How to reform boards

Owning up
Publisher: John Wiley
Pages: 199
Price: Rs 1,412

For the past decade or so, corporate scandals at companies such as Enron and Satyam have reinforced the notion that directors on a company’s board are mere pawns of CEOs, forced to rubber stamp his or her directives. This doesn’t have to be the case, says Ram Charan—a Harvard PhD in corporate governance and management guru to many of the world’s companies. In his new book, Charan outlines 14 questions— along with detailed answers and case studies— that company directors simply must ask themselves in order to shed the image of being corporate puppets and fulfill the role of watchdogs for shareholders. Here is a sampling:

Q.Is our board composition right for the challenge?
Boards must do their own succession planning with lead time to ensure they have the right mix of skills, experience and expertise at all times….

Personality is a hugely important criterion in selecting directors. Directors must be able to work well together for the board to be effective and yet be independent. The governance committee owns the process of having the right composition of the board at all times. The committee must have a clear process on what skills and experiences will be needed when, and how changes will me made along the way.

Q.Are we addressing the risks that could send our companies over the cliff?
Boards have to consider how risks might combine in a perfect storm, and link managerial decisions with risk to the balance sheet as well as the P&L. Boards can get a better handle on risk by viewing the business and the landscape through different lenses…. (financial vulnerability lens, Strategy and Operation lens, Political and Geopolitical lens.) Consider creating a risk committee to dig deeper into the potential sources of risk.

Q.Are we prepared to do our jobs Well When a Crisis Erupts?
Boards have to be vigilant to prevent crises and ensure that management is well prepared for the knowable unknowns. When an unknowable unknown strikes, the challenge is to sort through the ambiguity fast and imagine different scenarios and ramifications. Boards may have to take the lead when an emergency situation arises to keep people informed, steady people’s nerves, and help management sort through ambiguity.

Q.Are we well prepared to name our next CEO?
A well-designed succession process starts by pinpointing what the company needs most. It also reveals what each candidate really has to offer, shaking loose directors’ biases toward or against CEO candidates they already know. Discussing succession several years in advance allows time to get to know the candidates well, and if the field falls short, to bring in outsiders below the CEO level.

....Boards should get to know more leaders at lower levels than they typically do, and they must know who will take charge in an emergency.

Q.Does our board really own the company’s strategy?
Directors want to—and must—get engaged in company strategy.... The shelf- life of a strategy is shortening. The board’s objectivity and diverse viewpoints can help management detect a bend in the road and peak times to sell a business. Management should create a concise strategy document….One-on-one conversation with individual directors clarifies the strategy and sets the stage for richer group discussions. Boards should consider strategy on three levels—portfolio, business unit, and functional— and watch for opportunities to make occasional strategic bets.

Q.How can we get the information we need to govern well?
Boards should assign one or two directors to work with management on the architecture of the information that comes to directors.... Information has to go beyond reporting past performance to show the drivers of future performance.

....Boards should not get all their information from management alone. They should be more active in seeking outside voices and judgements and hearing directly from employees.

Q.How can our board get CEO compensation right?
…Rigid formulas and absolute numerical targets don’t always work as expected, especially given the volatility in the global financial markets.....The full board, not one or two individuals, should determine CEO compensation.

A “compensation philosophy” makes the guidelines for decision making explicit, while reserving the board’s right to exercise discretion. Most constituencies accept the board’s judgement provided the decisions are thoughtful and the guidelines transparent.

Compensation committees have to step up their efforts to dig into the details of executive compensation; they cannot delegate the job, even to the best consultants.

Q.Why do we need a lead director anyway?
Leadership, usually from the Lead Director, plays a big role in creating the positive social dynamic that a board’s effectiveness depends on. An effective Lead Director is one who can zero in on key issues, make meetings more productive by keeping dialogue on track, and strengthen the relationship between the CEO and the board. …The Lead Director’s real job requirements are social skills and a special blend of temperament and personality.

Q.Is our governance committee best of the breed?
The governance committee has a pivotal role in ensuring the board functions well enough to own up to its responsibilities. It should define its role broadly and be assertive in holding the board to a high standard. (It) must think through the criteria for various board leadership roles, balancing expertise with sensitivity to human behaviour and rotate committee assignments and chairs to avoid pockets of power.

Q.How can executive sessions help the board own up?
The executive session is the single best innovation for the boards to own up. Conducted in the right way, executive sessions cement the CEO-board relationship. Conducted the wrong way, they strain it. Executive sessions must be informal enough for directors to raise any issue, but they cannot be allowed to devolve into unfounded criticism. The CEO should attend part of the executive session and be kept informed as the board’s thinking evolves. Executive sessions better serve their purpose when they are held before board meetings.