Leading the board

Also by Andrew Kakabadse

GEOPOLITICS OF GOVERNANCE SMART SOURCING CORPORATE SOCIAL RESPONSIBILITY INTIMACY CSR IN PRACTICE

Also by Nada Kakabadse

GOVERNANCE, STRATEGY AND POLICY

Leading the board

The six disciplines of world-class chairmen

Andrew Kakabadse and

Nada Kakabadse

pal ra e T C''1 ld!)

* © Andrew Kakabadse and Nada Kakabadse 2008 Softcover reprint of the hardcover 1st edition 2008 978-0-230-53684-5

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PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin's Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries.

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DOI

To Alexei Mordashov, the Severstal Organisation and the Severstal Board

May you grow and prosper

List of figures x

~if~~ n

Acknowledgments XlI

About the authors XVI

Foreword XVlI

Our argument and research XV111

About the book xx

Introduction The rise, fall, and rise of the chairman 1 Who's in charge? 2 The chair leader 6 Birth of the firm 8 Different models ... same driver 11 School for scandal 13 The loneliest chair 14 Key points 16

Discipline 1 Delineating boundaries 18 Governance: chairman as soul provider 20 The CEO mandate: what CEOs do 21 Discretionary choice: shaping leadership 24 Role duality: between schizophrenia and focus 28 Role separation 30 Visions, dreams, and strategies 33 The board team: mix and match 36 Key points 45

Discipline 2 Sense making 47 Start with passion 48 Acknowledge diversity 49 Studying chemistry 51

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viii Contents

Delineate strategic responsibilities 53 Canvass reality 56 Review progress 59 Encourage feedback 60 Sense damaging 61 Sullen silence 65 Breaking the cycle 66 Key points 69

Discipline 3 Interrogating the argument 71 Breaking down the argument 74 Positioning the argument 78 Managing expectations 79 Discussing the issues 82 Reworking the argument 85 Key points 89

Discipline 4 Influencing outcomes 91 Surfacing sentiments 93 Working through divisive emotions 102 Oratory skills 103 Focusing on the salient points 106 Thinking several meetings ahead 109 Not the darker side 111 Key points III

Discipline 5 Living the values 113 Actions speak louder 115 Trust, truth, and Enron 118 What you think of me 121 Who cares what you think of me! 123 Right and wrong 124 Responsibility of the corporation 128 Know your organization l3l Know yourself l34 Key points 135

Discipline 6 Developing the board 137 Board assessment and review l37 The power of profiling 141 The ambitious but angry board 145

Contents

Director development Development of the chairman Picking your guru The transition factor Growing the talent pool Key points

On being world class The six disciplines at work Clarity of purpose Bringing balance to the board Beyond compliance: leading governance The bucks stop here: integrity checks Accountable today and tomorrow The new agenda Bad chairmen The ultimate test

Notes

Index

155 156 161 163 170 172

174 175 177 181 185 192 196 200 201

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1.1 The hour glass funnel 25 1.2 The US hour glass 28 1.3 The Australian hour glass 31 1.4 The UK hour glass 32 1.5 The extended hour glass: the US chair/CEO

and LID relationship 40 1.6 The extended hour glass: the UK chair/CEO

and SID relationship 42 2.1 Hour glass: strategic dissection 55 6.1 Board visioning map 142 6.2 Drive it through 146 6.3 Switched off and angry 147 6.4 CFOasCEO 148 6.5 Strategic healer 150 6.6 Transition curve: board members 12-18 months 165 7.1 Governance of sustainability: a threefold view 195

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1.1 Chairman and CEO: what do we know? Findings from research

2.1 Differences of vision at top team level 2.2 Top managers on sales and marketing 4.1 Feeling inhibited 4.2 US boards: contract of contributors 4.3 Habermas's speech forms 5.1 What counts? Knowing or believing

the mission and goals 5.2 Trust at the top 5.3 Qualities of the chairman 7.1 24 month performance assessment (US$)

23 50 58 93 97

105

116 117 134 190

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We would like to thank all of those who have, over the last five years, generously given their time to be interviewed as part of our research. In particular we would like to thank (alphabeti­cally) those we quote in the text:

Aclan Acar, chief executive officer, Dogus Otomotiv, Turkey

Ishak Alaton, chairman and founder, Alarko Holdings, Turkey

Tony Alexander, non executive director and deputy chairman, Imperial Tobacco Group pIc; former UK chief operating officer and director of Hanson pIc; former chairman of Madey pIc; non executive director of Misys pIc; Inchcape pIc, Cookson Group pIc, Laporte pIc, United Kingdom

Don Argus, chairman, BHP Billiton, Australia

George Bell, chairman, Anglia Farmers, United Kingdom

John Berndt, member and former chairman, Thunderbird Board of Trustees, United States of America

