Center for
Issue #43
February 2023
An Agenda for Effective Boards
While codes of corporate governance, regulators and some scholars still point out that the board’s main function is to monitor the CEO and the senior management team, evidence shows that this is not enough to guarantee that the company has a functional and competent board. On the contrary, boards that mainly focus on monitoring and compliance do not dig deep enough into some of the real drivers of the firm’s long-term performance.
Moreover, with the proliferation of geopolitical conflicts, a slowdown in the globalization process, mounting trade restrictions, interventionist industrial policy and serious frictions in global supply chains, the firm’s competitive context has become in most cases highly complex. Boards are supposed to be an active governance institution, which means that they should understand the company and its context. They should also work with and support the CEO and the senior management team to guarantee the firm’s long-term development.
A number of recent corporate governance failures, as well as strategy blunders and abrupt exit of CEOs without clear succession plans in well-known international companies provide evidence that some boards may not be doing a good job in steering the company towards a clear, long-term destination.
​​​​It has been particularly astonishing to see many boards of large, international companies, recently deciding to show the exit door to active CEOs without clear succession plans. Examples include Adidas, Carlyle, Credit Suisse, Disney, General Electric, DWS, Peloton and Unilever, among others. In some cases, such as those of Siemens Gamesa and El Corte Inglés, the board suddenly decided to reshuffle at the top several times over a short period of time, while often bringing in external CEOs. This shows not only poor judgement, but significant weakness in the board’s professional competencies.
Many corporate governance crises follow a similar cyclical pattern: a decrease in sales and profitability leads to a reduction in cash flows, which reflect poor strategy or mediocre execution. The cycle tends to be rooted in dysfunctional elements within the firm’s culture and values, or people development. This eventually leads the board to judge that the current CEO and the management team may not be right for taking the company to the next level. 
In a recent research project on how to design and organize boards of directors in disruptive times1, based on the experience of many international companies, I found evidence that boards of directors have three critical functions. The first is leadership development, in particular, the succession process and planning of the CEO and key senior managers. Appointing the next CEO is one of the most consequential decisions that the board will make. It is also an area in which board members often have a little experience, due to the fact that it's not a regular board decision. 
​​Leadership development at any company should not just relate to the role of the CEO. It should also include how the CEO promotes the education, development and retention of junior managers in the company and helps them prepare for future challenges within the organization. It is a function closely related to people management and development. When the board tries to understand this process and helps the CEO work deeper in this area, the quality of leadership development improves. In the end, this process should eventually lead to better CEO succession planning. The board’s work in this area should also include making sure that the CEO and the top management team have the required competencies to lead the company in a specific context. Sometimes the board should look for the next CEO outside of the firm. Nevertheless, a company that relies mainly on external searches for key managerial positions is revealing structural weakness in its leadership development process.
The second key area for boards of directors is nurturing and caring for the firm’s purpose, culture and values. As recent evidence of major corporate crises – such as those in Boeing, Volkswagen, Wirecard and Wells Fargo, among others, suggests – a broken culture of deceit or corruption will lead to a major corporate failure. Each board should develop its own approach to understand and monitor the quality of the corporate culture. Unfortunately, it is difficult to assess how healthy corporate culture and values are and their indicators are complex. Nevertheless, there are good proxies to evaluate these periodically: equal opportunities regardless of gender, race or country of origin; the role of performance-based pay; the rates of attraction and retention of key people; regular surveys on corporate culture and values: opportunities to get to know managers two, three or four  levels below the executive committee; and the ability for employees to express perspectives on business issues that differ from what senior managers say. The board has to become convinced that corporate culture is important and learn how to assess it. As it has been argued in this newsletter, one effective way to develop a positive culture is to anchor the firm’s strategy and policies on a clear notion of purpose. This should highlight why the firm exists and which people and parties it wants to serve. Purpose is different from culture and values, but helps support and develop them.
The third area is to care about the firm’s long-term development, which involves two key elements. The first is the board’s work with the senior management team around company strategy. This is primarily the job of the CEO and the senior management team. The board is responsible for the firm’s long-term development and should understand, debate and eventually approve the strategy. This responsibility goes beyond rubber-stamping regular strategic plans. The second pillar stems from the first: the board should make sure that the firm has a clear distribution of responsibilities between the board and the top management team, with optimal decision-making processes. This is an inherent feature of good corporate governance. Moreover, an important element of this framework is the positive collaboration between the board and the top management team. The board should support and work with the CEO, which goes beyond simply monitoring the person holding this position.
As pointed out previously, the notion that the main job of the board is to monitor the CEO is obsolete. Boards have a complex and delicate function in understanding the firm and governing it for the long term. CEOs and their senior management teams must carry out daily responsibilities to achieve this. Boards should work cooperatively with CEOs and their teams, appointing and replacing them when necessary, but also challenging and supporting them. This is what board governance is all about.

(1) See J. Canals (2023). Boards of Directors in Disruptive Times, Cambridge: Cambridge University Press. In Spanish, Transformarse para perdurar, Barcelona: Ed. Deusto.
Corporate Governance Trends and News.

According to the latest Lazard’s review of shareholder activism, the number of campaigns initiated in 2022 increased by 36% compared to 2021, with the technology sector most frequently targeted during that period. A recent example is Salesforce who has been targeted by Starboard Value and, more recently, Elliot Management.
CEOs are aware of the unprecedented disruptions and challenges that their companies will face in the coming years. According to PwC's 2022 Annual Global CEO Survey, almost 40% of the 4.410 surveyed CEOs understand their company will not be economically viable in 10 years or less if they continue on their current path. 
According to the Russell Reynolds Global Corporate Governance Trends Report for 2023, this year we may expect further scrutiny of the board effectiveness, CEO performance and pay, as well as more demands from investors on sustainability reporting.
The International Oversight Committee has issued its annual report with recommendations that proxy advisory firms should follow to enhance the implementation of their own best practices codes and trust in the role they play in the market.
Upcoming events.

March 1, 2023 7:00 pm. Barcelona.
Speakers: Prof. Jordi Canals and José Ignacio Goirigolzarri (CaixaBank President)
March 7, 2023 6:00 pm. London. 
Speakers: Prof. Jordi Canals and José Viñals (Chairman of Standard Chartered)
Upcoming programs.