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Guest columnist Ward Graffam was the founding chairman of the Maine International Trade Center and is former chairman and CEO of Unum UK.
April 6, 2021
Your board members are smart, but how well do they know your business?
By Ward Graffam
All board members have multiple duties and responsibilities they need to understand and execute. One clear responsibility is to understand the business of the companies and other organizations they govern.
Other than some general knowledge about how a company functions, how deep must this knowledge be? What responsibility does the company have to educate the directors? Do you have a well-conceived orientation program for new directors that provides background on the company’s products, its key processes and markets? In order for directors to be useful to the company, they need to understand the industry and market context within which the company operates.
Clearly, the directors have some well defined legal obligations — many of which were set forth in a landmark Disney case.
Some of a director’s legal obligations include certain fiduciary duties such as the duty of good faith and due care but what about a duty to inquire? Inaction such as not asking questions to determine the extent of any critical issues that could have extremely negative bottom line impact on the business could be really harmful. Yes, it is management’s responsibility to run the business. But are you as a director asking enough questions to truly understand the risks to your business in particular situations so that you could provide or guide management to getting “best practices” advice?
Some of those obligations have recently been referenced in the controversy surrounding Boeing’s ongoing production problems and the fallout from the 737 MAX crashes. The engineering issues in those disasters have gotten huge amounts of scrutiny already. Many of those duties are straightforward. Other duties may not be so obvious.
The Boeing case raises one of the most difficult questions: How much should directors know about the company’s business?
Clearly the directors do not need to be subject matter experts of the businesses they oversee. The CEO, management and their experts have those responsibilities. However, a significant question is, How much should directors know about the business? Clearly, they need to have some general knowledge about the company’s products and the market(s) in which it operates. But, what does that mean?
With respect to the MAX disasters, it is unknown to this writer whether anyone has seriously suggested that the directors should have known about the complex autopilot problem that kept pushing the nose down on those jets. However, once the issue was raised to a management level should the directors have been told and then demanded a full and complete engineering report and a summary report and recommendations to the board about the scope of the issue and the best short and long term fix for the problem? Perhaps they were and hopefully those steps were taken.
What about the most fundamental question of all — what is the company’s value proposition? How does the company really make money and what differentiates it from the competition? Doesn’t the board need to understand that value proposition, how the company makes money and where its products are on the life cycle curve? These very basic marketing concepts are important pieces of information and could trigger directors to request more data depending on the maturity of the market within which the business operates.
What is your orientation program for directors when they agree to come on the board? What about your continuing education program for those board members so that they can understand the most critical business risks facing the company such as a periodic SWAT analysis as part of the multiyear planning process?
A comprehensive continuing education program for directors about key aspects of the company’s operations and markets is clearly in the company’s best interest.
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