Board governance, connecting the dots

By Dinesh Weerakkody
Dave Ulrich is a Professor at the Ross School of Business, University of Michigan and a partner at the RBL group, a consulting firm focused on helping organisations and leaders deliver value. He studies how organisations build capabilities of leadership, speed, learning, accountability and talent through leveraging human resources. He has published over 175 articles and book chapters and 23 books and has been Ranked #1 as the most influential international thought leader in HR. Ulrich is the HR gurus’ guru, credited with developing the ‘HR business partner’ model and other influential ideas in books including ‘HR Champions’ and ‘The HR Value Proposition’. Following are the excerpts of an interview with Prof. Ulrich. 
 

Business dramas in recent years have piled on pressure on boards to become more connected with the business and become a no-nonsense board. What is your experience?
Recent scandals in major companies have cast the public spotlight on the role and performance of the chairman, CEO and board of directors. Since this attention was generated by corporate malfeasance and since it has the prospect of criminal charges for CEOs and board members, people have been attempting to create regulatory controls that define ethical and legal behaviours. 

Though, defining appropriate leader and board behaviours through bureaucratic controls is relatively easy, it may not be sufficient or right. Apart from the fact that honesty cannot be legislated through a set of rules, this focus misses the bigger question of how boards must work if they are to be effective and add value to the firm’s stakeholders.

Ultimately, every board is responsible for governing its firm in the best interest of the shareholders and board members. They are responsible for their actions and the actions of the firm’s leaders relative to shareholders. To fulfil this duty, boards traditionally have focused on the visible, tangible and financial data of the firm found in balance sheets and income statements.

The emerging rules and regulations shift attention to governance in addition to financial requirements, but these regulations attempt to track governance issues the same way that financial issues were tracked, by prescribing processes and procedures designed to measure board governance. Measuring board behaviour is critical but insufficient for a board that wants to help a firm create value.
 

Are you implying that most boards spend more time now figuring out what good governance is and how to measure it than helping a business deliver value to its shareholders?
Creating value often requires that leaders make some bold moves. But after the 2008-10 scandals, too many boards have grown hesitant to endorse such moves. In the name of governance, too many boards are looking to reduce risk and to assure proper governance. As a result, more time is spent figuring out what good governance is and how to measure it than helping a business deliver value to shareholders. But internal governance focus makes boards timid—not a good thing when you want to win.

here has almost been a pendulum shift from what is required for shareholders to gain value to what is required for corporate regulators to avoid corporate malfeasance. What is needed instead is a way to enable boards to assure good governance while at the same time serving shareholders. Making bold decisions, taking appropriate risks and delivering value to shareholders must be done in the context of ethical governance. 
Therefore, figuring out how to monitor board performance and leader behaviour while not losing sight of customers and investors means finding new ways to govern boards. The emerging practice of defining governance through rules is a bit like trying to rescue a football game by evaluating the scorecard. Rules can provide guidance to set up a reliable process, but they do nothing for the quality or the content.
 

So what do boards have to do to track governance?
What boards need to track governance is to find a way to monitor their players, their motivation, their skills, their ability to learn, the way they interact and the behaviours that get them ahead. Enron, for example, on paper had excellent governance systems, but adhering to them seems to have been a career-limiting move. 

To govern for value, boards are going to have to understand, advocate and monitor the ‘soft’ side of business: Do we have an organisation culture that assures honesty and success? Do we have the right organisation capabilities to deliver our shareholder and customer promises? Do we have the right people in the right places with the right skills? What motivates them and what gets them ahead in the firm? 
Can we learn from past successes and failures? Are decisions being made by the right people in the right places? Are people aligned with the corporate intent? Do we have a firm brand that reflects who we truly need to be both inside to all employees and outside to customers and investors? Posing and answering these questions become 
the foundation for governing for value.
 

Often if the board of directors isn’t right, then nothing is right. Great boards combine several skills and competencies to govern effectively. What do boards need to do to govern effectively?
Boards need to have as unadulterated an access as possible to what is happening in the firm. That is, they need to get to the ‘ground truth’—what is really going on at the most basic level behind all the smokescreens and window dressing. Traditionally, board meetings are highly polished PowerPoint fests and presentation ballets, where everything is rehearsed and tightly choreographed to make sure no warts or cracks are visible. Indeed, the board’s own behaviour reinforces the pattern. Too often, dissent, hard questions and probing, feel improper, uncouth and out of place.
 

