BOARDS AT WORK

Chapter One
The Board as Competitive Weapon

Welcome to the era or the high-performing board. At a small but growing number of companies, the corporate board, once a sleeping giant, is waking up and flexing its intellectual muscle. At these companies, the CEO is discovering new ways to tap the board's vast storehouse of experience and business wisdom, and the directors are finding new ways to contribute to the success of the corporation. The board not only protects shareholder value but actually helps create it.

Everyone knows about boards that don't work. At GM, IBM, Westinghouse, Kmart, Digital Equipment Corporation, and other corporate giants, the board seemed to stand idle as billions of dollars in market value went down the drain. The public failure of those boards triggered widespread cynicism about whether corporate boards would ever be more than rubber stamps.

But some boards do work. They listen, probe, debate, and become engaged in the company's most pressing issues. Directors share their expertise and wisdom as a matter of course. As they do, management and the board learn together, a collective wisdom emerges, and managerial judgment improves. The on-site coaching and counseling expand the mental capacity of the CEO and the top management team and give the company a competitive edge out there in the marketplace.

Boards that work demonstrate a compelling reality: Boards can be a competitive advantage to the corporation. In today's complex environment in which shareholders will tolerate nothing short of optimal performance, this reality cannot be ignored. Investors are already recognizing the connection between board effectiveness and market value.

Boards can work. Chairmen, CEOs, directors, shareholders — anyone who has a stake in the success of the company — must see to it that they do.

The Quest for Good Governance

Empowered shareholders, conscientious directors, and enlightened CEOs are putting corporate governance on the agenda, each for their own reasons. Institutional investors, still reeling from the frustration they felt in the 1980s and early 1990s when boards stood idle as market values languished, have forced the issue. To the U.S. economy, businesses floundering under poor leadership represented a national competitiveness problem. To investors, they represented undervalued and depreciating assets — whether a brand name, a division, or an entire company — over which they seemed to have little control.

After years of pension fund growth and helped by various shareholder organizations and changes in SEC regulations, shareholders found their voice. In the early 1990s, they began to speak out regularly at annual meetings, in letters, through proxies, in the courtroom, and to the press. CEOs never knew when their annual meeting, once a quiet, docile event would erupt into confrontation and debate of the core economic issues of the business.

Calpers (California Public Employees' Retirement System), the activist pension fund, has led the charge, targeting underperforming companies in its portfolio and recommending adoption of board practices aimed to make boards more effective. Calpers has, for instance, been a leading advocate of appointing a "lead director" or outside director as board chairman. Although their specific recommendations may miss the mark (as demonstrated in Chapter Three, a lead director or outside chairman actually does more harm than good), Calpers and other activists have focused national attention on the obligations and roles of corporate boards.

Some directors, particularly newer, younger ones, are putting better governance on their board's agenda. Many are a new breed recruited for their business expertise rather than their ties to management. Some are successful CEOs themselves and are not inclined to protect chief executives who defend the status quo in the face of discontinuous change. Denied a socially acceptable forum to ask questions and express candid opinions because of boardroom norms, some directors are seeking radical change in board practices.

A growing cadre of CEOs also is putting better governance on the agenda. Many recognize the wealth of knowledge that directors possess. Also, the abrupt removal of once celebrated CEOs at GM and other Blue Chip companies in the early 1990s is fresh in memory. Many CEOs realize that the empowered shareholder is here to stay and that boardroom coups are not the only — or the best — expression of good governance.

In their quest for better governance, shareholders, directors, and CEOs have arrived at a common realization: The true potential of the board lies in its ability to help management prevent problems, seize opportunities, and make the corporation perform better than it otherwise would. Rarely is a CEO so ineffective that the board must ask him or her to step down, but no CEO is perfect. The board's wisdom and judgment is a valuable managerial resource for any CEO.

The standards for good governance are rising. The search is on for boards that govern more actively and in ways that add value to the corporation. Boards are expected to play a broader role than that of watchdog and to make an ongoing contribution to the business. The quest has begun to release the competitive power of the board and to put the board to work.

The New Frontier

More often than not, boards believe they have the right CEO. For the majority of boards, the relevant question is: How can we make a good CEO perform better? Improving managerial judgment is the new frontier for boards.

Away from the headlines, some boards — like those of NYNEX and Citicorp — are exploring this new territory. These boards try to help the CEO be more effective by serving as a coach, a counselor, and a sounding board. They are not quiet and passive when times are good. They work all the time, even when they have full faith in the CEO, his or her team, and the company's strategic direction. They believe that in a fast-changing world, a CEO has never fully arrived. Even the best CEOs must learn and grow.

This form of engagement is not the kind of interference or micromanaging that CEOs fear. It is constructive, positive, and value-adding. Such involvement can keep established companies alert and flexible. For start-up companies, it is critical to survival.

This new territory is rich with value-creating opportunities. The board is, after all, the best opportunity a CEO has to catch the blind spots and faulty reasoning. What contingency has management overlooked? (Should IBM have geared its investment commitments to the aggressive sales goal of $180 billion in the mid 1980s?) What competitive threats are you seeing but not believing? (Why did Microsoft outwit Apple?) What perspective has management failed to consider? (Should Detroit have considered itself cost competitive with Japan because the yen was at 80?)

The board is the best source of creative thinking about new opportunities for growth. It is, as John Trani, chairman and CEO of Stanley Works and former president and chief executive of GE's Medical Systems, says, "the only body that has the stature and ability to tell the emperor — in a nice way — that he has no clothes."

Copyright © 1998 Ram Charan