In this day, most companies are exposed to risks that go beyond financial risks. Thus risk warrants a separate discussion of its own. Every element of strategy involves investment and risk. Most risk are small enough or low enough in probability that they are manageable. But if the perfect storm arrives, the company could face a threat.
All too often, any discussion of risk beyond financial takes place piecemeal, capital expenditure, for example. But it is often a combination of operating risk and financial risk that compound to put survival in question.
The board can expand its monitoring function by examining the links between risks in the business—whether driven by factors in execution, competition, customers, supply chain, economy, or natural disaster—and financial health. It can also help the CEO stress test the strategy to see what happens to the company’s liquidity under variety of circumstances.
There are many types of risk to consider, beginning with financial risk. How sensitive is the business to interest rate movements? What might put the credit rating at risk?
Then there is political, legislative, regulatory risk. What if new tariff make raw material more expensive? What if laws are eased to make it easier for new competitors to enter the industry?
Some boards are forming Risk Committees to assure themselves that management understands the major risks the company faces. The committees can work with management to examine the risk factors and identify where risks may concentrate or compound. While the Risk Committee can take the lead and make recommendations, the whole board should involve it self with risk assessment in one board meeting per year. The full board must understand the most dangerous and likely risk and help management think through the implications.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
วันอาทิตย์ที่ 15 พฤศจิกายน พ.ศ. 2552
Strategy Monitor
Strategy has an inherently long-term out-look, but boards have to know how the company is progressing toward that strategy in the short-term What are the milestones this quarter, this year, or even three years down the road?
In 2003, Kodak announced a three year strategy to accelerate its shift into digital products. It recognized that the long-term ability of the company to compete would depend on embracing the dramatic change in consumer take-up of digital image. But how might the board know each quarter or each year whether the company still on track to make its three year transition?
Kodak’s board needs to identify the strategic metric the will indicate sufficient performance in printers today to achieve the financial results that the company laid out for 2006. For example, it could ask management to draw upon a third-party research firm to look at:
- What particular position of the printer marketplace has been targeted? For that segment, what has been the product acceptance?
- How appropriate is the distribution? How much attention are dealers giving to the product line?
- What post-sales service are we providing and how does it measure up to the competition?
Overtime, questions like these will provide insights into the customer experience, irrespective of quarter-by-quarter financial results. Other research might look into product quality or manufacturing efficiency to make sure the product line is competitive. If the result are negative compared to plan, the board has to ask management what it plan to do. If results are positive, the board should support the strategy, even if financial performance is not yet where it was projected.
A telecom firm trying to enter and establish the broadband segment of business might track number of subscribers, revenue per subscribers, churn rate, or competitors’ pricing on a quarterly basis. If company isn’t meeting milestones, the board has to get management to define the root cause, including of course the possibility that the strategy is no longer viable.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
In 2003, Kodak announced a three year strategy to accelerate its shift into digital products. It recognized that the long-term ability of the company to compete would depend on embracing the dramatic change in consumer take-up of digital image. But how might the board know each quarter or each year whether the company still on track to make its three year transition?
Kodak’s board needs to identify the strategic metric the will indicate sufficient performance in printers today to achieve the financial results that the company laid out for 2006. For example, it could ask management to draw upon a third-party research firm to look at:
- What particular position of the printer marketplace has been targeted? For that segment, what has been the product acceptance?
- How appropriate is the distribution? How much attention are dealers giving to the product line?
- What post-sales service are we providing and how does it measure up to the competition?
Overtime, questions like these will provide insights into the customer experience, irrespective of quarter-by-quarter financial results. Other research might look into product quality or manufacturing efficiency to make sure the product line is competitive. If the result are negative compared to plan, the board has to ask management what it plan to do. If results are positive, the board should support the strategy, even if financial performance is not yet where it was projected.
A telecom firm trying to enter and establish the broadband segment of business might track number of subscribers, revenue per subscribers, churn rate, or competitors’ pricing on a quarterly basis. If company isn’t meeting milestones, the board has to get management to define the root cause, including of course the possibility that the strategy is no longer viable.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
Monitoring and diagnosing Financial Health
A company must maintain sufficient cash resources to pay all legitimate bills as they arise. A company that cannot do so has run out of liquidity and is in a very serious financial condition.
