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The Handbook of Board Governance: An Introduction and Overview
Richard Leblanc CMC BSc MBA LLB JD LLM PhD
Professor of Governance, Law & Ethics, and Director, Master of Financial Accountability Program, York University; and Independent Governance Advisor
Introduction
Welcome to the second edition of The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members.
I hope you enjoy this second edition, which includes significant updates and many new authors. There are new chapters on agile governance, asking better questions as a director, behavioral archetypes, blindspots, blockchain governance, board chair and CEO succession, board dynamics, business model disruption, climate change governance, cannabis governance, dual class share governance, fraud detection, gender diversity, geopolitical and populism risk governance, human capital and pay governance, risk governance, shareholder engagement, social media governance, not-for-profit and private company governance, subsidiary governance, the corporate secretary, and global governance, including within Australia, the Caribbean, China, India, Singapore, Russia, and South Africa.
To the best of my knowledge, information, and belief, it is the only board governance handbook of its kind in the world. This is because of its scope (all aspects of governance are covered) and its depth (by subject matter experts). The views of any author should not be attributed to any organization with which the author is or was affiliated.
What follows in this chapter is a description of each of the chapters within the Handbook. Authors are thanked for working with the editor. There are eight parts to this Handbook, corresponding to all the areas of board governance, for any type of board or organization. Each part has relevant chapters within its part, exploring the topics in depth.
Diversity of Authorship
The authors within this Handbook are carefully chosen by the editor as subject matter experts within their respective domains, and possessing deep expertise. Their expertise originates from experience, skills, education, knowledge, and training. There are current or past academics, auditors, authors, CEOs, chairs, compensation consultants, directors, executives, investors, lawyers, and recruiters, all with a passion and demonstrated track record for effective board governance. Each author is a leader within his or her governance domain, and manyâif not mostâauthors have considerable governance expertise across all types of companies, including public, private, state owned, and not for profit.
There is also considerable diversity of experience and background among the 81 authors of the 61 chapters in this Handbook. The authors, collectively, live and work in 17 countries: Australia, Barbados, Belgium, Canada, China, Denmark, Finland, India, Ireland, Malaysia, Netherlands, New Zealand, Russia, South Africa, Turkey, the United States, and the United Kingdom. There is gender and ethnic diversity among the authors (almost 30% and over 15% respectively). Most authors are active on social media, and as speakers in liaising with their practitioner communities.
This Handbook is not only about the present, but also about where the field of board governance is going, and what changes directors and those who study and advise boards can expect over the next five years. Authors have been asked to be forward-looking and critical as much as possible. Individual authors may agree or disagree, within their respective chapters, and that is characteristic of a field that is in a period of dramatic change.
Improved Corporate Governance
The field of corporate governance is in a state of continuous change. Enron and WorldCom, among others in the early 2000s, were largely implosions that caused great harm to shareholders, employees, pensioners, and other stakeholders, and resulted in reformulating the independence of audit committees and the reporting relationship of external auditors. The global financial crisis of the late 2000s was more widespread and invoked greater outrage and regulation.
Now, since the first edition, there has been a strong focus on climate, technology, terrorism, and populism risk governance arising from the election of President Trump and Brexit. All these topics and more are addressed in this new edition.
The Handbook assumes that governance change is occurring and will continue. I have asked authors to be as practical as possible so that their experience and advice can be shared with readers in an efficient, inviting, informed, and time-effective way.
Readers of this Handbook are encouraged to view the practices within it as a menu of options to consider for their own board. There should be nothing recommended within this Handbook that is not already practiced or is not currently a best practice. It is not a question of whether the practices herein should be practiced by your board, but when and how.
I will now proceed to outline each of the parts and chapters within this Handbook.
Part I: The Board's First Responsibility: The Right CEO
To begin this part, Gary Larkin, researcher at The Conference Board, in Chapter 2, sets out our introductory chapter on CEO succession, entitled CEO Succession Planning Trends and Forecast.
Only 25 years ago, the succession of a public company's chief executive was just another traditional vanilla responsibility for the board of directors. In many cases, larger companies would have âemergencyâ CEO succession plans in place in the case of a long-term illness or sudden death. These used to be called the âexecutive gets hit by a busâ succession plan.
