Courage at the Top: Empowering the Board of Directors

In January 2001, Tyco’s then-CEO L. Dennis Kozlowski presented his board of directors with a new employment contract stipulating that a felony conviction would not be grounds for his termination. The board signed it without any fuss. Eighteen months later Kozlowski was being investigated for fraud, while Tyco was on the brink of collapse with $32 billion in debt and an $8 stock price.

Kozlowski’s replacement, Edward Breen, promptly set about overhauling Tyco’s board of directors for one simple reason: he knew that in order for the company to survive, return to sustainable success, and to never have this problem again, the company would need board members who asked questions. Kozlowski had spent five years taking Tyco down a path to its own destruction, but at no point did the board ever question his lavish spending, his nearly 600 corporate acquisitions, or even his unusual contract terms. It was this lack of courage, as much as Kozlowski’s excesses and shady dealings, that doomed Tyco.

After all, what is the purpose of a board of directors, if not to provide oversight and guidance to a company’s officers on behalf of shareholders? A board that fails in these duties is every bit as responsible for the company’s demise as the CEO who makes bad decisions.

Unfortunately, establishing a board of directors with the appropriate amounts of intellectual curiosity and courage is somewhat easier said than done. Many CEOs understandably want board members who are supportive and will allow the CEO to run the company as he or she sees fit. But ultimately this is a less effective option for the long term health of the organization.

Board members can come from inside or outside the corporation, and there are pros and cons to both. Board members who come from outside the company are normally less beholden to the CEO and are more prone to critically examining the proposals and decisions of company officers. The downside is that, unfortunately, outside board members also have less information, less context, related to what is happening within the company. To put it another way, they are not as closely in tune with the day-to-day goings on of the business as board members who come from inside the company.

Here in the U.S., the New York Stock Exchange requires that a company’s board be comprised primarily of company outsiders. The reasoning behind this rule is sound, but it is not without its problems. For one thing, while outsider-dominated boards typically provide better monitoring and control, because they have less information than insiders they tend to rely much more heavily on financial controls – which are easier to objectively measure and require less understanding of the business – than on strategic controls. This reliance on financial controls over strategic ones often leads to less reinvestment in the company, and occasionally to over-diversification.

Of course, many companies do not have to worry about the rules of the NYSE. These firms are free to stock their boards with as many company officers as they like, but this can come at a cost as well. While better informed, insider-dominated boards are less likely to critically question CEOs and board chairpersons who also happen to be the company’s majority owner. Owners and chief executives are able to exert a great deal more influence over such a board, so even though the board makes better-informed decisions and is typically more focused on the long term health of the company, some issues don’t get the attention they need because inside board members are also concerned about maintaining a good relationship with their boss.

The best course of action is to have a good mix of both inside and outside board members. This provides a good balance of well-informed members with those who can safely ask hard questions, and enables the board to better balance short term profitability with long term sustainability. The trick becomes keeping the outside members properly informed of the goings-on within the company. With the introduction of Sarbanes-Oxley and a host of other regulatory changes affecting U.S. companies, board members are now flooded with information about the companies they serve, most of it financial. An extremely common complaint from board members today is the difficulty in digesting all of this information and still having time to discuss and make good decisions. Additionally, because there is so much information to sort through, it becomes difficult to spot potential red flags or issues to address within the data.

One partial solution to this problem is to increase the amount of time outside board members dedicate to the company. Some companies have resolved this through the introduction of more frequent meetings. Some require that outside board members spend a portion of their time onsite at various company facilities talking to people and learning about the business. Some provide more frequent updates to the board between meetings.

Another partial solution is to encourage curiosity and critical thinking by the board. Like any other employee, board members can be reviewed based on their performance, and replaced if they do not perform. The use of critical thinking, the willingness to ask tough questions, is something that board members absolutely should be rated on.

And CEOs have to encourage it. None of these suggestions will do any good if the CEO is unwilling to engage in critical discussions and to have their plans potentially torn apart by a board that is just trying to do its job. That’s not an easy thing to do. It requires a strength of character that is not easy to come by. But organizations that can establish this level of courage and intellectual curiosity at the top while finding the right ways to get their board of directors fully engaged will have the potential for a long run of success.