Boards can make a tremendous contribution by focusing on one key question: Will liquidity be sufficient if condition sour? Adverse situations will come, whether caused by externalities like a recession or aggressive competition or by internal disappointments such as a failed mega acquisition that was made by incurring very high debt. The board can suggest that management consider what will happen to cash if thing don’t go as planned, particular if things turn negative simultaneously. It may difficult to raise additional funds, if crisis arises. What happens, then, if customers see your operational and financial difficulties and become hesitant to do business with you?
The primary tool for board to assess financial health is operating cash flow. The flow of cash through organization is sometimes compared with the flow of blood through the body. Cash is continuous circulation through the arteries of business carrying value to its various organs. If this flow stopped, or even severely reduced for a time, then serous consequences result.
When boards are evaluating major business units in a diversified company, the operating cash flow diagnostics often reveal which business units are consuming cash, for how long, and which one are generating cash. How good is this balance?
Financial health is indicated also by the capital structure of the company. What debt-to-equity ration is robust and appropriate for the kind of risks and rewards the company anticipate? Often, a decision is made about what kind of rating the company must maintain. For example, in GE’s case, management will do everything in its power to maintain its AAA credit rating.
Periodic discussion of the balance sheet can ensure that the appropriate capital structure is adhered to. Attention to the balance sheet ensure the management does not overstretch to make acquisition that promise fantastic revenue and earnings growth.
Boards should do a full analysis of the balance sheet once or twice a year to help management consider its strength under variety conditions, such as an earnings slump or a slowing economy. How will the balance sheet look under these circumstances? Should it be restructured now to prepare for the future?
Notes
Operating cash flow = operating profit + Depreciation
When we look at a company’s liquidity position we must make a distinction between long-term and short-term sections of the balance sheet.
Short-term liquidity measures Current ratio (CA/CL), Quick ratio (CA-Inventory)/CL), working capital to sale ratio (CA-CL/sales), working capital days.
Long-tem liquidity measures Interest cover (EBIT/Interest, Debt to equity ratio (D/E), Leverage
The greater the debt, the greater the risk. However, debt cost less than equity funds. By adding debt to its balance sheet, a company can generally improve its profitability, add to its share price, increase the wealth of its shareholders and develop greater potential growth.
Source:
1. Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
2. Ciaran Wash, Key Management Ratio, Pearson Education Limited, 2003
Boards can make a tremendous contribution by focusing on one key question: Will liquidity be sufficient if condition sour? Adverse situations will come, whether caused by externalities like a recession or aggressive competition or by internal disappointments such as a failed mega acquisition that was made by incurring very high debt. The board can suggest that management consider what will happen to cash if thing don’t go as planned, particular if things turn negative simultaneously. It may difficult to raise additional funds, if crisis arises. What happens, then, if customers see your operational and financial difficulties and become hesitant to do business with you?
The primary tool for board to assess financial health is operating cash flow. The flow of cash through organization is sometimes compared with the flow of blood through the body. Cash is continuous circulation through the arteries of business carrying value to its various organs. If this flow stopped, or even severely reduced for a time, then serous consequences result.
When boards are evaluating major business units in a diversified company, the operating cash flow diagnostics often reveal which business units are consuming cash, for how long, and which one are generating cash. How good is this balance?
Financial health is indicated also by the capital structure of the company. What debt-to-equity ration is robust and appropriate for the kind of risks and rewards the company anticipate? Often, a decision is made about what kind of rating the company must maintain. For example, in GE’s case, management will do everything in its power to maintain its AAA credit rating.
Periodic discussion of the balance sheet can ensure that the appropriate capital structure is adhered to. Attention to the balance sheet ensure the management does not overstretch to make acquisition that promise fantastic revenue and earnings growth.
Boards should do a full analysis of the balance sheet once or twice a year to help management consider its strength under variety conditions, such as an earnings slump or a slowing economy. How will the balance sheet look under these circumstances? Should it be restructured now to prepare for the future?
Notes
Operating cash flow = operating profit + Depreciation
When we look at a company’s liquidity position we must make a distinction between long-term and short-term sections of the balance sheet.
Short-term liquidity measures Current ratio (CA/CL), Quick ratio (CA-Inventory)/CL), working capital to sale ratio (CA-CL/sales), working capital days.
