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This review is from: Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way (Hardcover)
The authors contend some boards are well run, benefitting the companies/organizations they serve, and others that are not. In 2006 H-P and IBM had about the same market valuations, but by 2013 HP had a market capitalization of $52 billion and IBM was worth $192 billion. IBM had a stable board with a successful relationship with the CEO, while the board at HP was scandal-riven. The variance originates from the human dynamics, social architecture, and business leadership of the various boards. Too often, collegiality trumps independence and it becomes impolitic to challenge the CEO. A board's role is not to be reactive, passive, and accepting. The authors' first manifesto - governing boards should take an active leadership role in vital organization decisions (CEO succession, executive compensation, goal choices and urgency, merger decisions, ethics, allocation of capital, etc.), and not just monitor management. However, board involvement should not go so far as to constitute meddling and create fractured authority.
Decades ago, stockholdings were widely dispersed among thousands of investors (6% of corporate equity was held by institutional investors), none with sufficient clout to impact things, and boards were largely ceremonial. Today institutions hold 73% of equity and demand attention; in addition, activist investors have also gained clout. In addition, relatively recent legal actions have established two standards for director obligation - exercising reasonable caution and good fiduciary judgment. Sarbanes-Oxley of 2002, and Dodd-Frank of 2010 has also empowered and holds directors accountable in several areas. Meanwhile, poison pill defenses have declined from 59% to 8%, and staggered-term directors from 61% to 20%, while board attention to company strategy now occupies twice as much time as shareholder concerns.
Absent cohesiveness, liberated board members can hijack board meetings and waste valuable top management time in between meetings by eg. pursuing inappropriate requests for long-term strategy, personal goal choices, or detailed operational minutiae, as well as giving long monologues. The board needs to form a consensus, often w/o taking votes, by ensuring all voices are heard and coming to explicit consensus on key matters. Absent such risks the CEO ending up with a 50-point to-do list compiled from every director's wishes. Sometimes the Chair needs to corral an off-point member by pointing out that the group doesn't agree and it needs to move on. Sometimes the CEO also needs to be told that certain presentations are overly time-consuming. (The authors contend that about half of Fortune 500 companies have one or two directors they would regard as 'dysfunctional.') It also helps to have the Chair restate the general consensus, central issues, and action items for management before the meeting ends. Simply increasing the length of meetings or holding more meetings is not the answer. Successful boards include group dynamics in their self-evaluations, best conducted by informal interviews by a third-party interviewer who reports back to the Chair.
Another characteristic of successful boards is designing in advance what information they need, as well as how and when it is provided. Members also spend time outside meetings learning about the organization - from employees, analysts, major customers.
A board's most important job is making certain the entity has the right CEO. Charan states he has analyzed 82 CEO failures over the past 20 years, as well as successes. Many boards doom their efforts by considering CEO candidates w/o knowing what they're looking for, especially the specific (not generic) skills and relationships the company needs most. Usually it takes 1 - 2 years to fully assess whether a new CEO is the right one, and another year or so to conclude to replace a CEO. Making certain the CEO's direct reports pass muster makes future CEO selection easier as well as wide-spread effective talent. Also important is making certain top management has the right compensation package that encourages/discourage key behaviors. Get it wrong, and a CEO could go on a debt-fuelled acquisition spree that at the extreme lands the firm in bankruptcy.
Charan believes boards should focus on providing companies with strategic advice. The second area of focus - getting their relationship with the CEO right, acting as personal mentors, high-level talent scouts, giving frank advice, as well as monitors in the Sarbanes-Oxley mold.
Board members must take care to phrase questions in a way that doesn't make the CEO defensive - eg. "I'd like to better understand how pricing affects our margins," instead of "I don't think we are being very aggressive in pricing." Criticism should be constructive and fast, not sugar-coated, inordinately delayed, or unnecessarily harsh.
Overall, Charan et al provide 18 valuable checklists to help transform board directors from monitors to leaders. The 'bad news' - this book is largely a repeat of his earlier 'Boards that Deliver.'