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Boards that lead

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In the year 2002, Warren Buffett made an admission that he had not been as vigilant as he should have been in his role as Director of the various subsidiaries of his holding company, Berkshire Hathaway. In a letter to the shareholders he wrote “ Too often I was silent when management made proposals that I judged to be counter to the interest of the shareholders. In those cases, collegiality trumped independence and a certain social atmosphere presides in boardrooms where it becomes impolitic to challenge the Chief Executive.

Kevin Sharer, Chairman of Amgen, the US biotech company, portrayed a very different relationship between board and chief executive. “ Working with the board is vital, complex, and beyond your prior experience. It is among the most complex human relationships, especially if you are the chairman, when you are their boss, and they are your boss. Get the relationship right or it will hurt you.

These two very different experiences open a new book, Boards that Lead- When to take charge, When to Partner and When to stay out of the way. The central premise of the books is a plea. “ Governing boards should take more active leadership of the enterprises, not just monitor its management?

The growing complexity of markets and strategy, the authors say, is one of the biggest challenges for board members. It also means that they cannot afford to sit back and rubber stamp executive’s plans.

Boards often fail to do their job, they point out, for example failing to do their due diligence. They cite the example of Yahoo’s Chief Executive Scott Thompson. After a few months in the post, it was discovered that he had listed a degree in both accounting and computer science, but had actually earned only the first.

A good book to read move from Delivering to Leading.

