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strategy and business
 / Fall 2004 / Issue 36(originally published by Booz & Company)


What’s a Director to Do?

That’s precisely the kind of question the courts will ultimately decide. Of course, an insurance company like AIG will have to pay for that legal defense. That is, unless AIG insures only those boards and directors who do in fact seek outside counsel before they vote on strategic management initiatives. Thus new standards of “good faith” are created.

What’s fascinating about so many of the governance reformers is not that they are cynical about the role of boards, but that they are so idealistic. The notion that independent directors can, on a part-time basis, simultaneously and successfully formulate strategy, hire and fire senior executives, ensure rigid compliance with myriad global procedures, detect fraud, appropriately incentivize managerial performance, and oversee metrics for organizational performance, all without any actionable conflicts of interest, strikes me as exceedingly optimistic.

The more provocative governance questions might well be: What are the two or three things a board — and its independent directors — must do outstandingly well? And how do we ensure the board does them? In other words, can governance be redefined in ways that sharpen and narrow the focus of the board rather than so dramatically extending its fiduciary obligations and reach?

Perhaps boards will become better vehicles for allowing individual and institutional investors to introduce initiatives for management consideration — the “California-ization” of corporate governance, with propositions and recalls galore defining a new era of shareholder democracy and republicanism. Maybe the board of the future will double down on Warren Buffett’s declared governance priority and focus overwhelmingly on supervising and measuring management as its role in maximizing shareholder value.

Conversely, maybe it’s time to go back to first principles and redefine the meaning of oversight in an era of high-tech transparency. Should the role of the board be, instead, to ensure appropriate levels of transparency so that other stakeholders can work with the firm more cost-effectively?

The point is not that any of these ideas represent a “better” approach to resolving the recurrent crises in governance, but that their underlying vision is more humble and modest. Over the past 20 years, there’s been no shortage of best-selling books celebrating entrepreneurial managers and visionary leaders. But who gets hot and bothered about governance? Even three years ago, no one would write, let alone buy, The One-Minute Director, In Search of Governance, or Who Moved My Board? Yet a fundamental reevaluation of what makes governance work — and why — is precisely what business executives need. Management and leadership exist in the context of governance. I think that means governance should be more tightly focused rather than all-encompassing.

Our systems of due diligence and disclosure have proved to be distorted and dysfunctional. But let’s not confuse good leadership and good management with good governance. The current generation of business leadership and corporate investment critics risks doing so. The price in both capital and credibility has been enormous. Recapturing credibility is a challenge that calls for greater humility, not greater ambition.

Reprint No. 04310

Author Profile:

Michael Schrage ([email protected]), a contributing editor to strategy+business, is the codirector of the MIT Media Lab’s e-Markets Initiative and a senior advisor to the MIT Security Studies program. Mr. Schrage is the author of Serious Play: How the World’s Best Companies Simulate to Innovate (Harvard Business School Press, 1999) and served on the board of Ticketmaster.
Knowledge Review/Books in Brief
by David K. Hurst

The Future of Competition: Co-creating Unique Value with Customers
By C.K. Prahalad and Venkatram Ramaswamy
Harvard Business School Press, 2004
250 pages, $29.95

Many economists welcomed the advent of the Internet in the hope that the theoretical assumptions of Economics 101 — perfect information accessible to multiple buyers and sellers — might be realized, with a consequent strengthening of the market’s invisible hand. In The Future of Competition, University of Michigan professors C.K. Prahalad and Venkatram Ramaswamy take a bold look at the emerging marketplace and affirm that competition is increasing and consumers do have more choices, but say that the value-creation process no longer resides with individual firms.

With open access to information and innumerable networking opportunities, the consumer is able to experiment with products and services on an unprecedented scale. The successful company needs to understand how to engage the consumer as a “co-creator” of value at all stages in the value chain. This will not be easy. Firms must first begin to bridge the gap between “company think” (customer service, distribution, marketing) and “consumer think” (lifestyle, communities, aspirations). The authors argue that co-creation exposes the differences and conflicts between these two perspectives, but that it also offers multiple opportunities for valuable business experimentation. One goal of co-creation is to find a balance between the traditional emphasis on value extraction from consumers and the new stress on value creation with consumers. Professors Prahalad and Ramaswamy describe the building blocks of co-creating value with this framework: Dialogue, Access, Risk Assessment, and Transparency, or DART for short.

This is a dense, conceptual book in which the authors offer numerous provocative frameworks, such as DART, to help executives in traditional companies think about how to identify and tap into new sources of value in the human experience, and how to deliver this value through co-creation. It is aimed squarely at existing large-scale firms and addresses many of the tensions that arise between new requirements and old capabilities.

