Victor Prozesky (The Board Practice) Knows What Effective Boards Have In Common

Challenging Management
During his long career, Victor Prozesky was involved in assessing the board of the Norwegian oil and gas company Statoil (now Equinor), after a merger and amid the globalization of operations. One of the questions was: How well-equipped is the board to question and challenge management? Telenor, also from Norway, one of the largest telecommunications companies in the world, wanted to test the effectiveness of the board and identify points for improvement, especially after significant international expansion and several board changes. Did they still have a good mix of skills and sufficient diversity? How could the board learn to handle uncertainty and risk within the sector more effectively? How could more time be dedicated to strategic discussions during meetings? And why did the succession process falter? For Singapore Post — where the shrinking postal market and growth in e-commerce activities resulted in a radical transformation process — not just the board, but the entire corporate governance was scrutinized, including the procedures concerning mergers, acquisitions and transparency about board members’ interests.
These are all examples of companies in transition, at a crossroads in their existence, navigating to a future destination while constantly having to recalculate the route.

In the Netherlands, we are mainly familiar with the two-tier model, which has separate executive and supervisory boards. Most other countries have a one-tier model comprising both executive and non-executive directors. Which model is most effective, in your opinion?
‘The Board Practice has a lot of experience with both models, but there is not one that is superior to the other. There are differences, of course. In the two-tier board model, the Supervisory Board is more distanced from the executives and there is an emphasis on oversight and supervision, whereas in the one-tier model, non-executive directors are closer to the proceedings and there is a greater emphasis on the advisory role. But we see a clear convergence: In the two-tier board, the changing world requires closer collaboration and more contribution to strategy and oversight of execution, and in the one-tier board, it requires more independent supervision of executives.
Effective boards are not so much about structure as they are about culture: The “soft” elements like boardroom dynamics, communication and chemistry. Governance protocols can be developed and audited, but, for instance, there is no set formula for collaboration between the Chair and the CEO and within the board. That applies to both governance models.’

How decisive is the national culture in which boards operate? Do you see any differences between Asia and Europe, for example?
‘In Asia, it is important that people can avoid losing face in the event of problems or criticism. During an assessment in Singapore, for example, we make a point of always discussing board effectiveness and avoiding the term “board performance”, because it has a negative connotation over there, that is, failure. So, during the assessment process, you have to respect the dignity of all parties involved and phrase conclusions carefully. The same applies to the United Kingdom, by the way. If collaboration between the Chair and the board is difficult, you first of all write three paragraphs in the review about the brilliant work that the Chair has performed and then you very subtly express what could be done differently. In short, you have to phrase the message very carefully. On the other hand, Scandinavia and a country like the Netherlands have a more egalitarian culture. Here, you can just get to the point, which increases the effectiveness of corporate governance. The sector can also be just as decisive for the board culture as the country in which the company operates. In the mining industry, for example, there is an emphasis on safety, which leads to risk-averse behavior. Within fintechs, however, risk-taking and learning from failure is encouraged. At The Board Practice, we factor that into our work with clients.’

What is the key to an effective board?
‘Being able to deal with difficult situations and issues without putting collaborative relationships under strain. When things are going well for a company, the boards begin to feel at ease. Executives and non-execs appreciate each other and are happy to share the joint success. But that often turns into conflict if the company is in difficulty. Rather than focusing on the bottlenecks, it can result in tension between directors and supervisory board members. An effective board has the ability, process and interpersonal skills to initiate difficult conversations — even when things are going well. They do not launch personal attacks on each other, but together seek constructive solutions to dilemmas and difficult issues.
An example where this did not happen is within the South African/German furniture company Steinhoff, where the Board of Directors found it too difficult to challenge a highly successful CEO who at first glance added huge value. Until it became clear that the added value was simply an overevaluation of assets and interconnected transactions. A lack of diversity on the board certainly contributed to that. The resulting scandal caused enormous damage to the company and individual non-executive directors. When I am asked whether the board influences the culture within an organization, I often tell the story of the security guard at the entrance to a company who greeted me as I arrived for an interview with the Chair. Upon hearing the time of the interview, he said that the Chair would probably be late as usual. That culture had permeated the lowest levels of the company. After that, it was no surprise that management meetings and executive meetings started at least 15 minutes late.’