Identifying Organizational Core Competencies

When C.K. Prahalad and Gary Hamel first introduced the idea of core competencies to the broader public in their 1990 Harvard Business Review article, the idea caught on quickly. Today, it is basically impossible to find a manager or business school graduate who is not familiar with the concept. The term is part of our common business lexicon, but… how many people actually know what their organization’s core competencies are? Or why they are so important?

If you can’t answer the second question, then you are wasting your time trying to answer the first. Luckily, understanding the importance of core competencies is not hard, and the answer is the same for everyone.

Core competencies are important because they are one of the three elements of competitive advantage, along with resources and capabilities. To elaborate on this trio in brief, resources are the elements the firm expends in order to create capabilities; they can be physical, financial, human, or technological, and can be intangible just as easily as they can be tangible. Buildings and equipment are resources, but so are public image and brand recognition. Capabilities are simply the things the firm is capable of doing. An auto parts manufacturer is capable of making a fuel filter, a bank is not. However, both are capable of marketing and making investments to help their business along. If they are not capable, they use their financial resources to acquire the needed capability.

And that brings us back to core competencies: those capabilities that truly distinguish a company from its competitors and give it a competitive advantage. These core competencies are often reflective of the organization’s personality, and in short, are what make the company special. Here are a sampling of well-known and easily recognizable core competencies:

Apple Innovation and design
Walmart Inventory tracking and logistics
Adobe Deep understanding and relationships with their core user base
Southwest Airlines Empowering employees

How do we determine our core competencies?

I recently spent a little time trying to determine if the internet held the answer to this question. Turns out, it doesn’t. Not really. What I did find was a number of articles and blog posts claiming to answer this question, but then not actually answering it. One in particular, from a professional organization that you would think should be among the best places to find the answer, actually held some very bad advice and very little useful information.

So, since I was unable to find an answer already out there, I decided to go ahead and put the answer out there myself. Here goes:

The first step in determining your organizational core competencies is to poll several of your firm’s decision makers. I would recommend, at minimum, pulling together the executive team. Ask them very simply to identify the things which they believe the organization excels at in relation to not only their competition, but even other companies operating in totally unrelated areas. Each person should come up with their own list. (Ideally, I would like to see each person take a couple days to think about it and make their own list before coming together as a group; this eliminates the problem of dominant personalities taking over the meeting and some ideas never being heard.) The number of people you query is entirely up to you, but you need enough to get a saturation of ideas.

Once you have collected the suggested core competencies, you want to assess each one against the VRIO scale developed by Jay B. Barney in 1991. Briefly, the VRIO scale examines a competency against four criteria:

  1. Value – Do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat?
  2. Rareness – How many competing firms already possess particular valuable resources and capabilities?
  3. Imitability – Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?
  4. Organization – Is a firm organized to exploit the full competitive potential of its resources and capabilities?

A capability is not considered a core competency unless it meets all four of these criteria. Another criteria I would add is that core competencies should be aligned with the mission and vision of the organization. If they don’t align, then either the competencies or the mission/vision should change.

Yes, it is possible to change your core competencies, and in the interest of full disclosure, it is probably easier to change your mission and vision statements and do all of the change management associated with that than it is to change core competencies. Changing core competencies is difficult, expensive, time consuming, and requires absolute commitment on the part of leaders at all levels. But it is possible.

A list of core competencies is typically going to be fairly short. If it isn’t, then that’s a good sign that you haven’t been quite critical enough when weighing things against the VRIO scale. Don’t be surprised if you find yourself in this situation. A lot of leaders believe their organizations are good at a lot of things, and they probably are, but very few of those are truly core competencies that provide competitive advantage.

Communication in times of major change

A few years back the folks at Aon released an interesting white paper about how to manage employee engagement during major organizational changes. A much shorter version was re-released last year, but some of the really useful information was unfortunately dropped, presumably in the interest of brevity. One of those really useful bits of information, I thought, was a chart showing the top five drivers of engagement during different types of organizational change. It looked like this:

managing-emp-engagement-aon
 (Aon, 2013)

This is terrific, actionable information. Most organizational development professionals can look at this table and understand, at least at a high level, what they ought to do to address each of these drivers.

