This is a classic article well worth a read. While the interviews the authors conducted relate to top US companies, their findings are so true of my experience with Boards here in NZ. As I read through the article my mind wandered to several boards I’ve worked with saying, ‘yep, seen that in operation there’.
The authors cover boards’ risk aversion, self-interest and self-preservation, the ‘celebrity director’, so called ‘professional directors’, and the absence of energetic debate in the boardroom.
The author’s summary sums it up best of all:
Board members should police one another. It’s difficult when you make the CEO accountable for dealing with disruptive personalities.
First, contrary to what some critics believe, CEOs do not want to keep their boards in the dark or to chip away at directors’ power
Second, most boards aren’t working as well as they should—and it’s not clear that any of the systemic reforms that have been proposed will remedy matters.
Third, the best leadership partnerships are forged where there is mutual respect, energetic commitment to the future success of the enterprise, and strong bonds of trust.
The full article:
Over the past several years, in the wake of corporate missteps that have taken a toll on shareholders and communities alike, we’ve heard plenty about how boards of directors should have been more responsible stewards. Corporate watchdogs, investors and analysts, members of the media, regulators, and pundits have proposed guidelines and new practices. But one voice has been notably missing from this chorus—and it belongs to the constituency that knows boards and their failings best. It’s the voice of the CEO.
There are reasons for this silence from the chief executive camp. Few CEOs volunteer their views publicly; they know they’d risk looking presumptuous and becoming a target. They realize it would be foolhardy to draw attention to their own governance dysfunctions or seem to reveal boardroom confidences. Meanwhile, people who do make it their business to speak out on governance haven’t made much effort to elicit CEOs’ views. Extreme cases of CEO misconduct have created skepticism about whether CEOs can help fix faulty governance—a dangerous overreaction. Many observers, having seen grandiose, greedy, and corrupt CEOs protected by inattentive or complicit directors, consider excessive CEO influence on boards to be part of the problem. Others may lack the access to CEOs and the level of trust needed for frank conversations. Whatever the reasons, the omission is unfortunate. Not only do CEOs have enormous experience to draw on, but their views are the ones boards are most likely to heed.
We recently tapped our networks to bring CEOs’ opinions to light. We talked to dozens of well-regarded veteran chief executives, focusing on people with no particular reason to resent boards—we didn’t want bitterness or self-justification to color the findings. We wanted to know: What keeps a board from being as effective as it could be? Is it really the cartoon millstone around the CEO’s neck, or does it have a positive influence on the enterprise? What can a board do to become a true strategic asset?
We were surprised by the candor of the responses—even given our comfortable relationships with the CEOs and our assurances that quotes would not be attributed without express permission. Clearly, CEOs believe it is important to address problems and opportunities they’re uniquely positioned to observe. They know that their strategic visions and personal legacies can be undone by bad governance, and they have plenty to say on the subject. We’ve distilled their comments into five overarching pieces of advice for boards.
Don’t Shun Risk or See It in Personal TermsIn theory, a board should serve as a check on a “cowboy CEO,” as one executive puts it. In reality, it can rein in boldness too tightly. CEOs complain that boards often lack the intestinal fortitude for the level of risk taking that healthy growth requires. “Board members are supposed to bring long-term prudence to a company,” as one CEO says, but this often translates to protecting the status quo and suppressing the bold thinking about reinvention that enterprises need when strategic contexts shift.Conservatism tends to grow with the scale of the enterprise, and it should be noted that all the executives we interviewed serve in large corporations. One CEO described how the thinking in his software firm’s boardroom changed over the years: “As a very young company, we did things early on that, had they not succeeded, would have led to our failure. The board embraced those as ambitious things to do. But recently we explored a couple of things that would be very high risk and decided not to pursue them. Because we’ve grown, the risk-reward envelope has changed shape, and there’s a lot more value at stake.”
“If you don’t take the time and effort to learn the business, I can’t really have a dialogue with you.”
CEOs are especially frustrated when directors’ risk aversion is driven by fears of bad press. They note that the rise in stakeholder and proxy-analyst pressures has made directors sensitive to any decision that might provoke a negative reaction from the media, proxy-advisory firms, institutional analysts, or activist investors. One CEO recalled that during a discussion about a merger, a director “pointed out that the company was front-page news for other reasons, and that a consolidation would likely fuel further media attention.” Another CEO stated the problem baldly: “The risk appetite is out of balance. We’re wasting time on image topics when we need that time to debate business issues.”
The most surprising criticism we heard is that directors too often put self-interest and self-preservation ahead of shareholder interests. One CEO told us, “They like their board seats—it gives them some prestige. They can be reluctant to consider recapitalization, going private, or merging—‘Don’t you know, we might lose our board positions!’ I have been shocked by board members’ saying, ‘That would be an interesting thing to do, but what about us?’” Another CEO recalled, “In one situation, we had a merger not go through because of who was going to get what number of board seats.” He shook his head. “It is still the most astounding conversation of my life.”
