- Michael Hilb
Reinterpreting the Role of the Board of Directors
Together with Harry Korine
How many times have we heard the phrase, “that’s a new challenge the board needs to address”! As recently as 1990, the board of directors generally enjoyed a largely ceremonial existence. In publicly listed entities that were legally required to have a board of directors, board membership was seen as a form of recognition. Many closely held businesses did not even bother with the added layer of bureaucracy a board of directors entails. Contrast that with 2022, when a continuously growing list of topics, from climate change to diversity policy, call for serious board attention, and many different types of organizations, from global giants to start-ups, aspire to a high-performing board. The board of directors was once an afterthought, a relic of historic laws of incorporation; today it is being asked to be all things to all people: supreme body of direction, faultless guarantor of compliance with laws and regulation, vigilant monitor of risk, and dedicated sponsor of social responsibility.
Under a burgeoning workload that seems impossible to satisfy for a body that only operates part-time, many boards concentrate on doing governance by the book. As the number of boxes to check increases, boards become more reactive, more formal and more focused on compliance, with corporate secretaries and legal advisors telling the Chair what to do. Ironically, by retreating to a narrow position of formal authority, boards risk undermining the essence of governance – provision of the long-term leadership that ensures the viability of the corporation. Here, we present the cases of three world-leading companies, whose boards have chosen to make corporate governance a source of competitive advantage: privately-owned building materials paragon Hilti that embeds the board in the business to drive change while maintaining cultural continuity; family-controlled, but publicly-listed transport logistics bellwether Møller-Maersk that future proofs the board to spearhead strategic reinvention; and widely held FMCG giant Nestlé that aligns the board with global industry conditions to navigate complex stakeholder relationships. Although their strategic challenges differ, and their timelines of change are not the same, the Chairs of all three have reinterpreted the roles of their boards of directors. The tasks formally required of a board – what is ordinarily referred to as “governance” – are still attended to, but the bold emphasis is on strategic differentiation. Where so many others are sticking to a cookie-cutter approach, these Chairs and their boards are prioritizing entrepreneurial leadership.
From Symbol of Stability to Guarantor of Compliance
Over the last thirty years, a sequence of economic crises has rocked the corporation: the Times-Mirror scandal that led to the influential Cadbury Report; the Enron/Arthur Andersen affair that Sarbanes-Oxley responded to, and, finally the financial crisis of 2008 that pulled the whole world into recession. With each of these crises, the board of directors was found wanting, and additional reforms became necessary. More recently, public concern about the impact of the corporation has shifted from the economy to the society. Business appears to be doing well, but society is suffering: rising inequality, increasing pollution, unbridled technology, underrepresented diversity, all bedevil society as a whole, and the board of directors is being called upon to act. From the 1990s, the responsibility the public ascribes to the board of directors of the corporation has grown in concentric circles – first for the corporation, then for investors at large, subsequently for the economy as a whole, and now for society. Of course, public concern has been focused on publicly listed companies, but, because closely held firms make up a large portion of economic activity –in some countries the largest share – they have not been able to escape the calls for a representative and effective board of directors to govern the corporation. Today, having a board of directors that covers all the bases has become as integral as having professional management. Thirty years of increasing pressure on the board of directors to take on a bigger role is more likely to continue than to be reversed. As an institution, the board of directors today finds itself sandwiched between shareholders and society. The board of directors has become a fulcrum for change, but, the reality of the work of the board is not keeping pace with the demands being put on it. Increased demand meets limited capacity, and the result is too often a board of directors that sticks to the bare minimum necessary to satisfy stakeholders and regulators.
New Ways Forward
In most jurisdictions, the legally defined purpose of the board of directors is to safeguard the interests of the corporation (the American emphasis on protecting shareholders is the notable exception). Safeguarding the interests of the corporation means making choices about what type of board work is absolutely necessary to maintain the viability of the business. As currently defined and constituted, the board cannot be all things to all people, but directors at Hilti, Møller-Maersk, and Nestlé demonstrate that it can be reinterpreted as a task force for entrepreneurial leadership. Consistent with the purpose of the board, this interpretation puts directors in the driver’s seat; rather than functioning as a post hoc instance of policy approval and passively reacting to events, the boards of these companies engage proactively with the business and its context. Instead of waiting for stakeholders and circumstances to define its mandate, the board takes advantage of its right to shape it.
