When a Company Incurs Losses... Does the Board of Directors Deserve Remuneration?

Whenever a company announces losses, the same question arises: How can the board be rewarded while the company is losing money? The truth is, the right question is not whether the company made a profit or a loss, but why it made a profit or why it incurred a loss.

Whenever a company announces losses, the same question arises: How do board members receive bonuses while the company is losing money? The answer comes quickly from the other side: We performed our duties professionally, and it is unfair to hold us accountable for executive results that are beyond our control. The problem is that both arguments seem logical, yet both are incomplete.

The right question is not whether the company made a profit or a loss, but rather why it made a profit or why it incurred a loss. Not every profit is evidence of board competence, and not every loss is evidence of its failure.

The question is not whether the company made a profit or a loss, but why it made a profit or loss.

A company might generate exceptional profits simply because it is in a booming cycle, even if the board was weak in risk management—something that will surface later. Another company might incur losses because it is investing heavily in a project that will transform its future, where the board made the right decision even if the financial statements do not reflect it yet. That is why board quality cannot be measured by a single year’s results, nor can the board be absolved from accountability for those results.

The board is not responsible for day-to-day operations, but it is responsible for selecting the CEO, defining strategy, managing risk, overseeing governance, monitoring performance, and holding executive management accountable.

If the loss resulted from circumstances beyond control and the board performed its role capably, remuneration may be justified. However, if it resulted from wrong strategic decisions, weak oversight, or retaining incompetent management, the board cannot distance itself from responsibility; it did not lose the money directly, but it permitted the causes that led to the loss.

Performance is not the outcome; Performance ≠ Outcome.

In governance, there is a crucial distinction between performance and outcome. Outcomes are influenced by many factors, whereas performance reflects the quality of decisions made within your control. That is why global best practices tie board remuneration to a blend of indicators: long-term financial performance, governance quality, risk management, and the achievement of strategic goals approved by the board.

Reducing the issue strictly to profit and loss is a simplification that slights everyone. It causes boards to avoid bold decisions out of fear of temporary losses; conversely, granting bonuses without accountability for decision quality strips governance of its true meaning.

Conclusion

Wisdom lies neither in always rewarding the board nor in always withholding rewards, but in asking: Has real, long-term value been created for the owners? A board is not held accountable for every outcome, but for the quality of thinking that generated those outcomes; because quality of thinking precedes quality of results.

A board is held accountable for the quality of thinking, not for every outcome

Mohammed Bin Saleh

Interested in Management and Finance