Boards that lead

Some Impressionistic takes from the book of

Dr. Ram Charan, Dennis Carey, Michael Useem

“Boards That Lead”by Ramki – [email protected]

Dennis Carey is Vice Chairman

of Korn/Ferry International. He

has placed some of the most

prominent chief executives and

corporate Directors in the United

States, including those at 3M,

American Express, Goldman

Sachs, GSK, Humana, MCI, and

Tyco International. This is his

fourth book on CEO succession

and corporate governance.

Ram Charan is a business adviser

who has worked with executives

and Directors of many companies,

including DuPont, GE, Novartis,

Verizon, and RBS Group (Brazil).

He has served on the Harvard

Business School faculty, teaches

in Wharton Executive Education,

and serves on the board of

Hindalco (India). He is the author

of eighteen books.

Michael Useem is a professor of

management and the director of

the Center for Leadership and

Change Management at the

University of Pennsylvania's

Wharton School. He offers

courses on leadership and has

authored books on leadership

and corporate governance,

including The Leadership

Moment and Investor

Capitalism.

About the Author

Prelude

The book was written by three of the foremost business leaders today. Dr. Ram

Charan, author of Execution and other business books. He joins experts Dennis Carey

and Michael Useem in outlining the significant processes that make an effective

Corporate Board.

Boards That Lead is divided into three sections.

The first delves into establishing functional boards, thus the title Boards That Lead.

The second, Leading the Leaders, examines how boards work with an executive

team.

The last section, Value Creation, identifies the activities that create the most utility

for an organization’s benefit.

The content of the book is gives the readers to imagine multiple combinations of direct

and collaborative leadership. Increased enterprise complexity calls for these varying

degrees of oversight.

The impressionistic take in this document captures the aspects of how a board leads,

partners, monitors, and delegates

“Investor demands for more independent boards

that would be accountable to them, paid like

them, and fiduciaries for them gave rise to

litigation….the legal actions did help establish two

standards for director obligation: Duty of care,

requiring Directors to exercise reasonable caution

in executing board responsibilities that could

harm others if not performed well, and duty of

loyalty, requiring that Directors exercise good

fiduciary judgment on behalf of the stockholders”

From Ceremonial to Monitor to Leader

Monitor to Leaders

Boards are increasingly taking an active role & responsibility on factors like

CEO succession, Executive compensation, & Goal setting. This increased

level of board leadership reflects the growing complexities of the marketplace.

This was earlier the responsibility of the Top Management.

In part, it is also a necessary response to new regulations. For example, the

federal Sarbanes-Oxley Act of 2002 holds Directors responsible for ensuring

the integrity of their company’s financial controls.

New York Stock Exchange rules imposed in 2003 require board audit

committees to oversee financial statements.

The Dodd-Frank Act of 2010 makes it easier for shareholders to propose &

elect their own board candidates.

Importantly, board involvement does not have to mean board

micromanagement. Effective Directors establish a constructive, collaborative

leadership partnership with top executives.

They become educated and interested in such matters as company strategy,

asset allocation, risk management, and talent development. They also take

steps to ensure skilled leadership of the board itself.

Monitor to Leaders

Given the current context the Director’s assume

three primary duties:

Duty of care: Directors must exercise

reasonable caution in executing board

responsibilities that could potentially harm

others.

Duty of loyalty: Directors must exercise good

fiduciary judgment on behalf of stockholders.

Duty of leadership: Directors must focus

attention on key dimensions of enterprise

management. At the same time, effective

Directors know when to lead, when to

partner, and when to stay out of the way.

They set aside personal pride so as to focus

relentlessly on what is right for the company.

Director’s Checklist for Leadership Decisions

When to take charge

Central or Core Idea

Involvement in Selection of the CEO

Board competence, architecture & modus operandi

Ethics & Integrity

Compensation Architecture

When to Partner

Strategy, Capital allocation

Financial goals, Shareholder value, Stakeholder balance

Risk Appetite

Resource allocation

Talent development

Culture of decisiveness

Director’s Checklist for Leadership Decisions

When to stay out of the way

Execution & Implementation

Operations & Routines

Areas of delegated authority

Non-strategic decisions

Excluded by Board charter

First Things First- Define the Central Idea

The central idea of a corporation is the seed that

blossoms into a clear framing of the company’s

full-blown strategy and the many implications for

how to execute it. It is the animating force from

which hundreds of strategic and operational details

emanate.

The central idea of an organization or the group articulates why it

exists, whom it serves, how and why it should be nurtured, how it

can be profitable while minimizing risk, & what direction it should

take to succeed in a competitive marketplace.

