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 / Fourth Quarter 2001 / Issue 25(originally published by Booz & Company)


Best Business Books: Corporate Governance

From Meek to Mighty: Reforming the Boardroom

You might remember the old story of Charles Atlas, a weak runt who grew tired of having  sand kicked in his face by muscle-bound men on the beach. Through determination and hard work, he transformed himself first into a bodybuilder and then into a muscle-marketing powerhouse.

This may seem like an odd place to start a discussion of recent books on the state of corporate boards, but there are some striking parallels. For one, it was not long ago that corporate directors were relative weaklings sitting on the equivalent of a tropical beach while receiving high pay and numerous perquisites. Although the muscle-bound CEO did not kick sand in the faces of board members, he used his insider knowledge and his personal relationships to control them. The press did the sand tossing, along with a few big institutional investors dissatisfied with their returns.

After several decades of weak boards being bullied, and a recent spate of books about making boards more effective, it seems timely to ask whether boards have gotten out of their beach chairs and begun to build some muscle. Certainly all the buzz about new governance initiatives suggests that behind those closed boardroom doors may be a group of corporate Charles Atlases who are powerful contributors to corporate performance. Ram Charan’s Boards at Work: How Corporate Boards Create Competitive Advantage (1998) optimistically shows good examples of boards that are becoming more powerful and effective.

But, as with bodybuilding, it has taken time for boards to build their strength, and motivation often waxes and wanes in the process. Moreover, the hunk in most boardrooms may still be the CEO.

Waves of Reform
The waves of reform began regularly breaking in corporate boardrooms in the 1980s. Three muscle men appeared on the beach: foreign competitors, corporate takeover artists, and institutional investors. Foreign competition exposed the flawed and outdated strategies of many major American corporations. Blame was laid squarely on the shoulders of senior managers, and ultimately on the board. The takeover movement, with significant help from leveraged-buyout firms, forced boards to choose their allegiances — were they beholden to management, or to shareholders? In most cases, the shareholders won.

The third muscle man was the institutional investor pressuring CEOs and boards to sustain performance improvements — especially the pension funds that tended to take long-term positions in firms. These investors supported initiatives to enhance board authority and make CEOs more accountable. The most popular governance initiatives included having a majority of directors be outsiders rather than insiders (a majority of insiders had been the norm), a separate compensation committee composed of independent directors, and formal performance evaluations of the CEO.

During this time of turmoil in the boardroom appeared a research-based book by Harvard professor Jay W. Lorsch and his colleague Elizabeth MacIver titled Pawns or Potentates: The Reality of America’s Corporate Boards (1989). It raised the timely question: Were the overseers of corporations doing their duty? From intensive interviews with executives and directors, the authors concluded that most boards were relatively powerless. Lorsch and MacIver’s data revealed that boards were hindered by several critical weaknesses. First, the norms of polite boardroom behavior and the pervasive presence of insiders discouraged most directors from openly challenging or questioning the CEO’s performance. Boardroom meetings were more akin to Japanese tea ceremonies than strategic debates and critical reviews of performance. Second, directors had a strong dependence on the CEO. After all, the CEO had far greater information and knowledge about the business than any director could possess. The CEO usually controlled the meeting agenda and the discussion process. He or she played a pivotal role in selecting each of the directors. In many cases, directors were also providing consulting services to the company or were subordinates to the CEO.

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