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Back to the Drawing Board: Designing Corporate Boards for a Complex World Hardcover – November 21, 2003
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"...a practical and ethics-infused approach that manages to be both readable and credible." -- New York Times, November 30, 2003
"[an] excellent book." -- Financial Times, November 26, 2003
About the Author
Jay W. Lorsch is the Louis Kirstein Professor of Human Relations at Harvard Business School.
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Carter and Lorsch have studied corporations worldwide, and have been on many boards. Their background and research make for good reading, while their recommendations are quite insightful.
Since 1989's "Pawns or Potentates", this is the best book about director's activities.
I recommend this book: very focused and structured contribution for actual corporate board members around the world.
Even boards that have adopted the entire current array of best practices, however, find the actual work of carrying out their responsibilities problematic. One reason why these best practices do not always translate into improved performance is that most of the recommendations for change coming from external groups focus only on those characteristics of boards that are visible to outsiders. They pay too little attention to what actually happens inside the boardroom, and leave the specifics of board design beyond their scope. Another reason is that each board's responsibilities are becoming more challenging and time-consuming. There is a significant gap between what boards are expected to accomplish and the time and knowledge available to directors to do their work. Put simple, the job is difficult if not impossible to carry out in the time most directors can devote to it. New requirements placed on audit committees by the Sarbanes-Oxley Act in the United States have raised the bar even higher.
But there is more. According to Colin Carter and Jay Lorsch, there are unresolved contradictions in board design that have never been acknowledged either internally or by reforms sought from outside the boardroom. For instance, the truly independent board, which is in many ways desirable, will struggle to achieve an adequate understanding of its company's business. Directors who have no other relationship with the company will have a lot to learn; what's more, they will be reliant on management in doing so. There are fundamental tensions and unresolved contradictions embedded in the best practices for board effectiveness: between independence and understanding, between the reliance on generalists and the need for specialization, between stock ownership and long-term goals, between shareholder value and stakeholders' well-being, etc. How boards should deal with such contradictions and other design problems is not yet on either their own radars or the broader governance agenda.
The solution, according to the authors, is to bring boards back to the drawing board and to redesign them from the bottom up, one board at a time. Boards must go back to the basic questions, starting with their roles and obligations. They must first address the tensions between their three functions of advising, deciding, and monitoring the corporation, and figure out how engaged in the company the board needs and wants to be. They must then design an organization to make their work more effective, raising fundamental questions of board structure (its size, leadership, and the committees it requires to accomplish its role), board composition (the mix of experience, skills, and other attributes of its members) and board processes (how it gathers information, builds knowledge, and makes decisions). As a last step, boards must address the issue of boardroom culture, define the set of behaviors they wish to encourage or prohibit, and develop a more open and productive working relationship, putting emphasis on candor, trust, robust discussion and debate, and legitimate dissent.
Although the authors' focus is practical and down to earth, they also raise fundamental questions. Why has the conventional wisdom on corporate governance acquired such authority, given that the best practices on which it rests are fraught with tensions and contradictions? How can society as a whole delegate so much power to an institution which is obviously not working properly? As the authors put it in their last chapter, "Boards are a conundrum. Take a group of part-time directors and present them with an extremely difficult job, but give them very limited time together. And then charge this institution with ultimate responsibility for ensuring that the nation's most important economic assets are well managed. How can such an unlikely arrangement work?"
And yet, this unlikely arrangement is becoming the norm for a wider range of social functions. Boards are not limited to private-sector, for-profit, publicly-listed companies. The board model is now extending its reach beyond corporate governance and is being adopted by the public sector as well as non-profit organizations and international institutions. Boards now play a prominent role in monitoring public service agencies, charitable foundations and NPOs, and institutions that provide public goods on a global scale. "Government by committee" gives board-like structures a commanding role in steering public policies. And are international gathering such as G8 and G20 summits not akin to board meetings? Boards provide the missing link that connects corporate governance to global governance. Although not addressed by this book, the issue of board design therefore raises challenges that go much beyond the corporate world.
I attended a Forum for Corporate Director's meeting featuring Professor Lorsch from Harvard Business School - it was an outstanding morning filled with additional insights, confirmations, and new ideas concerning corporate governance. This excellent book extended that rewarding experience and will likely be a constant reference in my corporate governance work. Carter and Lorsch have extensive research (included in appendices) behind their suggestions for change in corporate boards. In a refreshingly clear writing style, they expose the gap between theoretical board design and the practical results of board design. Further, they acknowledge that these gaps cannot be closed completely, nor can they be legislated out of existence. Instead, as always, we must rely on the women and men who sit on boards to have a deep understanding of their mission, the boards mission, a commitment to integrity, and knowledge of the workings of their executive suite.
Back to the Drawing Board is laid out in a logical manner, and approaches this complex issue of properly designing boards in an equally logical manner. The face, head on, the issue of increased time and energy that will be required of new board members. The clearly address the issue of independent directors and squarely address the advantages and disadvantages of independent directors versus executive directors. They also address the concerns of the executive director who, in many respects is required to sit in judgment of her boss. Perhaps most refreshing is the concern that we not throw the baby out with the bath water, that we not think that Sarbanes-Oxley is the complete answer, and that we not expect a "one size fits all" board structure. Rather, we must do the hard work of defining a particular board's role, redesign accordingly, and rethink the processes, practices and policies of our decision makers.
This book is a must read for anyone involved in corporate governance whether they are on a board, aspire to be on a board, consult to those responsible for corporate governance or are a member of the "c" suite. Thank you Mr. Carter (of the Boston Consulting Group) and Professor Lorsch (Harvard Business School) for this excellent work.