Len Bleasel, chairman, ABN Amro Australia Holdings Pty Limited; member of the Advisory Council, ABN Amro Australia Pty Limited, Australia

Derek Bonham, former chairman, Imperial Tobacco Group pIc, United Kingdom

Lord Sandy Bruce-Lockhart, leader of Kent County Council, United Kingdom

Lord Terry Burns, chairman, Marks and Spencer; chairman, Abbey National; chairman, Welsh Water, United Kingdom

Sir Colin Chandler, chairman, easyJet pIc, United Kingdom

Michael Chaney, chairman, National Australia Bank, Australia

Acknowledgments

David Clarke, chairman, Macquarie Bank, Australia

Peter Cummings, chief executive, Bank of Scotland Corporate, United Kingdom

Viscount Etienne Davignon, Minister of State; chairman of CMB, Recticel; vice chairman Suez-Tractebel, Belgium

Kate Davies, CEO, Notting Hill Housing Trust, United Kingdom

Gareth Davis, CEO, Imperial Tobacco Group pIc, United Kingdom

Rosalind Gilmore, chairman, Leadership Foundation, Washington DC; former independent director, Zurich Financial Services, Switzerland

Lord Clive Hollick, partner, Kohlberg Kravis Roberts & Co; senior director, Diageo pIc; director, Honeywell Inc; chairman, SBS Broadcasting; chairman, South Bank Centre, United Kingdom

Nick Johnson, chief executive officer, Bexley Council, United Kingdom

Lady Barbara Thomas Judge, chairman of the United Kingdom Atomic Energy Authority, United Kingdom

Ronnie Kells, chairman, United Drug, Ireland

Vadim Makhov, chairman, Severstal North America; former chairman of Russian and European companies; director of Corporate Strategy, Severstal Group, Russia

Susan R. Meisinger, J.D., SPHR, president and CEO, Society for Human Resource Management (SHRM), United States of America

Pat Molloy, former chairman, CRH; chairman, Enterprise Ireland; chairman, Blackrock Clinic, Ireland

Herbert Miiller, CEO, Ernst & Young, Germany

Professor Helen G. Nellis, MA, barrister, former chairman, Bedfordshire and Luton Health Authority; chairman, Bedford Hospitals NHS Trust, United Kingdom

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xiv Acknowledgments

Maurice L. Newman AC, chairman, Australian Securities Exchange, Australia

G. Kelly O'Dea, chairman, AllianceHPL Worldwide; chairman, Outward Bound International, United States of America

James G. Parkel, past president of American Association of Retired Persons (AARP), United States of America

Sir John Parker, chairman, National Grid pIc; senior non execu­tive director (chair) Bank of England, United Kingdom

Eric Parsons, chairman, president, and CEO, Standard Insurance Company, United States of America

John Phillips, chairman, Foreign Investment Review Board, Australia

Jeremy Pope, chairman, Milklink, United Kingdom

David Pumphrey, partner, Heidrick & Struggles, Australia

Bernard G. Rethore, chairman emeritus, Flowserve Corporation; chairman, McDyre & Spend ley Ltd, United States of America

Major General (Ret) Stephen Rippe, USA executive vice presi­dent and chief operating officer, Protestant Episcopal Cathedral Foundation, United States of America

Lord Tom Sawyer, chancellor of University of Teesside; former chairman, The Labour Party; former chairman, Notting Hill Housing Trust, United Kingdom

Dr Bernd Scheifele, CEO/president, Heidelberg Cement, Germany

Lord Dennis Stevenson of Coddenham, chairman, HBOS pIc; former chairman Pearson pIc, United Kingdom

Vannie Treves, UK chairman, Korn Ferry International; chair­man, Intertek Group PIc; chairman, Equitable Life; chairman, National College of School Leadership

Ellen Van Velsor, senior fellow, Center for Creative Leadership, United States of America

Ray Webster, former CEO, easyJet, United Kingdom

Acknowledgments

Thanks in particular to Lord Tom Sawyer of Darlington; Kate Donaghy of Manchester Square Partners, the United Kingdom; David Pumphrey of Heidrick & Struggles, Australia; Ellen Van Velsor of the Center for Creative Leadership, the United States; Keith Niblett, Thunderbird School of Global Management, the United States; Dr Robert Galavan, National University of Ireland, Maynooth, Ireland; Orhan Yavuz of SCMC, Turkey; and Andreas Schnurr, Heidelberg Cement, Germany for their enthusiastic help in organizing interviews with some of the most fascinating business and public service leaders in both the northern and southern hemispheres.

Our deepest gratitude to Alex Kessler for typing script after script of sometimes unintelligible text and to Sheena Darby. A special mention must also be made of two outstanding editors, Stuart Crainer and Des Dearlove, whose wizardry with words has brought this book to life.

