Observing boards' decision-making is an exciting and relatively new undertaking. In the past, researchers found it difficult to study directly the mechanics of board activities. This precipitated the growing interest we see today in considering and analysing the board on the strength of its decision-making capacity and characteristics.

Of major importance in this context is the issue of the board's relationship with management. Today's active boards seek to play a distinctive and additive role in the organisation. What's more, the nature and quality of their communication with management is critical in defining and achieving a sustainable business culture. There are two main aspects of the board–management relationship: supervision and support.

Supervision

In its supervisory role, a board works to ensure that management is making sufficient effort in critical strategic areas, such as managing risks and responding to competitive threats. The focus on compliance that was typical in the past has proved insufficient in today's competitive globalised environment. As a result, boards have become more directly and deliberately involved in charting their companies' strategy. They have emerged as a source of extended vision, helping to contextualise and interpret many of the opportunities and challenges facing the organisation.

In maintaining a clear view of the company's strategic differentiators, the board has an important role to play in drawing out relevant and necessary information from management, and in the process challenging and testing it. How far the board can go in ‘interrogating’ the management is a gauge of the trust and goodwill that has been established between the board and the executive team, and also depends on the quality of the questions that the board asks.

With more directors having become involved in strategic decisions in recent years, boards increasingly want to have a say in how management goes about complex new initiatives, including change processes. In this context, it is no longer rare to see the board put forward its own sets of metrics and incentives. Just as a strong board needs a regular dose of internal dissent to remain healthy, boards are embracing the need to challenge management views and proposals in areas that have long-term repercussions for the organisation's well-being.

The board's supervision of management initiatives also implies follow-up, and in particular monitoring implementation progress. This may take various forms. For example, the board may task management with preparing an implementation plan for specific recommendations that the board has endorsed. Action items have become a key board process that starts immediately after the board meeting itself (usually within 48 hours). Minutes, on the other hand, are prepared at more length as they have legal weight, and are presented a few weeks before the following meeting for adjustment. Periodic monitoring reports, annual or otherwise, will then provide details on action points included in previous implementation plans, especially if these actions are still outstanding.

The board should be able to review and comment on the design and results of specific programmes, but also to conduct thematic reviews of management issues and initiatives on a regular basis. Technology can facilitate many of these processes, particularly if it combines self-evaluation features with project management and also collaborative and work-sharing software capabilities. When tackling complex, multistakeholder undertakings, the board may choose to be creative in fulfilling its supervisory role by devising custom timetables, roadmaps, dashboards, and other tools that help visualise and measure progress as well as follow-up.

Support

In addition to their role as auditors of company performance, boards also have an advisory role to play. Directors' expertise should help management in making important strategic decisions. In particular, setting organisational strategy has emerged as an area where effective boards have performed an advisory, collaborative role.

Along the way, it has also become commonplace for board members to search outside the organisation for relevant trends and data (see also Chapter 5). Directors are conscious of the dynamics of disruptive change, which inspires them to examine how familiar issues play out in different industries, segments and markets.

Working out and recognising their own role and use of authority has been a continuous challenge for board members around the world. To begin with, the dual roles of supervision and support come with different time horizons. Boards therefore need to balance them carefully.

The tension between supervision and support has sometimes been recast as a tension between accountability and organisational development. Directors who settle fully into an accountability role may become unlikely to play a robust developmental role. Nonetheless, much of this tension can be diffused when the board is energised by the organisation's mission. Such boards are in a good position to exercise adequate controls while providing independent viewpoints – a powerful combination that can mitigate many types of management behaviour, including overconfidence and excessive risk-taking.

Blurring the Board–Management Relationship

Board members have a responsibility to know, and understand in detail, the backgrounds of key executives in the firm. High performing boards tend to nurture and invest in each director's relationship with top executives, often using tools such as dual coaching. Similarly, a key priority for the CEO should be to build a strong relationship with the board – formal, informal, professional, human, and social. The CEO would be well advised to know about the board members’ occupations, businesses, and families. He or she needs to listen and ask questions consistently and be seen to attach real value to the board's opinions.

So far, so good. As long as boards and management teams embrace the relationship in all its facets and social complexity, they will have a healthy, robust foundation to build on, right? Not always. In reality, there are many ways in which the difference between the roles of the board and the management team can become blurred.

For instance, company founders, family members, and alliances with board members that are based on these relationships, may exert a strong positive or negative influence on the culture of the organisation. Through his or her sheer knowledge of the company, a CEO may have overwhelming influence on board decisions. This immediately creates an imbalance of power.

In addition, there is a powerful ‘birds of a feather’ phenomenon in business that chips away at the distinction between board and management roles. Many directors are themselves current or former CEOs. Consciously or otherwise, the fraternising instinct may be tough to resist. This can lead to a sense of misplaced solidarity and patience, even with a CEO who has clearly long outlived their usefulness.

Similarly, ex-CEOs on the board often accept dated solutions and strategies that are oblivious to the realities of today's marketplace, let alone that of the future. This is because their judgement and acumen have been compromised by an overwhelming sense of familiarity, past achievements, and the feeling of what it was like to be the top executive in their old organisation. When mixed together, these perceptions can give rise to an unyielding, even if not openly articulated, need to protect the CEO.