Driving change while maintaining cultural continuity: The embedded board at Hilti
“As a privately-owned company, we take corporate governance very seriously, but we are also willing to defy certain principles of what is generally considered good governance,” says Michael Hilti, Honorary Chairman and former CEO of Hilti. “Our CEO normally becomes chairman without any cooling-off period, our board members can exceed the 12-year term limit if necessary, and the Hilti Family Trust never has dominant representation on the board." Unlike a listed company, Hilti has the privilege of shaping corporate governance from conviction and experience, rather than slavishly following rules imposed by outside institutions. This entrepreneurial approach to corporate governance is deeply rooted in Hilti's history. After successfully growing internationally for forty-five years as a private company, Hilti went public in 1986, offering participation shares. Only seven years later, however, the decision was made to take the company private again. This interlude on the stock exchange shaped the current approach to corporate governance. Not only did it force the company to be more transparent, it also established the principle that leadership is not a prerogative of the family. The most important lesson from the experience of going public and the crisis the company went through during the 1980s, was that effective corporate governance has to be based on a strong culture. Corporate culture at Hilti is a continuous journey, led by a team of 70 dedicated internal professionals and renewed in “culture camps” that are organized every 15 to 18 months and involve all 30,000 employees, worldwide. Significantly, board members are an integral part of this cultural journey. Each attends a two-day culture camp where the key themes for the next organization-wide culture camp are tested and discussed. Feedback is received from all levels in the company. The Board’s demonstrated commitment to the process of the culture journey means that it is also accountable for the results, just like the executives and the regular employees. The culture camp is only one aspect of how deeply the Board is embedded in the fabric of work at Hilti. Once a year the board meeting takes place in one of Hilti’s market regions, where members spend two days in one of the countries of the region accompanying local sales staff on customer visits, attending project meetings and interacting with local management. Experiences gained are then exchanged and discussed with the board but also with the management of the region concerned. "There is a tremendous amount of knowledge among our customers and employees," says Michael Hilti. "Board members need to tap into that knowledge and to see what is happening on the ground." The respective roles of board and executive management are clearly defined, as is the role of the Hilti Family Trust (majority shareholder) within the board. Moreover, with each handover at the top, the Chair and the new CEO sit down to establish their own rules of engagement and cooperation. "The board is seen as a true partner who must contribute tangible value to the development of the company," says Hilti: "Our board is a ‘workhorse’; there is no room for egos." Clearly, this level of involvement comes at the cost of greater personal investment, but it is time dedicated to making sure that the board does the best possible job of ensuring the future of the corporation.
Spearheading strategic reinvention: The future-proofed board at Møller-Maersk
Former co-CEO of SAP, Jim Hagemann Snabe took over as Chair of the board of the Danish transport and logistics giant, Møller-Maersk, in 2017. The role of the board, in Hagemann Snabe’s words, is to “inspire management to take the risk of re-invention”. This stands in stark contrast to the traditional role of the board, a task that he describes as “continuous optimization”. His experience showed him that rapid technological and business model change are becoming ubiquitous features of business today, not only in IT but also in other, traditionally more stable industries. Whether in shipping or in industry more generally, the board of directors, in his view, simply cannot continue on the traditional rearward-focused route of evaluating the progress of existing strategy. In practice, this means that Hagemann Snabe devotes considerable board time to topics that are of high importance to the company’s future. The role of the board is to challenge the assumptions of the executives, not to second-guess them on operational issues, to ask questions, not to answer them. Concretely, Hagemann Snabe develops a list of 20 questions that inspire an “outside-in point of view on the future” and sends these to executive management four months prior to the annual strategy meetings. The aim is to develop a point of view on what the company’s entire value chain will look like in five years, which segments will grow, how margins will evolve, and where profit pools may emerge. The process is not based on existing businesses, but on data-supported positions on where the company will have a competitive advantage going forward. Critically, the questions are developed by the Chair, but the strategy workshop itself is owned by the CEO, who must deliver. The initial effort is the biggest, but, at Møller-Maersk, the process is revisited every year, with a new and more refined set of 20 questions. Since 2017, the 117-year-old company has refocused from shipping to logistics and supply-chain management; the transformation has involved intense questioning about how its advantages can be reinforced in the future. Refocusing the role of the board on strategic reinvention has led to more board meetings. However, the nature and emphasis of the work is different from that of a traditional board: much of necessary compliance, for example, is delegated to committees that are trusted to do what they have been asked to do; also, much less time is devoted to poring over quarterly reports and discussing the past. In fact, strategy days are explicitly exempted from fiduciary duties. This way, the board is freed up to do more on the redefinition of success and to keep tabs on the strategic experiments that are shaping the future of the company.
