Multiple-board or tiered structures can be wasting time and money
Reviewing corporate board structures is a good first step in looking at how a company works. One of the most challenging parts of a CEO’s job in a layered complex organisational structure is, really, just to be allowed to get on with his job.
For many talented individuals, the prestige of running an organisation of a certain size, and the opportunity to make it a significant success, is very enticing for a true professional. In fact, potential CEOs of such organisations are often told in the beginning that they will have the reins to run the operations, and that they will be given a key performance index (KPI) that will commensurate with the company’s performance under them. In most scenarios, the KPI is tied directly to the company’s bottomline.
However, for many companies, the chief executives are not intellectually challenged. In reality, the CEO’s day-to-day operations become very dull and limiting. One chief executive was lamenting that his entire corporate existence consisted of cutting ribbons and attending board or executive committee meetings every single day of the month.
To begin with, the chief executive is expected to attend the main meeting of his company’s board, as well as every subsidiary board meeting. However, when we examined the board structure of this conglomerate, we viewed it as being oppressively layered.
Each subsidiary has its own board of directors, each of whom may sit on the parent board too. And there could potentially be instances when a director may say that he agreed to a proposal during a meeting of the subsidiary board, and then change his tune when that same proposal is presented to the parent board for approval. This could be due to board peer pressure which, of course, results in the dreaded “board group think”.
Such fickleness is exasperating for any corporate leader and other board members, to say the least. Flippant board members do not seem to realise that they are not only wasting their fellow directors’ time, but also company’s money.
Each board meeting can cost a company easily US$750 per director for each meeting. However in addition to this cost, there are also preparation costs (staff time costs) as well as company secretarial and potential lawyers and accountant costs. Even printing board papers needs money. But an additional cost that many board members do not appreciate is the opportunity cost, that is, the chance that one is giving up a business opportunity because the time taken to make a decision by the board is way too long.
What occurs is that the management team can put up a business proposal to their immediate board, which happens to be a subsidiary board. Due to the terms of reference and low designated authority limits of this subsidiary board, the proposal – if approved – has to be forwarded for tabling at the next meeting of the parent board. The predicament is, the parent board meeting is often only held quarterly, so in some instances will not sit for another three months. This means the proposal could potentially be on hold for that long.
And to add salt to a wound, it is also very typical of board members not to read board papers carefully. Many board members wait until the eleventh hour at meetings to ask for further clarifications on what had already been raised at the subsidiary board meeting or that could be asked via email before the actual meeting. But if the board members request for clarifications at the actual meeting, the proposal has to be returned to the subsidiary board for answers. Which means waiting for the subsidiary board to meet again, often also only after three months. It is this sort of stringing along that causes a domino effect of potential concerns.
Additionally, such indecision can be demoralising for any chief executive especially if nimbler competitors who are free of such red tape seize those business opportunities that were available. Evidently, the executive is powerless to vie for the deal because he is waiting for his board’s go-ahead to do so.
So setting up multiple-board or tiered structures is not always the best solution if the goal is just an attempt to put more checks and balances into a corporate system. The worst-case scenario is if those who are appointed to the boards are not astute or business focused, this then results in the whole process of board meetings just becoming one big junket that serves only the interests of board members themselves.
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014