Boards should not only ensure that the central/ core idea is clear,

compelling, and comprehensible, but internalize and rely on it as a

touchstone in their own decision-making. Ideally, the central idea

should be simple, tangible, and short—a maximum of several

hundred words.

The best central ideas exert “Centripetal force.” This means they

draw management and board onto common ground and get them

moving toward a shared purpose.

Conversely, a weak central idea exerts a “centrifugal force” with the

potential to pull the organization apart. Because of its importance,

boards should regularly revisit their companies’ central idea.


They should also produce a document that sets forth the

central idea and expresses it in terms of both strategy and

execution—including specific actions needed to realize key

goals.

By taking ownership of the central idea, boards reinforce the

notion of company leadership as a partnership between

Directors and Executives.

They insert Directors irreversibly into an active leadership

role, and recruit new Directors who share their mindsets


Recruit Directors Who Build Value

Today’s board members need a mindset & a skill sets which are

different from Directors of the past.

They must bring to their roles not just a readiness to monitor, but a

willingness & ability to exercise leadership in key matters of

Strategy and Execution.

In the authors’ opinion, high-potential director candidates for

forward-looking enterprises should be qualified to:

Contribute to the central idea by thinking clearly and

strategically about the firm, its value proposition, and its

competitive position.

Contribute to boardroom discussion while steering clear of

operational detail.

Help formulate new direction as necessary and offer experience

with major strategic and executional issues.

Recruit Directors Who Build Value

Work in partnership with executives, based on a previous

track record of collaboration.

Bring intellectual and experiential diversity to the board.

Engage constructively in the face of high-stakes, high-stress

challenges.

Help the board become more effective—for instance, by

offering conversational intelligence.

Add value to both the boardroom and the executive suite.

In the past, sitting board members may have had limited

involvement with director recruitment. But today, finding and

vetting top candidates has become a major responsibility of the

board’s governance committee.

Almost all Directors look promising before they

enter the boardroom, but not all perform equally

well once inside. Sometimes a prince in other

realms can even turn into a petty gabber at the

table, the very opposite of what English novelist

George Eliot had championed:

“Blessed is the man who having nothing to say

abstains from giving wordy evidence of the fact.”

Root Out Dysfunction


A Person while highly accomplished in business, may be

unsuited for the boardroom. Because a board can only be as

strong as its weakest link, it is imperative to identify and find

ways to deal with these poor-performing or dysfunctional

members.

This should be a regular responsibility of the board leader,

occurring in stages.

First, the leader should have a private conversation with the

disruptive member, making the individual aware of behaviors in

need of change.

Next, the leader may offer intervention, usually coaching, to

help the director improve. But if intervention fails, the leader

should be prepared to advise the director to leave the board.


A good process is that boards should implement an ongoing

process of Director Evaluation, a practice already adopted by

most of the American companies as of 2011.

One approach is similar to peer evaluations in 360-degree

performance reviews: members assess the contributions of their

colleagues by using a matrix with key criteria on the left and

director names across the top.

Examples of useful evaluative criteria include whether each

director brings useful skills & experience to the boardroom; is

prepared for meetings; understands the company’s central idea;

asks good questions; helps develop the business; moves

discussions forward; and facilitates relationships between

members and with management.

Sometimes it is beneficial to invite a neutral third party, such as

outside counsel or a governance consultant, to ask questions of

the participants.


The difference between leading and overreaching on a board is

not always obvious, but most boards create implicit behavioral

norms. Often, Directors who violate such norms are driven by

personal motives.

Among the most common of these motives is a determination to

prove one’s expertise and grasp of detail, leading to operational

questions that are too deep & inappropriate for the boardroom.

Another is a desire to be considered for an executive position. A

third is anxiety on the part of an insecure director who fears

making a mistake or being blamed for a company problem.

Evidence suggests that evaluation and intervention can go a

long way toward rooting out boardroom dysfunction. However, it

is far more efficient to deselect or avoid recruiting unsuitable

Directors in the first place.

Leading the Leaders

A Leader of the Board

CEOs who lead in the boardroom as well as in the executive

suite have long been common in USA Corporations.

However, that norm is being replaced as more firms are

creating either an independent board chair or a designated

board leader.

As of 2010, over 90 percent of Standard & Poor 500

companies had a designated lead director; this was partly in

response to a 2003 New York Stock Exchange rule that non-

executive Directors must meet at least once each year

without executives present, and publicly disclose the name of

the director chosen to preside over the meeting.