You have worked with most of the top Fortune 500 companies in the world. How do great board ground their decisions?
But good decisions are based on two things—good data and good thinking—and a board needs both, not only as individuals but also as a group. Good data is real and relevant. For the board this means that it needs to be able to find out whether the company can actually do as it says. It needs to be able to ask the right questions of the right people. This is not an altogether easy task. 

The chairman and CEO need to play an active role here. This is what they must tackle first: help the board ask the truly relevant questions and then ensure that they get the true answers. How the board gets the answers is a question of corporate style. Some companies, such as Home Depot, expect their board members to spend time with employees to get a feel for what is happening in the firm. Most companies react to such ideas like this chairman of a large U.S. corporation: “Are you crazy?” And yet, a board’s usefulness is only as good as its understanding of the firm and that is usually best found on the shop floor. 

Good thinking comes when data is looked at from a number of angles and what data are turned into decisions. Board discussions should be intellectual free for all where board members examine information shared in terms of historical context and future opportunities. Out of discussions should emerge a shared point of view about what decisions the firm should make to create lasting value.
 

How do board members debate options that will lead to future success?
To turn data into decisions, board members need a shared context or a common understanding of the challenges facing a firm and opportunities in the marketplace. Shared context comes when the board has information on all aspects of the company’s past, present and projected future. This data includes employee surveys that report competencies and commitments, current and future customer requirements, competitor trends and market opportunities. 

With this data that builds context, board members may debate choices that will lead to future success. In the debate, dissent should be encouraged as interpretations of data and alternative responses are discussed and reviewed. Less time in board meetings should be spent reviewing data and more time spent debating and proposing alternatives. Nothing is more dangerous for a CEO and the company’s stakeholders than a board that makes decisions out of context because, it was ignorant.
 

How would a board ensure that they get the right data to ensure they do not make decisions out of context?
While data on customers and investors may exist, information on organisation and people often is scanty or anecdotal. Getting good data on organisation requires a corporate health check that supplies relevant data to the board on a regular basis.
 

Explain what you mean by a corporate health check?
Health check data summarize an organisation’s intangibles as reflected in the specific perceptions stakeholder groups (customers, employees, analysts, investors, suppliers, and others) about how leaders are building value through organisation capabilities. Such a health check does two things: It gives the board a framework with which to evaluate intangibles in a rigorous fashion. Moreover, it offers a view that is less biased than other alternatives.

Think of a health check as a 360-degree feedback tool for the whole organisation. Like an income statement and balance sheet that report intangibles, a health check allows boards to have organisational data on which to make decisions. This data alerts board members as well as senior executives to the perceptions that ultimately drive shareholder value. Findings reveal the motivational relationships among employees, customers and the economic value created. The results help leaders determine which efforts will leverage intangibles to produce the most significant performance and value impact.
 

Can the health check become the basis for an organisation audit?
Yes it can become the basis for an organisation audit that would explore four critical dimensions of intangible value with each participating stakeholder group:

• Does this organisation keep its promises?
• Do stakeholders understand the growth strategy and are they aligned to it?
• Has the company allocated resources consistent with its strategic intent?
• Does the company build value through people and organisation in a way that engenders customer loyalty and employee commitment and confidence?
• With data on the above questions in hand, the board is more able to make both bold and accurate decisions.

You talked of the intangibles. Why does it matter so much now?
The most important thing boards have to decide is that intangibles matter. Intangibles represent the market value of a firm not accounted for by today’s earnings. In many cases, this is 30-60 percent of a firm’s total market capitalization. While lip service is often given to intangible value, it deserves more. Frequently, what gets the board attention and respect are the economic numbers that are tangible, easy to track and publicly available. 
But who is paying attention to the data on intangibles? To put it bluntly, we now have processes that make it a lot harder to fudge the numbers. Numbers are tangible and bureaucratic processes can go a long way to ensure their reliability. With intangibles, though, the problem is much bigger. Being inherently soft, they are harder to grasp, understand, interpret and validate. Boards therefore need to get as good in dealing with intangibles as they are in dealing with traditional tangible numbers.
 

This means assembling a board that has a deep understanding of the business?
Yes, this means putting people on the board who are experts in things like branding, HR, risk, learning and the like—not usually the kind of people boards look to right now. That is why most boards miss major risks that they should have caught in the first round.