Globally, companies have realised the importance of communicating their sustainable value to stakeholders. It would follow that the conversation around ESG and sustainability is also on the board agenda in African organisations.
But in many listed companies in our African capital markets, the conversation is not on the table at all. Or if it is, it’s originated at and doesn’t move past management level.
Consequently, companies are not including sustainability in their communicated investment case, in their social content, investor engagements, reporting… The list goes on – a move likely to have increasingly negative consequences as ESG becomes a weightier criterion in investment decisions.
I regularly hear from senior level management that the board feels it’s unnecessary to get involved in the issue.
This thinking is not limited to ESG. Indeed, Baldwin’s article below, ‘The Fading Bright Line’, discusses the oft-blurry delineation between the duties and jurisdictions of management and the board.
He references a 7-question framework to determine whether or not the board is straying into management’s lane. When we apply this to the sustainability message and ESG, stakeholder communications is clearly a board-level issue.
Question One. Is it big? Yes! Messaging and activities surrounding an organisation’s sustainable value can have a substantial impact on shareholding and potential investment.
Question Two. Is it about the future? By nature, yes. Companies implementing sustainable business policies and practices ensure continuity. Stakeholders want to know that companies are pursuing sustainable value creation. Investors need reasonable assurance that their investment will appreciate in the short, medium and long term.
Question Three. Is it core to the mission or purpose? This depends on the organisation. The board is the guardian of the mission and has to determine to what extent they will examine strategic and financial decisions in the ‘sustainability’ context.
Question Four. Is a high-level policy decision needed? In most organisations, adopting sustainable practices will require a shift in policies and guidelines. For example, the move to ESG reporting is an issue which necessitates board involvement.
Question Five. Is there a red flag? This is highly contextual, and may take into consideration issues including governance history, political landscape and issues regarding resource availability, to name a few.
Question Six. Is your watchdog paying attention? Undoubtedly. Regulators, activist investors, government and other stakeholders are increasingly considering the sustainability message in policy and individual decisions. Boards need to consider this in high level strategy, ensuring that the business is acting proactively rather than reactively.
Question Seven. Does the CEO need the board’s support? Yes. As Baldwin states, ‘Sometimes the management team needs to know that the board has their back. Or the CEO may want help from directors with connections to important stakeholders. When the CEO calls for support, the board should respond with one voice.’
How do I help company boards and executives stay ahead of the sustainability curve?
- I advise companies on what content to publish, and how, and when, under a definition of what successful corporate communications actually is. I future-proof corporate communications.
- My team assists with what’s needed, integrates systems and manages content and engagement – on websites, email and social media (and apps) all the stuff most management teams can’t easily do or don’t have the time to do
- We then analyse live dashboards and amend the strategy accordingly
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The Fading Bright Line
Directors – both new and experienced – often struggle with differentiating their role from that of management. As a board member – whatever the nature of the organization you serve – you want to get a handle on your governance role.
“I would like to find out more about / receive a refresher on the division of governance and operations – what falls under governance, operations, or possibly joint responsibility.” – A Savvy Director reader
“I found it hard not to dabble in operations – I know I tended to ‘takeover.’ That’s a skill challenge worthy of sharpening up on, in my humble opinion.” – A Savvy Director reader
The traditional advice is that there’s a bright line between the role of the board and that of management. It’s an attractive idea, but the reality is not that simple.
What Bright Line?
There’s always a line down the center of the road, marking distinct lanes that keep traffic orderly.
Or is there?
In my part of the world, we’re used to dramatic weather extremes – sweltering summers and brutally cold winters. Along with frigid winter temperatures comes snow, and along with the snow comes road clearing.
The annual damage inflicted on our roads by the combination of snow, salt, sand, and heavy equipment is significant. For one thing, the painted lines fade away. By the time spring comes, they’re almost invisible. When the crews get around to repainting the lines, the clarity is a welcome relief. There are no more excuses for vehicles to straddle two lanes or randomly switch from one to another.
When it comes to governance vs. management, we may long for the same lack of ambiguity – a freshly painted line that delineates the two lanes. Unfortunately, at times it seems like the repainting trucks have lost their way. For some organizations, the bright line is as faded and blurred as the lines on a Winnipeg street in April.
