Tag Archives: governing board

corporate directors’ challenges

Business by definition requires taking up risk in order to exploit opportunities for growth. This creates another challenge of estimating the risk that can be taken within a growth strategy to increases value.

I remember one Board on which I sat struggling to decide whether to assume the risk of investing in an industry that we had no core competencies. It looked lucrative but the Board after much discussion; decided that we had no risk appetite for this kind of investment. subsequent events proved that our decision then was wise. But at the point of making the decision we also had an apprehension that we could be missing a great opportunity.

The balance between risk appetite which is normally driven by the executives to grow the business and risk tolerance which is normally fronted by the Board needs to be struck. The Board should not unnecessarily be too conservative and still expect returns on investment. and yet it should not be too risky that it destroys value.

Related to the previous dilemma is the fact that one chooses to either have organizational performance and growth or choose compliance with corporate governance codes and regulatory requirements through form filling. Compliance has to be balanced with performance. Some Boards are too focused on complying with boundaries imposed by regulators and codes that they dare not take any risks to growth the business. Acting in the best interests of the organization-which is one of the key roles of the Board – means that the Board should take appropriate risks to ensure sustainability and viability of the corporation. Viable sustainability and business continuity are critical aspects that require mindful consideration rather than just form filling to ensure compliance.

Governing bodies have to manage the often conflicting interests of the stakeholders. Often the interests of the equity shareholders and of other stakeholders may conflict. These will need to be managed. While equity providers are keen to see returns on investment, other stakeholders like the surrounding communities are keen to see meaningful investment in the community. After all the community is the ultimate licensor of the business. If the community withdraws its support and license the organization cannot be sustainable in that area. A more challenging dilemma for governing bodies is when the interests of the shareholders like a desire for dividend declaration, conflicts with the interests of the corporate. In cases like this directors have a legal obligation to serve the interests of the corporation. The moral hazard is that by choosing the interests of the organization, the governing body risks the censure of the shareholders since they serve at the pleasure of the shareholders.

The final challenge is that of speaking up and expressing a contrarian view without being perceived as toxic. It’s easy to drift into groupthink because members want to fit in. The desire to please others can cause a member to suppress their divergent view which would have been beneficial to the organization. It’s important for the governing body to allow for robust discussion and to entertain divergent views. It’s better to have a diversity of opinion rather than to have uniformity at all times. Learning to disagree and expressing a divergent point of view without being disagreeable is critical.

Despite all these challenges it is fulfilling to see an organization grow and thrive as the governing body works closely with management.