The Directors Manual> ROLE OF THE BOARD > RELATIONSHIP WITH MANAGEMENT > [¶1−610] Assisting better management 1

RELATIONSHIP WITH MANAGEMENT

[¶1−600] Ensuring proper management
The board may delegate to management whatever functions and authority it wishes, but it cannot delegate its responsibility to
the shareholders or its responsibilities under the law. The board remains responsible for management’s actions, or inactions, and
it must therefore see to it that management is managing properly. One of the board’s most important tasks is to select and
appoint a CEO who is as capable as possible of meeting the shareholder’s aspirations for the company. The board must monitor
the CEO’s performance and, if it proves inadequate, replace him/her.
How will the board know what ‘‘managing properly’’ means? How will it decide whether the CEO is as capable as possible?
There must be a clear yardstick for measuring performance that is understood and agreed to by the board and management. This
starts with the objectives of the company that must be set clearly so that all concerned will know whether they have been
achieved or not. There must then be a plan for reaching the objectives which will set out the principal steps to be taken in
achieving the objectives and which will deal with such issues as priorities, the allocation of resources and managing the risks
which may be encountered. So that the board will know whether or not the plan is being implemented properly, there must be
performance indicators which provide an adequate insight into what is happening as well as a monitoring system which allows
both board and management to know what progress has been achieved and what obstacles have been encountered.
This function of the board was described by the chairperson of General Motors, John Smale, in a speech at the Council of
Institutional Investors (Washington DC, 15th April 1994, at pp 6−7) following the revolution in the boardroom and the
development of the very influential General Motors board guidelines:
‘‘The board has the responsibility of representing the owners’ interest in the successful perpetuation of the corporation.
This is an active as opposed to a passive responsibility. It is incumbent on the board to ensure, in good times as well as
bad, that the management is capable of fully executing its responsibilities.’’
‘‘As I see it, the board’s role is to act as an independent auditor of management  asking the tough questions that
management might not ask itself... The board’s independent members are uniquely capable of performing this function
because they are not saddled with the burden of the company’s past success and culture.’’
Both the board and management must be involved in the process of establishing objectives, plans, performance indicators and
monitoring procedures. The board’s role in this process is discussed in greater detail in the ‘‘Strategies and Processes’’ tab,
commencing at ¶4−000.

[¶1−610] Assisting better management

The shareholders elect the board in order to preserve and enhance the investment entrusted to their care and this goal will be
achieved more effectively if the board not only hires good management and sees to it that it is managing properly, but also if it
proactively helps management to manage better. A good board can make a significant contribution to good management, and in
particular strengthening the CEO, in seven different ways:
1. Providing structure and focus
The day−to−day management of a company, particularly in a competitive environment, involves continuing short−term
pressures of many different types and there is a constant temptation to give the urgent problems priority over the less urgent but
more important ones. A formal structure of board meetings, combined with disciplined reporting, causes management to allocate
a significant part of its attention to the long−term objectives. If the board is focused on the owners’ interests and the
enhancement of the shareholders investment in perpetuity, management will be led to see the immediate issues in a longer−term
perspective. If the board concentrates a large part of its effort on the plan and on monitoring performance against the agreed
indicators; and if it is disciplined in the way it conducts itself, it will make a real contribution to making management more
effective.
In 1995, a prominent entrepreneur, John Smale, who had built up a very successful business, established a board for the first
time. He appointed two independent directors and began regular meetings. After one year’s experience he commented that it was
the best decision he had ever made. He said:
‘‘There are too many emotions in a family business and having a board with outsiders introduces objectivity into the
processes and reduces the danger of hasty decisions...’’
‘‘Managers, particularly successful entrepreneurs, have faith in themselves and think that they know all the answers
instinctively, the independent directors don’t accept that and call for cost benefit analysis, SWOT analysis and written
plans. Their presence gives perspective.’’

Copyright 2008, CCH Australia Ltd

The Directors Manual> ROLE OF THE BOARD > RELATIONSHIP WITH MANAGEMENT > [¶1−610] Assisting better management 2

Of course, in larger and more sophisticated companies management would employ such simple mechanisms of its own accord,
but there is always the risk of being caught up in the immediate crises or of pursuing the latest opportunity while neglecting
other important matters. An effective board acts like a flywheel stabilising the organisation.

