Private Board of Directors. 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. CEO Roger Enrico had previously turned around the unit— which had been the brainchild of two of Enrico’s predecessors, Don Kendall and Wayne Calloway—and must have felt great pride of ownership. Other ways to help board members raise their game include inviting renowned experts to board meetings, holding some board meetings in overseas locations where directors can be exposed to relevant new market developments and technologies, and, from time to time, seeking outside advice to get an independent view.5 5.Christian Casal and Christian Caspar, “Building a forward-looking board,” McKinsey Quarterly, February 2014. According to one governance expert, “Enron melted down because it lacks independent directors and several are quite long in the tooth.” His remarks reflect a general belief that boards become less effective as the average age of their members rises. Despite the fact that technology mergers rarely work, his point of view was summarily dismissed internally. None of the above. Copyright © 2020 Harvard Business School Publishing. If you’re the CEO, don’t punish mavericks or dissenters, even if they’re sometime pains in the neck. Financier Ken Langone tells the story of a widely admired CEO who was invited to join the board of a famous corporation that is suffering great distress today. If you would like information about this content we will be happy to work with you. Rotate board members through small groups and committees so they spend time together meeting key company personnel and inspecting company sites. Ever since stock-listing requirements prompted many US companies to name an independent director to serve as the chairman, lead director, or presiding director of the board, these companies have been grappling with what, exactly, the board leader should do and how to find the right person for the job. Against a backdrop of social media, viral video, and reputational risks, the CEO of one North American manufacturer recently placed the potential for brand-changing events on the board’s agenda. Push everyone—including the CEO—to challenge his or her roles and assumptions. Don’t allow directors to get trapped in rigid, typecast positions. The complicated reality is that sometimes a past CEO’s presence is helpful and sometimes it’s not. Let’s not forget, either, that the audit committee at Enron was consulted about suspending the conflict-of-interest guidelines and willingly agreed to it. Evaluate board performance. Least-admired companies like LTV Steel, CKE Restaurants, Kmart, Warnaco, Trump Hotels and Casino Resorts, Federal-Mogul, and US Airways had only one or two inside directors on their boards; Enron had only two. What’s the point of criticizing management, they ask, if management isn’t there to answer the criticism? Both he and Marcus describe times when the board disagreed with management about strategic questions—when reformulating the small-store concept, for example, and when revisiting expansion into Latin America. Directors are, almost without exception, intelligent, accomplished, and comfortable with power. In individual self-assessments, board members can review the use of their time, the appropriate use of their skills, their knowledge of the company and its industry, their awareness of key personnel, and their general level of preparation. If you ought to create one but do not know how, then this article will give you a set of samples and templates to slay every meeting that you’ll encounter. Members attended meetings regularly, had lots of personal money invested in the company, and weren’t too old, young, or numerous. In other words, they passed the tests that would normally be applied to ascertain whether a board of directors was likely to do a good job. (For a quick read of these topics, see the summary infographic, “Four essentials for building a stronger board of directors.”), Infographic Respect and trust do not imply endless affability or absence of disagreement. In addition, they can break down factions by splitting up political allies when assigning members to activities such as site visits, external meetings, and research projects. One survey found that nonexecutive board leaders have taken over or partnered with the CEO on some functions the chief executive has historically led, such as setting board agendas, recruiting new directors, and more aggressively assessing risk. But just as many board members have the training and smarts to detect problems and somehow fail to do their jobs anyway. Data from the Corporate Library, a corporate governance Web site and database cofounded by Minow, show the same “acceptable” attendance records at both kinds of companies. In the mid-1980s, after forging partnerships with delivery businesses around the world, a revolutionary concept at the time, the company decided to reverse course and become truly global itself. To build better boards, CEOs, lead directors, and board members themselves can work to: Create a climate of trust and candor. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Playing different roles gives directors a wider view of the business and of the alternatives available to it. Please email us at: Download our collection of McKinsey insights focusing on boards of directors. Having a board of directors is optional for an LLC. A virtuous cycle of respect, trust, and candor can be broken at any point. Directors at the most effective boards, according to our recent Global Survey results, spend an average of 41 days per year in their role and say they have no ambitions to spend more time. This happened at PepsiCo in 1997 when the board decided to sell the various components of its well-run restaurant group. It’s also useful to poll individual board members occasionally: An anonymous survey can uncover whether factions are forming or if members are uncomfortable with an autocratic CEO or chairman. tab. Non-Profit Board of Directors or Trustees. To help CEOs and board chairs, as well as executives and directors, build strong boards, this CEO guide synthesizes multiple sources to make quick sense of complex issues in corporate governance, while focusing on four areas that are essential for building a better board. McKinsey research shows that companies that reallocate more resources earn higher total returns to shareholders. Good board governance can’t be legislated, but it can be built over time. In addition, we’ve all seen instances when individual responsibility dissolved in large groups. 