However, the rash of accounting scandals in the late 1990s and early 2000s followed by the financial crisis of 2008â2009 led to a new focus on CEO succession planning. Although many executives (save Enron's and MCI WorldCom's leadership) were not prosecuted, the number of CEO turnovers skyrocketed from 1999 to 2009.
While there has been some progress among S&P 500 companies in the area of CEO succession planning, there is still room for improvement. Interviews with directors and research by such organizations as The Conference Board and the National Association of Corporate Directors show that there are two major elements to a successful CEO succession plan: ensuring the process is ongoing and part of executives' development and performance assessments and regularly disclosing to shareholders what the succession planning process entails.
We are next joined by David F. Larcker, James Irwin Miller Professor of Accounting, and Brian Tayan, researcher, Corporate Governance Initiative, both of Stanford University Graduate School of Business, in Chapter 3, entitled CEO Succession Planning. The authors review the processes by which board members carry out their accountabilities to hire, evaluate, andâwhen circumstances meritâremove or replace the chief executive officer.
CEO succession planning is a central function of the board of directors. A properly managed succession plan ensures that a company is prepared for multiple contingencies to ensure that capable leadership remains in place in the case of either planned or unplanned CEO turnover. In this way, succession planning is more extensive than simply lining up a handful of prospective candidates. It involves having a detailed understanding of the future needs of the business, the skills and attributes of candidates to meet those needs, and an understanding of the pipeline of talentâboth within and outside the companyâwho viably could handle the responsibility of running the organization. Similarly, it requires making an honest assessment of the performance of the current CEO, and recognizing when a forced change in leadership might be required. In this chapter, the authors examine in detail the process by which board members carry out this function.
Mark B. Nadler, principal of Nadler Advisory Services, a consultancy specializing in board effectiveness and CEO succession, concludes this part in Chapter 4, CEO Succession: Lessons from the Trenches for Directors. Nadler describes the substantial gap between the theory and practice of the board's most important task. While the process at many companies is substantially more productive and professional than it used to be, we still have a long way to go, as Larkin has stated. Based on experience with a wide range of public, private, and family companies, Nadler highlights ten of the most common ways in which the process can easily derail.
The good news is that all are avoidable if the board steps up to actively and intelligently manage the interplay of emotional, political, and rational dynamics that characterize every instance of CEO succession. Nadler identifies ten ways where he has seen the succession process stumble and fail, and explains how they are all avoidable, by constantly monitoring and managing the delicate interplay of the emotional, political, and rational dynamics.
Part II: The Board's Second Responsibility: The Right Board Chair
Henry D. Wolfe, private investor and chairman of De La Vega Occidental & Oriental Holdings, in Chapter 5, entitled The Nonexecutive Chairman: Toward a Shareholder Value Maximization Role, opens this part on The Right Board Chair. Wolfe provides a comprehensive blueprint for a more robust model of the nonexecutive chairman role. Wolfe notes that the current model of governance in public companies is broken. Although there is some positive movement in the right direction, far too many boards have failed to understand that their primary responsibility is to ensure that there is optimization of capital allocation and maximization of company performance and shareholder value. This failure has led to a grossly imbalanced focus toward compliance, suboptimal director selection, according to the author, and a continuing lack of holding management accountable for results. As such, a new, more robust model is needed that approximates the more engaged and high-performance model found at the best private equity firms' portfolio companies.
Wolfe recommends that the foundation of this new governance model is an expanded view of the role of the nonexecutive chairman, which is detailed in this chapter. The concept of this role must extend beyond simply separation from the CEO position and independence. New responsibilities must be defined, including: leadership, setting the standards for the value creation process, focusing the board toward engagement in monitoring progress toward the targets of the value maximization plan, and holding management accountable. In addition, to ensure that this role is executed at the highest level, this chapter delineates the high-level qualities and skills needed from directors, such as a performance-oriented mindset, understanding of and track record with the value-creation process, and the ability to have a holistic view of the enterprise that is essential to an optimization of this key role.
To continue this part on board leadership, we are joined next by Elizabeth Watson and Heather Kelsall, CEO and founder, and governance associate, respectively at Watson Advisors Inc., who author Chapter 6, Great Boards Don't Exist Without Great Chairs. In governance circles, it has long been recognized that the board chair plays a key role in overal...