Happy Reading

Published in: Leadership & Management

Boards that lead

  1. 1. Some Impressionistic takes from the book of Dr. Ram Charan, Dennis Carey, Michael Useem “Boards That Lead” by Ramki – ramaddster@gmail.com
  2. 2. Dennis Carey is Vice Chairman of Korn/Ferry International. He has placed some of the most prominent chief executives and corporate Directors in the United States, including those at 3M, American Express, Goldman Sachs, GSK, Humana, MCI, and Tyco International. This is his fourth book on CEO succession and corporate governance. Ram Charan is a business adviser who has worked with executives and Directors of many companies, including DuPont, GE, Novartis, Verizon, and RBS Group (Brazil). He has served on the Harvard Business School faculty, teaches in Wharton Executive Education, and serves on the board of Hindalco (India). He is the author of eighteen books. Michael Useem is a professor of management and the director of the Center for Leadership and Change Management at the University of Pennsylvania's Wharton School. He offers courses on leadership and has authored books on leadership and corporate governance, including The Leadership Moment and Investor Capitalism. About the Author
  3. 3. Prelude The book was written by three of the foremost business leaders today. Dr. Ram Charan, author of Execution and other business books. He joins experts Dennis Carey and Michael Useem in outlining the significant processes that make an effective Corporate Board. Boards That Lead is divided into three sections.  The first delves into establishing functional boards, thus the title Boards That Lead.  The second, Leading the Leaders, examines how boards work with an executive team.  The last section, Value Creation, identifies the activities that create the most utility for an organization’s benefit. The content of the book is gives the readers to imagine multiple combinations of direct and collaborative leadership. Increased enterprise complexity calls for these varying degrees of oversight. The impressionistic take in this document captures the aspects of how a board leads, partners, monitors, and delegates
  4. 4. “Investor demands for more independent boards that would be accountable to them, paid like them, and fiduciaries for them gave rise to litigation….the legal actions did help establish two standards for director obligation: Duty of care, requiring Directors to exercise reasonable caution in executing board responsibilities that could harm others if not performed well, and duty of loyalty, requiring that Directors exercise good fiduciary judgment on behalf of the stockholders”
  5. 5. From Ceremonial to Monitor to Leader
  6. 6. Monitor to Leaders  Boards are increasingly taking an active role & responsibility on factors like CEO succession, Executive compensation, & Goal setting. This increased level of board leadership reflects the growing complexities of the marketplace. This was earlier the responsibility of the Top Management.  In part, it is also a necessary response to new regulations. For example, the federal Sarbanes-Oxley Act of 2002 holds Directors responsible for ensuring the integrity of their company’s financial controls.  New York Stock Exchange rules imposed in 2003 require board audit committees to oversee financial statements.  The Dodd-Frank Act of 2010 makes it easier for shareholders to propose & elect their own board candidates.  Importantly, board involvement does not have to mean board micromanagement. Effective Directors establish a constructive, collaborative leadership partnership with top executives.  They become educated and interested in such matters as company strategy, asset allocation, risk management, and talent development. They also take steps to ensure skilled leadership of the board itself.
  7. 7. Monitor to Leaders  Given the current context the Director’s assume three primary duties:  Duty of care: Directors must exercise reasonable caution in executing board responsibilities that could potentially harm others.  Duty of loyalty: Directors must exercise good fiduciary judgment on behalf of stockholders.  Duty of leadership: Directors must focus attention on key dimensions of enterprise management. At the same time, effective Directors know when to lead, when to partner, and when to stay out of the way. They set aside personal pride so as to focus relentlessly on what is right for the company.
  8. 8. Director’s Checklist for Leadership Decisions  When to take charge  Central or Core Idea  Involvement in Selection of the CEO  Board competence, architecture & modus operandi  Ethics & Integrity  Compensation Architecture  When to Partner  Strategy, Capital allocation  Financial goals, Shareholder value, Stakeholder balance  Risk Appetite  Resource allocation  Talent development  Culture of decisiveness
  9. 9. Director’s Checklist for Leadership Decisions  When to stay out of the way  Execution & Implementation  Operations & Routines  Areas of delegated authority  Non-strategic decisions  Excluded by Board charter
  10. 10. First Things First- Define the Central Idea 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. It is the animating force from which hundreds of strategic and operational details emanate.
  11. 11.  The central idea of an organization or the group articulates why it exists, whom it serves, how and why it should be nurtured, how it can be profitable while minimizing risk, & what direction it should take to succeed in a competitive marketplace.  Boards should not only ensure that the central/ core idea is clear, compelling, and comprehensible, but internalize and rely on it as a touchstone in their own decision-making. Ideally, the central idea should be simple, tangible, and short—a maximum of several hundred words.  The best central ideas exert “Centripetal force.” This means they draw management and board onto common ground and get them moving toward a shared purpose.  Conversely, a weak central idea exerts a “centrifugal force” with the potential to pull the organization apart. Because of its importance, boards should regularly revisit their companies’ central idea. First Things First- Define the Central Idea
