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October 17, 2017

The board’s role is slippery

The Kenya Power’s logo at the headquarter offices along Nkrumah road Mombasa./FILE
The Kenya Power’s logo at the headquarter offices along Nkrumah road Mombasa./FILE

Board members of listed companies tread on slippery grounds, as the recent failures at Uchumi and Imperial Bank teach us. It means members could be held to account for decisions made based on information and professional advice received from management. With the increase in risky accounting, it is a cause for sleepless nights for any board member.

The need to keep eyes peeled for possible problems is real. Often times, if board members asked managers the right questions, some of the calamities could be avoided. There is the less common case of fraud, which is easier to spot and deal with. But it is more likely that someone will do something wrong while trying to do the right thing, and existing systems will fail to catch it and contain it. The role of the board is to put safety nets in place so that managers can make decisions within the safeguards. Cohen in Harvard Business Review calls them "the three company crises boards should watch for".

We start with the collapse of competence. This happens when managers take up problems that are beyond their capabilities, often without realising it. It could result from a manager taking up a new role, a promotion or a change in the complexity of the organisation or the operating environment. Boards have a duty to continuously align roles with skills.

Closely related is the shortcoming in self-governance. This results when managers fail to seek help in instances of collapse of competence. Systems may not be in place to detect that a manager lacks the skills for a project and the manager may not be aware. Sometimes the manager is in denial or they believe they can sail through. On the other hand, no remedial steps are taken even when the problem is identified. Patronage and politics may mask the problem altogether.

Finally is the more common area of corporate governance. Inadequate corporate governance results when essential information that highlights the possibility of failure does not flow from the CEO to the board. Routinely, the board chair relies on management to set the board agenda and this can be tailored to only safe items. Corporate climate may be that only good news flow to the board, and from low-level staff to senior management. The board at such times is at the mercy of management and may make decisions based on twisted or incomplete information. On the other side of the coin, the information flows but the board lacks the skills to correctly analyse and interpret it. In this case, the board abrogates the responsibility for really understanding the business and instead relies solely on management.

The role of the board is to anticipate and identify these problem drivers much earlier and take remedial steps. The times of boardroom as usual are long gone.

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