Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way

305 Pages·2013·3.243 MB·English

by  Carey, Dennis;Dennis.;Ram.;Useem, Michael

h a r V a r d b u s i n e s s r e V i e w p r e s s
management U C C us$35.00 / can$40.50
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“Boards That Lead provides the essential road map for corporate leadership. e e R b o a r d s
m y a
With gripping accounts and compelling illustrations, Charan, Carey, and Useem show Is your fIrm’s board creatIng value—
n
how directors can lead in strategic partnership with company executives. This is a game or destroyIng It?
changer, required reading for all who seek to bring out the best in their boards.”
—aLan mULaLLy,
Change is Coming. Leadership at the
Ceo and President, Ford motor Company
top is being redefined as boards take a more
active role in decisions that once belonged
t h a t
“This book shows how, through leading, partnering, and delegating, boards are now solely to the Ceo. But for all the advantages
starting to shape the architecture of the company in unprecedented ways. This book is of increased board engagement, it can create
rich with stories—there is nothing like learning from three world-leading practitioners debilitating questions of authority and
Ram ChaRan (center) is a business adviser on advancing board capabilities to get the company to raise its game.” dangerous meddling in day-to-day operations.
who has worked with executives and directors
—FReD hassan, Directors need a new road map—for when to
b
of many companies, including DuPont, ge,
managing Director (healthcare), Warburg Pincus; Chairman and director, Bausch + Lomb; lead, when to partner, and when to stay out of
novartis, verizon, and RBs group (Brazil). former Chairman and Ceo, schering-Plough; former lead director, avon Products; o the way.
he has served on the harvard Business
director, Time Warner Boardroom veterans Ram Charan, Dennis
school faculty, teaches in Wharton executive a
Carey, and michael Useem advocate this
e(idnudciaa)t.i ohne, aisn tdh see aruveths oorn o tfh eei gbhotaeredn o bf ohokinsd.alco “Boards That Lead offers an illuminating road map for how a board of directors can r l e a d new governance model—a sharp departure
effectively engage and motivate its corporate management team to successfully navigate d from what has been demanded by governance
activists, raters, and regulators—and reveal
even the most complex of situations. This book should be on the ‘must-read’ list of every
Dennis CaRey (left) is vice Chairman s
the emerging practices that are redefining
corporate board member and senior executive.”
of Korn/Ferry international. he has placed
shared leadership of directors and executives.
some of the most prominent chief executives —RogeR W. FeRgUson, JR.,
t Based on personal interviews and the authors’
and corporate directors in the United states, President and Ceo, Tiaa-CReF
broad and deep experience working with
including those at 3m, american express, h
executives and directors from dozens of the
goldman sachs, gsK, humana, mCi, and Tyco “This research, complete with compelling anecdotes and practical information, a world’s largest firms, including apple, Boeing,
international. This is his fourth book on Ceo brilliantly explores how creative, flexible, and innovative processes provide the foundation Ford, infosys, and Lenovo, Boards That Lead
t
succession and corporate governance. for long-term, sustainable partnerships between the board and the companies they serve. tells the inside story behind the successes
This work captures the true innovation intended to guide the leadership mandate and pitfalls of this new leadership model and
miChaeL Useem (right) is a professor of for any board.” l explains how to:
management and the director of the Center e
—ivan g. seiDenBeRg,
When to take charge, When to Partner,
for Leadership and Change management at ● Define the central idea of the company
former Chairman and Ceo, verizon Communications; a
the University of Pennsylvania’s Wharton
former Chairman, Business Roundtable ● ensure that the right Ceo is in place and
d
school. he offers courses on leadership and has and When to stay out of the Way
potential successors are identified
authored books on leadership and corporate
governance, including The Leadership Moment “Boards That Lead is chock full of real-world examples that directors can use to ● Recruit directors who add value
and Investor Capitalism. improve their leadership and decision making—an impressive one-stop shop outlining
● Root out board dysfunction
board member roles, responsibilities, and actions, including the boundaries that boards
and companies often fail to recognize. The checklists for putting this advice into action ● select a board leader who deftly bridges the
are comprehensive and practical— the best i have seen.” divide between management and the board
—maggie WiLDeRoTTeR,
● set a high bar on ethics and risk
Chairman and Ceo, Frontier Communications;
director, Procter & gamble and Xerox Corporation
jacket design: kimberly glyder With a total of eighteen checklists that will
author photo: frank farina/black tie photographers
transform board directors from monitors to
Ram ChaRan
leaders, Charan, Carey, and Useem provide
ISBN-13: 978-1-4221-4405-3
stay informed. join the discussion. 90000 a smart and practical guide for businesspeople
Dennis CaRey
Visit hbr.org/books everywhere—whether they occupy the
follow @harVardbiz on twitter boardroom or the C-suite.