  12. 12.  They should also produce a document that sets forth the central idea and expresses it in terms of both strategy and execution—including specific actions needed to realize key goals.  By taking ownership of the central idea, boards reinforce the notion of company leadership as a partnership between Directors and Executives.  They insert Directors irreversibly into an active leadership role, and recruit new Directors who share their mindsets First Things First- Define the Central Idea
  13. 13. Recruit Directors Who Build Value  Today’s board members need a mindset & a skill sets which are different from Directors of the past.  They must bring to their roles not just a readiness to monitor, but a willingness & ability to exercise leadership in key matters of Strategy and Execution.  In the authors’ opinion, high-potential director candidates for forward-looking enterprises should be qualified to:  Contribute to the central idea by thinking clearly and strategically about the firm, its value proposition, and its competitive position.  Contribute to boardroom discussion while steering clear of operational detail.  Help formulate new direction as necessary and offer experience with major strategic and executional issues.
  14. 14. Recruit Directors Who Build Value  Work in partnership with executives, based on a previous track record of collaboration.  Bring intellectual and experiential diversity to the board.  Engage constructively in the face of high-stakes, high-stress challenges.  Help the board become more effective—for instance, by offering conversational intelligence.  Add value to both the boardroom and the executive suite. In the past, sitting board members may have had limited involvement with director recruitment. But today, finding and vetting top candidates has become a major responsibility of the board’s governance committee.
  15. 15. Almost all Directors look promising before they enter the boardroom, but not all perform equally well once inside. Sometimes a prince in other realms can even turn into a petty gabber at the table, the very opposite of what English novelist George Eliot had championed: “Blessed is the man who having nothing to say abstains from giving wordy evidence of the fact.” Root Out Dysfunction
  16. 16. Root Out Dysfunction  A Person while highly accomplished in business, may be unsuited for the boardroom. Because a board can only be as strong as its weakest link, it is imperative to identify and find ways to deal with these poor-performing or dysfunctional members.  This should be a regular responsibility of the board leader, occurring in stages.  First, the leader should have a private conversation with the disruptive member, making the individual aware of behaviors in need of change.  Next, the leader may offer intervention, usually coaching, to help the director improve. But if intervention fails, the leader should be prepared to advise the director to leave the board.
  17. 17. Root Out Dysfunction  A good process is that boards should implement an ongoing process of Director Evaluation, a practice already adopted by most of the American companies as of 2011.  One approach is similar to peer evaluations in 360-degree performance reviews: members assess the contributions of their colleagues by using a matrix with key criteria on the left and director names across the top.  Examples of useful evaluative criteria include whether each director brings useful skills & experience to the boardroom; is prepared for meetings; understands the company’s central idea; asks good questions; helps develop the business; moves discussions forward; and facilitates relationships between members and with management.  Sometimes it is beneficial to invite a neutral third party, such as outside counsel or a governance consultant, to ask questions of the participants.
  18. 18. Root Out Dysfunction  The difference between leading and overreaching on a board is not always obvious, but most boards create implicit behavioral norms. Often, Directors who violate such norms are driven by personal motives.  Among the most common of these motives is a determination to prove one’s expertise and grasp of detail, leading to operational questions that are too deep & inappropriate for the boardroom.  Another is a desire to be considered for an executive position. A third is anxiety on the part of an insecure director who fears making a mistake or being blamed for a company problem.  Evidence suggests that evaluation and intervention can go a long way toward rooting out boardroom dysfunction. However, it is far more efficient to deselect or avoid recruiting unsuitable Directors in the first place.
  19. 19. Leading the Leaders
  20. 20. A Leader of the Board  CEOs who lead in the boardroom as well as in the executive suite have long been common in USA Corporations.  However, that norm is being replaced as more firms are creating either an independent board chair or a designated board leader.  As of 2010, over 90 percent of Standard & Poor 500 companies had a designated lead director; this was partly in response to a 2003 New York Stock Exchange rule that non- executive Directors must meet at least once each year without executives present, and publicly disclose the name of the director chosen to preside over the meeting.  Board leaders have different titles and job descriptions, but their primary function is to organize & speak for the other members apart from the CEO, other executives, or board chair.
