<B>Designing management committees</B>

Jose Luis Alvarez. Vice Dean. Instituto de Empresa

19 February 2004

The author offers suggestions for building successful Executive Councils and Boards of Directors, and for attaining sound corporate governance in general.

The last few months have spawned numerous reports about restructuring Management or Executive Committees; those reduced group of executives who report directly to the firm’s chief senior executive (known as Managing Director, CEO or Executive Chairman). Recent changes to management’s organizational chart have taken place in companies across a wide range of sectors, from telecommunications to construction. Practically all aim to trim the number of members (as is the case with Boards of Directors) and to appoint those heading the company’s key businesses or processes.

Despite their importance, Management Committees were left out of the corporate governance debate that occupied so much of our attention last year. Discussions revolved mainly around the Board of Directors and the General Meeting of Shareholders. As it is the internal support organ to the chief senior executive, the Management Committee also constitutes corporate governance. Some of its members also sit on the Board of Directors, as “internal advisors”. And Management Committees, acting on behalf of the Board, draw up a large part of the data on which the latter must act at a later stage, both to monitor corporate progress and to formulate basic strategic alternatives.

Management Committees are not easy to design. Nor is it a simple matter to get them to work productively. Many senior executives report high levels of dissatisfaction with them. There are numerous reasons for these difficulties. Topping the list is their difficult and assorted range of duties, which involves decisions affecting both the organization’s internal and external aspects. They are also groups that attain their objectives by influencing other executives, which means through intensely political activity, and all political work demands great effort and time.

Moreover, this often occurs within a competitive environment, dominated by succession to the chief executive post, with all candidates present on the Committee. We must consider the high profile and repercussion of their decisions, which fall under tremendous scrutiny and criticism. Finally, we could mention the unique role of the chief senior executive, since there is no higher authority to which members of the Committee can lodge an appeal.

Building the dream team

What are the basic factors to consider when designing a Management Committee? The first is size. It is still common to find bloated Management Committees and Boards of Directors in Spain. One reason for Executive Committee overpopulation comes from naming members by representativeness. By this I mean heads of divisions which enjoy the greatest status within the organization. An Executive Committee should only include those executives concerned with strategic and integration decisions (those affecting the whole company) – and there are not too many of these. I recall one Executive Committee that had 22 members.

The overload was due to reluctance of the chief senior executive to withhold membership from former executives who had contributed to the organization’s success. That Committee was more an Honorary Club than a true decision-making body. Of course, behind the scenes real control was wielded – very efficiently, as it happens – by an informal “dominant coalition” of four executives.

The second, and perhaps most important factor for good design is heterogeneity. This is the mix of abilities and functional experiences from the management organizational chart. An Executive Committee must contain as much diversity of skills as the varied nature of the context to which the organization must adapt. The greater heterogeneity of background and viewpoints, the more intense the management of internal conflicts within the Committee must be.

Finally, there is leadership. As with Boards, the Committee’s leader must foster divergence and debates, or “independence” as they say nowadays. This is difficult to achieve, given members’ dependence on their chief senior executive, in remunerations and career terms. Avoid the situation of one Committee, where the Managing Director held separate talks with each executive before every meeting, where their stance and vote were agreed on.

The subsequent Committee meetings took place in an exemplary negative fashion. Executives worked individually on their papers, only raising their heads to nod agreement with decisions already decided on beforehand. They never commented on subjects that did not directly affect their units. Dialogues were radial in nature, following a predefined script, with the leader addressing each member in turn and no exchange whatsoever taking place between the latter.

Executive Committees are not, at first glance, key factors for ensuring transparency and responsibility of companies before their shareholders. This task corresponds more to Boards of Directors. Yet they do act as groups supporting the strategic decision-making process, another activity key to corporate governance. In fact, once the regulatory, social and legal basics have been established for corporate governance, future debates on it will hopefully focus on the manner in which those strategic decisions are taken.

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