How do you assess the interplay between the Board and the Executive Committee (ExCo), and how can non-executive directors get a better handle on it?
‘There used to be command and control at the top: The CEO and CFO made the final decisions on everything. In this Information Age, the CEO and CFO cannot possibly have all the relevant information they need at their fingertips. They have to come to a solution together with the ExCo. The CEO therefore has to play a role as part of the team and as a leader at the same time. A strong CEO also functions as a link between the Supervisory Board and the ExCo.  He or she ensures that the Supervisory Board’s message is conveyed to the ExCo and therefore to the organization as well. Conversely, the CEO regularly asks members of the ExCo to talk to the Supervisory Board about their areas of expertise. This way, non-executive directors can assess how effectively the CEO is managing the management team and whether the ExCo comprises potential successors.’

How open are boards to performance assessments?
‘Roughly half of the boards are assessed just because the governance codes require it. They simply see it as an obligation and then continue as they were. To a certain extent you cannot blame them, as assessment processes often provide little added value. That added value only emerges when the board formulates an objective: Where does the company want to be in five years’ time, and what does the board need to guide the management in making strategic decisions and remaining relevant? Are the supervisory board members reactive or proactive in this regard? Only then do assessments add value. If the board has not formulated these kinds of objectives, we can help shape them. Compliance with the assessment obligation is necessary, but not sufficient. It is the starting point for working in a focused way on more effective supervision.’

Why does The Board Practice stand out from other companies in the Netherlands that conduct board effectiveness assessments?
‘Our international work at board level provides clear insights on various good practices. The cultural diversity of boards in the Netherlands makes that experience highly relevant. More than 60% of supervisory board members and more than 40% of the executives of large, listed companies in the Netherlands are non-Dutch, and that has changed the dynamics and culture of the boards considerably in recent years. Moreover, for The Board Practice, board assessments are core business. Our services focus entirely on that. Even when it might be necessary, we do not actively search new board members.’

What do your board assessments look like?
‘We have a basic process that we adapt for each client. We gather as much relevant information as possible to fully understand both the context and the purpose of the assessment, before developing the process itself. We then gather input by conducting online surveys, which have both quantitative and qualitative sections. However, the key to effective board performance depends on interpersonal relationships and informal communication. Even though a board is created as a governance construct, it is more than just a group of experts. Each board is a social construct — a group of people with their own ambitions, idiosyncrasies and egos.
In order to gain an understanding of the collaboration and group dynamics, we conduct interviews and observe meetings. What is the balance of power and what is the role of the Chair? Does the Chair invite debate, or is every form of discussion or idea immediately shot down with phrases like "we have already tried that" or “do not worry, we have everything under control"? And how formal are people’s manners within the board? There are still boardroom tables with name cards for the directors. The longer your term of office, the closer you get to the Chair. But some boards have a very informal culture, where members can get away with shouting at each other. Both can be very effective.
The little things matter. Sometimes, the power balance between management and the non-executive directors can indicate who sets the agenda for board meetings — the CEO or the Chair — and the process for adding items to that agenda.’

Do you do peer-to-peer reviews, where executive and non-executive directors give their opinions on each other?
‘That is a standard part of our assessments in other countries, but in the Netherlands we find that it can still be a sensitive issue. Non-executive directors usually have had very successful careers, so they are often reluctant to have their performance assessed by others. But the purpose of peer-to-peer reviews is not to assess whether a non-executive director is good enough. No grades are handed out. It is a development-oriented approach: How can we as a board learn more about the industry or a topic like cybersecurity, and how can we supervise and collaborate more effectively? It is also a confidential process, as each non-executive director sees only his / her own feedback. The Chair does have access to all the reports, so that he / she can have discussion with individual non-executive directors, which can work very well. On one international board, for example, it emerged from peer reviews that one Supervisory Board member occasionally fell asleep during meetings. When we called him out on it, his response was: “Of course I fall asleep — people are talking such nonsense!” We could then discuss the underlying problem: How can the board’s working method be improved? Peer reviews can therefore produce good results, but a little persuasion is required in the Netherlands. 360° Assessments can also provide valuable information and ideas as part of that process.’

