The 3 Things an Effective Board of Directors Should Never Do – Value Creation Strategy #14

September 3, 2020

In my last post for the NAW Blog Distributing Ideas, I talked about the importance of having an effective board structure as a foundational element of a sustainable competitive advantage, whether your business is public or private. It’s a rare thing, however, and a great one in a distribution company is an exception.

As I outlined, a board has three core responsibilities to shareholders: ensure there is a strategy in place that will create long-term growth in shareholder value; ensure the right people are in the right seats (CEO and direct reports); and ensure that the executive team is making adequate progress on achieving the strategy.

To do this well, board members need to understand the business and the challenges faced by the management team. Unfortunately, most board meetings are spent with the executive team informing the board around these activities, so urgent always trumps important and little time or emphasis is ever placed on the three foundational roles a board should play.

Here are three things an effective board should never do if they want to help a distribution company drive real shareholder value:

1. Avoid the tough questions.

Board members, in an environment of mutual respect, should continually have tough conversations with the executive team around their roles. Far too often these conversations are avoided. Most often it is because the board member lacks enough information to ask tough and insightful questions. Other times they don’t want to disrupt the collegial atmosphere. And it should be noted that without term limits, outside directors become insiders and tough questions become the exception.

2. Double as your professional advisors.

Too often boards lack experienced outside directors who understand the business. Even worse, firms often have their professional advisors in board positions, like accountants, attorneys or consultants. These are clear conflicts of interest. Our firm can’t provide any consulting services to a distributor if one of our partners is in a board seat.

3. Give direction to the CEO’s direct reports.

A board member’s desire to be helpful can often be misconstrued as direction. Effective board members never give direction to a CEO’s direct reports and understand the chain of command necessary for accountability.

Why am I criticizing board governance?

Most large public and global distributors grew out of lifestyle businesses. In a lifestyle business, most decision-making is vertical, and in a professionally managed one, it’s made horizontally by CEO direct reports, who have access to financial information and carry responsibility for an aspect of the firm’s performance. In a lifestyle business, the CEO is the final decision-maker, but in a professionally managed firm, a board of directors has real responsibility and oversight, even if the firm is 100%-owned by the CEO-entrepreneur.

Lifestyle businesses have historically been built on the DNA around growing sales — which was a proxy for growth in shareholder value. But today, growing sales is just one component and not even the most important. Many CEOs remain good at selling but aren’t so good at running a business.

An effective board, when functioning properly, is a force multiplier that challenges, coaches and supports the executive team development to achieve the A-level performance standards of the best firms.