Borders, Boundaries and Boards

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Corporate chieftains — notably those who gather each year in Davos, Switzerland — may think they live in a world where countries with interdependent economies and companies with interconnected markets operate as if there were no borders. The notion that these connections would ensure both global prosperity and universal peace was shattered by Russia’s invasion of Ukraine. In contrast to popular political theory, countries that between them have hundreds of McDonald’s restaurants do, in fact, go to war. National borders delineate boundaries, and leaders who fail to recognize them do so at their own peril.

Like national borders, boundaries for good corporate governance separate management prerogative from board oversight. Executives have certain responsibilities, such as hiring and firing, that are reserved to their discretion. However, with heightened scrutiny coming from activists inside and outside the company, some of these prerogatives are no longer seen as unilateral or exclusive to management. Boards are getting into areas once considered within management’s sole discretion, such as talent management. This encompasses hiring practices, DEI and more. Some executive teams are embracing this board participation; others are less welcoming. The former view the board as helping effect best practices; the latter see it as infringing on good management.  

Some boards act as if there are no defined boundaries. They ebb and flow into areas typically reserved for management decision-making. Whereas “noses in, fingers out” has been the modus operandi of most boards, now some are leaning in further — sometimes much further — with not only fingers, but feet roaming about. For these boards, the line between top management and board oversight has become blurred, creating concern, confusion and often consternation. Ostensibly “to find out what’s going on,” some board members have taken to talking to managers several levels below the executive suite.
Given the increasing range and degree of risks, such as cyberattacks; the growing challenges of business operations, such as global supply chains; and the rising requirement for disclosures, such as ESG, the board is taking on more monitoring and reporting duties. These enhanced responsibilities require greater understanding of business operations, policies and practices. Business strategy, CEO succession, talent development, corporate culture and more remain high priorities on a board’s agenda, and ample time must be scheduled on a board’s calendar to address them. Often with the help of outside consultants, boards are digging in deeper to better understand and monitor these critical issues. Consequently, the line between management prerogative and board oversight is no longer as bright or as fixed as it was a decade ago.

Directors are getting more involved in matters that were once the sole province of management, such as investor relations, where greater board engagement has come about in response to investor community requests. Large asset managers like BlackRock are requesting to meet with independent directors without management or legal counsel present.

Boards and individual directors are increasingly meeting independently with the CEO’s direct reports, notably the CFO and CHRO, to discuss, for example, issues of risk mitigation and talent acquisition respectively. The CFO can answer how ESG is being incorporated into the capital allocation process, and the CHRO can address how the company is growing a diverse and stable workforce from the front lines to top management. When the board and individual directors are making such inquiries, it’s always a good idea to inform the CEO of the nature and scope of these discussions.  

Deeper dives into the organization may be warranted, but directors need to be both aware and respectful of the boundary between accessing information and making decisions. The chair or lead director must provide strong leadership to manage and regulate the depth and scope of these inquiries so they don’t become too intrusive. These inquiries can consume management time and create confusion, so individual directors should not make random forays.  

The degree and scope of board inquiries may vary depending on the condition of the business, the nature of the problem and the implications for top management, in particular the CEO. Executive sessions among the independent directors, led by the chair or lead director, can help address these issues and determine the board’s course of action.

Top executives are accountable for the management of the business and are rewarded for its performance. Directors are responsible for corporate governance in terms of assessing performance and monitoring adherence to policies. Management operates the company. The board oversees management. Though the line has moved somewhat, there should be a boundary between management prerogative and board oversight that is recognized by all directors. Like borders, which exist to regulate interactions between countries, boundaries exist to regulate interactions between top management and their boards. Transgressing borders and overstepping boundaries can lead to contention and conflict. 

Robert H. Rock is chairman of MLR Media.

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