Long-tem liquidity measures Interest cover (EBIT/Interest, Debt to equity ratio (D/E), Leverage
The greater the debt, the greater the risk. However, debt cost less than equity funds. By adding debt to its balance sheet, a company can generally improve its profitability, add to its share price, increase the wealth of its shareholders and develop greater potential growth.
Source:
1. Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
2. Ciaran Wash, Key Management Ratio, Pearson Education Limited, 2003
วันเสาร์ที่ 14 พฤศจิกายน พ.ศ. 2552
Board contributions that Count
Ram Charan, expert in corporate governance illustrated the building block of the progressive board: getting the group dynamics, information architecture, and focus right. This foundation allows boards to exercise their common judgments on crucial topics.
With the three building blocks providing foundation, boards can begin to add value. Best practices in five important areas help progressive boards apply their wisdom and experience to contribute to the long-term health and prosperity of the business:
1. The right CEO and succession: There is no more important job for the board than making sure the company has the right CEO. This means hiring and retaining the right CEO, making a good CEO better, and firing the wrong CEO. Considering that it usually takes one or two years to fully assess whether a new CEO is the right one, and another year or so for the board to come to conclusion to replace the person, a company can suffer for years. Repeated missteps in this are huge value destroyers. The succession process, leading up to the selection of the right chief executive, is the single largest mechanism through which the board can add or destroy value. Boards must improve their succession and selection processes, and be prepared at all times to spring to action.
2. CEO compensation: Also important is making sure that the top management team has the right compensation package. What is the philosophy or set of principles that guide the design of the package? What kinds of behaviors and actions does the board want to encourage or discourage? What is the right set of objectives to truly pay for the performance? Does the board have the framework to view the total package? Get compensation right and the CEO adds significant long-term value. Get it wrong, and a CEO could go on a debt-fuelled acquisition spree that at the extreme lands the company in bankruptcy.
3. The right strategy: Boards contribute greatly by ensuring the company’s strategy is correct for the company, the time, and the industry. One challenge is for all the directors to have the same understanding of the company’s strategy. This is often lacking; different directors on the same board at times articulate vastly different versions of the company’s strategy. Getting to a shared level of understanding is crucial, because strategy is umbrella covering all of the board’s work, from CEO compensation to oversight of leadership development, monitoring operating performance, and risk assessment. Director don’t develop the strategy, but their input is vital in making sure management has fully thought through its opportunities and opinions and has a realistic sense of the available resources, external factors, competitive threats and risks.
4. The leadership gene pool: The board needs to make sure that management is taking adequate steps to develop the leadership gene pool. What is the CEO succession plan? How robust is it? Do the CEO’s direct reports pass muster? Does the next level of leadership have potential? How is management identifying tomorrow’s leaderships and how is management testing and developing them? Developing the company’s leadership gene pool not only makes CEO selection easier when the time comes for succession but also ensures that business units have the best talent in the right positions. If done effectively within the context of future needs, this process provides the ultimate competitive advantage.
5. Monitoring health, performance, and risk: Looking at earning reports alone is not good enough for governance. The board must be foreword-looking and anticipatory in making sure that company stays financially viable at all times. Identifying and tracking the physical measures of performance underlying the financial measure further gives boards a heads-up on how plan are progressing. Many companies‘s grand visions vanished because of excessively amounts of debts taken on during good economic times. Anticipating the effect on liquidity—the availability of cash internally and externally—if risks begin to sour can change the fate of the company. Helping management identifying risks and develops contingency plans if conditions don’t go as expected is a tremendous contribution a board can make.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
With the three building blocks providing foundation, boards can begin to add value. Best practices in five important areas help progressive boards apply their wisdom and experience to contribute to the long-term health and prosperity of the business:
1. The right CEO and succession: There is no more important job for the board than making sure the company has the right CEO. This means hiring and retaining the right CEO, making a good CEO better, and firing the wrong CEO. Considering that it usually takes one or two years to fully assess whether a new CEO is the right one, and another year or so for the board to come to conclusion to replace the person, a company can suffer for years. Repeated missteps in this are huge value destroyers. The succession process, leading up to the selection of the right chief executive, is the single largest mechanism through which the board can add or destroy value. Boards must improve their succession and selection processes, and be prepared at all times to spring to action.
