Boards That Deliver

Advancing Corporate Governance From Compliance to Competitive Advantage

Ram Charan

• Publisher: Jossey-Bass
• Year: 2011
• ISBN:
  9781118046616
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Finally, a book that brings the vision of truly good governance down to earth. Ram Charan, expert in corporate governance and best-selling author, packs this book with useful tools and techniques to take boards and their companies to a higher level of performance. Charan puts his finger on a growing problem for boards: the disconnect between directors' efforts and their results. The added time and attention boards invest is not translating into better governanceâ??that is, governance that adds value to the business.

Boards That Deliver gets beyond the rhetoric of corporate governance reform. It captures the tried-and-true practices used by high-performance boards. In contrast to experts who base prescriptions on number-crunching exercises, Charan identifies the real problems that drain directors' time and suppress their best judgmentsâ??and explains clearly and succinctly how boards can solve those problems. These battle-tested solutions help boards achieve what rules and regulations alone cannotâ??to get succession right, refine a winning strategy, and design a rational CEO compensation package.

Good governance requires leadership. Boards That Deliver is the no-nonsense guide for directors and CEOs who are rising to the leadership challenge to make their boards a competitive advantage.

Part One

Boards in Transition

Around the world, boards have accepted a new mandate and are adopting a new mindset toward their work. But living up to new expectations is posing a challenge for many boards. Understanding the true nature of the transformation corporate governance is undergoing can help directors recognize where they are getting stuck, why, and how to move forward.

Chapter One describes three phases boards go through—from Ceremonial to Liberated to Progressive—as they try to increase their contribution to the corporation. Many boards today are stuck in the middle phase and therefore do not add as much value as they could.

Chapter Two explains what makes a board Progressive, the third phase of board evolution. Three building blocks must be in place for boards to make a substantive contribution to the business.

Chapter One

The Three Phases of a Board’s Evolution

Boards of directors have undergone a rapid transformation since the Sarbanes-Oxley Act of 2002. The shift in power between the CEO and the board is perceptible. Directors are taking their responsibilities seriously, speaking up, and taking action. It’s a positive trend and an exciting time for boards.

But the evolving relationship between the CEO and the board has yet to find the right equilibrium in most cases. It’s important that boards become active, but there is danger in letting the pendulum swing too far. Astute directors and CEOs sense the tension. They recognize that just as past practices have failed them, recent attempts to make the board a true competitive advantage are not always hitting the mark.

Here’s one example. In the spring of 2003, a CEO approached me at a conference. “Something’s gnawing at me,” he said.

“What do you mean?” I asked, with some surprise. “I saw your latest earnings report and it looks like you’re really delivering.” This was true. I knew the company went through a period of adjustment following the recession, but business had rebounded and the company was turning niche products into real growth opportunities both domestically and abroad. “Is there some bad news that you’re not making public?”

“No, no. It’s not that, Ram,” said the CEO, whom I’ll call Jim Doyle. (He, like some of the other executives I spoke with in researching this book, would prefer to remain anonymous.) “The business is rock solid. We’re executing well.”

“Well, it sounds like you’ve got it all together,” I said.

Then came the punchline: “It’s the board.”

I let Jim continue. “I took over from Alan three years ago. Before that, I was president and I remember how Alan ran board meetings. There was essentially no dialogue; communication was a one-way street. When I became CEO, I wanted the board to help me. I wanted to make it a modern board. So we made all the structural changes that have been asked of us, like changing the composition of the Audit Committee. We now have eleven directors; eight of whom are independent by any definition. Only two directors are holdovers from the old board. We have eight full-day meetings per year, and everyone participates. The boardroom is very lively,” Jim explained.

“Sounds like you’re doing all the right things,” I said.

“I thought so. But lately, I’ve heard more and more questions in our meetings. Now I don’t mind fielding questions from directors. In fact, I consider it their job to ask questions and my job to address those questions. But some of the questions and the analyses directors ask for are off the wall. I’m getting sidetracked covering all of them. And the same questions keep coming up. It’s frustrating and I know some directors are frustrated, too.”

“Give me an example, Jim?”

“Sure. I presented our new strategy to the board several times and they tell me in the boardroom that they support it. But after some one-on-one chats, I began to realize that not everyone gets it. So we held a retreat last weekend, and I brought in the brandname strategy firm that helped design the strategy to present it,” Jim said.

“Let me guess, they flipped through a deck of a hundred PowerPoint slides,” I conjectured.

“I admit that I probably let the consultants show a few too many slides,” Jim said. “But within thirty minutes, two directors began to go off on minutiae. Charlie told us he didn’t believe the media strategy was appropriate. Then he said he didn’t like the national TV ads he saw last week. He thought regional advertising would be more effective than national TV ads. This was during a discussion that was supposed to be dedicated to strategy. The other directors bit their tongues. Later on, Jeff started in on how he thought discounts were too high for large customers. He wouldn’t let it go, even though he knew we depend on our ten biggest customers for thirty percent of our revenues. Needless to say, the retreat fell apart and we accomplished very little. When we adjourned, everyone told me, ‘we support you,’ but their body language said something different.”

“How long has this been going on?” I asked.

“I’d say off and on for the past three meetings. Some directors keep coming back with the same questions over and over. It’s very draining. I need to find a way to get us on track.”