Board leaders have different titles and job descriptions, but

their primary function is to organize & speak for the other

members apart from the CEO, other executives, or board

chair.


They have the power to convene meetings and to review

management performance without the presence of the CEO.

Because of the growing importance of board leadership, it is

critical for the individual in that role to have the right

personality, temperament, and skill set; he or she must be

able to build and maintain a constructive relationship not only

with the CEO, but also among other Directors.

Like any high-level company or team leader, an effective

board leader should have excellent skills in strategic thinking,

persuasive communication, and decisive decision-making.

While focusing the board on strategy and working

collaboratively with the CEO, the leader should be able to

avoid micromanagement.


In general, 6 qualities help to define the best board leaders:

1. Executive experience. Most leaders have served as chair,

president, or CEO of another company. They have well-

honed business judgment & deep Strategic and Executional

knowledge.

2. Respect and confidence. Leaders earn the respect &

confidence of other board members because they are

excellent facilitators, able to inspire others & draw them

toward judicious decisions.

3. Collaboration & restraint. Strong board leaders hold back

their own opinions in order to encourage the participation &

collaboration of others. They avoid dominating boardroom

discussions.

4. Personal bonding. Leaders create personal connections that

facilitate the ability to speak for the board as a whole.


5. Personal comfort. Leaders should be authentic: this means they

are comfortable setting aside their own interests and ambitions,

committing exclusively to the mission of the enterprise.

6. Resilience. Board leaders commonly face at least one significant

crisis during their tenure. Thus, they need the ability to head off

trouble when possible and the resilience to face disaster and

bounce back from it if it comes.

Apart from the above basic qualities of effective board leaders, it is

suggested adding another:

A capacity for candor & a willingness to demand candor from

others. Directors who suspect that information is filtered or

hidden from them will lose trust in the leader. Also, a CEO who

is not kept fully and honestly informed about director opinions

and deliberations will lose confidence in the board-management

partnership.

CEO Succession “ The Ultimate Decision

The top most challenges or task of the board’s

responsibility that of choosing a Chief Executive.

Even if they retain a consultant, today’s Directors must

take an active part in the process.

Some companies successfully grow their own talent,

presenting Directors with strong candidates on the

inside.

This is often the most favorable scenario, because

insiders are already familiar with the firm’s strategy &

mission.

In order for it to happen, Directors need access to

good internal data that documents the performance &

potential of top managers.

CEO Succession “ The Ultimate Decision

But whether CEO/MD candidates emerge from

inside or outside, boards must involve themselves in

due diligence; Directors should demand in-depth

information and personally check the references of

serious contenders.

Otherwise, they risk making a mistake that can be

nearly irreparable—the wrong CEO can cause

serious, long-term damage to the firm.

Board leaders standing too tall on their own soapbox can inhibit

a free flow of ideas. At the same time, it is important for a lead

director to exercise individual and collective restraint so that

board directives do not tread on management’s toes.

Ten Principles for finding the Right CEO

People set strategy- Directors & Executives who are

strategically adept are in the best position to lead the

enterprise in the right direction.

Implement a CEO and successor evaluation methodology-

The company’s evaluation system should be linked to its

central core idea & be able to discern the capacities of

individual candidates.

Include in the CEO’s evaluation a succession plan

assessment-Developing the next generation of leaders

should be among the CEO’s key tasks.

Place the board leader in charge of the succession process-

CEO succession decisions should not be crisis-driven.

Instead, board leaders should undertake this responsibility as

part of their fundamental, ongoing partnership with

management.

Ten Principles for finding the Right CEO

Retain potential inside successors in addition to an effective

CEO. In order to keep executives with high potential, it will be

necessary to offer them incentives including extra compensation.

Seek data on inside candidates from all executives who have

worked with them. This process may be guided by a third party.

Verify data with both outside sources and candidates- It is critical

for Directors to be personally involved in the vetting process.

Maintain confidentiality- To protect CEO candidates, Directors

should communicate orally about the search and steer clear of

journalists.

Embed succession planning in corporate culture- Talent

planning, coaching, and mentoring should be viewed by both

Directors and executives as an ongoing responsibility of

leadership

We believe that the concept of the Universal

Chief Executive is as misleading as the idea

that a gifted athlete should be able to excel at

more than one position on the sports field or

even several kinds of fields. Strategic fit

between a candidate and the shoes to be filled

is the crux.

Director’s Checklist for CEO Succession-( 1/2)

Are company Strategy & Executive succession explicitly

linked.

