The argument for using external advisers isn’t about a Chairman being so frightened of an issue that all he/she can think of is to call in the cavalry, it’s actually about using the right tools for the job. It is important that the risks associated with poor Board or director performance are taken seriously, also that a Chairman has enough trust in him/herself and the other directors to deal with the risks but perhaps most importantly, the Chairman must be prepared to seek external help and guidance.
There are many Board performance related issues that should concern all forward looking Chairmen and, whilst many of these issues can be dealt with internally, there are others that require a genuinely independent view to be fully understood.
BEL can help Chairmen identify the true nature and extent of issues and to propose solutions that are not always obvious to those facing the challenge. Importantly, though, at BEL our focus is not simply on regulatory and legal compliance or dealing with issues, it is about getting the best value out of the Board. The Board of directors is an expensive and powerful asset and to ensure that the organisation performs to its best advantage it is crucial that the Board operates effectively and in-line with the organisation’s objectives and principles.
The terminology of the question posed is interesting because if a Chairman is genuinely frightened about an issue then there must be concerns about the ability of the Board to deal with it. The corollary of this is that there are real challenges out there facing Boards and if there is not enough concern being shown, then perhaps the Board is not appropriately aware or informed. In both of these situations, the organisation in question is clearly in need of good quality external advice.
I appreciate that this is, perhaps, just a matter of the wording of the question but it is a genuinely important point, the Chairman must have absolute confidence in the ability of the Board but not to the extent that external advice and guidance is not valued.
If the Chairman considers the Board performance evaluation to be simply a regulatory compliance ‘box ticking’ exercise, then the point is being missed. These reviews are a key component of good governance and, if they are not being carried out for the right reasons, not only is an opportunity being missed but there is a real danger that non performance issues are being over-looked. Stakeholders in an organisation have every cause to be frightened if they find out that board performance reviews are not being carried out properly. An ineffective or biased review can hide many major faults in the Boardroom and, as the history of corporate failures shows us, these faults can be fatal.
The biggest exposure that a Chairman has is to not knowing the truth. Board communication and reporting systems are crucial to enable the Board to do its job properly and there are many examples of organisational failure caused or exacerbated by the Board’s lack of awareness. Sometimes this can be fraudulent, it can be fear of telling the truth or it might be pure mis-interpretation (individuals hear the same information in different ways!); either way, this can be dangerous. The use of professional, external advisers can help the Chairman to be confident that true and accurate information is being provided.
This is particularly important when considering board performance, if this exercise is carried out in-house, there is no objectivity and, more often than not, a real desire to avoid conflict. There are good reasons for this; a board is a team, they have to work together and criticism of colleagues, particularly the Chairman, is difficult to deliver without upsetting the natural balance and harmony around the table. External advisers can ask the awkward questions, confront the issues and provide a level of challenge that the ‘team’ members cannot.
An associated issue here is the risk of independent directors ‘going native’. After a certain period of time, certain practices and ways of working become the accepted norm and if exposed to them for too long, independent judgement is compromised. This doesn’t necessarily mean that the board members concerned are no longer of value, it just re-inforces the need for external validation.
At the other end of the scale from long-serving directors, newly appointed NEDs need guidance and training; the skills needed to be a good NED are different to those of an executive. The risk of NEDs ‘going native’ from day-one is exacerbated by this training being provided internally.
The benefits of independence and objectivity should never be underestimated. For this reason, certain activities, such as ‘awayday’ facilitation or board observation, should never be handled internally or by associated contacts. Other activities, such as composition, communication, performance and process reviews, can be handled internally but best results will always come from externally facilitated work. Similarly the validity of certain exercises is enhanced by using independent advisers. Regulators, customers, funders, investors and business partners will all give far more credence to a Board performance review carried out externally by independent advisers than they would to an in-house version.
To de devil’s advocate, if this question is posed in the context that external advisers having nothing to add to the corporate governance infrastructure around an organisation, then, again, the stakeholders need to be very frightened! A Board who thinks they have all the answers is a very dangerous Board indeed. Large organisations and the market places in which they operate are complex and dynamic environments, an external validation of what is going on around the boardroom table is crucial to ensure the board is structured properly to meet the challenges and is aware of the latest tools and techniques available to deal with them.
Going back to my opening comments, the argument for using external advisers is about using the right tools for the job. The Chairman must have trust in the Board’s ability but it is also important that external help and guidance is sought to complement their skills and to ensure they are being effectively utilised.