Jim’s five-minute story matched what I’ve seen happen too often. Since Sarbanes-Oxley, I’ve heard variations of his story many times. Directors have turned the corner in their attitudes toward directorship and are devoting more time and energy to the job. But they are still searching for ways to make a meaningful contribution to the business.

The Real Risk of Value Destruction

Jim’s board, like most boards in the post-Sarbanes-Oxley world of corporate governance, is very different from its counterpart of a dozen years earlier. It’s not that the directors themselves are markedly different. By and large, boards still consist of smart, trustworthy people—individuals with backgrounds of achievement and ability who are a credit to the firms on whose boards they serve. In some cases, in fact, the new directors of a dozen years ago are the very same wise sages on today’s boards.

The change in boardrooms today is not marked by the people but rather by the social atmosphere. Boardrooms have more energy, liveliness, inquisitive interactions among directors, and thoughtful engagement by CEOs. The difference today is a mindset, an emerging collective desire to do something meaningful. It appears that boards of directors, as an institution, are coming of age.

Much of the public outcry—and resulting regulation—of recent years is based on the failure of boards to root out fraud, some of which destroyed whole companies. But boards are recognizing that they have failed in another, arguably more widespread, way: by allowing (sometimes inadvertently contributing to) faltering performance. Entire industries collapsed in the wake of the dot-com bust; too many companies failed to adapt their businesses to the different external environment after the recession began and after the 9/11 tragedy. No one could have foreseen global terrorism, but what about anticipating the fallout from the go-go years of the New Economy, or not recognizing the importance of emerging new channels? Couldn’t boards have prompted their managements to pinpoint and consider these issues?

In some cases, boards have made costly mistakes. How about hiring a CEO from the outside who is a master of cost-cutting—when the company needed a leader who could grow the business? Or tying the CEO’s incentives to the wrong goals? Or approving a grand growth strategy with an unhealthy appetite for risk?

Most boards want to do the right thing, whether it’s complying with the new rules (and there are a lot of them) or contributing in substantive ways on matters of choosing the CEO, compensating top management, ensuring that the company has the right strategy, and providing continuity of leadership and proper oversight. Their commitment and level of engagement marks a new stage in their evolution.

The good news is that these boards are unlikely to commit the sins of omission that were common among the passive, CEO-dominated boards just a few years ago. The bad news is that they are now vulnerable to committing sins of commission. That’s because past board experience has not fully prepared directors and CEOs for the challenges they face today. Without clear guidelines to take them forward, well-meaning boards such as Jim Doyle’s can actually erode the vitality of the company and drain time and energy from the CEO. It’s a real danger, and companies truly suffer when this happens.

To achieve their full potential, boards must continue to evolve. They must make a conscious effort to go to the next level.

The Evolution of Boards

Boards began their evolution in the pre-Sarbanes-Oxley era of passivity. Back then, they were “Ceremonial” boards, because they existed only to perform their duties perfunctorily. Sarbanes-Oxley has driven many boards to a second evolutionary phase; directors have become active and “Liberated” themselves from CEOs who previously dominated the boardroom. But there is also a third phase awaiting boards, when active directors finally gel as a team and become “Progressive.”

The Ceremonial Board

A decade ago, when one non-executive director joined the board of a paragon of American industry, a long-serving colleague told him, in private, “New directors shouldn’t speak up during board meetings for the first year.” That attitude is untenable today and, in fact, that board is much different now. But such comments are indicative of the culture of passivity that permeated the Dark Ages of corporate governance.

Some readers may remember when such Ceremonial boards were commonplace. Management had all its ducks in a row by the time a board meeting began. There was a scripted morning presentation that was rehearsed to the second in a tight agenda. The CEO communicated very little with the board between meetings, other than with the one or two confidants the CEO trusted and worked with if the need arose.

These boards perfunctorily performed a compliance role. Many directors served for the prestige and rarely spoke among themselves without the CEO present. They made sure to fulfill their explicit obligations, including attending the required board meetings and rubber-stamping resolutions proposed by management. “An important trait of boards during this era,” observes Geoff Colvin, senior editor at large at Fortune magazine and co-host of the Fortune Boardroom Forum, “is that they were largely anonymous to the public. The general interest media rarely reported directors’ names. So back then, the prospect of shame and embarrassment when a company ran into trouble wasn’t much of a threat.” Such were the norms and expectations of directorship during this era.

Most readers will recall a few boards that fit this description at some point in time. Hopefully, it doesn’t sound like any boards on which they now serve, though these boards do still exist.

The Liberated Board

Most boards left their Ceremonial status behind after the passage of Sarbanes-Oxley. A new generation of CEOs now expects boards to contribute. And candidates for directorship now expect active participation as a condition of their acceptance. There is a general sense of excitement as directors embrace an active mindset.

The transition to liberation had really begun about a decade earlier. In 1994, the General Motors board, advised by Ira Millstein, first published its “Guidelines for Corporate Governance.” The document was widely praised as a model for corporate boards. BusinessWeek even called it a “corporate Magna Carta,” referring to the document signed in 1215 by King John that stipulated, among other things, that no one, including the King, is above the law.

The comparison was fitting; GM’s CEO and Chair, Robert Stempel, stepped down late in 1992 after losing the confidence of GM...