Effective Governance Leads to Long-Term Value

It is the board’s job to help a company create value over the long term.  The board can do this by encouraging management to present to the board a realistic picture of where the company is going, what are the drivers of the business, what are the risks and obstacles the company faces, and what is the rationale for the particular strategy that the management is presenting to the board for approval.

Board members need to have these factors presented to them in ways that they are able to reasonably grasp.  One of the problems today is that businesses are so complex that it has become very difficult for an outside director to fully understand certain nuances.

Boards must press management to express what they believe to be the key drivers of the business.  In what situations are business drivers dependent on other drivers?  What are the short and long term risks?

We’ve seen cases where management assumes that the company will always be in business, so that they look at risks only in narrow, reflecting the way they are currently doing business.  The board, however, sees things from a different standpoint – looking at larger issues that management may simply miss.

In any event, management has to present to the board the risks and what they are doing to manage those risks.  Risk is important.  It’s not eliminated because there is a certain balance between the amount you’re going to risk and the benefits you’ll incur.  Since there’s no free lunch, there will be no benefit if there is no risk.

Next, the board must encourage management to think through and explain to the board the pro’s and con’s of the particular strategy management is advocating.  The board can help here by asking insightful questions and challenging assumptions. The result should be a strategy tempered for the best chance of success.