One of the most important tasks that non-executive directors have is to select a new CEO. However, succession planning is often a secondary concern.
‘It remains puzzling to me: People are key assets for any company, but leadership development and succession planning often receive the least amount of attention from boards. The most common mistake is that boards wait too long. You have to begin the succession process on the day of the CEO’s appointment. It then becomes an objective process and does not feel personal and threatening to the CEO. If you only start talking about succession after two or three years, the CEO will think: What is the hidden message? It then turns into a ‘me vs. them’ process.
A second mistake is to make the CEO responsible for the succession process. That is just like asking the turkey to organize the Christmas dinner. The board must take the lead, even if the CEO has to do most of the work. The third mistake is that boards simply see succession as a replacement, whereas you should be asking the question of which leader the organization needs in the future. Different people are suited to different roles. Think of 20 to 30 potential successors within the organization and follow them. How closely do they fit that future profile? By selecting just one or two potential candidates, people within the organization know who might become the boss in the future and start positioning themselves. The balance of power will shift. If the pool of successors is large enough, the CEO will not feel threatened. The board can also include external candidates in all stages of the process.’

Do you have a preference for internal or external succession?
‘That depends on the situation. If the company is doing well and there is no need for fundamental change, internal succession is usually better. Internal candidates understand the organization, know its ins and outs and can often take over without any problems. The risk is small — just do not expect a drastic new vision.
If there is a crisis situation or a need for radical change, external succession is better as internal candidates are too embedded in the system to be able to initiate significant change. An external candidate does run a high risk of being rejected by the organization, however. External succession is often either highly successful or disastrous. In short, select an external candidate if you want to shake things up, but be prepared for the risks.’

What are the three most important skills to have as a 21^st century CEO?
‘There has been an information explosion. Today’s CEO realizes that information is, by definition, incomplete and sometimes contradictory, but still dares to make decisions. The second skill is timeless — curiosity. If you give CEOs a problem, they will dive in and ask you all about it because they want to solve it. The third skill is good stakeholder management: Making decisions based on sustainable value creation and maintaining a dialogue with a broad group of stakeholders. Sector-specific and business-specific knowledge are, of course, essential components of the set of skills.’

How well or poorly do non-executive directors manage their own succession?
‘We still see boards that get started too late: “Oh dear, the Chair of the audit committee is stepping down in six months' time, how do we find a new one?” In the past, they would hurriedly contact those in their network. The board knows the terms of office and the rotation schedule, and can therefore anticipate change based on that information. Ideally, the composition and replacement of the Supervisory Board should also be an ongoing process focused on the long term: What is the strategy for the next five years, what is the appropriate combined board profile and which sector knowledge, disciplines, skills, local networks and composition diversity does that require? What does the ideal board look like if we still want to be successful in five years' time? Well before those six months, you need to initiate a professional search for a new audit committee chair and perhaps expand the board skillset by bringing in a risk expert or HR specialist. That way, you can work strategically on continuous renewal of the board based on the organization’s strategic demands.’

What is your advice to boards that want to remain relevant?
‘In a rapidly evolving world, boards need to be in a state of constant transition in order to govern effectively and remain relevant. One way to achieve this is through a program of well-executed board effectiveness assessments.’

What is your personal purpose?
‘Our slogan is “Boards matter”. Whether or not companies are well managed is of societal importance. The more effective the management and supervision, the more added value in the long run. Once non-executive directors start supervising after their managerial career, they are expected to know everything and be able to do everything. But the world is changing rapidly around us and that can create a gap in knowledge and skills when it comes to tackling the difficult situations that executives and non-executives face. Almost all companies have to deal with sustainability issues, technology, cybersecurity, big data opportunities and risks, and artificial intelligence, but few boards are well-prepared for how that might affect the future. We want to help bridge that gap, hoping that boards will be more effective in ten years' time.’

This article was published in Management Scope 04 2022.