Boards Can Encourage Greater Innovation

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boardsBoards need to help their companies grow. As Fred Steingraber and I note in our article, What Boards Need to Do to Remain Relevant, directors need to re-examine and even revise board committees and committee work to bring the level of attention that is required to better understand the companies they serve. While oversight of executive compensation has caused the greatest shareholder concern followed by too little attention to talent and succession management, boards have not paying enough attention to productivity, quality, growth and risk management—mechanisms by which companies renew their businesses, pursue sustainable growth and mitigate risk.

Directors, please turn to the New York Times Magazine of December 16 and read about Jump, a hybrid strategy firm focused on growth. Either charter a new committee to review organic growth targets and trends or add that to another committee’s responsibilities. Innovation is what will enhance a company’s and yes, even the country’s success. Directors who understand the broader developments in products and services, markets and channels, geography and relevant resource requirements can challenge and expand management’s thinking.  This committee should oversee the due diligence related to acquisitions as well as post-merger audits. They would also be responsible for understanding and overseeing the targeted and actual growth in revenues from new products in the last three to five years.

Improving Civic Discourse

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While the editors of the Columbia Journalism Review discourseare addressing the press in helping to rebuild the American conversation, their advice has value for all of us.Improving Civic Discourse 

“Ideas, particularly political ideas, are meant to be shared, to redefine themselves over the blue flame of discussion…increasingly Americans live in separate information silos. In uncertain times the tribes gather close. People don’t talk to outsiders.”

The editors urge the press to help “rebuild the forum that makes democracy work by being its best self” by taking steps to “Ignore the bias bullies”, “Stand up for facts” and “Return to deep reporting backed by institutional processes” which means “lots of feedback from near and far, fact-checking, copy-checking and double-checking, all part of the practical effort to publish something as accurate as possible.

“A massive retreat into ideological niches is hardly restricted to cable TV, and it doesn’t help the nation address its challenges.”

Amen.

How Directors Can Assess Risk (and Learn More about the Company’s Talent)

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How Directors Can Assess Risk (and Learn More about the Company’s Talent) Ed Breen became the Chairman and CEO of Tyco after the disastrous leadership of Dennis Kozlowski, who said from prison that his board “didn’t get in his way.”  After convincing Kozlowski’s board not to stand for re-election, Jack Krol, the former CEO of DuPont, became lead director of Tyco and worked with Breen to recruit a new board that could work effectively as a team and serve as a competitive advantage to the company. risk

In the tumult of change, Krol was concerned about the company’s risk and proposed that he and members of the board visit every division of Tyco, talk to the leadership and build a risk profile of the company, an enterprise-wide assessment. Not only were the board members able to develop an assessment of the company’s risk, but  in the process, board members got to know the next level of leadership in the company. Tyco divisional management liked the unfettered access to the board. Of course the company had its own risk assessment process and they are currently combining the two.

It’s not easy to take on such a task.  But after developing a process and executing on it, the board came to a deeper understanding of the company. Directors like Jack Krol, willing to spend the time and energy to help a company recover and become better, bring real value to shareholders.

CEOs, Directors and Lake Wobegon

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While the news is full of reports about shareholder concerns over the quality of corporate boards, it turns out that CEOs have questions too.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to work by Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally to the enterprise.  That means that 80 percent of the directors are seen as not being very effective by the CEO.

The fictional town of Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average,” has been used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities.

CEOs need to see their boards as providing a competitive advantage to them and their enterprise. If board members are less effective, the board needs to replace them.  Without outside help, CEOs and other directors find it hard to ask less effective directors to leave.

CEOs need to ask, are they giving their boards the right tools to be effective.  Is management teeing up information for decision, providing the context and the why for the company considering it. Or, do boards get a firehose of information or worse yet, only the information that management want them to see? Are boards spending their time on the right issues?  Do boards have access to tools and advisors to make them more effective?

Boards are working harder than ever.  CEOs need to see to it that the board has the resources it needs to create strong work groups.

While the news is full of reports about shareholder concerns over the value their elected representative, the board of directors, bring to the enterprise, it turns out that CEOs have questions too.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally

The Power of an Individual Director

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John Gillespie and David Zweig offer “solutions” to their indictment of corporate boards in their book, Money for Nothing:  How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.  In addition to their recommendations to split the chairman/CEO role, to allow shareholders to call an extraordinary general meeting, add some clout to say-on-pay, they cite individual talented and committed directors who have helped to improve governance.

Jack Krol is cited for his role in helping Ed Breen to restore Tyco after the Kozlowski debacle, Ralph Whitworth is lauded for the ways he restored governance to Waste Management and Michele Hooper for her leadership in changing board culture and spreading those changes to multiple boards.

“Drawing on her early experience on Target’s now legendary board beginning in the 1990s, Michele Hooper, a financial expert with a University of Chicago MBA, has brought those lessons to Warner Music Group, PPG Industries, AstraZeneca, UnitedHealth Group, Seagram and DaVita.  Hooper learned from Target the value of having “a boardroom that allows for open and collegial discussion around the table without people getting upset or having a CEO who is going to put the kibosh on conversations.”