“… the Board is becoming more and more involved in the business and the boundary of what the Board should direct and what is management’s responsibility is blurring.” – A Savvy Director reader
Noses In. Fingers Out.
In simple terms, boards are responsible for oversight and planning and management takes care of the daily operations, as described by the colorful phrase “noses in, fingers out.” It’s meant to convey that the board should challenge management but refrain from meddling. The article ‘The Difference Between Governance and Management’; provides a clear explanation.
The board’s oversight involves duties such as selecting and evaluating the CEO; establishing the tone at the top; ensuring effective compliance and risk management; approving and monitoring the strategic plan; ensuring the integrity of financial reporting; allocating capital allocation; and directing crisis management.
The CEO is expected to manage the affairs of the business, develop and implement the strategic plan; recommend capital allocation; respond to enterprise risks; prepare budgets and financial statements; select the management team and work with the board on succession; and develop crisis management procedures.
But one size doesn’t fit all.
Every organization has to find its own division of responsibilities – one that works for its size, maturity, and the sector where it operates.
The law doesn’t preclude boards from managing the companies they serve. There’s enough flexibility for a board to fully delegate management responsibilities or to actually run the day-to-day affairs of the business. Usually, the board finds a middle ground where some responsibilities are delegated to management and others retained by the board.
There’s a variety of scenarios where board members might need to get their fingers in. Sometimes board directors are required to participate in a variety of roles to help the organization be successful. This type of scenario is particularly common in the non-profit sector, or with start ups and smaller companies. That’s completely fine.
“In the NFP sector, balancing governance with the need to be more hands on.” – A Savvy Director reader
“Boards of smaller companies may need to roll up their sleeves and be more involved in the company’s day-to-day activities. … Directors … may need to be accessible to investors, lenders, and other stakeholders, as well as to auditors and other external advisers, and may need to take a more active role in seeking capital and other activities.” – ‘An alternate universe: The small, young company board.’ ; Deloitte Center for Board Effectiveness
But when fulfilling their governance responsibilities, the directors’ role needs to be clear. Everyone needs to be on the same page. Getting consensus when times are good helps avoid problems down the road. This could be a written board mandate or terms of reference, or board-approved policies that specify the limitations on the CEO’s authority.
Even within one organization, the role of the board shifts depending on the area being considered and the situation it’s faced with. The book ‘Boards That Lead’; by Ram Charan, Dennis Carey and Michael Useem (© Harvard Business Review 2014) describes a model where boards consciously choose to take charge, partner with management, monitor, or stay out of the way, (as illustrated in the graphic below, adapted from the book.)
A crisis may require a board to adapt its approach – for instance, shifting from staying Out of the Way to Partnering or even Taking Charge. Directors need to know when and how to make that shift – and then shift back when the time is right.
When Everything Changes
When the external environment changes dramatically, or a black swan event occurs, or an unforeseen crisis develops, even the most carefully worded board mandate will probably not be up to the task. Think of the crisis as a blizzard. Even the brightest lines are completely obscured by the falling, blowing, swirling snow. If things get bad enough, traffic is restricted to one lane – there’s no separation at all.
When the blizzard ends, driving in the newly fallen snow creates ruts – and when the ruts get deep enough, it can be all but impossible to escape from them without extra traction, a good hard push, or maybe even a tow.
That may be what happened to board governance during the COVID-19 pandemic. Boards were required to lean in. They got involved, received more frequent updates, had more meetings, and generally drifted into what had been management’s lane.
The COVID blizzard may be ending (let’s hope so!), but I’m pretty sure it’s going to take some work to get out of the governance rut we find ourselves in and catch sight of that bright line again!
Because it’s not just about COVID. During the same period, governance expectations have increased exponentially in so many other areas as well – DEI (Diversity, Equity and Inclusion), ESG (Environment, Social and Governance), VUCA (Volatility, Uncertainty, Complexity and Ambiguity), Stakeholder Capitalism, and so on.