“The risk appetite is out of balance. We’re wasting time on image topics when we need that time to debate business issues.”
As Time Warner’s Jeff Bewkes puts it, “If directors join a board because of status or reputation or are risk-averse because of legal liability, then they are not as interested in making money—and to that extent, they don’t represent the interests of the shareholders.” For your business to thrive, he emphasizes, “You need to make sure both management and the board are always focused on long-term shareholder value.”
Former SEC chairman and Aetna CEO William Donaldson pushes that point even further. One of the most important functions of the board, he says, “is to insulate the CEO from short-term considerations.” Although he acknowledges that “you can’t shout in the pages of the Wall Street Journal” that the board is looking out for more than just the profit motive of today’s shareholders, directors still have a responsibility to provide air cover for management decisions that look beyond the next quarter’s, or even the next year’s, earnings.
Do the Homework, and Stay Consistently Plugged InIt’s basic table stakes: No one should accept a director role unless he or she is willing to thoroughly prepare for boardroom discussions. Well beyond reading the briefing books sent out a week or more before meetings, directors should make sure they understand the workings of the company and stay abreast of industry developments. As one CEO says, “If you don’t take the time and effort to learn the business, I can’t really have a dialogue with you.”
CEOs recognize that they have a responsibility to keep directors in the know. Formal board minutes are sparse and legalistic and can’t be counted on to trigger memories of earlier board discussions and conclusions. It’s easy to lose the continuity of thought from meeting to meeting. After board members at DirecTV told the new CEO, Mike White, that they wanted more communication between their regularly scheduled meetings, he began sending an update letter in the middle of each quarter. And he doesn’t hesitate to pick up the phone. “If I am dealing with a highly sensitive subject, I’ll call the lead director,” he says. “Compensation issues are increasingly a big deal; when one comes up, I’ll talk to the HR committee to make sure we are on the same page.” All this between-meetings communication is necessary, he believes, because “it’s a complex, complicated business.” Another CEO sends a weekly Sunday morning e-mail to directors. “It’s informal—I don’t worry about getting grammar exactly right,” he explains. “I just want them to know what’s on my mind.”
“The board is a social entity…The longer individuals are there, the more allies they have, the more they have their dislikes, the more irrational they become in terms of personal conflict.”
There are dangers, however, in having boards rely too heavily on management for the knowledge they need. As Jeff Bewkes says, “With most topics, management can overwhelm the board with the facts—but that doesn’t mean management is right.” He advocates “a corps of well-informed directors” so that management doesn’t have to carry the burden of keeping the board up to speed. “When the board has a collective sense of the issues, it can discipline the discussion,” he explains.
William Lauder, the chairman of Estée Lauder, cautions that when a company is facing a big decision, it may be wise to give directors extra time to conduct due diligence and to deliberate. “With key decisions, we’re not going to present an idea and ask for resolution in the same cycle,” he says. “We’ll let the board know our thoughts and allow for conversation and discussion.” The decision might be made at the following board meeting—“or maybe the issue gets deferred until our next meeting, and we discuss it again.”
Bring Character and Credentials, Not Celebrity, to the TableGovernance cynics often presume that if left to their own devices, CEOs would pack the board with like-minded cronies. But the leaders we interviewed don’t want a board populated by their golf buddies. They recognize that diversity is required in order to bring perspective and specialized knowledge to bear on important deliberations. As the former McDonald’s CEO Jim Skinner says, “It’s important to have directors from outside the company with different skill sets.”
Achieving the ideal mix isn’t easy. Many CEOs wish that more of their fellow chief executives were available to serve on other companies’ boards. “CEOs may not be fashionable these days,” one says, conceding that the public’s trust in corporate chiefs has declined. “But they make great directors; they understand short-term blips, SEC investigations, media tricks, and other situations CEOs face. They have been through a lot of these things themselves and have great perspective.” He paints a sorry picture of boards stocked only with “academics, money guys, number twos, and HR people,” who, in his experience, don’t have the same “ability to synthesize.”
“Board members should police one another. It’s difficult when you make the CEO accountable for dealing with disruptive personalities.”
One challenge is that current CEOs struggle to give other boards sufficient attention. That leaves former CEOs, who, although usually very valuable, sometimes behave in disruptive ways. We heard about retired CEOs who became overinvolved with management and generally acted as if they hoped to regain a lost sense of power and glory. (Not surprisingly, we also heard the opinion that any board members interested in being considered for the CEO role themselves should step down.)