Conversely, in some organisations, CEOs wield considerable power over the board, and can greatly influence the process of selecting directors. In many cases, dominant CEOs will prefer board members similar to themselves – not just in terms of demographic characteristics such as ethnicity, social background, and gender, but also in terms of personality type – and may exercise this bias in the director recruitment process.

Research has shown that the longer the CEO's tenure, the more likely he or she is to have allies installed on the board. And some of them will support the chief executive's decisions no matter what. This trend has been further amplified by the arrival of the ‘celebrity CEO’. For many years, there has been a tendency among corporations to recruit larger-than-life, charismatic chief executives, typically from outside the company, and to bring them in amid frenzied media attention that shouts if not ‘saviour’ then certainly ‘superhero’.

The trouble with overbearing, overconfident, and narcissistic CEOs is that they sincerely believe they are creating shareholder value even as they are destroying it. Many of them are enthusiastic risk-takers, pushing through dramatic ramp-ups in spending on mergers and acquisitions, capital investment, and research and development. In the long run, these behaviours will interfere with management's ability to stay in touch with organisational reality, thus preventing real learning and change.

For example, Fiat Chrysler Automobiles in 2014 initiated a civil lawsuit against its former Australia CEO whom it accused of breaching the law and his contract by giving cars to celebrities and inflating contracts to benefit his financial interests. For his part, the former local CEO denied breaching his legal duties and said the Chrysler Asia Pacific CEO and other senior company officials had approved his actions. It is then hard to decipher what is healthy and what not.

Writing Governance Codes Is Easier Than Changing Behaviours

Boards that do address the issues of learning and change are often particularly hopeful that revising governance codes will produce meaningful shifts in the way their directors interact with top management teams. What many boards fail to realise, however, is that for all their good intentions, writing something down is not the same as implementing it in daily communication and action.

Through the write-up of hundreds of pages of codes and manuals, a board may aim to change an organisation by conducting an in-depth internal survey, mapping out the roles and responsibilities of the board and management, and rating different areas for effectiveness and importance. The changes may be first drafted by one director and then sent to all the other board members for amendments, with the final text then discussed and agreed – word by word – by the board as a group.

But this does not guarantee real progress, nor that the quality of the relationship between the board and management will ascend to a new level. All too frequently, despite greater lucidity on paper, only minor changes may be observed in practice. Tellingly, strong top executives tend to resist and resent even soft challenging and questioning of self-edited performance targets, strategic thrusts, results, or succession plans.

This is not to say that all exercises and initiatives aimed at specifying more clearly the roles and domains of the board and management are doomed from the start. On the contrary, there is great value to be derived from tasks such as detailing existing areas of responsibility, outlining perceived ‘missing’ areas, clarifying decision authority in specific scenarios, defining the respective roles of the chair and CEO in setting agendas, and documenting perceived roadblocks. But this value will only present itself when the board recognises these exercises for what they are – departure points in a long and demanding process of individual and group adaptation, change, and commitment.

On high performing boards, a big part of that commitment comes from understanding that creating sustained business value requires a strong CEO. Such a chief executive needs to be matched with an equally strong board that is ready and willing to engage with them dynamically. This is a very different power equation from the one we described earlier in this chapter, where a weak board protects an underperforming CEO out of a false sense of solidarity and identification.

To balance the CEO's influence, directors should re-examine the board's composition with the objective of bringing in knowledgeable, independent, and skilled members who can act as counterweights to the chief executive and provide oversight of the corporation. Directors can also help to restore the board's influence by using their own human capital – such as their status as a former CEO, or their experience on a board compensation or auditing committee. All these undergird the social nature of the decision-making process that takes place in the boardroom.

In theory, independent directors should enjoy more decision-making influence and power than dependent board members. However, empirical research has uncovered little evidence that the dependent/independent distinction is significant in relation to influencing the board's decisions and its relationship with the CEO.

Crucially, and regardless of the organisation's performance, the board should under no circumstances waver in its ability to observe and judge management's behaviour objectively. Once the board finds itself seduced by the company's perceived power and success, its capacity for discharging its duties will likely become compromised. Boards of directors are important monitors of corporate behaviour, and can rein in opportunistic action on the part of top management by providing incentives for it to pursue appropriate goals. Overbearing executives are increasingly seen as a result of the corporate system, in addition to performance systems and structures, power allocation, and managerial beliefs. In many organisations, the absence of challenge or resistance from shareholders and other stakeholders, including the broader financial community, may have encouraged management's illusion of grandeur and vast control.

Finally, today's boards have a tangible and growing role to play in managing the organisation's relationship with stakeholders such as governments and the broader public – a topic we will cover in greater detail in Chapter 27. Successful companies run by overconfident leaders may be exciting to watch – but at some point, stakeholders are likely to demand mechanisms that will mitigate the downside risk of narcissistic CEOs. Those checks are expected to come from the board, particularly as twenty-first-century boards become more diverse and independent. And effective diversity is the theme of the next chapter.