McKinsey & Co. has published a piece this month in which it interviews veteran board member David Beatty, O.B.E. and C.M. (Order of Canada) about how boards need to improve thier effectiveness. Beatty is also Chair of the Clarkson Centre for Business Ethics and Board Effectiveness (Univ. of Toronto's Rotman School of Management) and if I recall correctly used be a board director at BMO, as one of 35 board positions held over the years.
Beatty feels that boards everywhere need to learn as much as they can about the companies they serve in order to validate financial results, protect corporate assets, and effectively counsel the CEO. One "litmus test" for boards and firms achieving this aim is whether or not there are activist investors about. Firms that don't pass the grade may become opportunities for activist directors to come in and shake up things for financial gain.
In this light, I have started to see activist investors as an actor in market discipline. Market discipline is an important governance tool and my read of Beatty's comments is that if a board and management is underperforming, market discipline can occur with the arrival of activist or engagement players.
The interview starts with a wake up call that sitting on boards today is not for the faint at heart or "gifted amateurs". His sense is that boards need to be smaller, nimble, and importantly more expert about the company, its operations and affairs. He suggests directors should clock 300 to 350 hours a year between preparation, board and monitoring responsibilities. He notes that outside directors can really add value in two areas: a) monitoring and b) offering a different perspective on the competitive environment.
Beatty posits that while CEOs maybe somewhat closed minded about the potential value of a board from time to time, the CFO role is more pivotal, can "unlock the potential value of the board". The CFO knows the numbers and the operations (but vitally are not running the operations day to day) so are uniquely placed to contribute to effective boardroom norms. He advocates the English system of having more than the CEO on the board representing operating management and clearly thinks the CFO (or FD here in the UK) is a natural given their knowledge of the numbers and independence from day to day operating management.
Beatty posits that the Chairman carries an important responsbility to bring out the best in management, other directors and other stakeholders alike but isn't necessarily a front line player him or herself. Importantly, Beatty feels the CEO and Chairman roles should be seperate but doesn't think the practice of combining those roles will change anytime soon in the US. He also feels there should be term limits of around 9-years for directors. He doesn't advocate peer evaluations but instead continual contact with fellow directors to faciliate an exit of poorly performing board members when serving in the Chair.
Beatty interesting remarks that public family controlled business typically outperform non-family controlled firms given the family nest egg effect. He should know, given his role at such firms in his professional experience.
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