It’s a board’s responsibility to manage a company’s managers and ensure that they have the right strategy in place to achieve the goals of the firm, as set by its owners. If a board fails to fulfil this role, then it puts the firm at risk of activist takeovers to reestablish the original mission.
That’s according to Massimo Massa, Professor of Finance and The Rothschild Chaired Professor of Banking at INSEAD, who explores the role of a board in relation to a firm’s owners and managers in this episode of INSEAD Explains Governance. For Massa, a good board should act as a counterbalance to the CEO of a firm, challenging the reasons for their actions and questioning the management team on what they aren’t doing in relation to a company’s mission.
But how a board operates is heavily dependent on whether the company is listed on the stock market or privately owned. In privately owned businesses, boards remain responsible for supervising the managers and are becoming more involved in the crafting of the company’s strategy, making sure the firm is well run and focused on its mission. This can be especially challenging in companies with split owners – say, private equity and family owners – who might hold conflicting objectives.
For listed firms, where ownership is dominated by big institutional investors such as BlackRock and Vanguard, the market plays this governance role. If a company is run well, then the market will invest. If it’s run badly, the market divests, and the company fails. In these situations, a board’s role is about ensuring full transparency, disclosure and compliance. Indeed, Massa believes there has been a major transformation in the last 20 years, with the strong supervisory role of the board being replaced by the discipline of the financial markets.
If you have family and private equity, they fit with each other like a drop of oil in a bucket of water. They don't glue."
A firm’s ownership also impacts a board’s decision-making when it comes to hiring a CEO with the right skills. Companies owned by the likes of BlackRock are more driven to take risks and create value for investors as they can absorb the failure of an individual firm. This is not the case for family firms, where a CEO who takes big risks can lead to the owners losing everything.
While this sounds cutthroat, Massa believes that the strong role of the markets is essential to create new value for investment in new innovations and industries.
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