Of course, key to many of these drivers of engagement is communication. This is especially true during large transformations that will affect the whole company, such as being acquired by another firm or a major restructuring. Being on the buyer’s end of an acquisition could also qualify, depending on how the acquisition is being structured. The point is: these scenarios create tremendous uncertainty for employees at all levels, and uncertainty leads directly to disengagement. Communication is the only tool at our disposal for combating that uncertainty.

Okay, but…

But many, many leaders get stuck here. They know they should communicate, but they just aren’t sure how they should do it, or when, or even what to say. And because they don’t know how, when, or what, they often default to not communicating anything at all. And that’s a problem.

So here is my simple solution, and the advice I give to business leaders who find themselves in this situation: tell them everything you know, via every channel you have, at every chance you get. It is virtually impossible to over-communicate during these major organizational transformations, especially during M&A situations. And it needs to be a top priority. Senior leaders, and the CEO in particular, need to build time into their schedules for communicating with their people. It is that important.

Why is it so important? Because human beings loathe uncertainty. During times of major change, when uncertainty is high, people dedicate a significant amount of their mental resources to trying to resolve that uncertainty. In the absence of reliable information from an authoritative source, they will actually draw their own conclusions from the information they have available as a way of resolving the uncertainty. This is how wild rumors get started during major organizational changes, and in the absence of an authoritative voice countering those rumors with facts… you can probably guess where this is going.

Let’s talk specific strategies

My advice to leaders here has three elements to it. I’ll hit them in order.

1) Tell them everything you know

An article in a recent issue of Training magazine had some excellent thoughts from David Noer, author of Healing the Wounds: Overcoming the Trauma of Layoffs and Revitalizing Downsized Organizations. David says, “Avoid the four no’s: no secrets, no surprises, no hype, and no empty promises” (Freed, 2017). The first two are just absolutely critical. Be honest, and share everything that you are legally allowed to. If you don’t know something, you can tell them that, too. In fact, you should. “I don’t know” is a perfectly acceptable answer to many questions during times of major change, but it should be followed up with some kind of timeline as to when you think you will have the answer. What you should never do is lie, or make promises – even ones you think you can keep. Lies will eventually be found out, and even one broken promise will utterly destroy your credibility with the broader employee population. Do not do it.

2) Use every means at your disposal

Using a variety of different means of communication might seem overly time consuming, but it is also a necessity. People will not feel like they are being engaged unless you communicate to them in the ways that they prefer to be communicated to. For some people that will be email. For some it will be via conference calls or web meetings. For some it will be in-person meetings. You will need to use all of these, and quite possibly some others, as well. You will want to have an email account set up that people can send questions to. You will want to host town halls. You would be wise to post FAQs on your company intranet, with links to supplementary information. The more significant the change, the more of these channels you will need to take advantage of.

3) Communicate often

Finally, it is important to communicate with people as often as possible, especially as the changes begin taking place. At times this will seem hard, and it will feel like information is being repeated over and over again. Or it will feel like there is nothing new to say. And that will be true. But during times of major organizational change people will need that reassurance, and you never know who missed that last email or company-wide conference call. (Hint: you can safely assume a lot of people missed it.) During M&A scenarios, what typically occurs is that people have many questions and concerns in the first few weeks immediately after the announcement. Then things will lull back into a state of calm until the deal closes and the actual integration starts to take place, and that’s when uncertainty rears its head again.

Major organizational changes are hard on everyone involved. They create an enormous amount of uncertainty, and can generate very high levels of disengagement if they are not managed properly. Without an effective communication strategy, you can count on an even rougher road ahead.

References

Aon. (2013). Managing employee engagement during times of change. Retrieved from http://www.aon.com/attachments/human-capital-consulting/2013_Managing_Engagement_During_Times_of_Change_White_Paper.pdf

Freed, J.E. (2017). What they don’t teach in business school. Training, 55(4), (pp.10-11).