Is a Board process is place for evaluating the CEO &

potential successors?

Does the Board explicitly assess the CEO’s management of

succession plan for the next generation of company

leaders?

Is the Board working to retain a high-performing Chief

Executive- but also to keep capable successors ?

Does the Board have a member who could serve as CEO in

the wake of an unexpected exit if no insider is yet ready for

succession ?

Has the Board compiled data on the inside CEO candidates

from those who had worked with all of them?

Director’s Checklist for CEO Succession- ( 2/2)

Have Directors had direct contact with both the CEO

candidates & the information sources to verify information

about them?

If Executive Search consultants are retained, have they

been vetted to ensure that there are no conflicts of interest?

Does the Board ensure candidate confidentiality ?

Has the Board gathered independent references on the

outside candidates?

Is succession planning embedded in the company’s culture?

A Question of Fit

Selection of CEO/MD- a Strategic fit between the job to be done

and the person to do it.

This requires a focus on two dimensions:

Leadership Requirements given the Organization/ Business

Context

The current competitive landscape, & each candidate’s

capabilities.

Importantly, leadership requirements must be considered first.

Otherwise, the board risks hiring someone who is well suited to

solve the problems of the past— but likely to flounder when faced

with the challenges of the future.

Often a leadership committee of the board is created to assess the

company’s most critical strategic issues and decide what specific

talents and experience is needed to address those issues.

The committee takes responsibility for vetting candidates in light of

the necessary match-up.

Spotting, Catching or Exiting a Falling CEO

Directors should look / watch for when the CEO begins

to falter & there are usually warning signs which should

not be ignored.

Directors reaction or response should not be slow for

actions. They fear the consequences of forcing an exit,

or cannot agree on how to proceed.

In reality, this is precisely the wrong mindset. Effective

Directors must be constantly vigilant, ready to deal

decisively with emergent issues even if the issues are

eventually resolved.

It is important the Board works on what is right and not

what is convenient .

General Indicators – Falling CEO

Lack of clear strategy

If the CEO is unable to articulate the firm’s strategy coherently

and succinctly, the board will be hampered in its decision-

making and unable to assess tactical proposals.

Failure to execute.

The most common early warning sign of CEO failure, a failure

to execute, usually results from several bad habits. These

include a lack of focus on key priorities; dislike of follow

through; and inadequate anticipation of & adjustment to

setbacks.

Wrong people calls.

A CEO may rely too much on a single senior officer or adviser

who has significant shortcomings or filters diverse views.

Another mistake is to promote an ill-prepared functional

executive into a line position.

General Indicators – Falling CEO

When Directors notice one or more of these indicators, they

should test their concerns quickly, albeit cautiously, with

others. Also, they need to seek more information about what

may be causing the apparent problems.

As general practices that can facilitate early detection and

intervention,

Boards should include candid discussion of the CEO’s

performance during their executive sessions;

Focus the CEO’s annual evaluation and feedback on

strategic thinking and other leadership capabilities as well

as financial metrics;

Meet and appraise the CEO’s top management team; and

engage all Directors in any decision to revive or relieve a

struggling CEO, even in the middle of a crisis.

Value Creation

Turning risk into Opportunity

Risk management –is a critical board priority in an era

characterized by financial, environmental, and technological

disasters.

Managing /Mitigating risk is as much about seizing opportunities as

averting catastrophes.

Effective Directors do not reflexively avoid taking chances; instead,

they learn to balance options.

Setting strategic boundaries too narrowly can cut off good avenues

for expansion, while setting them too widely can expose the firm to

excessive uncertainties.

Directors must decide which risk-related metrics they will focus on,

and at what granular level. They also need to be wary of low-

probability but high consequence events, like airplane crashes.

Often it is helpful to create a risk-appraisal advisory board,

composed of highly knowledgeable individuals who can provide

diverse thinking and fresh insights.

Turning risk into Opportunity

While most common among family-owned

businesses, advisory boards are increasingly being

used by multinational firms and in emerging

markets.

Because they do not have shareholder oversight

responsibilities, they may be more willing than

Directors to drill deep into operational details.

Also, advisory boards are free to focus on specific

regions, or on difficult challenges.

Staying out of the way

A challenging but critical task for today’s Directors is to find the

right balance between leadership and meddling.

One helpful criterion is to involve the board in operational

decision-making when the challenge is of clear strategic

significance—otherwise, Directors should usually stay out of the

way.

Many firms use planning devices to identify decisions that should

be made at the board level and those better left to management.

