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With this, the baronial era of the chief executive, seated on
an industrial domain with all the privileges, is coming to an
end. Same with the Directors.
These events were particularly important, given the
reputation of companies as training ground and inspiration
for future executives from other companies.
What is the lesson to be learned? They have tried to change
their organizations but have failed to react quickly enough
to the forces that affect their companies. The question is,
is only changing the CEO enough to change the direction
of the organization? Or would it also be necessary to
change the profile of the board members? The answer
seems quite obvious and is already happening. Directors
also need to change, evolving from family-like clubs to a
much more diverse and demanding constituency. From a
risk-based view to a forward-looking view.
This reflects the increased power of controlling investors,
who buy shares in companies and then demand changes.
They are now looking for bigger returns, requiring annual
double-digit earnings growth in an economy that is still
almost stagnant.
A first change brought about was to dismiss the CEOs and
Chairmen, those who occupy the two positions. According
to a review by Strategy & Consulting arm of PwC, in 2001,
more thanhalf of thenewCEOs also took over as Chairman.
Fast forward fifteen years and only 10% occupied both
roles.
This is a reflection of the activist investors, who are getting,
well, more active. More than 300 US companies were
targeted by these investors in 2015, a huge leap from
around 100 in 2010, according to the Wharton Business
School study. They are also becoming more successful in
gaining the seats of the board.
There needs to happen an evolution in the boards of
companies, which should be less concerned with the
bureaucratic role or compliance and more with the
evaluation of the future of the company. They need,
therefore, strategic advice. This role, previously delegated
to the CEO or its managers, is now exercised by the board,
in conjunction with the managers.
One of the conclusions of this analysis is that the
performance evaluation of the Board and the CEO in
most companies may be misguided, and this is also
reflected in the financial incentives granted. With the
exception of companies where Board members are also
large shareholders, there are rare situations where there
are long term stock options for board members. So what
would be the benefit of a director in thinking about the
long-term business if they could not share the economic
benefits? Another question leads to the future. Wouldn’t
it be interesting to have young executives on the board?
Or greater gender or ethnic diversity? Certainly not for
the most part, but for them to act on this bottleneck by
assuming the role of risk managers and in the future to
become good strategists.
Thus, recognizing that todaymany boards of directors focus
their action with a look to the past or to legal compliance,
delegating to the C-level and external consultants the
task of planning the future. This takes precious time from
the CFO and CEO who should focus on the most effective
delivery of the present, following a plan established by the
board. Any example of a company that is changing that?
Petrobras. It has just created council support committees
to carry out strategic planning. In order tomake the council
more strategic, it is also necessary to select with confidence
itsmembers, allowing a greater diversity of opinions, partly
by inviting younger executives with different backgrounds,
maybe including different corporate cultures by adding
members that haven’t spent decades on the same
company. This will prevent companies from having the
same fate as Kodak or Olivetti.
CASE – ONCE UPON A WHILE
It was our second meeting in a Board of Directors of a
large corporation and we witnessed the following scene:
Board Member #1: We need to redefine our strategy, do
you agree Mr Chairman?
Chairman: Yes, let’s do it. I propose we hire a global
strategic consultancy firm.
Board Member #2: Considering that most board
members sited here have already participated in a
strategic planning, wouldn’t it be better to do that by
creating committees and using our employees, thus
saving more than $ 3-5 million dollars?
Chairman: We do not have this knowledge in house.
Lesson: the chairman does not trust his own people and
couldthrowaway3-5millionUSD,spendalotofmanagers
and directors time with providing the consultancy with
inputs, and still, even the best consultancy firms may,
from time to time, make mistakes, and thus the process
itself wouldn’t be risk free.
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