2. Thinking outside the square

There is always a danger of tunnel vision in a hierarchical management system. If the CEO or the top management team has an
instinctive feeling that a particular course is right, or comes to a firm conclusion after their initial consideration, it is more likely
that junior managers will wish to conform, will find the logic of their superiors compelling and to discover persuasive reasons to
support the growing consensus.
If the board contains independent thinkers who see the world from different perspectives, and who challenge management’s
assumptions and conclusions by asking incisive questions such as, ‘‘What if?’’ or ‘‘Have you considered...?’’ or ‘‘What were
the rejected alternatives?’’. If they insist on understanding each important proposition and being convinced of the logic behind
each proposal, they will help management avoid serious mistakes and will make a real contribution to the company’s long−term
welfare. John Smale’s comments (quoted above) about the board ‘‘asking the tough questions that management might not ask
itself’’ reflect this thinking.

3. Avoiding hubris and sloth

There is a similar danger in hierarchies that the leader will be surrounded by subordinates who look to their chief for tenure,
promotion, remuneration and all the good things of life, and who will be reluctant to challenge the judgments and the
preferences of their superior. In such situations agreement and praise are common, sycophancy is not unknown, and challenge
and scepticism are rare. CEOs in that position may become over−confident, perhaps even arrogant, and they may begin to
believe that they are infallible. A good board will redress these tendencies and restore a sense of proportion by its questions and
its challenges. The Roman practice of causing a slave to ride in the chariot of a victorious general during his/her triumph for the
sole purpose of whispering, ‘‘remember you are mortal’’ had real merits.
It has been argued that the greatest monopoly profit is the quiet life and there is always a danger that CEOs who have reached
the summit of their ambition will be tempted by luxurious surroundings and lavish entertainment to drive themselves less
rigorously than was necessary on their climb to the top. While many would devote themselves conscientiously whatever the
circumstances, the presence of a board which ensures that there is sufficient stretch in the targets, and which monitors
performance against them, will reduce the danger of complacency and sloth.

4. Setting effective remuneration and incentives

The board is responsible for setting the remuneration of the CEO and for approving proposals for the rest of the management
team, whether this involves considering individual situations or ratifying general principles and guidelines. If the remuneration
scales are considered competitive, fair and appropriate good managers will be retained and the management team stabilised. If
effective incentives are laid down the CEO and his/her colleagues will be motivated to strive more energetically and their
energies will be channelled more directly in the shareholders’ interests.

5. A sympathetic sounding board and source of advice

A good board will also act as a sympathetic sounding board for management’s ideas and will provide a variety of views and
perspectives so that board meetings will be a constructive experience for the CEO and those executives who attend. Particularly
in the early stages of preparing the annual plan, but at whatever other times it is thought appropriate, management should be able
to bring proposals and options to the board for discussion, and should be able to count on receiving wise counsel and objective
and experienced advice. All of this can be of great assistance in the running of the company.
Similarly, the feedback provided by an experienced and well−informed board on operational developments, and on
management’s achievements and difficulties, can be of considerable value.

6. Coaching and training

Few humans are perfect or equally strong in all respects; few CEOs do not have areas of relative weakness, and a good board
can contribute much by identifying aspects of performance that can be strengthened by training or the provision of relevant
experience. Perhaps even more importantly, a strong and understanding chairperson can help a CEO to improve his/her
performance by judicious confidential coaching. Additional specialist advice from directors with special experience or expertise
can also be of value.
7. Allowing management to get on with the job
The board will make a further important contribution to good management if it concentrates on doing those things it has reserved
for itself and refrains from meddling in matters that have been delegated to management. Intermittent interference in operational

Copyright 2008, CCH Australia Ltd

The Directors Manual> ROLE OF THE BOARD > RELATIONSHIP WITH MANAGEMENT > [¶1−610] Assisting better management 3

detail reduces management’s confidence and effectiveness because no one performs well when they are in danger of being
second−guessed on a random basis. Not only that, it also reduces the ability of the board to hold management accountable for
results.
If a board disagrees with an operational decision that the CEO has made, or is about to make, it can and should discuss the
matter with the CEO and attempt to persuade him/her to its way of thinking. If necessary, the board can issue a firm warning.
However, if the matter is one that has been delegated to management it is important that the CEO should make the final decision.
If the board overrules management in a delegated area and unfortunate consequences later occur, the board’s decision will be
blamed. What is more, it will not be possible for the board to hold the CEO accountable on that matter and the accountability of
management for the results of the company will have been undermined.
If a board does all these things consistently it will make a major contribution to the good management of the company.

Copyright 2008, CCH Australia Ltd