What is the role of a company board?

Headline: Hard for board to be brake and accelerator
Author: Lawrence Loh
Source: The Straits Times, 18 June 2011

Quote1:
The proposals in the Consultation Paper on revisions to the Code of Corporate Governance … drill down to the very mechanics of corporate supervision. … One issue that bears more discussion is the philosophical one of what the role of a company board is, in the context of corporate governance. …

Comment1:
This sets the context for the ensuing discussion, and pinpoints the matter of interest – the philosophical issue of the appropriate role of a company board. This falls clearly into the area of philosophy known as Business Ethics or Philosophy of Business.

Quote2:
In an entrepreneurial context, the board is often a vanguard, a torchbearer and a scout for the company. … The board assumes a key business function and helps to create value for the company. … But the worry is that boards may be constituted too much for control functions, and too little for value creation. …

Comment2:
This introduces the disjunction (an either-or situation) between a “value creation function” and a “control function” for the company’s board of directors. With reference to Quote1, the philosophical issue is clearly the relation between these two functions.

Quote3:
At its heart, there is an underlying tension in conceptions of the role of a company board. Is it meant as a control function (like a watchdog) or as a value creation function (to drive business)? A watchdog board will provide checks and balances on the management. … But there is a risk that this may impede agility that drives responsiveness and success. …

Comment3:
The disjunction is now clearly stated: Either (control) or (value creation). The stated risk suggests that the disjunction is exclusive (they cannot be both adopted). We now expect to see arguments for and against each disjunct.

Quote4:
No thanks to the recent spate of financial crises, the pendulum may have swung more towards control rather than value creation. Whether this is desirable is debatable. …

Comment4:
The disjunction, and the philosophical issue, is once again stated.

Quote5:
It will be hard to have a two-in-one role. It is like a car. It will be hard for a board to be both a brake and an accelerator at the same time.

Comment5:
The exclusive nature of the disjunction is repeated. It is a case of “either but not both”.

Quote6:
I am not advocating that we disregard the need for codes of governance in their current forms and thus throw the baby out with the bathwater.

Comment6:
The author does not completely reject the control function. Some control (the baby) is still needed. No explicit argument is presented for this. However, we can intuitively see that a company with no control function is untenable.

Quote7:
The more important consideration is to promote a code purposefully without losing sight of the essence of the business corporation. A code should not be so stifling as to kill the goose – the company – that lays the golden eggs.

Comment7:
On the other hand, ignoring the value creation function will result in the collapse of the company, and hence obviate any role for the board. This is an argumentum ad absurdum (reduction to absurdity), leading to the conclusion that the value creation function must also be served. So we need some control (Quote6), and some value creation (Quote7). How much of each?

Quote8:
There may not necessarily be a conflict of interest between the control and value roles of any board in itself.

Comment8:
In Quote3, the author says there is an “underlying tension” between the two roles. In Quote5, he says “it will be hard to have a two-in-one role”. Now we learn that this tension and difficulty is not necessarily so. Now it turns out that the disjunction is inclusive (either and possibly both).

Quote9:
The tradeoff has to be weighed intelligently and justified by its context, for any company to define the posture of the board.

Comment9:
It is possible to have both roles present, but they have a “zero sum” (tradeoff) relation. More of one will mean less of the other. Certainly the optimum must be sought intelligently. I am, however, perplexed by the phrase “justified by its context”. If each company’s optimum (between the board’s control and value roles) is particular to each company, then there is not much that a Code of Corporate Governance can specify.

Quote10:
The best prescription for companies is to do more with less, and create more value with less control.

Comment10:
The author’s philosophical position is now made clear: Boards of directors should play more of a value creation role than a control role. Given Quote9, the specific optimum point for each company is particular to that company. While the philosophical position is now clear, what about the supporting arguments? We have intuited an argument for the control role (Comment6). We have seen an argument for the value role (Comment7). We have not seen any argument supporting the claim that there is a tradeoff between the control and value roles. We have not seen any argument for the value role superceding the control role. The philosophical discussion is incomplete.

END