Boards that Lead

boards-that-lead

Boards that Lead: When to Change, When to Partner, and When to Stay Out of the Way

by Ram Charan, Dennis Carey, Michael Useem

“A board can be a destroyer or a creator of value.” This book presents an excellent analysis of how the inept boards of Hewlett-Packard, Motorola, and AIG destroyed shareholder value; interesting insights into the turnarounds of Apple and Tyco; CEO succession at Ford, 3M, and GlaxoSmithKline; and Procter & Gamble’s acquisition of Gillette.

The authors introduce the concept of the central idea as a “frame of reference against which to gauge strategies, external information, and board decisions… The central idea of a corporation is the seed that blossoms into a clear framing of the company’s full-blown strategy and the many implications for how to execute it.”

What makes a good director? “Informed directors who trust one another and have faith in their executives constitute an essential platform for board leadership… Actionable questions here include whether each of the other directors: (1) brings useful skills and experiences to the boardroom, (2) comes prepared to the board meetings, (3) understands the central idea and the company strategy, (4) poses useful questions, (5) helps with business development, (6) moves discussions forward, and (7) facilitates relationships within the board and between directors and executives.”

“In our experience, as many as half of Fortune 500 companies have one or two dysfunctional directors… It becomes a drain for everyone involved—except the dysfunctional director… Conversational intelligence—an ability to read the moment and to contribute agenda-advancing comments—can be vital here. Its occasional absence underscores its essential presence.”

“At one financial services company, to better pinpoint those who might be best rotated off the board, the lead director asked each director annually who among the fellow directors were ‘keepers’—or not… He then asked those who came up short to remove their name from the next proxy ballot.”

The book discusses the relationship between a nonexecutive board leader and the CEO. “We would suggest simply designating the senior executive as chair and CEO, and the top director as board leader. We believe that these titles are likely to better reflect how leadership now works at many firms—and more in the future—than titles created in an earlier era when executives led and directors monitored.”

“Board leaders should be deft at creating cohesion among directors and executives, and bridging the formal gulf between them, while also focusing directors on strategic content without edging into micromanagement. Also critical is an ability to work hand in hand with the CEO and other top executives on company issues. That, in turn, relies heavily on the informal rapport that the board leader is able to construct with them.”

The board leader “is the ombudsman between the CEO and the board,” said Novell board member Richard L. Crandall. “You have to know how to work well with all the independent personalities in the room. And you have to make sure that anyone who has something to say has the opportunity to do so without being clipped.”

“All of the board leaders on our panel emphasized the need for close collaboration and trusted communication with the chief executive and fellow directors to focus boardroom discussions on the central idea and value creation.”

One of the board’s most significant responsibilities is to select the CEO. “In truth, there is never a perfect fit between leadership requirements and candidate capabilities. What is more, the requirements for a good strategic match can change over time as the market evolves. But a better fit will come when director attention is explicitly focused on both requirements and capabilities, in that order. In cases where there is too little fit, incoming CEOs may be great performers elsewhere but doomed from the start, poorly suited for the new position in the first place.”

“There are usually warning signs, early and late, that might enable vigilant directors to detect a faltering chief executive. What is sometimes less in evidence is a board’s willingness to recognize and act on those intimations of trouble ahead. Rocking a boat that seems to be sailing smoothly can invite more criticism of the complaining director than the faltering CEO.”

“One avenue is to request information or analysis on what may be causing the company’s decline. This helps separate unforced CEO errors from what any company executive might have been compelled by the market to do. We have heard a range of innocent-sounding questions posed in the boardroom to this end, including, ‘I would love to have a third-party view for the next meeting regarding the precipitous loss of our brand position’ and, speaking directly to the CEO, ‘It would be nice to know your plan of action to get back to our preeminent position.’”

“Concentrating on just several priorities for the year has advantages, a point we have previously stressed in advocating better execution. The board leader provides the chief executive with just a few areas that require special attention and then requests that the two follow up on those specific priorities in the months ahead.”

Risk management is another topic addressed in the book. “Boards are increasingly working directly with top executives to institute enterprise risk management (ERM) systems.” Jeff Immelt appointed Mark Krakowiak, as General Electric’s first chief risk officer in 2009. “Their objective was not to avoid risks… The purpose was instead to understand the risks that the company was already taking, whether they were managed well, and if they were generating enough gains given the uncertainties… One particularly dangerous blind spot in risk assessment that the board, CEO, and chief risk officer had to be wary of was the low-probability but high-consequence event. ‘It is the one-in-a-hundred event that can kill you,’ said Krakowiak… ‘Too often people just dismiss that kind of risk for a variety of reasons… That is a failure of leadership.’”

At Tyco, the board arranged “for its members to visit the major business units annually for review of their assessment and management of risk.” Board leader John A. Krol “led the visit with one or two other directors… Directors not only acquired an in-depth view of enterprise risks; they also came to know the leaders of each of the business units, including their president, chief financial officer, and managers of human resources, information technology, and manufacturing. Directors could directly appraise their leadership effectiveness and promotion prospects.”

The board is generally expected to refrain from straying into the weeds of operational detail. However, “complex decisions entailing even relatively modest resources can usefully be taken to the board if they are of strategic significance because they touch on the firm’s central idea, business strategy, or core values. Minding that store does not necessarily bring meddling.”

I’ll close with an amusing choice of words from page 136: “The directors had to reduce all the data bearing on the strategic fit down to a simple binary decision of which of the four candidates to hire.” Faced with four choices, I’m not sure if I’d decide yes or no.

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Charan, Ram, Dennis Carey, and Michael Useem. Boards That Lead: When to Take Charge, When to Partner, and When to Stay out of the Way. Boston: Harvard Business School Publishing, 2014. Buy from Amazon.com

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