Finally, this book and so many other studies would not have been possible without the generosity and forethought of the top management of the Severstal Corporation. We are deeply indebted to Alexei Mordashov, Vadim Makhov, Vadim Shvetsov, Anatoly Kruchinin, Mikhail Noskov, Dmitry Afanasyev, and Dmitry Kouptsov for their funding and encouragement to research and dig deep so that others may benefit.

This book is a tribute to you all.

ANDREW KAKABADSE

AND

NADA KAKABADSE

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Andrew Kakabadse (a.p.kakabadse@cranfield.ac.uk) is Professor of International Management Development at Cranfield University's School of Management in the United Kingdom. He holds, and has also held, visiting appointments at the Centre for Creative Leadership and Thunderbird, The Garvin School of International Management, in the United States; at the University of Ulster in the United Kingdom; at the Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Australia; and at Macquarie Graduate School of Management, Australia. Andrew has consulted and lectured in every region of the world. His bestselling books include The Politics of Management, Working in Organizations, and The Wealth Creators.

Nada Kakabadse (Nada.Kakabadse@Northampton.ac.uk) is a research professor at the University of Northampton Business School in the United Kingdom. Previously, she was a senior research fellow at the Cranfield School of Management. Nada has worked for international organizations in Scandinavia, the Middle East, and North Africa, as well as for the Canadian Federal Government and the Australian Public Services Department of Employment, Education, and Training.

Andrew and Nada are the authors of eight books: Leadership in Government (1998); Essence of Leadership (1999); Creating Futures: Innovative Applications of IS/IT (2000); The Geopolitics of Governance (2001); Smart Sourcing (2002); Intimacy (2004); Governance, Strategy, and Policy (editors, 2006); and CSR in Practice (2007).

In recent years, vociferous public debate and an ocean of ink have been devoted to the subject of corporate governance. In part, we have Enron and a handful of other corporate wrong­doers to thank for that. In the United States, a string of very public corporate scandals led Congress to pass the Sarbanes­Oxley Act, beefing up the rules and regulations that boards have to comply with. Sarbanes-Oxley ushered in a new era of account­ability in American boardrooms. If we were in any doubt, it re-underlined the importance of the board in corporate affairs in the twenty-first century.

So, who leads the board of directors in a modern corporation? It is a simple enough question. The correct answer, of course, is the chairman, but members of the public could be excused for getting it wrong. Well intentioned as it was, Sarbanes-Oxley -and a great deal of the media coverage surrounding it - focused on the role of the chief executive officer (CEO) and, to a lesser extent, on that of the chief financial officer (CFO). By com­parison, very little attention was lavished on the role of the chairman.

Why was this? The CEO and CFO are seen as the leader and the financial controller, respectively. Leadership and money have an understandable and perennial allure. But the notion that the CEO is the leader rather than the chairman is actually a rela­tively recent - and largely mistaken - development. Up until about 30 years ago, the chairman role was regarded as the senior cor­porate position. It is only now making a comeback, but it is a comeback that will continue to gather pace and which will have repercussions for those who work as chairmen and for all who interact with boards.

In many firms, especially in the United States, of course, the job titles of CEO and chairman are held by the same person, a fact that partly explains the confusion. This combination of titles is,

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xviii Foreword

in our opinion, misleading and potentially dangerous in terms of both governance and corporate performance. Being a chair­man and being a CEO are fundamentally different roles.

So, while all the evidence and research points to the importance of an effective well-led board, the one role that has been largely neglected is the most important of all: that of the chairman. Put simply, without an effective chairman there cannot be an effect­ive board. And, even when you have a great CEO who is also the chairman, their CEO skills are not sufficient on their own to ensure a well-led board. We believe it is high time this fact was acknowledged.

An additional confusion is semantics. The title "chairman" has an old fashioned, clearly male ring to it. It conjures up images of mahogany board tables and whisky sours over genial chitchat. Though it comes laden with baggage, it is the word we are stuck with. Chairwoman is now rarely used, despite the increasing numbers of women in chair roles. If we were to start again, we would suggest chair-leader as a title, but for the purposes of this book we refer throughout to chairmen.

Our argument and research

The central argument behind Leading the Board is twofold. First, that the role of the chairman is distinct from that of any­one else on the board or elsewhere in the organization, requiring its own unique set of skills and qualities. And second, that the role of the chairman as the leader of the board of directors, is the most critical one of all for the long term success of the firm. In short, world-class companies require world-class chairmen.

So what should we look for in a world-class chairman? That is the simple question that has driven our research for the past years. The comments quoted in this book are recent, gathered over the last eighteen months. However, the full programme of study is extensive. That research, which now extends to top teams and to boards covering more than 12,000 organizations in 17 countries, including 400 board members, has convinced us of four important points.