  21. 21. A Leader of the Board  They have the power to convene meetings and to review management performance without the presence of the CEO.  Because of the growing importance of board leadership, it is critical for the individual in that role to have the right personality, temperament, and skill set; he or she must be able to build and maintain a constructive relationship not only with the CEO, but also among other Directors.  Like any high-level company or team leader, an effective board leader should have excellent skills in strategic thinking, persuasive communication, and decisive decision-making. While focusing the board on strategy and working collaboratively with the CEO, the leader should be able to avoid micromanagement.
  22. 22. A Leader of the Board In general, 6 qualities help to define the best board leaders: 1. Executive experience. Most leaders have served as chair, president, or CEO of another company. They have well- honed business judgment & deep Strategic and Executional knowledge. 2. Respect and confidence. Leaders earn the respect & confidence of other board members because they are excellent facilitators, able to inspire others & draw them toward judicious decisions. 3. Collaboration & restraint. Strong board leaders hold back their own opinions in order to encourage the participation & collaboration of others. They avoid dominating boardroom discussions. 4. Personal bonding. Leaders create personal connections that facilitate the ability to speak for the board as a whole.
  23. 23. A Leader of the Board 5. Personal comfort. Leaders should be authentic: this means they are comfortable setting aside their own interests and ambitions, committing exclusively to the mission of the enterprise. 6. Resilience. Board leaders commonly face at least one significant crisis during their tenure. Thus, they need the ability to head off trouble when possible and the resilience to face disaster and bounce back from it if it comes. Apart from the above basic qualities of effective board leaders, it is suggested adding another:  A capacity for candor & a willingness to demand candor from others. Directors who suspect that information is filtered or hidden from them will lose trust in the leader. Also, a CEO who is not kept fully and honestly informed about director opinions and deliberations will lose confidence in the board-management partnership.
  24. 24. CEO Succession “ The Ultimate Decision  The top most challenges or task of the board’s responsibility that of choosing a Chief Executive.  Even if they retain a consultant, today’s Directors must take an active part in the process.  Some companies successfully grow their own talent, presenting Directors with strong candidates on the inside.  This is often the most favorable scenario, because insiders are already familiar with the firm’s strategy & mission.  In order for it to happen, Directors need access to good internal data that documents the performance & potential of top managers.
  25. 25. CEO Succession “ The Ultimate Decision  But whether CEO/MD candidates emerge from inside or outside, boards must involve themselves in due diligence; Directors should demand in-depth information and personally check the references of serious contenders.  Otherwise, they risk making a mistake that can be nearly irreparable—the wrong CEO can cause serious, long-term damage to the firm. Board leaders standing too tall on their own soapbox can inhibit a free flow of ideas. At the same time, it is important for a lead director to exercise individual and collective restraint so that board directives do not tread on management’s toes.
  26. 26. Ten Principles for finding the Right CEO  People set strategy- Directors & Executives who are strategically adept are in the best position to lead the enterprise in the right direction.  Implement a CEO and successor evaluation methodology- The company’s evaluation system should be linked to its central core idea & be able to discern the capacities of individual candidates.  Include in the CEO’s evaluation a succession plan assessment-Developing the next generation of leaders should be among the CEO’s key tasks.  Place the board leader in charge of the succession process- CEO succession decisions should not be crisis-driven. Instead, board leaders should undertake this responsibility as part of their fundamental, ongoing partnership with management.
  27. 27. Ten Principles for finding the Right CEO  Retain potential inside successors in addition to an effective CEO. In order to keep executives with high potential, it will be necessary to offer them incentives including extra compensation.  Seek data on inside candidates from all executives who have worked with them. This process may be guided by a third party.  Verify data with both outside sources and candidates- It is critical for Directors to be personally involved in the vetting process.  Maintain confidentiality- To protect CEO candidates, Directors should communicate orally about the search and steer clear of journalists.  Embed succession planning in corporate culture- Talent planning, coaching, and mentoring should be viewed by both Directors and executives as an ongoing responsibility of leadership
  28. 28. We believe that the concept of the Universal Chief Executive is as misleading as the idea that a gifted athlete should be able to excel at more than one position on the sports field or even several kinds of fields. Strategic fit between a candidate and the shoes to be filled is the crux.
