A Brief Lesson About Boards

Most people are not familiar with how corporate boards work. Their perceptions may be shaped by stories about activist boards ousting a CEO, as when Apple fired Steve Jobs in 1997 or, more recently, when Uber ousted Travis Kalanick. Or their impression may be based on movies in which a sleek bunch of cronies rubber-stamp the villainous proposal of a crooked CEO. The reality of being a board member can be very different from what many people think a board member does. Each board is different but at their most fundamental, boards should be a repository of expertise. Board members are usually chosen for their deep knowledge in a certain area or their experience in running companies. What they do with that expertise is shaped by the current directors and the practices passed down from previous boards. However, there are certain commonly accepted duties for a corporate board:

1. Selecting the Chief Executive Officer

As representatives of the company’s shareholders, the board’s most important duty is typically considered to be the hiring and firing of the CEO. This is the biggest reason for an independent Chairman. It is a little more challenging for the board to continuously evaluate and, if necessary, fire the CEO, if the CEO is also the Chairman, although these companies typically appoint a lead director who has certain specific duties in order to minimize the downsides of a joint CEO/Chairman role.  

2. Approving the Company’s Strategy

The second most common duty for the board is to approve the company’s strategy. Not create the strategy, but approve it. Boards take various different approaches to this. Some are actively involved in defining the strategy together with the management team, and some only get involved when the time comes to approve it.  

3. Ensuring the Company is Well-Managed

The third most important duty is ensuring that the company is well managed. This often relates to working with the auditor to ensure that the company’s books are correct and the processes related to the administration and accounting are of sufficient quality.  

4. Establishing Compensation

The fourth relates to setting the compensation practices for the company and, especially, for the executives of the company.  

Board Work in Practice

Board can do much more, depending on the need and the circumstances. A board that believes their primary duty is to appoint and evaluate the CEO falls far short of the full potential of their contribution. When I became chairman of Nokia in 2012, the company was teetering on the edge of a precipice. Everyone — including the board — needed to work together to pull us to safety. In Transforming Nokia, I describe in more detail what we did and how I like to see a board work. As I see it, a board should do whatever is necessary to ensure the company’s success. It’s that simple. That includes hiring and firing the CEO but so much more, depending on the issues the company is facing. It may comprise serving as a brain trust for the management team. It may involve challenging the top management’s plans and thought processes. It may demand investing far more time improving their knowledge and strengthening the work of the management team. A company is successful only if the management team is successful. That’s why the ultimate role of the board is doing whatever it takes to maximize the leadership team’s success.     Adapted from Transforming Nokia: The Power of Paranoid Optimism To Lead Through Colossal Change. Copyright © 2018 by Risto Siilasmaa. Published by McGraw Hill Education.