2. CEO compensation: Also important is making sure that the top management team has the right compensation package. What is the philosophy or set of principles that guide the design of the package? What kinds of behaviors and actions does the board want to encourage or discourage? What is the right set of objectives to truly pay for the performance? Does the board have the framework to view the total package? Get compensation right and the CEO adds significant long-term value. Get it wrong, and a CEO could go on a debt-fuelled acquisition spree that at the extreme lands the company in bankruptcy.
3. The right strategy: Boards contribute greatly by ensuring the company’s strategy is correct for the company, the time, and the industry. One challenge is for all the directors to have the same understanding of the company’s strategy. This is often lacking; different directors on the same board at times articulate vastly different versions of the company’s strategy. Getting to a shared level of understanding is crucial, because strategy is umbrella covering all of the board’s work, from CEO compensation to oversight of leadership development, monitoring operating performance, and risk assessment. Director don’t develop the strategy, but their input is vital in making sure management has fully thought through its opportunities and opinions and has a realistic sense of the available resources, external factors, competitive threats and risks.
4. The leadership gene pool: The board needs to make sure that management is taking adequate steps to develop the leadership gene pool. What is the CEO succession plan? How robust is it? Do the CEO’s direct reports pass muster? Does the next level of leadership have potential? How is management identifying tomorrow’s leaderships and how is management testing and developing them? Developing the company’s leadership gene pool not only makes CEO selection easier when the time comes for succession but also ensures that business units have the best talent in the right positions. If done effectively within the context of future needs, this process provides the ultimate competitive advantage.
5. Monitoring health, performance, and risk: Looking at earning reports alone is not good enough for governance. The board must be foreword-looking and anticipatory in making sure that company stays financially viable at all times. Identifying and tracking the physical measures of performance underlying the financial measure further gives boards a heads-up on how plan are progressing. Many companies‘s grand visions vanished because of excessively amounts of debts taken on during good economic times. Anticipating the effect on liquidity—the availability of cash internally and externally—if risks begin to sour can change the fate of the company. Helping management identifying risks and develops contingency plans if conditions don’t go as expected is a tremendous contribution a board can make.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
The Phases of Board Development
Ram Charan, expert in corporate governance classified the board evolution into three phases: the Ceremonial Board, the Liberated Board, and the Progressive Board.
The Ceremonial Board: The board in this phase is characterized as passive board. CEO is powerful. This phase is before the Sarbanes-Oxley regulation. Management tightly controls information flow. Information is summarized at very high level, and presentation run long. Board is rubber-stamps CEO’s decisions. The boards do only compliance only.
The Liberated Board: Most boards left their Ceremonial board status after behind the passage of Sarbanes-Oxley. A next generation of CEOs now expects boards to contribute. Directors free to speak up in boardroom but dialogue is fragmented and most of the time no concensus is reached. Boards promise to improve but they focus on mechanism solution and do not act on self-evaluation with conviction. Management wildly makes company transparent to board but it is frustrated by ad hoc demands by some directors that leave management complication. Board asks for more information but what they get is not packed well and does not help the directors understand the guts of the business. Board desires to make contribution but overwhelmed by issues, become driven by compliance and routine operating issues.
The Progressive Board: Directors work as a group. Mutual respect and trust among each directors and management. Everyone participates and consensus is very frequently achieved on key issues. Self-evalution gives tool for continuous improvement and directors take results seriously. Information is focused, timely, regular, and digestible. Management anticipates board needs. Directors learn the business. Board and CEO jointly set twelve month agenda. Board focuses that are vale-added and anticipatory, as well as those that are compliance related.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
The Ceremonial Board: The board in this phase is characterized as passive board. CEO is powerful. This phase is before the Sarbanes-Oxley regulation. Management tightly controls information flow. Information is summarized at very high level, and presentation run long. Board is rubber-stamps CEO’s decisions. The boards do only compliance only.
The Liberated Board: Most boards left their Ceremonial board status after behind the passage of Sarbanes-Oxley. A next generation of CEOs now expects boards to contribute. Directors free to speak up in boardroom but dialogue is fragmented and most of the time no concensus is reached. Boards promise to improve but they focus on mechanism solution and do not act on self-evaluation with conviction. Management wildly makes company transparent to board but it is frustrated by ad hoc demands by some directors that leave management complication. Board asks for more information but what they get is not packed well and does not help the directors understand the guts of the business. Board desires to make contribution but overwhelmed by issues, become driven by compliance and routine operating issues.
