The Idea in Brief
The meltdowns of once-great companies like Enron, Tyco, and WorldCom have riveted attention on their boards. Were the directors asleep at the wheel? In cahoots with corrupt management teams? Out-and-out criminals themselves?
None of the above. And that’s what’s so scary: Like most boards, those of the fallen giants followed all the rules. Members attended meetings regularly, had lots of personal money invested in the company, and weren’t too old, young, or numerous. These boards even had audit committees, compensation committees, and ethics codes.
Yet great boards do far more than just follow good-governance rules. They’re robust social systems: Their members know how to ferret out the truth, challenge one another, and even have a good fight now and then.
The Idea in Practice
To build better boards, CEOs, lead directors, and board members themselves can work to:
Create a climate of trust and candor. If you’re CEO, share important and difficult information with directors in time for them to digest it—not the night before a meeting. If you’re a member, insist on receiving adequate information. To discourage members from creating back channels to line managers in pursuit of political agendas, give them access to company personnel and sites—then trust them not to meddle in day-to-day operations.
Foster open dissent. The willingness to challenge one another’s assumptions and beliefs may be the most important characteristic of great boards—indicating bonds strong enough to withstand clashing viewpoints. Don’t punish dissenters or forbid discussion of any subject. Probe silent board members for their opinions and the thinking behind their positions.
If you’re asked to join a board, say no if you detect pressure to conform. Blind obedience puts your—and your company’s—wealth and reputation at risk. An ideal board member, Home Depot chairman Bernie Marcus has said, “I don’t think you want me on your board. I am contentious. I ask a lot of questions, and if I don’t get the answers, I won’t sit down.”
Use a fluid portfolio of roles. Don’t let directors get trapped in typecast positions—the peacemaker, the damn-the-details big-picture person, the ruthless cost-cutter. Push everyone—including the CEO—to challenge his or her roles and assumptions. Require a big-picture person to dig deeply into the details of a particular business, or a peacemaker to play devil’s advocate. Results? Wider views of the business and its available alternatives.
Ensure individual accountability. The most effective enforcement mechanism is peer pressure. Give directors tasks—for example, meeting with customers, suppliers, and distributors, or visiting plants or stores in the field—and require them to inform the rest of the board about the company’s strategic and operational issues.
Evaluate board performance. No group’s performance is assessed less rigorously than boards—yet no group learns without feedback. To conduct a full board review, a governance committee can evaluate the board’s understanding and development of strategy, the quality of board meeting discussions, the level of candor and use of conflict, and the credibility of reports. It can evaluate individuals by examining initiative, preparation for and participation in discussions, and energy levels.
In the wake of the meltdowns of such once great companies as Adelphia, Enron, Tyco, and WorldCom, enormous attention has been focused on the companies’ boards. Were the directors asleep at the wheel? In cahoots with corrupt management teams? Simply incompetent? It seems inconceivable that business disasters of such magnitude could happen without gross or even criminal negligence on the part of board members. And yet a close examination of those boards reveals no broad pattern of incompetence or corruption. In fact, the boards followed most of the accepted standards for board operations: Members showed up for meetings; they had lots of personal money invested in the company; audit committees, compensation committees, and codes of ethics were in place; the boards weren’t too small, too big, too old, or too young. Finally, while some companies have had problems with director independence because of the number of insiders on their boards, this was not true of all the failed boards, and board makeup was generally the same for companies with failed boards and those with well-managed ones.