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 / Spring 2003 / Issue 30(originally published by Booz & Company)


Corporate Governance: Hard Facts about Soft Behaviors

To those who object that these safeguards consume too much time, Mr. Hills argues the opposite. Having handpicked the auditing firm, the audit committee will have more confidence in the final numbers, saving time that might otherwise be wasted rechecking results. “It really takes that load off the audit committee,” he says.

Nurture Constructive Skepticism
Balance works in the other direction, too. With popular culture demonizing boards and CEOs alike, directors must take care not to disempower the CEO.

The layman’s currently jaundiced view of corporate governance — defensive CEO packs board with cronies and weaklings, then manages the information they get so they can’t do him harm, in the process so enfeebling the board that they can never add value — is leading many to propose a more “modern” governance model: Enlightened, open CEO enlists extremely talented, opinionated, and strong-willed board members, gives them free access to whatever information they need, and then uses them as a strategic forum for formulating strategy, answering really difficult questions, etc.

But this kind of board can also do the CEO real harm, because directors are smart and well-armed enough to get him or her fired. So the CEO has to be secure enough to trust the board to help him or her do the right thing — and board members have to enter into an implied contract with the chief executive to forward that guidance in the most constructive manner possible.

Although it’s important to empower directors with information and arm them with the authority to make tough decisions, boards should not get into the habit of openly vying with the CEO. An atmosphere of antagonism and divisiveness serves no one’s interests, least of all the shareholders’. CEOs must be able to treat directors “as a valued asset rather than a pain in the rear,” says Richard Koppes, formerly with California Public Employees’ Retirement System (CalPERS) and now a partner at the law firm Jones, Day, Reavis & Pogue and a director of Apria Healthcare and ICN Pharmaceuticals.

That’s a stretch for many firms. As one company secretary we surveyed noted, “It’s pretty easy to manipulate the board’s role by the agenda and the papers we give them.” Mr. Koppes agrees. “A fair number of CEOs,” he says, “try to make the board nonperforming assets.”

A culture of constructive questioning requires members to perform a delicate balancing act. The goal is an oxymoron — directors exercising “collegial disagreement” or expressing “reserved advocacy.” “The atmosphere that needs to prevail between a CEO and a board is one of mutual confidence, trust, and a sense of them all being in it together,” says Michael Miles, a former CEO of Philip Morris Companies Inc. and a member of eight boards. “It must be an open, mutually supportive, two-way street.”

Although it is the responsibility of both the chief executive and the directors to nurture the right boardroom culture, “the CEO has to set the tempo,” says Steve Beering, a former president of Purdue University and a director at five companies, including Eli Lilly and Company and American United Life Insurance Company. “You need a very good CEO who is obviously the orchestra conductor.”

Establishing this collegial yet critical culture is indeed a challenge, especially on boards heavily loaded with current or former CEOs. Each person has to submerge his or her ego to work for the common interests of the company. The best directors, Mr. Beering says, tend to be self-effacing. Not incidentally, that character trait also defines successful chief executives, as Jim Collins showed in his recent best-selling management book, Good to Great: Why Some Companies Make the Leap… and Others Don’t (HarperBusiness, 2001).

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  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.
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