Foreword

First, some elements of the chairman role transcend national boundaries. Despite cultural, legal, and political differences between countries, and irrespective of differences in board structure, our research indicates that there is a meaningful set of skills and qualities that denote world-class chairmen. Again and again, people talked about the "disciplines of the chairman." And the same six disciplines applied whether he or she was oper­ating in Tokyo or Toledo, New York or New Delhi, Moscow or Madrid.

Second, the role of the chairman today is largely misunderstood and undervalued. This is despite the fact that the chairman was traditionally the preeminent corporate role. What has happened over the past 40 or so years is an elevation of the CEO role to that of corporate hero. This has clearly diminished the role of the chair. In the past, the chairman role was recognized as the one that handled the contradictions and ambiguities, balancing the interests of the company's employees, executives, customers, and shareholders. The CEO is now seen as carrying out this jug­gling act. It is no coincidence that this lionization of the CEO has been most pronounced in North America, where the dual role of CEO and chairman is common.

Third, and linked to the previous point, there is very little formal training and development for directors taking on the position of chairmen. Traditionally, new chairmen have had to make the transition by developing themselves. Nor have business schools and other external training suppliers developed effective programs for new chairmen. If boards are to become more effective - and more Enrons are to be avoided - there is an urgent need to find ways of supporting the development of chairmen.

Finally, the current quality of chairmen varies greatly - even within countries. One of the most alarming research findings is the variable quality of chairman in US companies. On the one hand, the best American companies have world-class chairmen. Yet, on the other, in the vast majority of US firms, the quality of the chairmen is mediocre at best. This is a serious challenge facing corporate America. The situation in other countries including those of Western Europe is slightly better but still requires urgent attention.

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xx Foreword

Other significant findings from our research are as follows:

• Three-quarters of boards do not know how they contribute value.

• There is a culture of inhibition in American boardrooms as a result of role duality and oppressive legislation. This is foster­ing a conspiracy of silence in US boardrooms.

• Board structure and formal governance regulations are less important in preventing governance breaches and corporate wrongdoing than the culture and trust created by chairmen.

About the book

This book is our attempt to bring some clarity to the role of the chairman in the twenty-first century.

The Introduction chapter examines the modern role of the chair­man and how it came about, including the current confusion surrounding it. It also identifies the six disciplines of world-class chairmen: delineating boundaries; sense making; interrogating the argument; influencing outcomes; living the values; and developing the board. The next six chapters examine each of these disciplines in turn.

The second chapter titled "Discipline 1: delineating boundaries" states that the role of the chairman must be distinct from that of the board and distinct also from that of the CEO and manage­ment. One of our interviewees argued that boards exist to appoint management, oversee performance, and enable man­agement to improve performance. There are, however, many other possible roles for the board. Moreover, it is critical to think about who serves on the board. It is only by clearly delineating boundaries between roles that the board - and the chairman -hold that allows both to effectively function.

The third chapter titled "Discipline 2: sense making" declares that chairmen must communicate and champion the organiza­tion's mission, values, and strategy so that they resonate with an array of internal and external audiences. For a chairman, this sense making has two aspects: the use of logic and the use of chemistry. Chairmen must excel at both.

Foreword

The fourth chapter titled "Discipline 3: interrogating the argu­ment" states that a key role of a board is to interrogate manage­ment about its strategy and policy. Managers should know how to submit ideas and reports to a board. Boards should decide if they want to consider proposals by dialogue or by debate. It falls to the chairman to ensure that the discussion remains constructive.

The fifth chapter titled "Discipline 4: influencing outcomes" declares that sometimes a chairman can do more by influencing decisions than issuing commands, harnessing opinion to gain enthusiastic support for a particular outcome. There are five steps toward effective influencing: surfacing sentiments, work­ing through divisions, using judicious speech, focusing on the most salient points, and scheduling meetings to align everyone's expectations.

The sixth chapter titled "Discipline 5: living the values" asserts that trust and integrity are critical to chairmen and to boards. For the chairman it is important to be aware of the ethics and values challenges confronting a board. There are espoused values and values actually practiced. An imbalance can be a problem for any chairman.

The seventh chapter titled "Discipline 6: developing the board" declares that every board and every chairman needs to be devel­oped. This can be either a very formal or a very informal pro­cess. Development starts with a process for assessment and review. How to develop the chairman is a special and demand­ing topic - there are some 40 criteria that need to be measured.

Finally, in "On being world class: the six disciplines at work," we pull it all together to examine what it means to be a world-class chairman. Drawing on their own experiences, senior executives and chairmen discuss the six disciplines in practice.

Each chapter is filled with insights from our research interviews with chairmen throughout the world. These serve as reality checks on how the theory stands up to the messy reality and the challenges that face chairmen on a daily basis.

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