miChaeL Useem
find us on facebook, linkedin, youtube, and google+ hbr.org/books 9 781422 144053
B O A R D S
T H A T
L E A D
WHEN TO TAKE CHARGE, WHEN TO PARTNER,
AND WHEN TO STAY OUT OF THE WAY
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RAM CHARAN
DENNIS CAREY
MICHAEL USEEM
Harvard Business Review Press
Boston, Massachusetts
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Copyright 2014 Harvard Business School Publishing Corporation
All rights reserved
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
No part of this publication may be reproduced, stored in or introduced into a retrieval
system, or transmitted, in any form, or by any means (electronic, mechanical, photo-
copying, recording, or otherwise), without the prior permission of the publisher.
Requests for permission should be directed to [email protected], or
mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston,
Massachusetts 02163.
The web addresses referenced in this book were live and correct at the time of the
book’s publication but may be subject to change.
Library of Congress Cataloging-in-Publication Data
Charan, Ram.
Boards that lead : when to take charge, when to partner, and when to stay out of
the way / Ram Charan, Dennis Carey, Michael Useem.
pages cm
1. Boards of directors. 2. Corporate governance. I. Carey, Dennis C.
II. Useem, Michael. III. Title.
HD2745.C44195 2013
658.4′22—dc23
2013023638
eISBN: 9781422144077
The paper used in this publication meets the requirements of the American National
Standard for Permanence of Paper for Publications and Documents in Libraries and
Archives Z39.48-1992.
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CONTENTS
A Call to Leadership 1
1. From Ceremonial to Monitor to Leader 3
Part 1: Boards That Work
2. First Things First: Defi ne the Central Idea 29
3. Recruit Directors Who Build Value 43
4. Root Out Dysfunction 61
5. Wanted: A Leader of the Board 81
Part 2: Leading the Leaders
6. CEO Succession: The Ultimate Decision 103
7. A Question of Fit 129
8. Spotting, Catching, or Exiting a Falling CEO 139
Part 3: Value Creation
9. Turning Risk into Opportunity 167
10. Staying Out of the Way 187
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iv Contents
11. The Leadership Difference 203
12. A Revised Defi nition of Corporate Governance 213
The Complete Director’s Checklists 221
Appendix A
Trends in Director Monitoring and Leading 241
Appendix B
Director Evaluation 251
Appendix C
Division of Responsibilities Between the Board
Leader and Chief Executive Offi cer 253
Further Reading on Director and Executive Leadership 259
Notes 263
Index 279
Acknowledgments 291
About the Authors 299
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A Call to Leadership
Here is the main point of all that follows: Chief executives must run
the corporation, but directors must also lead the corporation on the
most crucial issues. Monitoring is still important. Governance matters.
But the time has come for boards to rebalance their responsibilities.
Directors need to know when to take charge, when to partner, and
when to stay out of the way.
Regulators, investors, and employees are all pressing boards to de-
liver on their responsibilities—and their company’s results. That re-
quires a handful of decisions that only the board can make: the de-
cisions to select, retain, or dismiss the chief executive; to establish a
climate of ethics and integrity; to set the goals and incentives for the
executive team; and to pinpoint the company’s central idea, risk appe-
tite, and capital structure.
Why does board leadership matter? Because the fate of enterprises,
employees, and shareholders so often hangs in the balance. For ex-
amples of where directors turned the tide in fortune’s favor, we offer
accounts of America’s Ford Motor Company, Australia’s BHP Billiton,
Brazil’s Grupo RBS, Britain’s GlaxoSmithKline, India’s Bharti Airtel,
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2 BOARDS THAT LEAD
China’s Lenovo, and other enterprises. To see how boards have some-
times failed both their businesses and their stakeholders, we also dissect
companies that have faltered, including several that slid into the abyss.
A board’s leadership can create value, and its absence can destroy
value. Drawing on emergent practices at a number of fi rms, this book
offers actionable advice on how directors can best make that leadership
difference.
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1.