According to the HBR article ‘Covid-19 Is Rewriting the Rules of Corporate Governance,’ the new expectations of boards will require directors to devote more time working closely with management on strategy, tracking a richer set of performance measures, overseeing an expanded menu of risks, rethinking compensation policies, engaging in more thoughtful deliberation, and reviewing board composition.
Navigating the New Reality
“At this moment, when old assumptions are being questioned, [boards will want] to ensure that their members have a shared understanding of the board’s role and responsibilities, and of their individual role and responsibilities as directors. In the flurry of Covid-inspired activity, it is important that boards not lose sight of their central functions as governing bodies of the companies they serve.” – ‘Covid-19 Is Rewriting the Rules of Corporate Governance,’ Lynn S. Paine. Harvard Business Review.
If you need a push getting out of the post-COVID governance rut to re-discover the faded bright line, I recommend the article ‘Distinguishing Governance from Management’ by Barry S. Bader. It was written for a hospital administration audience and dates back to 2008, but it’s still tremendously useful today regardless of your industry sector or the size of your organization.
The author explains that different situations affect the appropriate level of governance involvement. Adverse financial results, allegations of impropriety, or consideration of a major transaction would all call for more board engagement and closer oversight. The article provides seven questions – summarized below – to help a board and management agree on their appropriate roles for any situation.
If you’re concerned that the board is straying into management’s lane, ask yourself whether the answer to one or more of these questions is yes or no.
Question One. Is it big? The bigger the impact, the more the board ought to play a role in shaping the action and its consequences. One rule of thumb is that organizational decisions impacting roughly ten percent or more of revenues are strategic decisions.
Question Two. Is it about the future? Boards make their impact on what the organization will be down the road – their fingerprints should be on the long-term vision and the strategic plan.
Question Three. Is it core to the mission or purpose? The board is the guardian of the mission. The board has to examine strategic and financial decisions in that context.
Question Four. Is a high-level policy decision needed? Board policies set forth principles or guidelines for situations that have a major impact, require compliance, or affect the conduct of the board and management. Examples are conflict of interest, executive compensation, CEO evaluation, and public transparency.
Question Five. Is there a red flag? The board should recognize red flags and troublesome trends. Even one-time events such as unethical activity or dramatic underperformance – or a pandemic! – require the board to ensure that management recognizes the problem, has the capability, tools and resources to address it, and has plans in place.
Question Six. Is your watchdog paying attention? Who’s your watchdog? That depends entirely on your organization and the sector it operates in. It might be a regulator, activist investors, government, stakeholders, or news media. If the watchdogs care about something, the board should care too.
Question Seven. Does the CEO need the board’s support? Sometimes the management team needs to know that the board has their back. Or the CEO may want help from directors with connections to important stakeholders. When the CEO calls for support, the board should respond with one voice.
- Don’t expect the line between governance and management to always be bright. It’s not that simple.
- The pandemic, along with a host of additional external factors, have blurred the fading line even more.
- It’s useful to clarify and document the specific roles of the board and management, even though it’s impossible to address every situation that will arise.
- When in doubt, encourage your board to examine the issue through the lens of the Seven Questions to help clarify roles.
- The Difference Between Governance and Management. Michael W. Peregrine. Governance Institute. July 2017.
- Boards That Lead. Ram, Charan, Dennis Carey and Michael Useem. Harvard Business Review. © 2014.
- Covid-19 Is Rewriting the Rules of Corporate Governance. Lynn S. Paine. Harvard Business Review. October 2020.
- The effects of Covid-19 on boards and governance. Bertrand Richard. Spencer Stuart. October 2020.
- An alternate universe: The small, young company board. Adam J. Epstein, Debbie McCormack, Jim Parkin and Bob Lamm. Deloitte Center for Board Effectiveness. July 2021.
- Distinguishing Governance from Management. Barry S. Bader. Great Boards. 2008.
This article, authored by Scott Baldwin, was originally published on The Savvy Director Blog: “The Fading Bright Line” by Scott Baldwin, DirectorPrep
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AfricanFinancials works with Boards, CEOs and companies who want to build sustainable businesses through better corporate and investor communications. Our focus is online investor relations to promote secure two-way communications with investors and stakeholders.