Creating harmony between boards and management

Today, dysfunctional relationships between boards of directors and top management teams (TMTs) hold greater potential for failure than in previous times. Firstly, dealing with geopolitical risks, sustainability imperatives, and social conditions of the firm’s operations to name a few contemporary challenges raises the bar in terms of firm governance. Moreover, the challenges faced by firms are increasingly interconnected, exacerbating the consequences of discord between firm’s board and TMTs. Secondly, stakeholders exhibit heightened expectations vis-à-vis firms, intensifying the repercussions of poorly managed relationships between the board and the top executives: stakeholders’ reactions are more aggressive, sometimes violent, and in any case potentially detrimental for the firm if the board and the management are misaligned. Lastly, the presence of non-linear associations between firm actions (or reactions to certain issues) and effects renders issue resolution more arduous than before. Consequently, a lack of agreement and common view on expected effects of decisions amplifies the likelihood of organizational downfall when governance structures fail to foster effective collaboration.

Traditionally, TMTs have been tasked with setting strategic direction and overseeing the execution of organizational goals, while the Board of Directors acts as a fiduciary overseeing TMT actions and representing shareholder and other parties’ interests. On its side, mid-management executes day-to-day operations and liaises between top-level strategy and frontline employees. Due to the interdependencies across issues, stakeholders’ demands, and nonlinearity of effects, the absence of common understandings and interests between Top Management Teams (TMTs) and both the Board of Directors and mid-management proves impractical and ineffective.

Firstly, a separation of interests between the TMT and the Board impedes effective communication and decision-making. While TMTs may prioritize short-term financial gains to appease shareholders, the Board should aim for the durable performance of the firm. Such misalignment can lead to conflicting strategies and a lack of coherence in organizational actions, ultimately undermining long-term sustainability and growth.

Second, the separation of interests exacerbates the agency problem, where TMTs may prioritize their own interests over those of shareholders and society at large. Without effective oversight from the Board of Directors and alignment with mid-management, TMTs may pursue strategies that maximize personal benefits, such as exorbitant compensation packages or risky business ventures, at the expense of long-term shareholder value and societal welfare.

To address these challenges, Board-TMT relationships require new attitudes, skills, and means to operate in the best interest of society and the organization. Firstly, fostering a culture of transparency and accountability is crucial. Boards must actively engage with TMTs to ensure strategic decisions align with organizational values and societal expectations. Likewise, TMTs must involve mid-management in decision-making processes to leverage diverse perspectives and foster buy-in throughout the organization.

Secondly, developing empathetic leadership skills is today more essential than ever for effective collaboration across hierarchical levels. TMTs must demonstrate humility and empathy towards mid-management and promote their diversity, recognizing their integral role in executing organizational strategy. Similarly, Boards must cultivate a culture of trust and mutual respect with TMTs, encouraging open dialogue and constructive feedback.

Lastly, embracing innovative governance mechanisms, such as stakeholder engagement initiatives and diversity quotas, can enhance Board-TMT relationships and promote holistic decision-making. By incorporating diverse voices and perspectives, organizations can mitigate groupthink and make more informed choices that benefit both shareholders and society.

In a collective manifesto, alongside with practitioners and academics, I advocate for the following ideas:

1. Individual board members should not satisfy themselves with limited information provided or ignoring so-called non-financial performance information, incorrectly perceiving their duty as primarily protecting shareholder interests by maximizing profitability. They should aim for more, actively seeking information, and embracing value creation for the sake of the firm itself, including other stakeholders beyond shareholders.
2. It is the role of governance to position the firm relative to today’s daunting ecological and social challenges. In order to face these new realities, certification of board members on knowledge and skills related to climate or human rights, or designation of a board member responsible for ensuring stakeholders' interests should be considered. Other suitable approaches can be establishing an impact committee in charge of representing outside parties’ interests with a board member's involvement and providing adequate financial resources for accessing expert advice on these vital challenges. Furthermore, regularly training and raising awareness among board members about sustainability and governance issues will enhance their effectiveness.
3. In a board, independent and mature cooperative relationships are vital. This necessitates a board that has sufficient time and resources to form its own opinions and engage in open discussions with management, while maintaining critical scrutiny. Board members should have the ability and financial means to seek insights from external advisors, chosen experts, management, as well as lower levels of the organization when necessary. Such a Board budget shall be provided by the firm and independent from management’s purview. 

As the challenges faced by firms increase in magnitude and complexity, it becomes crucial to keep adapting the nature and the means devoted to Board-TMT relationships to cultivate its quality and provide the firm with the best governing principles and decision processes possible. 

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By Rodolphe Durand, HEC Paris

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