CEOs complain about the “celebrity director”—the unengaged board member whose main contribution is star power. They argue that a marquee name on the board has a tiny marginal impact on overall corporate image. One executive commented, “More likely, directors get a certain amount of prestige and social standing by saying they’re on our board.”
But although celebrity directors are becoming less common, another group that CEOs are wary of is on the rise: “professional directors,” who’ve retired from full-time employment. By some estimates, about a third of new board members fall into this category, and the concern is that their first interest is the preservation of their board seats. “You want it to be a minority group that is doing it for the income,” one CEO says.
We heard a number of other wishes about board composition. “I’d like to see younger, more digitally savvy directors,” one leader commented, voicing a common desire. But CEOs point out that they have limited ability to improve the mix of their boards, because it’s extremely difficult to get board members to leave. Asking directors to vacate their seats can be unpleasant; we heard about explosive anger and vindictive behavior, including spreading stories damaging to the firm, the CEO, or other directors. One CEO marveled at his board’s constant attempts to circumvent the company’s 15-year limit on director tenure; he routinely had to urge directors to “change the rule or abide by the rule.” He was stunned when one of the directors who had lobbied for term limits confided, “My term was up, but they wanted to make a resolution to get me to stay!”
Constructively Challenge StrategyThere is a common perception among shareholder activists and members of the public that CEOs demand rubber-stamp approval of their plans and resent pushback. But CEOs say the opposite is true. They are disappointed by the absence of energetic debate in the boardroom.
One reason such debate is lacking is that conflict aversion sets in. On the one hand, that’s surprising, given that the room is full of opinionated, powerful people; on the other hand, it fits with what we know about the psychology of teams. A fraternity culture can easily take hold in the boardroom, suppressing discussion and disagreement. As one CEO describes the phenomenon, “In the boardroom, the thinking is: You have to be equal. Don’t be overwhelming or dominant, don’t hurt feelings, and don’t take someone’s chair. It’s all about getting along.” A board’s biggest challenge, Jeff Bewkes says, is “to strike the right balance between the necessities for collegiality and for the board to function effectively as a team. You want to deal with multiple points of view and not make it hard for people to express their views, but you don’t want to have overpronounced collegiality that allows any person to dominate.”
“I’d like to see younger, more digitally savvy directors.”
A habit CEOs don’t appreciate is when directors take their opinions outside the open boardroom discussions, where they can’t be contrasted and integrated with other views. One CEO described a director—a former CEO—who always dropped in on him after board meetings, often trying to overturn a decision or divert the direction the board was taking.
Of course, the other extreme—needlessly aggressive discussions in the boardroom—isn’t ideal either. And it happens more frequently than you might think. We heard about one director who stormed out of many board meetings “on principle.” He “prided himself on raising difficult subjects, but he wasn’t willing to have a debate,” the CEO recalled.
William Donaldson has thought a fair bit about “what’s really going on in that boardroom.” Frustrated with the superficial thinking of the “cottage industry” that has grown up around governance, he says, “The most important part is the least examined: The board is a social entity. And the human beings on it—they act like human beings do in groups. The longer individuals are there, the more allies they have, the more they have their dislikes, the more irrational they become in terms of personal conflict.” He’s amazed that more work has not been done to illuminate “the social contract within a board.”
Worst of all is when outspoken comments are completely unconstructive, focused on rehashing past mistakes or otherwise unrelated to the questions on the table. As another CEO colorfully put it, “We don’t need directors on the sidelines saying, ‘Oh, you missed the shot. You should’ve stayed in Cleveland.’” Little wonder that yet another executive expressed this wish: “Board members should police one another. It’s difficult when you make the CEO accountable for dealing with disruptive personalities.”
Instead of aggressively advocating a point of view, directors should ask probing questions, CEOs say. One CEO recalled a director’s weighing in on a proposed acquisition in an adjacent market space by wondering aloud whether the company had the skills to succeed in that market. “His question provoked a better decision,” the CEO said. In another case a CEO walked into a board meeting convinced that two independent business units should be merged, but thought better of the idea after one director asked, “If you do this, is there any way to undo it?” By the end of the discussion the CEO found himself unwilling to risk a “messy divorce” down the road. The director said, “Aren’t you the one proposing the change?” But the CEO felt no need to stick to his original position. “The purpose of these meetings is to review and critique, so I am no longer recommending the deal,” he replied.
“You want it to be a minority group that is doing it for the income.”
Naturally, CEOs come to their boards prepared to defend their own carefully considered opinions. But they really do want important decisions to emerge from intelligent stress testing—if only because that will help forge mutual conviction. A rubber stamp might be expedient in the short term, they say, but a casual “sounds like a great idea” won’t have enough tread for a longer journey. The payoff from constructive conflict, one CEO points out, is that “it’s their decision, too—and you hope they’ll have your back when the vultures come around.”