Role modelling the BOD function

Ensuring that functioning corporate governance is in place is a board of directors’ key task – as advocate and enforcer (George (2013)). The more ownership is dispersed, disengaged or indecisive, the more a functioning corporate governance and a cohesive board with complementary competencies of the directors matter (cf. Barton (2011)).

“The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner” (Barton (2011)). This means, that the board of directors has to actively carry out the capital-markets- and the single-owner-proxy roles in parallel, with the emphasis depending on a company’s background, i.e. whether owned by a family, by an institutional investor, being part of a conglomerate or being publicly listed (cf. Barton (2011)).


Becoming a board member, historically often a more ceremonial position, requires more than accepting an office (cf. Smith (2015b)): it is undertaking a task and assuming responsibility – clearly delineated from management and with an explicit governance metrics: the management is accountable for leading the company and achieving the results within the guidelines defined by the board, the board accordingly for qualified supervision and advice including setting aspirations.

The best way to criticise is role modelling. Before joining a board, one must ask oneself whether to be able to bring the required expertise and integrity to contribute to overseeing the company and to functioning as shareholder link (cf. Barton & Wiseman (2015), Bailey & Koller (2014)).[1] Larry Fink’s comment during a 2009 debate about the future of capitalism in light of the financial crisis demonstrates the far-reaching significance of professionalization of nonexecutive directorships and the interaction between management and board of directors: “I actually don’t think risk management failed, I think corporate governance failed, because … the boards didn’t ask the right questions” (quoted by Barton (2011)).


Expertise. Often boards focus primarily on financials and their understanding decreases with respect to sources of value creation and even more regarding industry dynamics.[2] Too many board members seem to be generalists and lack in particular contextual industry knowledge (Barton & Wiseman (2015), Barton (2011)). To avoid the expertise gap, the board composition should mirror the mix of competencies and diversity in light of a company’s investment case. Each board member should have a clear understanding of the individual role within the board, which can range from chair to industry, regional or functional expert, and therefore have a clear grasp of the specific area in which to add value and of how to exert influence.[3] In order to bring expertises to bear, board of directors’ may need more-effective structures, be it via committees (e.g. for governance, nomination, compensation and audit), or direct project involvement of individual representatives, for example, regarding strategy, large business units with high industry dynamics, major change projects or capex investments (cf. Barton (2011)).


Integrity. Availability, independence and the mental discipline of keeping the investment case foremost in mind should characterize the commitment of a board. To serve other people presupposes integrity.


Taking on a board role, one should be aware of the required ‘quality time’, “a commitment that should be factored in before accepting a directorship” (Smith (2015b), cf. Barton & Wiseman (2015)). Alongside with time constraints, too mechanistic procedures, size and dysfunctionality – due to “bickering power grabbers or rubber-stamping snoozers” (Smith (2015b)) –, all resulting in a too limited and decoupled engagement, can impede a more determined working mode of the board and lead its role within the corporate governance ad absurdum.[4] Board members – even more so in challenging times or when a company is in crisis – must be authentically engaged, passionate to learn the business, and stay connected between meetings (George (2013), Smith (2015b)). Barton & Wiseman (2015) recommend for board members a time dedication of at least 35 days a year.[5], [6] Smith (2015b) points out that of equal importance is doing the own “homework on current board members and board dynamics …: Is this a collegial, inquisitive, professional group to work alongside?” in order to decide about taking on a board seat.[7]


Besides prudence, the loyalty of placing a company’s interest ahead of one’s own is the other core ‘fiduciary duty’ (cf. Barton & Wiseman (2015)). The required utmost inner and external independence is additionally crucial for thinking outside the box/seeing around the corner and breaking through inertia (Barton & Wiseman (2015).[8] “No man is fit to hold office who isn’t perfectly willing to leave it at any time …” (Charles T. Munger, quoted by Larcker & Tayan (2014)). Yakola (2014) points out the importance of truly independent board members in particular for companies heading in a crisis, expecting them to take the “role of as an early-warning system”.


Finally, board members sign up on an investment case based on long-term value creation.[9] The mental discipline pursuing this, starts with the own due diligence and conviction regarding the case’s feasibility, without which someone should not engage (cf. Smith (2015b).[10] A board needs to balance the pressure to deliver short-term financial results with the long-term value creation objectives, also in light of top-managements’ contract durations – potentially complicated by a mismatch with own time horizons (cf. Barton & Wiseman (2015), Bhagat et al. (2013)).[11]


Functioning as shareholder link. Board members need to come on board with an owner’s mind-set and play a central role in shareholder engagement and in facilitating ‘best ownership’ (cf. Bhagat et al. (2013), Beatty (2017)). Not only due to the growing influence of shareholder activism,[12] this has to include direct involvement in investor relations by acting as link between shareholders and management in both directions (Beatty (2017)):[13] Echoing the outside voices/thinking like an activist who surfaces alternate strategies, and engaging in dialogues with major shareholders with a buy-and-hold orientation, in particular when it comes to ensure their support for longer-term plans (cf. Beatty 2017, Decker (2017), Huyett & Zemmel (2015), Barton & Wiseman (2015), Fink (2015a)).[14] Done right, the board – as insiders better equipped – should be able to outthink the activists (Decker (2017)).


