The challenges associated with value creation are at the heart of the mandate of the Board and Executive Committee. The revised UK Corporate Governance Code acknowledges that “a successful company is led by an effective and entrepreneurial Board, whose function is to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society”. The Code explicitly highlights the importance of value creation.
Any Chairman, Chief Executive or Investment Professional is eager to make their mark by being part of organisations that deliver ambitious value creation plans. When analysing value creation plans one soon discovers that the vast majority of executives and Investment Professionals rely on a narrow set of financial engineering and operational improvement approaches and tools. These are, of course, the basics of the trade. True mastery is, however, achieved by adding more tools and techniques to the basic repertoire of value creation. Even better when the tools satisfy the needs of other stakeholders and fulfil the requirements detailed in the revised UK Corporate Governance Code.
In this article we focus on the insight gained from our proprietary research on developing more effective Boards. We are not talking about yet another “tick-box exercise” or “leadership development programme”, rather a fully integrated approach to value creation that is grounded in research, peer-reviewed and published, and not only ensures greater value creation but also brings governance to life.
Let’s first have a closer look at where and how the value is created. The main pillar of operating models, and a key belief, is having the right management team in place. However, statistics show a different picture.
Over the lifespan of a Private Equity investment for example there is a Chief Executive turnover rate of over 50% and an even higher number relating to other Board members compared to a 15% rate in the world’s 2,500 largest public companies. In around 50% of cases the change in Chief Executive was not planned and is due to underperformance of the individuals. This ‘underperformance’ is, in many cases, simply caused by a mismatch of the skill set with the requirements after a change in strategy, ‘human incompatibility’ with other Board members, the incapability to gain the trust of the shareholder, lacking empathy to convince within the organisation or not acting as a role model for employees – to name but a few.
Given that leadership is the key enabler and driver of value creation it is quite surprising how little effort is presently put into the systematic development of Boards and Executive Committees. Having said that, I also have to confess that many Board audits and development programmes that are offered at present are regarded as ill-suited to drive value creation.
Our proprietary research indicates that in order for Board audits and development programmes to provide a return on investment and a positive impact on value creation, they have to meet five prerequisites:
- Board audit/ Board development programmes need to be an integral part of the value creation process. Anyone engaged in conducting a Board audit and/ or Board development programme must have an in-depth understanding of the value creation plan of the organisation and integrate and link the insight into the process.
- Board audit/ Board development programmes need to use an evidence-based approach. A lot of data can be collected but it is only useful if it is the right data! In our analysis we found that sadly more often than not Board audits touch on issues/ themes where there is no evidence whatsoever that could have an impact on effectiveness and value creation. On the contrary there appears to be an exacerbated focus on governance issue that stifles the Board and hinders value creation. We are not saying dismiss governance, but the balance needs to be right.
- Ensure that you provide management with relevant and meaningful data. The members of Boards and Executive Committees are high achievers. They want to succeed and develop, look good and develop their own careers. In our experience Board and Executive Committee members do engage if they see real hard data that provides them with genuine insight that is relevant to their role.
- Provide the leadership team with a safe, neutral and confidential environment to reflect about the data collected. Explore which actions would help them to strengthen their own position and that of the collective Board in relation to the value creation plan.
- Establish a mechanism so that data can be collected on a continuous basis and the executive team or Board can monitor progress.
Once these five prerequisites are fulfilled it is crucial to understand the hallmarks of effective Boards that ensure superior returns. Our research indicates that there are seven hallmarks of effective Boards. Each can be seen as a lever which members of a Board/ Executive Committee can pull to increase their level of impact, effectiveness and value creation.
- The composition of the Board
It is crucial to understand how different areas of expertise, preferred roles in a group setting and personality styles complement each other and fit into the development cycle of the organisation and the value creation plan.
- The ability of the Board to use the strength of its members
It is important that the individual members of the Board understand their own strengths, how they are perceived, the collective strengths of the group and how these can all can be leveraged to implement and execute the value creation plan.
- Clarity about roles and responsibilities
Ill-defined roles and grey areas of responsibilities are the norm rather than the exception. Clarity and transparency of roles and responsibilities need to be in place.
- Joint vision
A clear and common vision and orientation is pivotal. Transparency at the outset is vital.
- Ability to resolve conflicts between the Board and management
Members of effective Executive Committees and Boards understand how to resolve conflicts between them.
- The structure and organisation of the Board’s work
The organisation of the Board’s work depends critically on the Board secretaries and the interplay of the Chairman and Chief Executive. Effective Boards understand how to organise and structure their work.
- Regular reviews and reflections about the Board’s work
Regular time-outs, where Board members can connect, leave the daily work behind and reflect on their work are crucial to success.
Chairmen, Chief Executives and Directors, as well as Investment professionals, have the capability to master the art of value creation. They need to dare to reach out and incorporate other tools and techniques into their repertoire to create superior returns, strengthen their own position and enhance their own career along the way.
Each and every hallmark detailed is in essence a lever to achieve the goals set out in the value creation plan. If implemented in a consequential and professional manner organisations can achieve superior returns and attract ambitious professionals who wish to be part of high performing Boards and Executive leadership teams.
Dr Sabine Dembkowski is Managing Partner of Better Boards, www.better-boards.com