Where to Draw the Line?

It’s a given that it is the management’s role to run the operations of the company and the board’s role to oversee and advise management in fulfilling those duties. In most cases the lines are very clear.

Recent events in the financial sector and the rising importance of the role of the board over the last several years, though, have raised some important questions about the line of demarcation signaling where the job of corporate director begins and ends. Exactly how involved should the board be in providing corporate direction? Does the board overstep its bounds by providing strategic advice? Will expectations of boards become higher given recent events in the financial sector?

The answer to that last question is easy: You bet! Allegations from some that boards of financial companies were asleep at the switch are certain to change the way boards view their job. And the implications of the financial crisis on boards resonate out far beyond the paneled boardrooms high atop the financial district of lower Manhattan. Boards of every stripe are reevaluating how they fulfill their responsibilities and just what those responsibilities are.

Mainly, boards are asking themselves, if we are going to share in the blame when the corporate strategy fails, do we need to get more involved in setting that strategy? Many directors are reluctantly coming to the conclusion that they do. That’s not to say that the board is now responsible for setting the strategy. No one would argue that it is. But oversight is not a completely passive function. The word has always implied that action is necessary when the monitor doesn’t like what he or she sees. In the aftermath of the financial crises, board members will be more likely to increase their vigilance and take action when appropriate.

It is a subtle shift in the view of where the job of director begins and ends, but nonetheless and important one. It ups the ante for corporate directors. It could also require some shifts in the skills necessary for the job. Knowledge of strategy—always of high importance—is now a must. Directors will need a keen insight into how managers are performing so they can intervene before major problems arise. That raised awareness will also require deeper industry knowledge, understanding of risk, more visibility in the business, and more time sifting through the details.

Most boards are up to the task, but it could require adding more technical expertise and specific skills to the board.