Increased scrutiny leads corporate boards to consider more proactive positions

boardroom
Corporate board members aren't as comfortable in their role today as year's past.

As investors and members themselves pay increasing attention to corporate boards’ performance, the boards need to reconsider their roles, experts say.

Companies are doubling down on board members, hiring third parties to make objective evaluations, according to a recent Bloomberg BNA article, and the onus is shifting from boards as a whole to individual members. For instance, in 2016, 12 companies that Institutional Shareholder Services (ISS) studied used external evaluators, while 61 have in 2017 so far. ISS also found that most of the Russell 3000 company boards are shifting performance measurements to individual members.

“It’s gotten much more systematic,” Constantine Alexandrakis, a member of the board and chief executive officer advisory group at Russell Reynolds Associates, an executive search firm, told Bloomberg. Investors are looking more closely at who’s on the board, and members are becoming more critical of one another, he added.

A 2016 PwC poll found that directors were more likely to recommend replacing board members today than they were four years ago for reasons such as being unprepared for meetings and lacking expertise.

One way that boards can step up their game is to take a more proactive approach, Annette Mikes, professor of risk management and accounting at Switzerland’s University of Lausanne, wrote in a Board Agenda article. Headline-making corporate scandals such as when the Environmental Protection Agency found in 2015 that Volkswagen had intentionally programmed diesel engines to avoid limits on nitrogen oxide emissions, have made boards’ traditionally “passive monitoring of management decisions” less wise, she wrote. Instead, “a more proactive, interventionist approach is needed from nonexecutive directors.”

She studied the growing pains of the MultiBank Group board after it acquired in 2000 EurInsurance, an insurance firm in 16 countries. Although analysts lauded the purchase, a global stock market slump brought sizable losses to the European insurance industry. By the end of 2002, MultiBank was making substantial write-offs because of EurInsurance’s equity investment losses. That year, MultiBank lost more than half its 2000 market value, and its credit rating was downgraded in 2003, posing “a serious threat to the survival of the Group in its existing form,” the article states.

To respond to this crisis, MultiBank’s board became increasingly involved in management, Mikes wrote.

“The overall approach became far more proactive and interventionist,” according to the article. “The style of board management interaction assumed a ‘proposal—discussion—intervention’ pattern. All crisis-management-related proposals from management were now substantively discussed by the board, challenged and often rejected in their submitted form and returned to management with suggestive or directive guidelines.”

What’s more, the executive team changed, with the CEOs at MultiBank and EurInsurance replaced, and the board requested the establishment of a risk-management committee.

The board also became more active in internal operations and strategy, particularly, steps managers could take to preserve credit ratings and contain the problems to EurInsurance so they didn’t affect the rest of the organization. Optimistically, the board also addressed a postrecovery strategy “to re-establish capital flexibility, including paring back some business areas and potential sales,” Mikes wrote.

One of the most notable moves, she added, was the chairman’s June 2004 decision to make a strategic overhaul, and the board agreed to “dismantle the bancassurance business model, tasked management with devising a suitable strategy to deliver it, and shaped the terms of that strategy.” The model refers to the sale of insurance through banks.

At the end of 2004, MultiBank was returning to profitability and the board was becoming less active again.

This case study illustrates how “such behaviour may be crucial for corporate survival, and [how] board members need the skills and characteristics to act in a similar manner, if required,” Mikes wrote. “The level of control exerted over strategic decision-making may only be necessary in times of crisis. Nevertheless, boards can still take a more proactive role in determining how and what information is used to support board decisionmaking.”

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