Company management

A properly formed supervisory board can be the key to the business take off

By:
Mart Nõmper,
Peeter Saks,
Taavi Laur,
Gregor Alaküla
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Contents

A wisely selected supervisory board – one that doesn’t do its work only at meetings but lays down clear strategic goals for management and itself and meters them constantly, while serving as a mentor for executives – can contribute greatly to achieving solid business results.

"In Estonian businesses, the role of the supervisory board is currently underfilled and hopes are staked on a competent management board,” said Grant Thornton Baltic’s partner and head of audit services Mart Nõmper on the Äripäev daily's radio broadcast "Kasvukursil". “Yet a well-selected supervisory board can help to improve a company’s results.”

Taavi Laur, partner with consultancy Aureus Capital and chairman of the supervisory board of Tallinn University, also said a well-staffed supervisory board can contribute to creating value. “There’s the feeling that a seat on a supervisory board is a safe, prestigious appointment, but if the supervisory board lacks legitimacy and competence, talented people won’t want to join that kind of company.”

The supervisory board has to undergo evaluation, too

Nõmper emphasized that the efficient functioning of a business requires that goal-setting and laying down a strategy have to start while the owners are choosing people for the supervisory board. “For the supervisory board to function more effectively, clear criteria and expectations are needed.” The lead partner of investment firm BaltCap Peeter Saks said: “It would be ideal if the owner had a clear vision of the company and rotates the supervisory board based on its strategy.”

"The biggest risk to supervisory board appointment is if the appointer lacks a vision of the journey and what sort of role a given member should play along that path," said Nõmper. “That also makes it hard to evaluate the success of the supervisory board’s work.” Laur added for his part: “For example, the chairman of the supervisory board should plan meetings, based on the overarching vision of those appointing the supervisory board, and always consider whether discussion of some issue will help to make it a reality.”

It’s important for the supervisory board to have clear metrics to assess how it corresponds to the owner’s vision. "The metrics should be linked to the strategy, goal-setting and measurement are an underused resource currently even as the management board has to have specific budgets to fulfil," explained Nõmper. "Each year, the supervisory board could really also prepare a report on its activity similar to the management report."

It can be rotated based on how the supervisory board fulfils the goals set for it. Laur said it be a good idea to do this at a fixed interval. “At the same time, it should be ensured that the supervisory board retains historical memory,” he recommended.

Independence brings gains

In selecting the supervisory board members, Saks recommended keeping in mind that it had to be in balance with the management board. "The two bodies should be able to make plans together, the supervisory board should advise management in carrying out plans, but without intervening in everyday life," he said. "The supervisory board is responsible for strategy, finances and supervision, plus it has to ensure sustainability and competences and if something happens to the CEO, quickly appoint a new management board,” said Laur of the functions the supervisory board has to perform successfully.

He added the task of approving the budget. “This is an area where the supervisory board should also help with the thinking, see whether it supports achievement of strategic goals, not just inspect the row of dividends to be paid out,” said Laur.

Nõmper said not shying away from including experts independent of the core owners would help raise the quality of the supervisory board when it came to achieving goals. “There could be a 50:50 split between owner-dependent and independent experts; and if it can’t be right down the middle, there could be one fewer independent expert," he said regarding the ideal distribution. "At least 60 per cent of our listed companies observe that rule today,” he added.

Laur noted that including an independent expert meant the company would get outside experience from across the entire field. "Outside experience allows outside the box thinking, ask how things are done elsewhere, ask management questions that guide them, support management," he explained. “Without that; the company develops a blinkered view, loses perspective."

It’s important to bear in mind what size the supervisory board should be. That, said Nõmper, could depend on the company’s internal areas of expertise. "It’s worth considering what sort of support or value the company needs at a given point – if the firm has a strong legal team, there’s no point appointing someone with the same background to the supervisory board, but if the financial or engineering side are wanting, it’s worth including someone like that on the supervisory board. The final number of supervisory board members could depend on the number of shortcomings within the company that need to be compensated for."

Laur said it was important that everyone on the supervisory board have a say. "Everyone has their ego and desire to say something, and if there are too many supervisory board members, it becomes a seminar where everyone has only a minute or two, and that won’t satisfy the members."

An example of poor organisational structure is where the company’s owner has a seat on the management board. “Then the supervisory board becomes a pointless middle layer where nothing is decided but it takes responsibility,” said Saks about the problem of independence. "In such a case, one should think about whether a supervisory board is needed at all.”

Putting the incentives in place

Saks emphasizes that on top of all of the foregoing, it’s important to think about motivating the supervisory board members. "There has to be interest; without it the supervisory board just sits and looks busy.” Nõmper said he believed it was important to think of remunerating the independent experts to make it easier to involve them. “That helps get people on the supervisory board more easily,” he said regarding the importance of remuneration. Saks said it was also worth thinking about ceding a small holding to supervisory board members.

Saks noted that the remuneration of a supervisory board member usually depended on the company’s size and turnover. "Remuneration is generally paid out on a meeting basis and the remuneration for ordinary members could be linked to the fee for the chairman of the supervisory board, who is paid more,” he said. "In any case, people have to feel that their contributions are valued, because no one looks forward to a person who hasn’t read the material to attend a meeting – it’s all work that generates value and you have to presume that people’s time will cost something."

"A good supervisory board is one where the management board goes through the materials, proposes alternatives to the supervisory board for resolving the problem, and the supervisory board, based on the input they are given, can then consult, supplement and provide their own input,” added Laur.

Yet remuneration is not the most important motivator for supervisory board members. Nõmper said that the need for self-actualization is what gets people moving, the sense that they have something to offer a company. "Usually, supervisory boards convene once a quarter, and it’s important that after the meeting everyone senses the worth of their contribution they have made,” Laur put in.

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