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. Another common point of breakdown occurs when political factions develop on the board. And one can imagine a happier ending at Arthur Andersen had somebody said, “Wait a minute,” when the document shredding began, or at Tyco when the board learned of millions in undisclosed loans to the CEO and didn’t question them. A lost reputation can’t be regained, and director’s insurance won’t necessarily protect anyone’s fortune, because there are always exemption clauses. How can boards expand into these new responsibilities while still having time for the traditional fiduciary duties that remain important? 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. Our own experience is that the time required to do a good job is usually more than directors initially expect. Board members are assumed to be more vigilant if they hold big chunks of the company’s stock—but data from the Corporate Library don’t suggest that this measure by itself separates good boards from bad, either. What brought down the CEO eventually was an apparently private financial matter—the board seemed content to keep him on indefinitely. Private companies also have a board of directors if they are organized as an S or C corporation. collaboration with select social media and trusted analytics partners We think we’re bright, but we’re not the smartest people in the world.” Ken Langone corroborates this view of the Home Depot board. A board of directors works best when it and the CEO trust each other. If boards were doing their jobs, there would be no activist opportunities, according to David Beatty, Conway director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto’s Rotman School of Management. By contrast, at various times in their histories, Home Depot had five insider directors on its 11-person board, Intel had three on a nine-person board, and Southwest Airlines had three on an eight-person board. Small’s considered good, big’s considered bad. Directors possessing these collaborative tendencies must balance them by thinking like owners and guarding their authority, or there will be little constructive challenge between independent directors and management, and the board’s contribution to the company’s fortunes is likely to fall short of what it could be. For example, a board member who profits from his or her service on a board of directors may put the entire company in jeopardy. A 2001 survey by the NACD and Institutional Shareholder Services of 5,000 public company boards shows that 99% have audit committees, and 91% have compensation committees. Contribute the ‘outside view’ to strategy. How do you find the right people for board-director positions? The company’s 1991 move from Connecticut to Georgia was hotly debated within the management committee, for example, but once the plan to move was agreed upon, the board chose a new location unanimously and never looked back. 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. Viewing the breakdowns through the lens of my 25 years of experience studying board performance and CEO leadership leads me to one conclusion: It’s time for some fundamentally new thinking about how corporate boards should operate and be evaluated. However, good and bad companies alike have already adopted most of those practices. Home Depot’s board members are expected to visit at least eight stores outside their home state between board meetings; GE’s board members dine with the company’s largest suppliers and distributors the night before the annual meeting. Please try again later. our use of cookies, and When he was forced to go public with his objections, he was ridiculed publicly in a smear campaign. Don’t let directors get trapped in typecast positions—the peacemaker, the damn-the-details big-picture person, the ruthless cost-cutter. First and most important, CEOs can build trust by distributing reports on time and sharing difficult information openly. Several members of the board of GE, Fortune’s most-admired corporation in 2001, had less than $100,000 of equity, whereas all board members of the least-admired companies held substantial equity stakes. Take board size. William George, former CEO of Medtronic and a veteran of ten corporate boards, says one’s perspective on board governance depends on the board seat one holds—independent director, chair and CEO, or chair only. Directors need to be aware of what makes a good board and how they can contribute and add value as an individual. Most CEOs aren’t as manipulative as Trippe, and in fact, they’re often frustrated by divisive, seemingly intractable cliques that develop on boards. Global Headquarters 100 Southeast Second St, Suite 2200 Miami, FL 33131. Perhaps the most effective enforcement mechanism, though, is old-fashioned 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. Engage in a continuous improvement process. Frequently, executive recruiters looking for leads during board candidate searches will ask, “Is this fellow a team player?” which is code for “Is this person compliant, or does he make trouble?” If a board member challenges major decisions, a company sometimes goes to great lengths to discredit the person. These responsibilities also raise the premium on carefully protecting the independence that makes boards valuable allies to senior executives, shareholders, and a diverse array of other stakeholders. At the time of their meltdowns, for example, Kmart had six current or recent Fortune 500 CEOs on its board, and Warnaco had several prominent financiers, a well-known retail analyst, and a top-tier CEO; all those excellent credentials made little difference. Five crucial questions can help steer boardroom conversations toward not just the costs but also the capabilities and value that IT engenders. 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