Monday, September 21, 2015

Conformance vs. Performance: What’s Board’s Priority

To some degree, conformance is inherent within the value-driven performance.

Corporate Board is one of the most important governance bodies to oversight strategy and enforce GRC disciplines. Many directors think that the role of the director is conformance. The underlying question is actually fundamental: What is corporate governance, when is it necessary and how should it work? Conformance vs. Performance, which is more important for the Corporate Board? Is it possible that companies are burdening the boards with so many different tasks that the main task and focus of the board, which is to create long-term profitable companies, will be inundated by all other types of issues?

Both performance and conformance are important. Boards need to perform and conform at the same time. Performance without conformance is not genuine. Conformance without performance adds very little to the firm value. The 'elephant in the room' question for directors, boards and directors' institutes is authenticity. Many directors are aware of 'how time should be prioritized,' but in the heart of the engagement, a different pattern emerges, or so it seems. While some boards seem to balance these priorities well, many do not. What will it take for boards to do both well, in the name of value/wealth creation, and for directors to report accurately? The catalyst for the question is what appears to be a chasm between what directors claim as the priority and what actually occurs when boards are in session. Some suggest that a new conception of corporate governance is required. The current model is still skewed by too much emphasis on compliance, too much "hands off" and now a host of social and politically correct pressures being applied.

No question that performance is the priority for boards. Many boards think that the role of the individual director is conformance, which has the result to stifle probing questions and the natural tensions that allow for good decision-making. There is no doubt that the board only fulfills its role to shareholders and the management team when it is focused on performance. To some degree, conformance is inherent within the value-driven performance. More specifically, this "performance" should be focused on the maximization of 1) Capital allocation, 2) Company performance and 3) Shareholder value. The Board's role, in large part, is to make good decisions that enhance the value creation for the organization. They need to focus on their own performance as well as the performance of the management team; and, that performance is not limited to financial performance, but also to the firm's performance in creating value for employees and customers. It's not only about now, but also about the future and that means an open mindset to change.

Generating a high-performing Board is a question of appointing the right persons to Boards which implies inclusiversity (inclusiveness+ diversity); It's the diversity both from a cognitive difference or functional perspective. The question now becomes who (can or should) drive such diversity in the Boardroom and how can you make that happen? Board meetings can be intense with the much more in-depth questioning of management, plans, results, etc. accompanied by much higher levels of holding management accountable. In essence, it is about savvy business people digging in to make the business the best and most valuable it can be. In allocating board meeting time, it’s important to structure the agenda so strategic and performance related issues come first and compliance issues towards the end. Otherwise, there is a risk that the compliance or conformance issues crowd out performance matters.

As with anything, context is essential. When a board does not have any context or the wrong context, then everything else including non-executive chairman selection, director selection, agenda focus, interaction with management, etc. will be sub-optimal or worse. But, if a strong chairman who has the right stuff to lead a board, defines the primary purpose of the board as the maximization of capital allocation, business performance, and shareholder value, then there is a clear context for all of the other components to fall into place properly.


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