Perhaps the advice in this book is more appropriate for the next generation of managers, who won’t have to deal with the legacy of past successes. Experienced corporate leaders, however, need to lead the way. They, too, will benefit greatly from the deep and provocative thinking of this collaboration between the self-described “nontraditional strategy researcher” and the “eclectic marketing scholar.”

MBA in a Box: Practical Ideas from the Best Brains in Business
By Joel Kurtzman with Glenn Rifkin and Victoria Griffith
Crown Business, 2004
432 pages, $34.95

The field of management thought is notoriously placid. Academics and consultants can labor away indefinitely at their own specialties undisturbed by criticism of either their ideas or their practices. In MBA in a Box, consultant and former strategy+business and Harvard Business Review editor Joel Kurtzman, together with business journalists Glenn Rifkin and Victoria Griffith, sets out to shake things up.

This book is not a “portable” MBA, a compressed MBA curriculum. Mr. Kurtzman asked practitioners, journalists, and academics to write candid, open, opinionated pieces about their chosen topics. Their essays are leavened by short extracts from classical writings on management, and incisive commentaries from Mr. Kurtzman and his fellow editors. The contents address the functional areas presented in any MBA course.

The subjects dealt with best are strategy, implementation (there is a particularly helpful essay on using the balanced scorecard), and marketing, where the importance of appropriate segmentation and focus are emphasized. Overall, the book provides a lively picture of current issues for management practitioners.

The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer
By Jeffrey K. Liker
McGraw-Hill, 2004
330 pages, $24.95

Toyota invented “lean production” and is still its most advanced exponent. No other company has been able to emulate its success, even though Toyota has been astonishingly open in providing access to its facilities. The reasons for this failure become clear when one reads The Toyota Way, an admirable new book by Jeffrey K. Liker, professor of industrial and operations engineering at the University of Michigan, and a cofounder and director of the Japan Technology Management Program.

Although the book is structured around 14 principles that will be familiar to many strategy+business readers, it is clear that leanness can’t be achieved with a simple multistep program. Professor Liker places the principles within a four-level pyramid illustrating his “4 Ps” philosophy: Processes at the base, then People, Partners, and finally Problem-Solving. True lean production can be realized only when all these levels are addressed and integrated, which rarely happens. Lean production is also a continuous process of learning by doing. The primary goal is to root out waste (muda in Japanese), which Professor Liker says takes eight forms, from overproduction to unused employee creativity. What distinguishes Toyota from most companies, he writes, is that it not only seeks to eradicate muda, but also attacks two other equally important, and common, problems — mura (unevenness in the flow of work) and muri (overburdening of people).

Lean production is a management art that highlights the tensions between the visceral and the cerebral, between learning and instruction, and between standards that are supportive and those that are coercive. Success depends on reaching the appropriate dynamic balance between these apparent opposites. The author emphasizes the inherent counterintuitiveness of lean production for Western-trained managers. No wonder it’s not easy being lean.

The Culting of Brands: When Customers Become True Believers
By Douglas Atkin
Portfolio, 2004
234 pages, $24.95

What do Apple, Harley-Davidson, Saturn, Timberland, the U.S. Marines, and the Mormon Church have in common? According to Douglas Atkin, director of strategy at New York ad agency Merkley + Partners, they are all cults, organizations dedicated to some person, idea, or thing that satisfies their members’ hunger for community and their need to find meaning in their lives. Typically, cult members are devoted exclusively to their particular interest and are often voluntary proselytizers.

In The Culting of Brands, Mr. Atkin contends that many successful brands now perform the emotional and spiritual functions traditionally delivered by social and religious institutions. This is not a development that he necessarily welcomes, but he presents it both as a fact and as an opportunity for marketers to exploit.

The cultlike nature of many brands is illustrated with numerous examples, and, once alerted, readers can think of many others, whether rock groups, sports teams, or the BlackBerry. Mr. Atkin identifies the elements that cult brands have in common with more familiar cults. People join cults both to break with a larger community and to conform to a smaller one. In that process they usually feel more individual, more special, and more appreciated than they have in their previous lives. Thus marketers have to determine their potential sense of difference; declare that difference in doctrine, symbol, and language; demarcate the brand from the rest of the world; and demonize outsiders.

This advice is contrary to much conventional marketing wisdom, and marketers may be understandably nervous about restricting a product’s appeal to a particular group. But the author makes a compelling case that this laserlike focus can build an emotional bond of immense and matchless value.

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Corporate Governance Resources:
Works mentioned in this review.

  1. Paul W. MacAvoy and Ira M. Millstein, The Recurrent Crisis in Corporate Governance (Palgrave Macmillan, 2004), 160 pages, $65.00
  2. American Insurance Group’s White Paper on D&O Insurance: Click here.
  3. The California Public Employees’ Retirement System governance Web site, “CalPERS Shareowner Forum”: Click here.
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