In the realm of corporate governance, maintaining a healthy balance of power between the company board and management is crucial. Most recently, the board of Qantas has been under the microscope for potentially allowing management, and particularly the CEO, unchecked authority for decision-making which has negatively impacted its public reputation.
Permitting management to overstep their boundaries can lead to disastrous consequences for companies. One prominent example from Australia is the case of HIH Insurance, where poor oversight and management misconduct resulted in the company’s collapse. The HIH board failed to exercise its duty to oversee management, and as a subsequent Royal Commission demonstrated, was effectively held hostage by its CEO. A similar set of circumstances caused the collapse of the telecommunications company One-Tel at around the same time. Overseas, there are numerous examples of corporate failures due to management overreach, most notably Enron.
Ideally, there should be a clear line of demarcation between the board and senior management. This is currently not the case in Australia, where in virtually all large public companies, the CEO is also a board member.
In this article, we will explore five warning signs that can help boards identify when management may be crossing the line.
- Lack of transparency and reporting:
When management fails to provide accurate and timely information to the board, it is a significant red flag. Boards must receive regular updates on financial performance, strategic initiatives, and potential risks. The case of HIH Insurance demonstrated how inadequate reporting masked the company’s deteriorating financial position, preventing the board from taking appropriate action.
2. Overly dominant management:
If a company’s management consistently dismisses or disregards the board’s concerns and input, it could indicate a power imbalance. Boards should actively engage in decision-making processes and challenge management’s assumptions. HIH Insurance suffered from a top-down management culture that silenced dissenting voices and hindered effective oversight.
3. Weak board composition:
A board composed primarily of insiders or individuals lacking relevant industry expertise can easily fall victim to management’s influence. It’s crucial to have a diverse and independent board with members who possess the necessary skills and experience to scrutinize management decisions effectively.
4. Lack of succession planning:
When a company does not have a proper succession plan in place, either for the Board or senior management, it creates an environment where management can exert undue influence, as they can take advantage of the lack of a Plan B for their replacement. Boards should ensure that succession planning is a priority and that management changes are handled transparently and objectively. They should also ensure that all senior management roles (particularly the CEO) have employment contracts which spell out the duties and responsibilities of the role, how performance will be measured and against which parameters, and sanctions for misbehaviour.
5. Excessive risk-taking:
Management’s pursuit of aggressive strategies without proper board oversight can lead to catastrophic outcomes. Boards must actively monitor and assess the company’s risk appetite and ensure that risk management processes are in place. HIH Insurance’s collapse was, in part, due to management’s high-risk investment decisions that went unchecked.
Protecting the integrity and independence of a company’s board is vital to ensure effective governance and mitigate the risk of management overreach. By remaining vigilant and attentive to warning signs, such as lack of transparency, dominance by management, weak board composition, insufficient succession planning, and excessive risk-taking, boards can proactively address potential issues. Learn from past failures like HIH Insurance and prioritize a healthy balance of power between the board and management to safeguard your company’s long-term success.
Robert Powell FCA GAICD is the founder and Managing Director of Family Boards Pty Limited, a specialist consultancy helping family companies achieve best practice in board governance and risk management. He is a Chair of the business leader peer support group Leadership Think Tank Australia, an accredited specialist adviser member of the Family Business Association (AU), a Graduate of the Australian Institute of Company Directors, and a Fellow of Chartered Accountants Australia and New Zealand.
