19th December 2011
Hilton was responding to news that Equitable Life chief executive Chris Wiscarson plans to mark the 150th anniversary of the trouble insurer with a report into why ‘intelligent boards make bad decisions '; Hilton reckons the research is long overdue:
"So much of corporate governance is devoted to making sure boards have the right mix of skills, and the right amount of diversity and deliver the right amount of challenge. People who are close to these things say it is a complete waste of time because boards have more mood swings than a troubled adolescent. Some respond brilliantly to crises, some are hopeless. Some are great with the detail, others ignore it. Some are good one day, erratic the next. And you just have to look at the recent record of some of the greatest names in the land to know that they can all make very bad decisions."
It is a subject previously touched upon in the Mindful Money piece responding to the RBS report, where an apparently good board failed to prevent calamity:
"The 17 strong RBS board was held out as a boardroom of all the talents, more than a match for a strong chief executive. And there were many talented individuals although few with direct involvement in banking. Goodwin found it easier to control a large group than he would a smaller number of more determined non-execs."
Clearly there is more at work in the construction of a good board than simply gathering a selection of fine minds, though clearly it is important to have skilled and intelligent people. There is always a difficult line to draw between the number of insiders and outsiders. Insiders will attract the tag of cronyism and may be too close to challenge the decisions of management effectively. Outsiders may bring perspective, but can be blinded by science by those with more in-depth knowledge of the industry. This seems to have been part of the problem for RBS.
This piece by headhunters' Russell Reynolds highlights some of the most important considerations for companies. It suggests that companies have to achieve balance in three major areas: Continuity vs. fresh perspective; Cohesion vs. diversity; Granular expertise vs. big-picture oversight. It adds that companies are currently in flux over board composition, as the financial crisis has exposed their inadequacies.
In the wake of the RBS report, a number of solutions have been offered to the problem of ensuring that boards enable a company to operate efficiently. Christinej, on the Guardian comment boards believes that a strong Chair is the key to the effectiveness of a board: "Boards are mainly, I think, as good as their Chair. If you have a weak or ineffectual chair then nothing is EVER discussed fully, in depth or effectively. If you have a Chair that is too close to the CEO – same problem. Issues that should be flagged are deemed to be micro-managing or are left off the agenda completely!"
Some believe the issue can only be resolved through government intervention. peterfieldman says on the same site: "Whether there will be a massive shake up of this cosy cosseted world depends on governments cracking down on excessive earnings, bonuses and pensions and abolishing all the tax avoidance schemes to level the tax playing field and making boardrooms accountable to all the shareholders with penalties for negligence or wrongdoing."
DonkeyLogic: "If I were a PM, I would have at least 2 burly, aggressive, Government pedants, sitting in on the meetings of every single large UK national Bank, Insurance and Pension group – until I was utterly satisfied that incorruptable remote monitoring was operating effectively."
C2H4n suggests that some of the structural problems stem from the ‘almost incestuous' relationship between remuneration committees and boards: "The fact that the committees set the directors packages and the board then decides the level of reward for the non-executive directors, many of whom serve in several companies, is a nonsense. Restricting boardroom pay in these circumstances is akin to inviting turkeys to vote for Christmas."
The Equitable Report, when it finally emerges, should provide some insight into the ideal board composition. The economic crisis has exposed the limitations of existing boardroom arrangements, but it has – as yet – failed to unearth a solution.
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