How to make corporate board more effective, Prof. Krishna G Palepu,Harvard Business School

Slide 1: Making Corporate Boards More Effective Professor Krishna Palepu Harvard Business School Copyright Professor Krishna Palepu, Harvard Business School

Slide 2: “A” Grade Board Members … “B” Grade Boards? Potential issues  Role of directors  Board information  Board agenda  Boardroom discussion dynamics  Board leadership Copyright Professor Krishna Palepu, Harvard Business School

Slide 3: Key Board Functions Role: Protect the long-term interests of the corporation and external investors  Oversight of Strategy  CEO Appointment and Succession Planning  Performance monitoring and Compensation  Firm  Management  Oversight of financial reporting and legal compliance Copyright Professor Krishna Palepu, Harvard Business School

Slide 4: New US Board Governance Requirements Focus: independent and empowered oversight and prevention of fraud  Board independence  Majority of independent directors  Strict definition of independence  Key board committees of independent directors  Audit Committee – Financial expertise and oversight  Compensation Committee – Compensation Disclosure and Analysis  Nominating and governance committee – New director selection, and existing director evaluation  Executive session of independent directors  Auditor independence – appointment by audit committee, limit on consulting activities, partner rotation  Internal controls audit (section 404 in the US)  Management certification of financial statements Copyright Professor Krishna Palepu, Harvard Business School

Slide 5: Effective Board Practices  Appropriate Board composition - right skills and capabilities  Board size – large enough to staff committees, but not too large to prevent good discussions  Board leadership – Chair/CEO, Lead director Copyright Professor Krishna Palepu, Harvard Business School

Slide 6: Effective Board Practices (continued)  Board information – streamlined information focusing on strategic performance metrics  Board agenda – focus on key strategic issues and risks  Time commitment – Board members’ ability and willingness to commit adequate time to prepare for and attend meetings  Board meetings – adequate time allocation, and discussions that promote healthy debate  Board retreats – annual retreats to focus on strategy and board evaluation Copyright Professor Krishna Palepu, Harvard Business School

Slide 7: McKinsey Study Survey of 824 US outside directors  Two of the top three priorities – approving strategy and tracking progress against strategy … But  Only 52% say they are satisfied with their access to strategic information Copyright Professor Krishna Palepu, Harvard Business School

Slide 8: A Potential Framework  Focus Board’s agenda on key drivers of value and key risks that can derail the strategy (the 80-20 rule)  Create a strategic board information system that allows tracking these key drivers on a regular basis Copyright Professor Krishna Palepu, Harvard Business School

Slide 9: A Framework For Boards (2)  Focus on strategic drivers in  approving strategic initiatives and resource allocation  on-going performance evaluation and compensation  oversight of financial reporting and disclosure Copyright Professor Krishna Palepu, Harvard Business School

Slide 10: Strategy: Five Key Questions  What is the customer need we seek to satisfy?  What is the competition?  How do we differentiate ourselves?  What are the key capabilities and processes to successfully differentiate?  What are potential threats to our differentiation? Copyright Professor Krishna Palepu, Harvard Business School

Slide 11: Will our Strategy Create Value? Strategy Organizational Capabilities Business Processes Customer Value Shareholder Value Copyright Professor Krishna Palepu, Harvard Business School

Slide 12: Two Key Questions on Execution  Are we investing in the right capabilities and processes to execute our strategy?  Do our customers experience the promised differentiation? Copyright Professor Krishna Palepu, Harvard Business School

Slide 13: A Simple Strategic Board Information System  “One-pager” on strategy (for each business)  “One-pager” on customer metrics & related strategic initiatives during the year  “One-pager” on key process and capability metrics & related strategic initiatives during the year  “One-pager” on key competition and industry developments Copyright Professor Krishna Palepu, Harvard Business School

Slide 14: Strategic Agenda for Board Retreat  Reaffirming the current strategy or discussing potential changes to it  Discussing strategic initiatives for the year  Shore up key capabilities related to our competitive advantage  Expand into new geographies  Enter new businesses  M&A, partnerships Copyright Professor Krishna Palepu, Harvard Business School

Slide 15: Strategic Agenda for Board meetings  Tracking the progress of the strategic initiatives identified in the retreat  Drilling deeper into one aspect in each meeting  Customers  Competition  Key Capabilities and processes  Key strategic business risks Copyright Professor Krishna Palepu, Harvard Business School

Slide 16: Potential Pay-offs  Focus limited Board time on what is strategically critical  Add an external market focus to Board’s agenda  Identify problems early on, so they can be discussed and corrected  Linking Resource Allocation choices, Audit and Compensation committees’ work with the broader Board work Copyright Professor Krishna Palepu, Harvard Business School

Slide 17: Process Issues  Initiating the process - board evaluation, board retreat, external facilitators as triggers  Bringing the CEO/Management on board  Articulating the role of management versus Board - avoiding micromanagement but performing the oversight role  Role of the Board Leader in board information design, agenda setting, and board discussions Copyright Professor Krishna Palepu, Harvard Business School