Navigating global stakeholder relationships: The aligned board at Nestlé
When Nestlé presented its Net Zero Roadmap to shareholders at the AGM 2021, seeking shareholders’ support for investment to reduce CO2 emissions over the next four years, it was seen as a pioneering approach to aligning shareholder and stakeholder interests. Equally, the election to the board of corporate outsider Lindiwe Sibanda, a professor from Zimbabwe who focuses on food systems, was perceived as progressive, a way of adding expertise on two topics that are likely to shape the future agenda of the Board of Directors: sustainability of the world food system and Africa. What may seem pioneering from the outside is, however, is "nothing new" in the eyes of Paul Bulcke, Chairman of Nestlé: "Relevant stakeholders have always been represented on our board. Only in this way is it possible for the board to make a real contribution to a group that operates in so many different segments and markets." With 14 members, Nestlé's board largely exceeds good governance recommendations. "You don't succeed by doing everything the way everyone else does. Our approach of representing all relevant perspectives on the board is based on a long, proven tradition," according to Bulcke. As a consumer goods company active in 187 markets around the world, Nestlé has a long history of anticipating consumer and societal trends on the one hand and dealing with stakeholder disagreements on the other. Indeed, over the last decade, investor activism has added a further layer of complexity. "It is one of the main tasks of the board, but also of me personally, to deal with this ambiguity. Today there is no longer black or white, there are multiple opinions on everything," notes Bulcke. "That's why I see it as the board's most important job to ask the right questions about the outside world, and to [pursue] a permanent journey of conversation [with stakeholders].” But how can a ‘council of the wise’ effectively monitor management's behavior? Here, too, Nestlé takes a nuanced approach that runs counter to generally accepted practices. Paul Bulcke moved from CEO to chairman in 2017 with a short cooling-off period of only four months. "I know this goes against rules of good governance, but it has worked very well for us, as even the harshest critics would admit today," says Bulcke. Since Mark Schneider became the first CEO to be recruited from outside of the company, Nestlé's portfolio has undergone major changes and new innovations have been introduced. "These successes were possible because we had a clear understanding of our complementary roles as Chairman and CEO, and I was able to support Mark, who came in from outside, with my deep knowledge of the company," thus Bulcke. Not only is the CEO a member of the board, but, except for regular in-camera sessions, the entire executive team is also present at board meetings and join for the pre-Board dinner. "This exchange is extremely important for both sides," says Bulcke. "Executives can use the board's wisdom to validate their plans, and the board has the opportunity to address critical issues openly and directly with the executive team." Roles have to be clear, of course, and a strong, lead independent director who interacts with both Chair and CEO ensures that boundaries are not blurred at Nestlé. Ultimately, it is the combination of a clear division of responsibilities and a close interlocking of board and executive management that makes Nestlé's unorthodox governance approach work.