For example, annual calendars can schedule meetings on key

topics—like company strategy or executive compensation—to

ensure that Directors discuss these topics.

Committee charters may help define specific decisions for which

board committees are responsible.

Decision protocols can explicitly identify items under the Directors’

purview, such as financial statements, annual dividends, or

acquisitions and divestitures.

Staying out of the way

Often, the lead director and CEO reach an informal

understanding of matters that should be kept out of the

boardroom.

The single most important factor in cordoning off appropriate “no-

fly zones” is the Directors’ trust in their leader and top

management to keep them informed and involve them when

necessary— while holding them at arm’s length when this is in

the best interest of the company.

If unexpected issues arise that are outside the bounds of an

existing decision protocol, like regulatory changes or competitor

moves, the lead director and CEO usually make a judgment call

together as to whether the topics merit board-level consideration.

In general, they can help ensure the right balance between

leading and meddling by providing the right information;

facilitating a high level of discussion; focusing on the central idea;

and reinforcing a no-micromanagement norm.

The Leadership Difference

It is time to redefine Corporate governance to

explicitly include the role of collaborative company

leadership.

This revised definition should be institutionalized by

transforming the traditional governance committee

into a leadership & governance committee, with

responsibility for board candidate recruitment,

director evaluations, and board leader oversight.

The committee will need highly experienced

members, along with an appropriate charter and

budget that reflect its increased obligations.

The Leadership Difference

Today’s Corporate board must decide early on

where it will lead, partner, or stay out of the way.

It must designate its own leader; establish decision

protocols; create collaborative relationships with top

management; and ensure that every member is a

contributing member of the team.

Without wading deeply into daily operations, all

directors should be prepared to play an ongoing role

in realizing the company’s strategic goals—goals

that are increasingly the product of board-

management leadership partnerships.

1. Does the prospective director have the capacity to think strategically and

clearly about the organization as a whole, its constituents, value

proposition, etc.

2. Will the candidate be able to contribute tangibly to discussion without

veering into operational detail?

3. Is the candidate familiar with and experienced in the specific strategic and

execution issues flowing from the central idea—and capable of helping

formulate a new direction when disruptions in the context dictate?

4. Does the director have a proven track record of working collaboratively?

5. Will the candidate add intellectual and experiential diversity to the board?

6. Will the candidate be ready to engage constructively when vital issues are

on the line, the stakes are high and leadership becomes even more

essential?

7. Will the candidate help the board become more effective by asking good

questions and avoiding unrelated issues that highlight his/her area of

expertise?

Learning’s for Application

Boards must commit to Co-creating Leadership as a partner. The

Independent Directors should not get into micromanagement.

Having said this they must contribute , collaborate with the CEO/MD and

other Senior Leaders in the areas of Company/Group Strategy, ERM, and

Human Resources.

Directors need to take ownership of the firm’s central idea. The central idea is

a statement of why the company exists and what will make it successful.

Directors should ensure that the central idea is compelling, internalize it, &

use it as a touchstone in their decision-making.

A leadership mindset & a willingness to collaborate are critical qualities to be

sought in today’s director candidates. Prospective Directors should be able to

think strategically about the firm, its value proposition, and competitive

position.

Given the expanded role of Directors, it is more important than ever before to

root out those who are dysfunctional or who fail to contribute. Boards can

benefit greatly from a regular, meaningful evaluation process for their

members. The board leader should take responsibility for dealing with a

problematic director.

Learning’s for Application

It is good for the boards to nominate one of their members to serve in a presiding role.

This lead director is empowered to convene meetings without the CEO present, review

management performance in confidence, and speak on behalf of the board.

When choosing a CEO, Directors must focus first on Job Role and deliverables for the

current & future of the organization and then leadership requirements, then on

candidate capabilities.

A Leader may be highly gifted, but lack the skills needed by a company at a particular

point or the context in its strategic evolution.

In a business climate rife with unprecedented threats— financial, regulatory, and

environmental—boards must take a leadership role in risk management. At the board

level, risk management does not necessarily mean risk avoidance. It means balancing

options so the firm can exploit opportunities without taking on excessive uncertainties.

Boards must continually maintain the right balance between leadership and meddling.

Decision protocols are helpful in explicitly defining appropriate areas for board

involvement. But ultimately, Directors must trust in the board leader and CEO to stake

out the right “no-fly zones.”

It is time to redefine the basic concept of corporate governance to incorporate the new

reality of board leadership. To institutionalize this new reality, boards should

reconstitute the traditional governance committee as a “leadership and governance

committee.”

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Leadership & Management

Boards that lead