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(originally published by Booz & Company)


Best Business Books 2004: Governance

Do the Split
Sir Adrian's account of how a well-run board should operate is the best there is. He writes mainly for boards structured British-style, with a mix of senior executives and outsiders and with an independent and usually part-time chairman. The author has a tip for solving every quandary, whether it is what to do when the chairman disagrees with the finance director about a proposal coming to the board, or how to get rid of a chairman who is no longer up to the job. Like MacAvoy and Millstein, Sir Adrian believes in the advantages of splitting the top job; he also argues that there are signs that the practices in America and Britain may converge, if American boards grow more collegiate, and as a lead or presiding director becomes the norm. But ultimately, as he emphasizes more than any other author, what matters is behavior. Structures matter; getting human relationships right matters more.

Of the past year's crop of books on governance issues, though, none beats Back to the Drawing Board. Carter and Lorsch have an ideal combination of consultancy, real-world, and academic experience. They are prescriptive but not rigid, realizing that different solutions fit different companies. They both have long memories that allow them to describe what worked in the past, as well as what failed. Unlike MacAvoy and Millstein, let alone Tapscott and Ticoll, these experts remind executives about the international differences in approaches to governance. Ideas of what is appropriate board structure differ widely from one country to another. In Britain, for example, a company that combines the roles of chairman and chief executive is regarded with suspicion by regulators and shareholders alike. In America, the single "Chairman and CEO" is the norm.

Carter and Lorsch's primary concern, however, is that by focusing on the external pressures for change, boards will ignore the basic actions they must take internally to become more effective. Boards must go "back to the drawing board" -- closely examining their role by looking at the obstacles to doing their job properly and at the forces within the corporation that need oversight.

The authors debunk large tracts of accepted wisdom. They argue that the external appearance of boards -- the proportion of outside directors, or the frequency of board meetings -- bears no relationship to shareholders' results. What really counts in meeting the oversight, decision-making, and advisory challenges of the 21st century is "the dedication, energy, time commitment, and skills of the directors," together with a constructive, results-oriented atmosphere around the boardroom table. To that end, Carter and Lorsch preach the gospel of pragmatic eclecticism: "Today's conventional wisdom suggests that all boards undertake very similar roles, but we believe that boards have considerable leeway in deciding what activities they wish to undertake and that they must address this choice explicitly."

The pursuit of independent directors also comes at a price. Carter and Lorsch point out the impossible burden of responsibility that modern regulators have placed on independent board members. They note how little time board members have to give to a job in which they are supposed to set the course of great corporations. They worry that the increase in board power and responsibility has harmed relationships between chief executives and their boards.

Furthermore, "senior executives and CEOs tell us repeatedly that they question their outside directors' real understanding of their business," the authors report. No wonder. The definition of independence on boards "rules out just about anybody who has firsthand knowledge of the company and its industry," and it takes several years to get to know a company properly. "The ironic truth is that the more independent directors are on the board, the more reliant it is on management for information," the authors write.

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