demands in the society, how they think and strategize to solve various social issues and other challenges that may crop up in the future. Corporations needs boards to be more transparent, more knowledgable, diverse and deeply involved in the strategic course of the companies they lead. This book is worthy a read for people looking to get more insights into how boards work, opens up a lot new perspectives to makes us aware of what goes into the boardroom, which is often a blackbox for non-executives.
Dambisa starts with briefing about some history of the boards — traditionally how they have been functioning, discussing the various roles in the C-suite cadre and how board's role have to evolve based on the changing conditions. People have often thought why the need of boards while there is a CEO for a company. “Governance” is a key concept for understanding the difference between a board and a CEO. Ray Dalio defines boards to be an oversight system that removes people and processes when they do not work well. The essential difference between a board and CEO is that board is fundamentally a structure of governance while the CEO is a day-to-day leader.
Boards generally have these four main committees — nominations and governance — nominating potential new board members, audit (company’s adherence to accounting rules, company is operating in line with all the rules and regulations) and compensation (approving compensations for executives and managing pay policy) and CSR (Corporate Social Responsibility which is a mandate now to address all the environmental and social challenges). Typically, in a company's group of boards, there are twelve directors generally coming in from various backgrounds, who are up to date with the latest happenings, its impact on the economy, finances etc. As each of them bring great value to the table, they work together to decide the company’s strategy to achieve success, sustain in hard times, make back up plans, are prepared for the worst times etc.
Boards meet once a year or two to discuss about the strategy plan which consists of short-term plan (STP) covering net twelve months, medium term plan (MTP) which covers the next three to five years and the longer-term plan which the company wishes to achieve. For instance, STP might be deploying marketing strategy that will ensure that more Chinese consumers become familiar with the brand. MTP would be building a factory and distribution network. Before going further down the line, the company has to have a mission statement. Based on that, management and the board decide specific metrics of operational and financial performance. Specifically, management decides the strategy. CEO pitches in, conveys and contributes to this strategy to the board members. During the strategy discussion sessions, there are debates that occur and chances that the management’s proposal of a strategy is dismissed by the board. Personally, to my knowledge, I had assumed CEO is the ultimate decision maker, but reading this book helped in understanding how the decision-making flows in the company. CEO can propose an idea/strategy, but the management and the board should be aligned with it.
Choosing a right CEO for the company is a challenge too. Most of the companies prefer selecting an organically grown CEO who is well versed with company culture, policies, competent and with an outstanding career. But at times, when companies are not able to find such CEOs, they have to fetch for outside candidates. such outsiders have to be assessed on several factors such as being culturally fit, performance, competence etc. Boards are clear about how to judge CEO’s performance; they are more concerned about preserving the company culture.
The essence of the book captures the wide range of issues that board has to tackle. One of the company’s biggest assets is the shareholder value. Dambisa shares how the board works to balance out the shareholder returns and at the same time, deal with sensitive topics like diversity, the way the company treats its suppliers etc. Board members also have to deal with various decisions and policy formation related to environmental and social concerns. There are constructive debates that happen in the company around the emerging trends in the market and in the society. For instance, in order to achieve the carbon free emissions by the year 2050, there are several constructive initiatives that have emerged to achieve that goal and to prevent the earth from global warming. In US, President Joe Biden rejoined the Paris Agreement to limit global warming, accelerated the adoption of electric cars, reduction of greenhouse emissions and many such initiatives. Boards have to be well aware of such initiatives and ensure that the company aligns with all the emerging new policies/initiatives in the nation.
Similarly, when it comes to boards addressing any social concerns, they have to be dealt meticulously or else might end up having a negative impact on the company and its employees. The company’s reputation also comes at stake when social or societal issues are not addressed in the right fashion. For instance, the impact on the society with covid was tremendous and mind boggling. Human connections were at loss, employees working from home and dealing with mental stress of handling office and housework all of a sudden. Boards had to study this carefully — the impact of covid on people, their mental state, people who got infected with the disease, taking care of elderly and kids at home, people losing jobs, rise in unemployment etc. Definitely not an easy task to accommodate all these impacting factors and formalizing any policies in the company that would be for the employee’s welfare.
Along with social and environmental, boards have to be aware of the recent geopolitical happenings in the country and assess its impact that could potentially occur in the company. War happening with Russia and Ukraine, which nations are supporting the attackers, which nations are supporting the victims etc. changes a lot of dynamics and has a direct and indirect impact on the company. With President Joe Biden deciding on making our own silicon chips instead of importing from China and Taiwan, changes a lot of decision making/supply chain management programs within silicon chip-based companies. Boards have to carefully align with all these existing and impending situations that may occur. In such ways, boards are confronted with copious amounts of issues to varying degrees. Now give this a thought — while dealing with a global corporation ceaselessly delivering their best in world class products, in cost effective way, the boards have to work with the management to monitor and oversee employee policies, sappy chain issues, adopt the best technologies like AI, and target great shareholder returns at the same time along with dealing with plethora of emerging new daily challenges as mentioned above. Such a challenging job for the boards!
Dambisa makes a number of proposals at the end for the reform. She presses the fact that the boards should focus on long term strategy by working closely with management. NEDs should also ensure they have sufficient challenge of management data and hear external views on industry trends. Boards should consider setting up an ethics committee apart from the already existing committees as mentioned above. Most importantly, boards must be alert to the need and open to fresh ideas. Their involvement and participation in the decision making is crucial for the company’s existence and future as well.
This is an interesting book for those wanting to know more about boards, it helped me open up a lot of new perspectives about boards. It gave me the key to that black box, provided that outlook which I was missing. Dambisa being a part of the boards herself, provides us visibility into various factors in the boards. I like her style of writing, easy to read and follow, lucid language and well-structured book explaining all the aspects of boards!
