In the past 10 years, corporate boards have changed dramatically — strategy and talent oversight, board composition, the quality of board discussions, and the board’s relationship with the CEO have seen striking innovations.
In the past 10 years — under pressure from shareholders, stock exchanges, and state and federal governments — corporate boards have changed dramatically. Today regulations require that a majority of directors be independent, a practice that was previously optional. If the chairman is also the CEO, most boards appoint a lead or presiding independent director, who has much more influence in and out of the boardroom than before. The independent directors regularly meet in executive session without the CEO. Shareholders are permitted to review decisions by the compensation committee, and audit committee members have significantly expanded responsibility and accountability.
Unfortunately, however, externally driven reforms have proved rather ineffectual when it comes to improving boards’ managerial oversight. The reforms suffer from a “one size fits all” problem. Improving oversight involves something more than imposing a structure, or requiring attendance at board meetings, or installing independent, supposedly impartial people. “We can quote board best practices like catechism,” says Don Gogel, the CEO of the private equity firm Clayton, Dubilier & Rice, who sits on many boards, “but the best boards have a certain magic.” In other words, they can pull together to achieve extraordinary results.
To understand how such magic occurs, we interviewed two dozen directors from the boards we most admire and coupled their insights with our own broad experience leading, serving on and counselling boards. We’ve observed a process of quiet yet dramatic self-reform and continuous improvement, with striking innovations in four main categories: strategy and talent oversight, board composition, the quality of board discussions, and the board’s relationship with the CEO.
Overseeing strategy and talent
In the past, a typical board’s approach to understanding the company’s strategy often consisted of listening to one manager after another give formal, highly rehearsed and lengthy presentations. Today, a good board understands that directors must engage in a process of continual two-way learning about strategy and talent. Raj Gupta, a director at Delphi Automotive, HP, Tyco and Vanguard, notes, “Traditionally, directors sat in the boardroom. Today they are out visiting the businesses.”
Another key role of effective boards is to review their companies’ top talent and discuss succession plans to maintain a deep bench. This growing understanding of companies’ talent is showing up in the statistics around CEO succession. According to an annual study of CEO succession at 2,500 public companies conducted by Booz & Company, over the past four years 70 to 80 per cent of CEOs have been promoted from inside.
Getting board composition right
Many directors serving on U.S. boards today are people of great business judgment and long and valuable experience. But they serve only part-time as directors and often lack industry expertise, making it difficult to apply all their talents.
That is in part a consequence of the push for independent directors; it is challenging to find someone with deep industry knowledge who isn’t associated with a competitor or a related business. The result is that many directors today are generalists. That can be problematic, and today more and more boards are looking for relevant experience.
But the push for more-relevant experience should not come at the price of diversity. Like-minded individuals are susceptible to groupthink, and variety in age, gender and ethnicity as well as in experience and training is needed to guard against the self-confirming biases — and too easily reached consensus — that often endanger businesses.
Managing the quality of the conversation
Good directors are aware that when meeting with the board, even well-intentioned managers might succumb to a normal human tendency to overstate opportunity, understate risk or sugarcoat problems. This reflects the shortcomings of the discourse in many boardrooms, and conscientious directors work hard to get below the surface to the key issues.
We see individual board members spending more time with management in preparation for board meetings, and directors at some companies take tutorials to deepen their understanding of critical areas of the business. Great boards get out of the boardroom as a group. Directors today often travel together and hold a meeting yearly or every other year in the field.
Good boards also bring in governance experts to review their practices and provide feedback.
Experts are especially helpful when there’s a risk that the interests of management and of the company diverge.
When both the board and management have advisers on the same subject, the two sides can discuss the quality of each other’s advisers and work together to ensure that even if they don’t agree, they understand the issues at stake.
As good as some boards are, they can do more to enrich the quality of boardroom discussions. We would like to see them cooperate with management on crisis simulation.
No one knows how a board will react in a crisis until one occurs. Human nature is unpredictable in group situations where people are put under pressure.
Few companies escape crises altogether; rehearsal, unusual as that tactic may be, might help boards prepare for them.
Engaging with the CEO
Smart CEOs know the value of good communication with the board and invest a lot of time in keeping close to their board members. CEO engagement is valuable, but boards must also retain their independence from the CEO; it is all too easy to be captivated by a charismatic and powerful leader, especially when he or she is also in the chairman role. How boards support, challenge and evaluate their CEOs can be a bellwether of board effectiveness. The growing practice of executive sessions, in which the independent directors meet alone, is, according to the governance expert Ram Charan, “the single most important innovation in governance to date.” We agree. Executive sessions enable directors to discuss concerns in a candid manner without fear of offending or alienating management.
The key challenge at companies that hold executive sessions is how best to communicate unwelcome conclusions to the CEO. The best boards will often invite the CEO to return to the room after every executive session to hear about their discussions and concerns, and will wrap up the meeting with an agreement on next steps. It may be useful to put the feedback in writing, giving the CEO an opportunity to correct the written record before responding.
These practices all add up to a quiet revolution in how boards behave, the work they take on, the decisions they make, and the manner in which directors interact with one another and with management. Viewing themselves as direct contributors to corporate performance, many U.S. boards have worked to improve the governance of their enterprises. As a result, they are rewarding their shareholders and driving long-term value for employees, customers and communities.
Richard D. Parsons, a former CEO of Time Warner and chairman of Citigroup, is a senior adviser to
Providence Equity Partners.
Marc A. Feigen, the founder of Feigen Advisors, is a management adviser to Fortune 300 CEOs and boards.
© 2014 Harvard Business School Publishing Corp.
From Harvard Business Review.