Reinterpreting Governance as a Source of Competitive Advantage
In putting former executives on the board of directors, Hilti appears to run the risk of debilitating power struggles between old and new; by having a chief supervisor who acts as the chief futurist, Møller-Maersk would seem to be vulnerable to a confusion of roles; and a board that emphasizes relational engagement with executives over control could make it more difficult for Nestlé to detect failures. Each company, in its own way, is breaking with an established tenet of corporate governance. Are they weaker for it, or stronger? Michael Hilti, Jim Hagemann Snabe, and Peter Bulcke reinterpret the board as an instrument of entrepreneurial leadership – practical, future-oriented, and taking responsibility for strategic direction, rather than waiting to be blamed for mistakes. At each one of these very large and complex companies, the board aims to be more knowledgeable about operations and more active in collaborating with executive management than is common practice. This is not an accident. On the one hand, deep familiarity with the actual workings of the business is essential if the board is to credibly lead. On the other hand, this apparent break with the established governance procedure of staying out of the business unless there is an emergency is tangible evidence of the strategic role of the board in these companies. Power struggles, confusion of roles, or inadequate oversight are not inevitable byproducts of board and executive working closer together. The key to avoiding these issues is to move away from a mechanical view of corporate governance as post hoc supervision and inspire directors and executives to collectively reinterpret their respective roles as the needs of the company evolve. What these boards and their Chairs have in common is an entrepreneur’s strength of character: to be honest, to be distinct, and to be adaptable. Boldly reinterpreted, governance, like strategy, can be a source of competitive advantage.
Strength to be honest: Governance, like strategy, relies on candid assessment of the context
The starting point for corporate governance as entrepreneurial leadership is an in-depth evaluation of the external and internal challenges faced by the organization. In the process, the Chair and the board members define their roles, not according to a textbook or a legal opinion, but in line with the organization’s current and future requirements. Instead of relying on custom, the entrepreneurial Chair determines in specific terms how the board can strengthen the organization. As the case descriptions demonstrate, different organizations require different contributions from their boards: driving change while maintaining cultural continuity, as exemplified by Hilti’s embedded board; inspiring strategic reinvention, as typified by Møller-Maersk’s future-proofed board; and navigating global stakeholder relationships, as embodied by Nestlé’s aligned board. In every case, the board’s contribution departs from routine to fit the context. In every case, the Chair has presented a sharp vision of the board’s role, based on a clear-headed analysis of what the organization needs; there is no room for embellishment. Instead, these Chairs foster a culture of debate, with open conversations and frank exchanges as the expected modus operandi.
Strength to be distinct: Governance, like strategy, creates value by differentiation
A big part of corporate governance is mandatory – ensuring that the company complies with statutory and conventional requirements. In that sense, all companies of a certain type have to meet the same standards. As we have pointed out, however, the heavy and increasing weight of compliance tends to obscure the possibilities for making distinctive choices and creating value. Every Chair has the freedom to decide what areas to emphasize and the ability to shape how the board functions. Uncritically following best practice is the safe option, but it will not add value. In deciding what areas to emphasize, board composition is of particular importance. Not all and not even the majority of board members at Møller-Maersk, for example, are strategists who have spent their careers focused on the future, but all of them agree to play their parts in the process of leading the company into the future. The right metaphor for thinking about the entrepreneurial board is the team built over time, not the team brought together for the annual all-star game. In shaping how the board functions, high-performance collaboration can also be a mark of distinction. Hilti and Nestlé both stress the role of the working board. Unlike a traditional board of directors, a working board is involved in meeting challenges as they occur, as a repository of knowledge for executives, as an extra hand for particularly sensitive projects, and as a relevant face of the company for stakeholders. Collaboration like this doesn't happen overnight, but, with the right leadership from the Chair and the right people in place it can be fostered over time.
Strength to be adaptable: Governance, like strategy, is a subject never closed
It goes without saying that strategy needs to be adapted to changing conditions. Governance is no different. What works today, to fit a specific strategy, is unlikely to work as well tomorrow, when opportunities and risks are different. Embedded at Hilti, future-proofed at Møller-Maersk, and aligned at Nestlé, the boards of these companies are set up to suit tomorrow’s challenges, as far as these can be discerned today. Reinterpreted as entrepreneurial leadership, governance means that no structure is permanent, and no position is untouchable. In due course, the Chairs of these companies and others who have a similarly dynamic conception of governance will work themselves out of a job. Strength to be adaptable also implies the willingness to initiate succession. If governance is about leadership, then succession is the ultimate test.
This article appeared in Think at London Business School in August 2022.