Setting up a board composition with the required qualifications and availabilities, which acts in an unpretentious manner and ideally with good chemistry among its members as well as with the management, demands a careful assessment.[15] George (2013) recommends a formal evaluation (by fellow board members) and a defined term of office.[16] “Yet process matters hugely in the boardroom …to establish the proper balance of power between management and the board” (George (2013)). “Creating a participative, collaborative dynamic while maintaining a healthy tension is critical” (Bhagat et al. (2013)). Management on the other hand must be willing to engage actively with their boards. Remaking boards against the described needs is standard counsel, but for many public and private companies – given the evidence for ‘governance arbitrage’ – reality is lagging behind, and ensuring a functioning corporate governance often seems to be an overdue change.


Frankfurt, 20 February 2017



[1] “Candidates [for the board of directors] should be selected for, among other things, their independence, character, ability to exercise sound judgment, diversity, age, demonstrated leadership, skills, including financial literacy, and experience in the context of the needs of the Board”(Apple Inc. (2012)).

[2] A McKinsey survey of 1,597 corporate directors confirms the dominance of financial figures: 86% of the respondents said they have a complete (36%) or good (50%) understanding of the company’s financial position, and 74% (complete 16%, good 58%) of how value is created in the company, but only 65% (complete 10%, good 55%) think that they understand the dynamics of the company’s industry (Bhagat et al. (2013)).

[3] “The only place outside directors can really add value – aside from policing and oversight functions – is in offering a different perspective on the competitive environment and the changes in that environment” (David Beatty, interviewed by Bailey & Koller (2014)).

[4] Bhagat et al. (2013) point out that within the six to eight meetings a year of most boards it is often hard to get beyond compliance-related topics and be at cause.

[5] The estimates for the required time commitment vary, e.g. from 16 to 20 days excl. committees (Fockenbrock (2015)) to 24 days in addition to regular board meetings (Robert C. Pozen, quoted by Barton & Wiseman (2015)) to as many as 54 days a year as standard for directors of PE owned companies (Barton (2011)). This is why in particular for multi-board members an insufficient attendance can be observed (Fockenbrock (2015), i.e. not serving on as many boards is a question of integrity (cf. George (2013). “There is a growing consensus that directors should sit on fewer boards and get paid … substantially more … [with the payment structure] shifted … toward longer-term rewards.” (Barton & Wiseman (2015)) At the same time compensation should be limited to a level by which a director would not lose independence (Larcker & Tayan (2014)). In this context Beroutsos et al. (2007) indicate, “nonexecutives seldom enjoy great financial gains if a company is successful, but they do stand to lose if there are lapses in compliance; lawsuits may ensue.”

[6] For example, Apple demands from its board of directors, beyond board and committee meetings, at least four executive sessions per year without the presence of management and encourages direct talking to officers and employees, visits to the corporation’s facilities, and attending accredited director education programs (Apple Inc. (2012)).

[7] Larcker at al. (2016) found in a survey of 187 US board directors of public and private companies that only 23 per cent “rate their boards very effective at giving direct feedback to fellow directors“ despite sub-optimal board room dynamics, e.g. with respect to active participation of all members, honesty in front of the management, coming too quick to consensus or even staying on-topic.

[8] “Only 14% of 692 directors and C-suite executives survey by McKinsey in September 2014 picked ‘a reputation for independent thinking’ as one of the main criteria that public company boards consider when appointing new directors” (Barton & Wiseman (2015)).

[9] If long-term value creation is not the basis of an investment case, the investment rather represents an arbitrage opportunity.

[10] In order to tie a board member to long-term performance, Barton & Wiseman (2015) encourage companies to insist on a – for the individual – ‘material’ ownership investment when joining a board, e.g. as combination of purchased equity and vesting incentive shares. At Apple, for example, “directors are expected to receive a substantial portion of their annual retainer in the form of equity” (Apple Inc. (2012)).

[11] According to a survey of McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted among 604 C-suite executives and directors in March 2014, often management holds the board responsible for overemphasizing short-term financial results vs. long-term value creation (Barton & Wiseman (2015)).

[12] Findings of research firm Activist Insight suggest that even “a stock’s short-term underperformance makes a company vulnerable” (Foley (2017).

[13] As the “shareholders are ultimately the ‘boss’ of the board”, the board should not rely only on analysts’ reports and management talking to the investors rather than taking the opportunity of direct contact (Decker (2017)).

[14] “… even if short-term investors cause day-to-day fluctuations in a company’s share price and dominate quarterly earnings calls, longer-term investors are the ones who align market prices with intrinsic value” (Goedhart et al. (2015), cf. Palter et al. (2008)). Therefore Larry Fink (quoted by Maisch (2015)) points out that companies owe their long-term investors loyalty. – “I believe in running the company for shareholders that are going to stay, rather than the ones that are going to leave” (Warren Buffet, quoted by Decker (2017)).

[15] Regulatory “one-size fit all” constraints, e.g. regarding workload (“e.g., able to focus on performance and not conformance”) or board composition make the task to set up a functioning board more difficult (Schofield (2014)).

[16] Decker (2017) advocates very consciously to limit terms but to not install term limits. At Apple, for example, directors serve for one-year terms and the ‘Nominating and Corporate Governance Committee’ reviews the appropriateness of continued service periodically. For each upcoming year, the agenda items have to be set to the extent foreseeable and practical, and each committee has its own charter (purpose, authority and responsibilities) and annual agenda (Apple Inc. (2012)).