From Ceremonial to Monitor to Leader
The authors of this book have occupied a front-row seat for seeing
the gap between boards that are well run and led and are boons to the
companies they serve, and those that are far less so. We have seen how
public agencies and governance activists have sought to close that gap
by insisting on tougher rules, check-the-box lists, and tighter regula-
tions. We believe, however, that much of the variance stems instead
from a very different source: the human dynamics, social architecture,
and business leadership of the board itself.
We seek as a result to focus attention on building more engaged lead-
ership in the boardroom, not just the executive suite. The manifesto
that follows makes an uncomplicated argument to that end: Governing
boards should take more active leadership of the enterprise, not just monitor its
management. For the reasons behind doing so, the principles of how to
do so, and the costs of not doing so, read on.
In bringing this argument to life, we make it pragmatic and we keep
it short. And along the way, we expand the working concept of corpo-
rate governance from one of shareholder oversight to director leader-
ship of the most vital company decisions. To do otherwise, we believe,
is an opportunity lost, a responsibility abdicated.
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4 BOARDS THAT LEAD
We also believe that many of the thrusts of government regulators,
activist investors, and governance raters have focused on the wrong
issues. Rather than being concerned with whether the chief execu-
tive should be the same person as the board chair or whether directors
should have staggered terms, we worry more about whether the board
leader can help direct the board in setting strategy and gauging risk in
concert with the CEO, and whether the directors’ talent and collective
chemistry make the board a substantive player at the table.
We identify a distinctive social architecture that is now required of
companies if directors are to lead the enterprise along with executives,
not just stand guard over it. This calls for a different kind of vigilance
in the boardroom, a deeper kind of relationship between directors and
executives, and a new kind of leadership from both.
The emergent model is a result of forces not of its own making.
Increased regulation, shareholder pressures, and governance reforms
over the past decade were intended to strengthen the board’s oversight
function. Yet as boards have become better monitors, they have also
become better leaders, delving into a host of other areas that had been
delegated to management in earlier times. We believe that directors
can and will more actively lead in the years ahead, and on balance we
anticipate that this should fortify company performance. But that is not
a given. Poorly handled, this new board enablement can cause serious
damage, resulting in fractured authority and dangerous meddling.
We seek a practical road map for knowing when to lead, when to
partner, and when to stay out of the way. In developing it, we are less
concerned with theories of corporate governance or ratings of good
governance and more focused on the practical steps that directors and
executives can take to make their collaborative leadership most effective.
A New Model of Collaborative Leadership
In a 2002 letter to Berkshire Hathaway shareholders, Warren Buffett fa-
mously lamented his multiple derelictions of duty as a director of some
forty corporations over nearly two decades: “Too often I was silent when
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From Ceremonial to Monitor to Leader 5
management made proposals that I judged to be counter to the interest
of shareholders,” Buffett wrote. “In those cases, collegiality trumped
independence [and a] certain social atmosphere presides in boardrooms
where it becomes impolitic to challenge the chief executive.”1
A decade later, Amgen chairman Kevin Sharer painted an almost
opposite picture of the relationship between board and corner offi ce:
“You’re a lion tamer and they’re the lions. Respect them, but if you let
them eat you, they will. Working with the board is vital, complex, and
beyond your prior experience—unlike anything you’ve done before.
It is among the most complex human relationships, especially if you’re
the chairman, when you’re their boss, and they’re your boss. Get the
relationship right, or it will hurt you.”2
Allow for a little hyperbole on both sides—Warren Buffett was
never that neglectful, and Kevin Sharer carried neither whip nor chair
to keep his directors at bay. Still, the difference between the two obser-
vations illustrates a striking reconfi guration taking place in how boards
operate and how company directors work with top management: the
emergence, in an extraordinarily short time, of the potential for boards
to be a vital leader and new force in corporate governance.
But note the qualifi er—potential. This leadership capacity has yet to
be fully exploited or even realized at many fi rms. Too often, directors
remain one of the most valuable but least utilized of a company’s assets.
Smart, experienced, and dedicated men and women are ready to serve.
They are sworn to protect and advance the enterprise, to ensure that
it does what is best for customers and investors. Yet their wisdom and
guidance are still too often closeted in the boardroom.
But the prevailing model is changing, and quickly. At company after
company, boards and management have been embracing new practices
that help defi ne a more directive, more collaborative leadership of the
fi rm. They are taking charge of CEO succession, executive compensa-
tion, goal choices, merger decisions, risk tolerance, and other functions
that have traditionally been the province of management.
Based on our work, interviews, and research with executives and di-
rectors of multiple Fortune 500 fi rms ranging from Agilent T echnologies
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