Professional Documents
Culture Documents
Elevating Board Performance
Elevating Board Performance
Elevating Board Performance
Keywords: Board of directors, mindset and behavior, board culture, independence and authority
JEL Classifications: G34, M14
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2011 Simon C.Y. Wong
The global financial crisis has prompted debate once again on how to improve the
effectiveness of the board of directors at listed companies. In their investigations of the recent
economic meltdown, the Organisation for Economic Co-operation and Development, European
Commission, US Congress, and others found serious deficiencies in the way boards, particularly
at financial institutions, guided on strategy, oversaw risk management, structured executive pay,
managed succession planning, and carried out other essential tasks.1
What is most troubling is not that boards have failed per se but that their alleged
shortcomings have persisted despite the considerable board reforms pursued over the past two
decades.
Today, they
increasingly consist of highly qualified individuals, operate more professionally, and undertake
substantive work. But reforms in the past focused principally on board structure, composition,
and processes. Much less attention has been paid to behavioral and functional considerations,
such as director mindset, board operating context, and evolving human dynamics.
See, for example, Organisation for Economic Co-operation and Development, Corporate Governance and the
Financial Crisis, February 2010; European Commission, Corporate Governance in Financial Institutions: Lessons
to be drawn from the current financial crisis, best practices, June 2010; David Walker, A review of corporate
governance in UK banks and other financial industry entities (Walker Review), November 2009; and US Financial
Crisis Inquiry Commission, The Financial Crisis: Inquiry Report, January 2011.
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2011 Simon C.Y. Wong
UK Department for Business, Innovation and Skills, A Long-Term Focus for Corporate Britain: A Call for
Evidence, October 2010.
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European Commission (2010).
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2011 Simon C.Y. Wong
US Securities and Exchange Commission, Shareholder Proposals, Staff Legal Bulletin No. 14E (CF), October
27, 2009.
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Brooke Masters, King pledges radical change on bank scrutiny, Financial Times, March 1, 2011.
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2011 Simon C.Y. Wong
limited mention in corporate governance codes and other best practice guidance, which continue
to focus predominantly on structures and processes.6
Signs of change are emerging, though. The recently released UK Financial Reporting
Councils Guidance on Board Effectiveness, for instance, acknowledges the limits of the
prevailing approach and admonishes boards to think deeply about the way in which they carry
out their role and the behaviors that they display, not just about the structures and processes that
they put in place.
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Effective board leadership, which has received increasing attention, is discussed in several of the
recommendations rather than treated separately.
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2011 Simon C.Y. Wong
At one financial
For example, among the 1,000 largest companies in the world, the 200 family-owned firms have higher return on
investment (26% vs. 21%) over a five year period. John Ward (lecture), Governing the Family Business Course,
Kellogg School of Management, Northwestern University, October 2008. See also Ronald Anderson and David
Reeb, Founding-Family Ownership and Firm Performance: Evidence from the S&P 500, 2003.
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For further information, see Jeffrey N. Gordon, The Rise of Independent Directors, Directorship, February 1,
2008.
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Spencer Stuart, 2010 Spencer Stuart Board Index, 2010.
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See, for example, discussion in European Commission, Corporate Governance in Financial Institutions: Lessons
to be drawn from the current financial crisis, best practices, Commission Staff Working Document, 2010.
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2011 Simon C.Y. Wong
Prompted in part by
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Take the recent proposal by stock market operator Hong Kong Exchanges and Clearing to require non-executive
directors at listed firms to undertake 8 hours of training per year. According to its Head of Listings, mandatory
training has been proposed because directors need to keep up to date with regulatory changes. While board
members should be aware of legal requirements, this should not be the sole or primary focus of board training.
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2011 Simon C.Y. Wong
telecommunications group holds at least one board meeting a year in a country where it has a
substantial investment or interest in investing. During these visits, meetings are often arranged
with local business leaders, government officials, and business partners.
At a UK-based business services company with operations in more than 50 countries, the
chairman visits three countries a year to spend time with local managers. In addition, two board
meetings are held at business units in the UK or abroad each year.
Importantly, information shared with the board should include dissenting opinions. One
bank chairman invites the research analyst with the most bearish view of the firm to address the
board. Another chairman asks outlier analysts holding diametrically opposite opinions of the
company to engage in a debate before the board.
Moreover, non-executive directors should take personal responsibility for their own
learning and not over rely on the chairman and management to supply them with information.
Given the complexity of some industries financial services, global mining, and
pharmaceutical, to name a few there may be a limit to which outside directors are able to
acquire the requisite depth of knowledge solely through service on the board.