The Progressive Board: Directors work as a group. Mutual respect and trust among each directors and management. Everyone participates and consensus is very frequently achieved on key issues. Self-evalution gives tool for continuous improvement and directors take results seriously. Information is focused, timely, regular, and digestible. Management anticipates board needs. Directors learn the business. Board and CEO jointly set twelve month agenda. Board focuses that are vale-added and anticipatory, as well as those that are compliance related.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
วันพฤหัสบดีที่ 5 พฤศจิกายน พ.ศ. 2552
Where Does Your Boards Stand?
The following question constitutes a diagnostic to help boards figure out where they stand. The goal is to identify how a boards could improve and move to the next level. Indeed, the awareness of the need for continuous improvement is one characteristic of a Progressive board.
Group Dynamics
1. Does the board consistently bring dialogue on critical topics to a clear closure, with consensus? Or is dialogue fragmented?
fragmented or consensus
2. Do all directors freely speak their minds on key points?
seldom or always
3. Do all directors respond to each other during board meetings, particularly when they don’t agree with each other? Or do directors engage in dialogue solely addressing the CEO?
CEO or directors
4. Have board meetings focused on the most important issues, as defined jointly by the board, the committee Chairs, and management? Or have they wandered into details or tangents?
details or focused agenda
5. Does the board feel that the company is getting a return on the time the board is spending on corporate affairs? Or does the board feel their time is very productive?
not very productive or good return on time
6. Do directors individually feel they get something out of board meeting? Or is it chore and a burden?
responsibility or learn something every time
7. Is the dynamic between the board and the CEO adversarial or constructive?
adversarial or constructive
8. Have directors acted on feedback that emerged from a real and constructive self-evaluation?
no individual evaluations or personally made improvement
Information Architecture
9. Is sufficient time given for discussion in the boardroom? Or are presentations scripted to the second with no time left for discussion?
fully scripted or discussion built-in
10. Is information presented in a way that leads to useful insights that facilitate productive discussion?
no insights or leads to insights
11. Does the board go out on its own to learn about the company (Visiting plants) and the industry?
not at all or boards take initiative
12. Does the CEO feel comfortable discussing bad news and uncertainness with the board?
good news only or bad news, too
Focus on Substantive Issues
13. How the boarded succession in dept during recent meetings? Or is it waiting until succession in dept during recent meeting? Or is waiting until succession nears?
waiting or discussed recently
140. Do all directors fully understand the philosophy underlying their CEO compensation plan?
unclear or philosophy understood
15. How clear each director on the strategy going forward?
unclear or clear
16. How well has the board bought into the company’s strategy?
not at all or totally
17. Has the board discussed with management the potential risks inherent in its strategy? Or has it left risk management to management?
left to management or full discussion of risk
18. Does the board explicitly monitor financial heath and operating performance relative to the competition by focusing on causal factors?
financial measures or causal factors
19. How familiar is the board with leadership gene pool and efforts to develop up-and –coming managers?
not very familiar or very familiar
Group Dynamics
1. Does the board consistently bring dialogue on critical topics to a clear closure, with consensus? Or is dialogue fragmented?
fragmented or consensus
2. Do all directors freely speak their minds on key points?
seldom or always
3. Do all directors respond to each other during board meetings, particularly when they don’t agree with each other? Or do directors engage in dialogue solely addressing the CEO?
CEO or directors
4. Have board meetings focused on the most important issues, as defined jointly by the board, the committee Chairs, and management? Or have they wandered into details or tangents?
details or focused agenda
5. Does the board feel that the company is getting a return on the time the board is spending on corporate affairs? Or does the board feel their time is very productive?
not very productive or good return on time
6. Do directors individually feel they get something out of board meeting? Or is it chore and a burden?
responsibility or learn something every time
7. Is the dynamic between the board and the CEO adversarial or constructive?
adversarial or constructive
8. Have directors acted on feedback that emerged from a real and constructive self-evaluation?
no individual evaluations or personally made improvement
Information Architecture
9. Is sufficient time given for discussion in the boardroom? Or are presentations scripted to the second with no time left for discussion?
