Challenges for Board Directors Professor Andrew Kakabadse Steve Macaulay There has been a lot of criticism of the power of boards; there is a lot of criticism that they are falling down on the job, that they are interfering in the whole future of economies. That somehow they are deficient, that they need to shape up, they need to change. To explore this issue, I have in the studio today Professor Andrew Kakabadse. Now Andrew, you have worked with a lot of boards, you have seen a lot of these issues first hand – what do you see the situation is at the moment? Andrew Kakabadse The critical issue with boards is number one, do they really understand their organisation and what is its competitive advantage in how you position it? Secondly, how do you interpret and position governance in order to enable business, but maintain an ethical and moral position in the market place and community. And thirdly, remuneration: how do you pay your executives fairly, but in a way that will not damage the reputation of the organisation. Steve Macaulay So how are boards falling down at the moment on those three issues? Andrew Kakabadse The problem is most boards have to deal with unique circumstances, so no matter how much governance stipulation you generate each board has to consider its organisation as a unique entity. So for many board members understanding what makes this organisation, what are the markets really like that it operates in, does corruption and bribery have to take place in operating in different markets of the world? And it does by the way. How do we handle this? Do we move out of those markets? Will we damage shareholder value? So one of the issues of boards is that you are asking part timers to basically to take on a full time job. In fact, being a board director is the most full time, part time job you could ever imagine. Steve Macaulay So what is the remedy to this given the current situation, given widespread criticism – where do we go from here? Andrew Kakabadse The criticism will not go away. All you can do is control it a little bit, and for many board directors, I think the critical issue is you have to reduce your portfolio of non executive directorships. Knowing the organisation is primary; making contacts in the organisation and Knowledge Interchange Online© Cranfield University October 2009 1 Professor Andrew Kakabadse
understanding its managers is critical. Knowing how to stand back and give the independent opinion and having the personal resilience and courage to do so is mandatory. Now if you are going to do all that, how many directorships can you have? Three or four? How many chairmanships can you have? One or two? In fact, our research showed two chairmanships and that’s it. Two or three directorships, and no chairmanships and that’s it. So if you want to have boards working effectively, train their directors in the reality of board dynamics and then pay these directors so that they give full attention to this organisation and can be held truly accountable, as opposed to many saying we didn’t quite understand these issues. Steve Macaulay Some people see the answer of bringing boards to heel by tighter regulation – do you see that to be so? Andrew Kakabadse It won’t make any difference. If you look at all governance and regulation it tends to follow a scandal. So even when we go back to Cadbury in the 1980s the scandal was then certain corporate centre directors were giving themselves mortgages and paying themselves excessively with money that was not theirs. And so we got the Cadbury Report. And if you follow all the governance stipulations, both in the US, the UK, France, Germany – the same pattern. So by and large, the majority who are probably quite good and quite honest are being penalised for the actions of the minority. And low and behold, how does that add to business? So I am not against regulation, but I am against the belief that greater regulation is going to improve things; it doesn’t it just constrains things. If you are having to operate in China, India, parts of Africa, Indonesia and you are having to work your way through those networks, and you having to pay agency fees – which we in the west call corruption – how is tighter regulation going to do that when your bulk income as an organisation is going to come from that part of the world? So you need better leadership on the board. You need people to give more time to the board. You need the board to give more time to the organisation. You need the board to have a culture of being sensitive and yet independent. No regulation will ever achieve that. © Cranfield University October 2009 2 Professor Andrew Kakabadse
Steve Macaulay © Cranfield University Andrew, thank you. October 2009 3