  29. 29. Director’s Checklist for CEO Succession-( 1/2)  Are company Strategy & Executive succession explicitly linked.  Is a Board process is place for evaluating the CEO & potential successors?  Does the Board explicitly assess the CEO’s management of succession plan for the next generation of company leaders?  Is the Board working to retain a high-performing Chief Executive- but also to keep capable successors ?  Does the Board have a member who could serve as CEO in the wake of an unexpected exit if no insider is yet ready for succession ?  Has the Board compiled data on the inside CEO candidates from those who had worked with all of them?
  30. 30. Director’s Checklist for CEO Succession- ( 2/2)  Have Directors had direct contact with both the CEO candidates & the information sources to verify information about them?  If Executive Search consultants are retained, have they been vetted to ensure that there are no conflicts of interest?  Does the Board ensure candidate confidentiality ?  Has the Board gathered independent references on the outside candidates?  Is succession planning embedded in the company’s culture?
  31. 31. A Question of Fit  Selection of CEO/MD- a Strategic fit between the job to be done and the person to do it.  This requires a focus on two dimensions:  Leadership Requirements given the Organization/ Business Context  The current competitive landscape, & each candidate’s capabilities.  Importantly, leadership requirements must be considered first. Otherwise, the board risks hiring someone who is well suited to solve the problems of the past— but likely to flounder when faced with the challenges of the future.  Often a leadership committee of the board is created to assess the company’s most critical strategic issues and decide what specific talents and experience is needed to address those issues.  The committee takes responsibility for vetting candidates in light of the necessary match-up.
  32. 32. Spotting, Catching or Exiting a Falling CEO  Directors should look / watch for when the CEO begins to falter & there are usually warning signs which should not be ignored.  Directors reaction or response should not be slow for actions. They fear the consequences of forcing an exit, or cannot agree on how to proceed.  In reality, this is precisely the wrong mindset. Effective Directors must be constantly vigilant, ready to deal decisively with emergent issues even if the issues are eventually resolved.  It is important the Board works on what is right and not what is convenient .
  33. 33. General Indicators – Falling CEO  Lack of clear strategy  If the CEO is unable to articulate the firm’s strategy coherently and succinctly, the board will be hampered in its decision- making and unable to assess tactical proposals.  Failure to execute.  The most common early warning sign of CEO failure, a failure to execute, usually results from several bad habits. These include a lack of focus on key priorities; dislike of follow through; and inadequate anticipation of & adjustment to setbacks.  Wrong people calls.  A CEO may rely too much on a single senior officer or adviser who has significant shortcomings or filters diverse views. Another mistake is to promote an ill-prepared functional executive into a line position.
  34. 34. General Indicators – Falling CEO  When Directors notice one or more of these indicators, they should test their concerns quickly, albeit cautiously, with others. Also, they need to seek more information about what may be causing the apparent problems.  As general practices that can facilitate early detection and intervention,  Boards should include candid discussion of the CEO’s performance during their executive sessions;  Focus the CEO’s annual evaluation and feedback on strategic thinking and other leadership capabilities as well as financial metrics;  Meet and appraise the CEO’s top management team; and engage all Directors in any decision to revive or relieve a struggling CEO, even in the middle of a crisis.
  35. 35. Value Creation
  36. 36. Turning risk into Opportunity  Risk management –is a critical board priority in an era characterized by financial, environmental, and technological disasters.  Managing /Mitigating risk is as much about seizing opportunities as averting catastrophes.  Effective Directors do not reflexively avoid taking chances; instead, they learn to balance options.  Setting strategic boundaries too narrowly can cut off good avenues for expansion, while setting them too widely can expose the firm to excessive uncertainties.  Directors must decide which risk-related metrics they will focus on, and at what granular level. They also need to be wary of low- probability but high consequence events, like airplane crashes.  Often it is helpful to create a risk-appraisal advisory board, composed of highly knowledgeable individuals who can provide diverse thinking and fresh insights.
  37. 37. Turning risk into Opportunity  While most common among family-owned businesses, advisory boards are increasingly being used by multinational firms and in emerging markets.  Because they do not have shareholder oversight responsibilities, they may be more willing than Directors to drill deep into operational details.  Also, advisory boards are free to focus on specific regions, or on difficult challenges.
  38. 38. Staying out of the way A challenging but critical task for today’s Directors is to find the right balance between leadership and meddling. One helpful criterion is to involve the board in operational decision-making when the challenge is of clear strategic significance—otherwise, Directors should usually stay out of the way. Many firms use planning devices to identify decisions that should be made at the board level and those better left to management. For example, annual calendars can schedule meetings on key topics—like company strategy or executive compensation—to ensure that Directors discuss these topics. Committee charters may help define specific decisions for which board committees are responsible. Decision protocols can explicitly identify items under the Directors’ purview, such as financial statements, annual dividends, or acquisitions and divestitures.
