A board of directors in an organization is primarily constituted to provide objective oversight on the management of the entity.
But how effective are these boards? In our series on boards of directors, in this part 2, we take a look at ten signs of a dysfunctional board.
Getting involved in day-to-day activities
Any board member who gets involved in the day-to-day operations of the business is a problem. The board is the topmost decision-making body. The board has an oversight role over the management of the entity to ensure going concern and risk management. They work at policy level.
For good governance, the board directly supervises the managing director (in a school this is usually the head teacher). The board’s oversight role entails review, monitoring and supervision of the managing director to ensure the business is a going concern and key risks are identified and appropriately managed. It is very difficult for anyone to review, monitor and supervise if they are involved in the day-to-day management of the company. Because they can easily become compromised and may fail to objectively supervise the MD or CEO (depending on the title of your topmost manager or executive).
Many government boards in Uganda are ineffective because appointment is based on patronage, and not skills and competence. The mandate of most of these boards is from the Acts of Parliament that formed the respective organizations. For example, the NSSF Act provides for the appointment of the board by the minister (of Finance, Planning and Economic Development), but does not provide for the requisite skills and competence of the members so appointed. The same goes for other statutory institutions of government.
You have some members appointed on the board based on old girl or old boy status or friendship or a tribe mate basis, etc. Others have twisted the conditions to say “to be on the board, one must have served as a civil servant or a government employee in the past.” So, you end up with a limited pool of people to appoint. Such people so appointed, have a lot of time that they take the board appointment as a full-time job. That is why most government institutions have not been effective. The board is not independent. They cannot do proper oversight role.
Members lack a common vision
Not all the board members are on the same page. Here is why. During one of the board meetings of a certain organization, the chairman asked members how many knew the vision and mission of the organization off head, and only two of the eight members knew them. This sounds childish, but people are so lazy that they have no time to read the board papers that are often provided in advance. And basic things like understanding how the organization makes money, are not clear to many board members. This lack of a common vision, always leads to dysfunction and failure of the business to succeed. After all, they say the fish begins rotting from the head!
The chair controls nothing (or everything) and adds no value)
Great boards have great chairmen. If the chair is incompetent or less knowledgeable, it is difficult for the board to perform their role of oversight. You would want to avoid having a chair who is weaker than the MD/CEO. Governance in many private businesses fails because in many instances, the MD doubles as the board chairman. In some rare cases, the owner acts as the board chairman. In this case, the person has so much power that his ‘ideas’ or deliberations are taken as decisions and members are not ready to discuss or evaluate them. Where the MD doubles as the chairman, they add no value at all because they tend to impose their thinking into policy.
Good governance requires that a non-executive director (someone on the board who is not involved in the management of the organization) chairs the board. The chair must also be knowledgeable in corporate governance with strong understanding of the market environment and risk management.
Board of directors wants same benefits as staff
If you have any board member wanting benefits same as staff, sack them. The boards earn allowances on everything and that should be it. A story is told of a member of a certain NGO board, who insisted on travelling with staff at the expense of another staff who should have travelled. He earned per diem and subsistence from this trip. Another wanted the company to provide a vehicle! Another asked for an iPad and all the facilitation needed. OK, by our standards, the iPad seems to be justified on the basis of cost cutting on paperwork, but a car! And the winner is this one who asked for health insurance. I thought these are schemes for staff. Members of the board appointed on the basis of friendship/patronage/tribe – not experience and skills to add value – tend to see it as a job, and will not be ashamed to ask for benefits usually meant for staff.
No mutual exchange of information
You have probably experienced it. There are boards that will send to you board papers a day to the board meeting. And many other boards still have a practice of having any other business (AOB) at the end of every agenda. Many CEOs/ MDs are comfortable with board members that won’t question their decisions or performance. If your board happens to have more than five members, chances of having some cliques are high. You have some board members with all the information they need, and others whose files “are missing some key documents”.
So you are at the meeting, and you don’t have as much information as other members have. Until you get to understand it, it will be too late that it is a ploy of the CEO/MD to keep you out of sync with the rest, so that your contribution and deeper enquiries are expunged.
The secretary (always within the control of the MD) will defer some contentious issues under the item ‘AOB’. Good corporate governance now entails that there should not be any item like ‘AOB’ as that agenda item has been over abused where critical issues are introduced and a decision made, even when other people have already left!