Michele has modeled excellence and has been generous about sharing what she’s learned.  As the president of the Chicago chapter of the National Association of Corporate Directors, she volunteers her time to lead one of the strongest chapters of NACD, distinguished by its highly highly effective seminar programs. A board member of the national NACD, she facilitates training sessions for directors. In her day job, she is president and CEO of the Directors’ Council, which finds candidates for boards.

By highlighting the impact of directors like Michele, the critics Gillespie and Zweig demonstrate that boards of directors are still our best hope for providing oversight to our management system.

CEOs Want Effective Governance, Too

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Perhaps the most surprising element of John Gillespie and David Zweig’s book, Money for Nothing, How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions is the jailhouse interview with Dennis Kozlowski, who considers himself a victim of the times and a weak board. The authors conclude that the Tyco board had faded into irrelevance compared to “the power, prestige, and satisfaction provided by the acquisitions” that Kozlowski engineered.

It’s clear that strong effective boards are in everyone’s interest.  Directors who offer a strategic sounding board for management, and bring to bear their wisdom and experience as the company encounters challenges, are to be highly prized.

It will take more than just committed directors to improve corporate governance.  CEOs, whether they hold the title of chairman or not, need to make the investments in effective boards. In addition to their personal commitment to make the relationship work, they need to provide the resources and support to help directors be effective.

Feinberg’s Approach Offers Clues to Directors

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How many professionals take on a highly visible thankless task for no pay not once but twice in the most challenging decade?

Kenneth Feinberg managed to create a program that persuaded 98 percent of the 3,000 victims’ families of 9/11 to stay out of court and instead apply to his fund while dispensing the $7 billion that seemed to satisfy almost everyone. Then, last year, he took on the job of administering pay for the executives of the failed businesses bailed out by taxpayers.  Not only did he create a credible template but injected common sense in the way that executives are paid. 

Directors could take a lesson.

Who but Warren Buffett could describe the current practice of a fictional greedy CEO engineering the approval of his rich pay package  by engaging the compensation firm of “Ratchet , Ratchet and Bingo” to prove to the board that he is worth it?  Buffett,  the Chairman and CEO of Berkshire Hathaway  , takes $100,000 in pay and say he would pay the company to do the job.  “It’s a great job!”  However, while he’s been running Berkshire Hathaway, the ratio of top pay to average pay at public companies has multiplied roughtly 11 times, from 24:1 to 275:1.

As Steven Brill conveys in his excellent profile of Feinberg in the New York Times Magazine, Feinberg shows himself to be a straight shooter, independent and fair.

That’s what most shareholders are asking directors to be–independent and fair.

Do the Right Thing: A Key Director Responsibility

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Whether you are serving on a public or private company board, there is an important principle to guide you:  doing the right thing, not just for the constituency that brought you to the board but for all the shareholders, according to Michel Feldman, partner in the Chicago office of Seyfarth Shaw, who has served on a number of private company and public boards.

“Especially when you are asked to be on a private board, be sure that you understand what you are getting into,” said Feldman at an NACD Chicago panel.  In private companies, it’s especially important to beware of a dominant CEO.

“And always, do the right thing for all shareholders.”

Boards Should Show Leadership in Corporate Governance

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With unprecedented interest in corporate governance, the Chicago NACD Chapter panel of Holly Gregory, Fred Steingraber, Donna Zarcone and William Atwood  addressed Changes in Regulation and Implications for Directors.

Panelist  Fred Steingraber, former Chairman and CEO of AT Kearney and director of several US and several international boards, said the time for boards to react was over.  Rather, boards should take a leadership position by demonstrating that they provide value through their oversight through transparency and better shareholder communication.

“Boards are in the midst of a very serious struggle to regain respect and control over  their growing responsibilities and image,” said Steingraber.  “To accomplish this will require demonstrating the will and capacity to make changes ranging from board organization/leadership, policy, process, committees, board composition to shareholder communications. They must now demonstrate leadership at the board level with a results orientation in the conduct of their work.

“Today,  the government is taking control of boards, largely due to directors not building good relations with shareholders and all too frequently being too defensive and too reactive in their communication.”

Boards need to break their silence to retain and regain control rather than ceding authority to critics.

Not only do boards need to listen to  shareholders to understand their concerns, but they also need to go beyond the derivative information that they normally receive to drill down to the underlying issues of business performance, said Steingraber. “Boards need to put together a longer term program that addresses the issues of succession planning and risk management.  This will not happen overnight.” For that reason boards need to lead by creating a  framework for change and communicate those changes, which will take place over time.

Making the Most of 24 Hours

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Directors unanimously agree, the pre-board package is bigger than ever before:  There’s more  reading. The detail is more dense. And, the issue of risk permeates every subject.  Is it any wonder that both the length and number of board meetings has increased for many boards?

What were once all day meetings three or four times a year–or 24 hours– have now expanded.  There are more meetings, more telephonic meetings, and many more formerly unheard of one-on-one inter-meeting calls with individual directors. Continue reading →