  39. 39. Staying out of the way  Often, the lead director and CEO reach an informal understanding of matters that should be kept out of the boardroom.  The single most important factor in cordoning off appropriate “no- fly zones” is the Directors’ trust in their leader and top management to keep them informed and involve them when necessary— while holding them at arm’s length when this is in the best interest of the company.  If unexpected issues arise that are outside the bounds of an existing decision protocol, like regulatory changes or competitor moves, the lead director and CEO usually make a judgment call together as to whether the topics merit board-level consideration.  In general, they can help ensure the right balance between leading and meddling by providing the right information; facilitating a high level of discussion; focusing on the central idea; and reinforcing a no-micromanagement norm.
  40. 40. The Leadership Difference  It is time to redefine Corporate governance to explicitly include the role of collaborative company leadership.  This revised definition should be institutionalized by transforming the traditional governance committee into a leadership & governance committee, with responsibility for board candidate recruitment, director evaluations, and board leader oversight.  The committee will need highly experienced members, along with an appropriate charter and budget that reflect its increased obligations.
  41. 41. The Leadership Difference  Today’s Corporate board must decide early on where it will lead, partner, or stay out of the way.  It must designate its own leader; establish decision protocols; create collaborative relationships with top management; and ensure that every member is a contributing member of the team.  Without wading deeply into daily operations, all directors should be prepared to play an ongoing role in realizing the company’s strategic goals—goals that are increasingly the product of board- management leadership partnerships.
  42. 42. 1. Does the prospective director have the capacity to think strategically and clearly about the organization as a whole, its constituents, value proposition, etc. 2. Will the candidate be able to contribute tangibly to discussion without veering into operational detail? 3. Is the candidate familiar with and experienced in the specific strategic and execution issues flowing from the central idea—and capable of helping formulate a new direction when disruptions in the context dictate? 4. Does the director have a proven track record of working collaboratively? 5. Will the candidate add intellectual and experiential diversity to the board? 6. Will the candidate be ready to engage constructively when vital issues are on the line, the stakes are high and leadership becomes even more essential? 7. Will the candidate help the board become more effective by asking good questions and avoiding unrelated issues that highlight his/her area of expertise?
  43. 43. Learning’s for Application  Boards must commit to Co-creating Leadership as a partner. The Independent Directors should not get into micromanagement.  Having said this they must contribute , collaborate with the CEO/MD and other Senior Leaders in the areas of Company/Group Strategy, ERM, and Human Resources.  Directors need to take ownership of the firm’s central idea. The central idea is a statement of why the company exists and what will make it successful.  Directors should ensure that the central idea is compelling, internalize it, & use it as a touchstone in their decision-making.  A leadership mindset & a willingness to collaborate are critical qualities to be sought in today’s director candidates. Prospective Directors should be able to think strategically about the firm, its value proposition, and competitive position.  Given the expanded role of Directors, it is more important than ever before to root out those who are dysfunctional or who fail to contribute. Boards can benefit greatly from a regular, meaningful evaluation process for their members. The board leader should take responsibility for dealing with a problematic director.
  44. 44. Learning’s for Application  It is good for the boards to nominate one of their members to serve in a presiding role. This lead director is empowered to convene meetings without the CEO present, review management performance in confidence, and speak on behalf of the board.  When choosing a CEO, Directors must focus first on Job Role and deliverables for the current & future of the organization and then leadership requirements, then on candidate capabilities.  A Leader may be highly gifted, but lack the skills needed by a company at a particular point or the context in its strategic evolution.  In a business climate rife with unprecedented threats— financial, regulatory, and environmental—boards must take a leadership role in risk management. At the board level, risk management does not necessarily mean risk avoidance. It means balancing options so the firm can exploit opportunities without taking on excessive uncertainties.  Boards must continually maintain the right balance between leadership and meddling. Decision protocols are helpful in explicitly defining appropriate areas for board involvement. But ultimately, Directors must trust in the board leader and CEO to stake out the right “no-fly zones.”  It is time to redefine the basic concept of corporate governance to incorporate the new reality of board leadership. To institutionalize this new reality, boards should reconstitute the traditional governance committee as a “leadership and governance committee.”
  45. 45. Mail your comments to ramaddster&gmail.com

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