strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: February 14, 2003

 
 

Corporate Governance: Hard Facts about Soft Behaviors

“Hard” solutions, in short, will not resolve the challenges companies face in simultaneously serving the interests of shareholders and other stakeholders. By reducing the critically important issue of corporate governance to what amounts to a box-checking exercise, corporate directors and senior executives are addressing the symptoms, not the root cause, of the governance crisis.

Our experience in advising boards and CEOs in the United States, Europe, Australia, and Asia; our primary research in these markets, including interviews with hundreds of directors and corporate officers about board effectiveness; and a review of contemporary best practices leads to one universal conclusion: Governance begins at home — inside the boardroom, among the directors. It is embedded in how, when, and why they gather, interact, and work with one another and with management … in other words, the “soft” stuff. But qualitative reforms to the behaviors, relationships, and objectives of the directors and the CEO are meaningless unless they are subjected to the “hard” mechanisms of performance criteria, processes, and measurements.

This combination of soft and hard solutions can turn governance from a vague concept into a means to deliver organizational resilience, robustness, and continuously improved corporate performance.

Qualitative Reform
It was, perhaps, inevitable that the bubble economy of the late 1990s would be followed by both decline and introspection, but the degree of soul-searching today is striking nonetheless. Forty-six percent of the corporate executives surveyed by Kennedy Information, publisher of Shareholder Value magazine, said the recent wave of corporate scandals had harmed the way investors viewed their companies, and 43 percent were committed to changing the way they did business.

The problem is, in too few cases is such reflection prompting companies to change, a situation that almost begs governments to attempt regulatory solutions — which will not, by themselves, create conditions for better governance and improved performance. “A lot of people who have not served on the inside think the reforms can be imposed from the outside,” says Bill George, former chairman of Minneapolis medical device maker Medtronic Inc. and the National Association of Corporate Directors 2002 Director of the Year. “These are necessary but not sufficient conditions for good governance.”

What distinguishes superior performance among boards is the “qualitative” reforms that companies put in place between the structural boxes and the lines of legislative mandate. With tens of thousands of publicly traded companies around the world, the recipe for reforming the soft side of governance will need to be adjusted to the specific circumstances of an individual company. Still, although governance regulations and management culture differ from firm to firm, our experience persuades us that the following best practices can — and should — cross borders:

  1. Select the right directors
  2. Train them continuously
  3. Give them the right information
  4. Balance the power of the CEO and directors
  5. Nurture a culture of collegial questioning
  6. Gain from directors an adequate commitment    of time
  7. Measure and improve

Although many of these principles may seem self-evident, in our experience, they too frequently are more honored in the breach. Too often, firms assume that “soft” reforms cannot be assessed, or even implemented, rigorously. But if a company aims to serve shareholders’ interests better — and adapt to the rigors of an increasingly competitive global economy — it must address board culture and behavior through a systematic and solution-oriented approach.

Select the Right People
The first imperative, naturally, is choosing the right directors — with the right skills, expertise, and personalities. An impulse in the current crisis environment will be to try to satisfy regulators simply by changing the insider–outsider mix on the board. But board balance alone is an insufficient guarantor of effectiveness. Boards need to possess, collectively, the diverse array of skills and knowledge needed to perform effectively in their advisory and oversight capacities. The central test for a director should be: Does he or she add value?

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

Resources

  1. Jay A. Conger and Edward E. Lawler III, “From Meek to Mighty: Reforming the Boardroom,” s+b, Fourth Quarter 2001; Click here.
  2. Sanjai Bhagat and Bernard Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance,” Journal of Corporation Law, University of Iowa College of Law, Winter 2002
  3. Gurmeet Kaur, “The Stock Market Link,” Investors Digest (Malaysia), May 16, 2001
  4. Steve Lin, Peter Pope, and Steven Young, “Are NEDs Good for Your Wealth?” Accountancy, September 5, 2000
  5. Ira M. Millstein and Paul W. MacAvoy, “The Active Board of Directors and Improved Performance of the Large Publicly Traded Corporation,” Columbia Law Review, 1998; Click here.
  6. Dawna L. Rhoades, Paual L. Rechner, and Chamu Sundaramurthy, “Board Composition and Financial Performance: A Meta-Analysis of the Influence of Outside Directors,” Journal of Managerial Issues, Spring 2000; Click here.
 
Close
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.

Close