No sharing information is one of the biggest corporate governance challenges. If you find you board paper file always missing some piece of information, be alarmed. It could be a deliberate strategy to keep you uninformed and, therefore, less critical during deliberations. Also, be clear on the minimum days to receive board papers. Avoid accepting to attend meetings where they bring your board papers a day or two to the meeting while others got theirs earlier. Ask yourself why.
Board chairman disrespects the CEO
If any board member does not respect the CEO/MD, it is a bad sign. As an accounting officer, the board’s trust/respect of the MD/CEO is paramount for ongoing engagement and governance. There is always a difference between fear and respect. If the owner of the business doubles as the MD (he appointed the board members in the first place), they will tend to fear him because he can fire or hire them. On the other hand, if the MD is knowledgeable, accountable and professional, provides information requested in time, gives board members clear papers for them to review and advise on the way forward, that is fantastic. Many boards are ineffective because they are brainstorming sessions instead of decision-making boards.
Lack of clear targets for the MD
Any board member will tell you: “Our role is to provide oversight and ensure going concern.” But ask them how they do it, and you won’t get the right answers. Why? Most board members do not set clear targets for the managing director. To provide proper oversight, the board must establish clear targets for the person accountable to it – the MD. That way, the MD/CEO will perform their duties with a clear mind. Many boards of government institutions are not as effective as they should be because of this. The board just rubber-stamps – working as a window dressing to show that the Authority has a board of directors, but in reality they add no value. In many instances, the board is not fully involved in the recruitment of the MD, and therefore they don’t establish clear performance targets and corresponding indicators.
If it is a bank, you expect the board, in their appointment of the CEO to state it clear thus: Be ranked within the top five in the Bank of Uganda’s supervisory report; Increase the customer numbers to 2,000,000 with average deposits of Ugx 500,000; Ensure a less than 10% annual staff turnover; or Keep loan defaults at less than 3% of the loans disbursed. With clear targets, it is easy to hold the MD/CEO accountable based on their achievement or failure to
achieve the agreed targets. And indeed the approach helps evaluate progress, review performance and the MD’s requests for achieving the targets. That is what oversight is all about. The business of any good board should be to review the strategy (and make improvement recommendations) and set the targets for the MD. That way, the MD can set the targets for his senior management team; who in turn set the targets of their juniors in that order.
Lack of respect for the auditors
Well, some auditors have caused it to themselves. They want to provide external audit services, then internal audit services and also IT security review; and so many things… how can you do all this and remain independent? We know about the Chinese walls. But who follows them anyway? It is recommended that a strong internal audit department is established with clear reporting structures to the audit committee or the full board, in case the board is small and has no sub-committees to handle some of its businesses. And the way I see things, the audit committee should be able to evaluate the performance of the internal audit team and also set their salaries and approve their annual operating budget. If internal audit has to continuously go to the MD to approve their budget, something won’t work out. Yes, auditors have to work with management. But they should be reporting to them.
No clear board effectiveness evaluation criteria
How do you evaluate the effectiveness of the individual board members? Most boards I have seen attempting to evaluate effectiveness, they base it on frequency of attendance: how many meetings did the board member attend? Ideally, the person appointing the board (the business owner, in case of a private business or the minister) must state their targets. What will show that they have done a great job by the end of their term? Some boards may decide to agree on their own targets or priorities; and that is also ok. The issue is every board must have some targets to achieve. Otherwise, it is difficult to evaluate the board’s effectiveness or value addition. And in the end, you will see pictures of board members, and the number of times they attended the board meetings, as if that is all that matters. I don’t have to attend to add value to the board. However, if I don’t read the board papers, vote on key resolutions or turnaround ideas and comment on the company’s strategy, I will have not added value. That is why boards must have clear targets.
If one of your board members is a lawyer, one of their targets should be to “ensure the company’s exposure to legal costs is contained within US $50,000 (depending on the size and materiality) per year.” If the company spends more than that during the year on legal costs in terms of unfulfilled contracts, etc… fire that board member. Likewise, Government of Uganda, going by the Public Accounts Committee of Government revelations, is losing a lot of money in wrong decisions by management. Board members of such government entities should be held accountable for exposing government that much. It is a responsibility to be a board member. Until clear performance targets are established, people will continue to see any board appointment as an honour, not an obligation, which will not only lead to bad governance, but collapse our institutions.