In a recent McKinsey Quarterly article, Simon C.Y. Wong explained that good governance isn’t just about following processes and best practices. It means that boards and management must challenge one another for the good of a company. Otherwise, he said, the effects could be disastrous – on investors and on workforces. For instance, Wong wrote:
“In North America and Europe, for example, boards of financial institutions that failed to check management’s aggressive forays into US subprime mortgages saw their firms decimated during the 2008–09 economic meltdown.”
What matters most in governance, he said, is human dynamics:
“Without the right human dynamics—a collaborative CEO and directors who think like owners and guard their authority—there will be little constructive challenge between independent directors and management, no matter how good a board’s processes are.”
Simply following best practices isn’t good governance or leadership – true leaders must take ownership, collaborate, and challenge others to go beyond the status quo. Wong’s vision of good governance means a board that is bold and competitive. What’s your model of leadership?
1. Willingness to Challenge Management
Wong writes that board directors need to be willing to challenge management. In fact, it’s their job. But even though there should be plenty of disagreement, there must also be respect. He writes:
“It’s a clear warning sign when a candidate cannot mention an occasion when she or he disagreed with management. Indeed, boards that operate to their potential are characterized by constant tensions, coupled with mutual esteem between management and outside directors. Rather than leading to endless bickering, this virtuous combination helps to facilitate healthy and constructive debate and improves decision making.”
According to Wong, directors are often subject to manipulation by management. He writes, “In recent years, there have been high-profile incidents of CEOs failing to inform or involve their boards on critical developments—for instance, merger discussions. Such breaches of trust often have ended up costing these CEOs their jobs.”
To guard against manipulation, board directors have to remain on their guard, and avoid CEO candidates that may be difficult to work with. “And a board should avoid, at all costs, candidates who give the impression that they see it as an entity to be ‘managed’ rather than a body to which they are accountable,” he says.
Being a good board director means taking the time to go to meetings, do research, and put in the effort to drive strategy and manage risk. Wong explains, “Boards should also gauge a candidate’s inherent interest in their companies and the amount of time the candidate can devote to the job. Why? Because a shortage of either will hinder a director’s ability to think and act as an owner.”
Directorship isn’t just an extra-curricular, it’s a job.
4. Authority and Independence
According to Wong, “Although few board directors like to say so, an increasingly successful CEO is one of the biggest threats to the board’s authority, regardless of whether she or he is rewarded with the chairman’s title too, as is common in the United States.”
When CEOs are successful, they are more difficult to question and successfully collaborate with – and more expensive. Wong said that to guard against difficult CEOs, boards should ensure that the CEO is not also made chairman.
Also, he adds, board directors should be of comparable status to the CEO – so that they do not act deferentially or appear weak or inexperienced.
Finally, Wong says, board directors need to plan ahead always. Good succession planing will keep the CEO in check. He writes, “…boards need to be on top of succession planning and leadership development, so that the CEO can’t hold the board hostage with unreasonable demands, whether on pay or additional authority.”
Wong’s vision of good governance is based on tension and challenge – a game of strategy in which the CEO must be kept in check by a powerful board – and vice versa. Are there other models for board/CEO relationships that revolve around a more trustful, collaborative process? Must leadership always be about competition?