Several years ago, I met with a former CEO whose company I served when I practiced
law and for whom I retained the utmost respect. Fifteen months earlier, he had switched from
serving as the chief executive of a major electronics firm to chairing the board of a leading
mining company. Although he had spent more than 150 days in his first year getting up to
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2011 Simon C.Y. Wong
managements responses were not convincing because the non-executives felt they did not
have adequate understanding to keep pushing.
Recently, some boards have increased the proportion of non-executive directors with
sector expertise. British bank Barclays, for instance, now requires 50% of outside board
members to possess a financial services background.
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Jennifer Pellet, What is Wrong With CEO Succession?, Chief Executive, May/June 2009.
The Korn/Ferry Institute, 34th Annual Board of Directors Study, 2007.
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Antony Goodman, The little black book of succession, Financial Times, February 1, 2010.
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In recent years, a number of successful CEOs in the US have been unexpectedly forced out due to improper
personal conduct.
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See Geoffrey Colvin, Changing Of The Guard, Fortune, January 8, 2001.
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Mark Maremont, Backdating Likely More Widespread, The Wall Street Journal, August 18, 2009.
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compensation and hostile atmosphere surrounding some pay discussions, boards must be willing
to stand firm on unreasonable pay demands while ensuring that executives feel they have been
treated fairly. According to a Nordic bank chairman, you need to be careful that the executives
do not interpret the boards decisions on bonuses to mean the board thinks they are not good
enough.
Recently, attitudes have begun to shift. According to the 2010 Spencer Stuart board
survey, US directors identified executive compensation as the most important board issue, with
80% of respondents listing it as a key topic.
While the board must inevitably delegate day-to-day work such as compiling data and
preparing board meeting materials to the HR department and pay consultants, it needs to take
charge of the overall process, starting with the selection of remuneration advisers. A seasoned
UK compensation adviser has observed that boards that delegate to the HR department the task
of coming up with a short-list of pay consultants usually end up with aggressive advisers more
sympathetic to management demands.
Crucially, compensation committee members must understand the key drivers of the
business and the competitive landscape including the companys key competitors so that the
right metrics and targets will be used to measure and reward managements contribution to
company performance. Particularly at banks, they also need to comprehend the impact of pay
arrangements on risk-taking by employees, from the executive suite to the trading floor.
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2011 Simon C.Y. Wong
Board will lead (e.g., CEO succession planning, remuneration for top management)
Board and management will share authority (e.g., leadership development for senior
executives, relations with shareholders and other external parties)
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For further discussion on the desirable traits of a non-executive chairman, see Robert F. Felton and Simon C.Y.
Wong, How to separate the roles of chairman and CEO, The McKinsey Quarterly, 2004.
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Board activities for instance, spearheading succession planning are often less visible to the outside world and
may not impact the firms bottom line in the near to medium term.
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important to farm general monitoring functions to sub-committees so that the whole board can
focus on the most important tasks.
In addition, board agendas should be prioritized so that routine and backward-looking
matters consume a modest amount of time. At one firm, items falling under for information
only for instance, monthly operational reports are not discussed during the board meeting
unless a director notifies the chairman beforehand that he wishes to raise an issue. Similarly,
items for discussion should be organized so that formal presentations take up no more than half
of the allocated time.
Significantly, boards that take charge of their priorities will ensure they are not rushed on
important decisions. At some firms, strategic matters such as entering a new market segment
are decided over multiple board meetings. At the first meeting, the issue is introduced and initial
questions are answered. At the next meeting, a full debate takes place. Finally, the board
renders its decision at the third meeting.
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Were all of the questions that the non-executive directors wanted answered answered?
How well does the CEO get along with the chairman and other directors?
At a UK energy company, the board provides periodic feedback to the CEO on his
communication approach. Recently, the chairman told the CEO that he was communicating
more effectively with the other board members, especially the outside directors, who are kept up
to date via e-mails, phone calls, and timely dissemination of research reports on the company.
Trust, of course, is built over time through repeated encounters. On their part, CEOs
must be equally forthcoming about successes and failures and be willing to ask for help. They
can also demonstrate good faith and strengthen trust by empowering the board. At a multinational minerals extraction firm, the chief executive felt that the outside directors didnt fully
understand the challenges the company faced. To deepen their knowledge, he started holding
some board meetings at operating sites in different geographies.
Through their own behavior, boards impact managements willingness to cooperate. For
instance, they can gain the CEOs trust and confidence by demonstrating an ability to add value
and not micro-managing the executive team. On the latter point, a FTSE 100 chairman remarked
that the test is whether executives consider board counsel on matters within managements
areas of responsibility as advice which they can accept or ignore. If they feel that they must
follow it, the line has been crossed.
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Conditional upon satisfactory performance, many US companies will award the chairmans title to a CEO 1-2
years following his initial appointment.
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Term limits can be expressed precisely (e.g., 10 years) or as an estimated range (e.g., 10-12 years).
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