fully scripted or discussion built-in
10. Is information presented in a way that leads to useful insights that facilitate productive discussion?
no insights or leads to insights
11. Does the board go out on its own to learn about the company (Visiting plants) and the industry?
not at all or boards take initiative
12. Does the CEO feel comfortable discussing bad news and uncertainness with the board?
good news only or bad news, too
Focus on Substantive Issues
13. How the boarded succession in dept during recent meetings? Or is it waiting until succession in dept during recent meeting? Or is waiting until succession nears?
waiting or discussed recently
140. Do all directors fully understand the philosophy underlying their CEO compensation plan?
unclear or philosophy understood
15. How clear each director on the strategy going forward?
unclear or clear
16. How well has the board bought into the company’s strategy?
not at all or totally
17. Has the board discussed with management the potential risks inherent in its strategy? Or has it left risk management to management?
left to management or full discussion of risk
18. Does the board explicitly monitor financial heath and operating performance relative to the competition by focusing on causal factors?
financial measures or causal factors
19. How familiar is the board with leadership gene pool and efforts to develop up-and –coming managers?
not very familiar or very familiar
What Makes a Board Progressive
Ram Charan, expert in corporate governance, classified the evolution of boards into three stages: Ceremonial, Liberated, and Progressive.
The Ceremonial Board: Management kept quiet in the board room. There was scripted morning presentation that was rehearsed to the second in a tight agenda. The CEO communicated very little with the board between meetings. The boards automatically performed a compliance role. Many directors served for prestige and rarely spoke among themselves without the CEO present. They attended the meeting and rubber-stamped the resolutions proposed by the management.
The Liberated Board: Many companies have followed the “Guidelines for Corporate Governance” since 1994, leading by the General Motors board. There was no urgency for change until the scandals broke at Enron, WorldCom, and elsewhere.
Most boards left their Ceremonial status behide after the passage of Sarbane-Oxley in 2002. A new generation of CEOs now expects boards to contribute. And candidates for directorship now expect active participation as a condition of their acceptance. There is a general sense of excitement as directors embrace an active mindset.
The Progressive Board: Most boards are on the second stage: liberated boards. Liberated boards focus on the size of the board, the degree of independence, the number of committees and meetings, the separation of the CEO and Chair positions. To move to progressive board, group dynamics, information architecture, and focus on substantive issues are basic building blocks of progressive governance and a better board.
• Group Dynamics: The tone of interactions among board members and between the board and management is a fundamental difference between Ceremonial, Liberated, and Progressive boards.
• Information Architecture: How boards get information, and in what form, is vital to how the board operates. The mechanisms are typically very different for boards at different stages.
• Focus on substantive issues: What boards focus their time and attention on will determine whether boards are able to add value consistently.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
The Ceremonial Board: Management kept quiet in the board room. There was scripted morning presentation that was rehearsed to the second in a tight agenda. The CEO communicated very little with the board between meetings. The boards automatically performed a compliance role. Many directors served for prestige and rarely spoke among themselves without the CEO present. They attended the meeting and rubber-stamped the resolutions proposed by the management.
The Liberated Board: Many companies have followed the “Guidelines for Corporate Governance” since 1994, leading by the General Motors board. There was no urgency for change until the scandals broke at Enron, WorldCom, and elsewhere.
Most boards left their Ceremonial status behide after the passage of Sarbane-Oxley in 2002. A new generation of CEOs now expects boards to contribute. And candidates for directorship now expect active participation as a condition of their acceptance. There is a general sense of excitement as directors embrace an active mindset.
The Progressive Board: Most boards are on the second stage: liberated boards. Liberated boards focus on the size of the board, the degree of independence, the number of committees and meetings, the separation of the CEO and Chair positions. To move to progressive board, group dynamics, information architecture, and focus on substantive issues are basic building blocks of progressive governance and a better board.
• Group Dynamics: The tone of interactions among board members and between the board and management is a fundamental difference between Ceremonial, Liberated, and Progressive boards.
• Information Architecture: How boards get information, and in what form, is vital to how the board operates. The mechanisms are typically very different for boards at different stages.
• Focus on substantive issues: What boards focus their time and attention on will determine whether boards are able to add value consistently.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
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