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
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