211. To what extent does every director really understand the business? (Question #9)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #9: To what extent does every director really understand the business? I’ve been pretty outspoken over the years about my thoughts on board composition. In general, I think boards tend not to be sufficiently open-minded about who “belongs” on boards – I hope you could hear the air quotes there. There’s basically no evidence or consensus that suggests *any* specific type of experience or expertise, or any type of personality or any demographic characteristics might be associated with business performance. This is part of the reason why I prefer to think about governance as being in the world of decision-making, a realm where there *is* plenty of decisive science to help us to understand how we might mess up and what we can do about it. Still, boards fundamentally exist to run corporations, and even if they choose to hire managers and other employees to do the operational work it doesn’t change the fact that boards are responsible for literally everything that happens in an incorporated entity. So, no matter your experience or skillset or personality. No matter who appointed or elected you to the board. No matter what other valuable things you might be bringing to the table, if you don’t understand how the business of the corporation works it’s going to be *really* difficult to be useful as a director. Where does the corporation get money from. Why do its customers or funders choose to give it money? How does the corporation spend money, and why? What are the nuances of its structure, and why are they the way they are? What is the competitive landscape? What does the balance sheet look like and why? Why does the corporation do the things it does and not do the things it doesn’t do? What might kill it? I know this is a podcast episode about one question: “to what extent does every director understand the business?”, but an infinite number of other questions live inside it. Collectively, you should be striving for the answer to this episode’s question to be “to a super frickin great extent, thank you very much.”