What Makes Great - GUBERNA A... · What Makes Great Boards ... HARVARD BUSINESS REVIEW. BEST PRACTICE vigilant, involved boards. However, ... Intel, Southwest Airlines, or Home De-

What Makes

Great Boards

GreatIt's not rules and regulations. Its the way people work together.

by Jeffrey A. Sonnenfeld

I N THE WAKE of the meltdowns ofsuch once great companies as Adel-phia, Enron, Tyco, and WorldCom,

enormous attention has been focusedon the companies' boards. Were the di-rectors asleep at the wheel? In cahootswith corrupt management teams? Sim-ply incompetent? It seems inconceiv-able that business disasters of such mag-nitude could happen without gross oreven criminal negligence on the part ofboard members. And yet a close exami-nation of those boards reveals no broadpattern of incompetence or corruption.In fact, the boards followed most of theaccepted standards for board opera-tions: Members showed up for meet-ings; they had lots of personal moneyinvested in the company; audit com-mittees, compensation committees, andcodes of ethics were in place; the boards

106

weren't too small, too big, tcx> old, or tooyoung. Finally, while some companieshave had problems with director in-dependence because of the number ofinsiders on their boards, this was nottrue of all the failed boards, and boardmakeup was generally the same forcompanies with failed boards and thosewith well-managed ones.

In other words, they passed the teststhat would normally be applied to ascer-tain whether a board of directors waslikely to do a good job. And that's pre-cisely what's so scary about these events.Viewing the breakdowns through thelens of my 25 years of experience study-ing board performance and CEO lead-ership leads me to one conclusion: It'stime for some fundamentally new think-ing about how corporate boards shouldoperate and be evaluated. We need to

consider not only how we structure thework of a board but also how we man-age the social system a board actuallyis. We'll be fighting the wrong war ifwe simply tighten procedural rules forboards and ignore their more pressingneed - to be strong, high-functioningwork groups whose members trust andchallenge one another and engage di-rectly with senior managers on criticalissues facing corporations.

The Inadequacyof Conventional WisdomOver time, good-governance advocateshave developed no shortage of remediesfor failures of governance. Most of theseremedies are structural: They're con-cerned with rules, procedures, compo-sition of committees, and the like, andtogether they're supposed to produce

HARVARD BUSINESS REVIEW

BEST PRACTICE

vigilant, involved boards. However, goodand bad companies alike have alreadyadopted most of those practices. Let'stake a look at some ofthe most common.

Regular Meeting Attendance. Reg-ular meeting attendance is considereda hallmark ofthe conscientious director.It matters a lot and, still, as shareholderactivist Nell Minow comments, "Somebig names on the boards...barely showup due to other commitments, andwhen they show, they're not prepared."Indeed, some WorldCom directors wereon more than ten boards, so how wellprepared could they be? Fortune's 2ooilist of the most-admired U.S. compa-nies reveals no difference in the atten-dance records of board members of themost- and least-admired companies.Data from the Corporate Library, a cor-porate governance Web site and data-

SEPTEMBER 2002

base cofounded by Minow, show thesame"acceptable"attendance records atboth kinds of companies. Good atten-dance is important for individual boardmembers, but it alone doesn't seem tohave much impact on whether compa-nies are successful.

Equity Involvement. Board mem-bers are assumed to be more vigilant ifthey hold big chunks of the company'sstock-but data from the Corporate Li-brary don't suggest that this measure byitself separates good boards from bad,either. Several members ofthe board ofGE,Fortune's most-admired corporationin 2001, had less than $ioo,ooo of eq-uity, whereas all board members oftheleast-admired companies held substan-tial equity stakes. Not only did all butone of the Enron board members ownimpressive amounts of equity in the

company, but some were still buying asthe shares collapsed.

Board Member Skills. PatrickMcGurn of Institutional ShareholderServices, like other expert observers,has frequently questioned the finan-cial literacy of troubled companies'audit committee members. It's cer-tainly true that many board membershave their jobs because they're famous,rich, well connected - anything butfinancially literate. But just as manyboard members have the training andsmarts to detect problems and some-how fail to do their jobs anyway. Atthe time of their meltdowns, for ex-ample, Kmart had six current or recentFortune 500 CEOs on its board, andWarnaco had several prominent fi-nanciers, a well-known retail analyst,and a top-tier CEO; all those excellent

107

BEST PRACTICE • What Makes Creat Boards Great

credentials made little difference. Onthis measure, again, we find that For-tune's most- and least-admired compa-nies alike had board members with thetraining and experience to analyzecomplex financial issues and to under-stand what kinds of risks a company istaking on.

Despite Enron's disastrously complexfinancial schemes, no corporation couldhave had more appropriate financialcompetencies and experience on itsboard. The list includes a formerStanford dean who is an ac-counting professor, the formerCEO of an insurance company,the former CEO of an interna-tional bank, a hedge fund man-ager, a prominent Asian finan-cier, and an economist who isthe former head of the U.S.government's Commodity Futures Trad-ing Commission. Yet members of thisboard have claimed to have been con-fused by Enron's financial transactions.

Board Member Age. According toone governance expert, "Enron melteddown because it lacks independent di-rectors and several are quite long in thetooth." His remarks reflect a general be-lief that boards become less effective asthe average age of their members rises.My research on executives over the pasttwo decades has shown that, to the con-trary, age is often an asset, and this gen-eral finding is supported by board datafrom the Corporate Library. CharlesSchwab, Cisco, and Home Depot allhave had several board members whoare well into their sixties. Michael Dell(Dell Computer placed tenth on for-tune's 2001 list of most-admired compa-nies) told me that when he incorporatedin 1987, as a 21-year-old college dropout,he found it invaluable to have then 70-year-oid George Kozmetsky, Teledyne'svisionary founder and the former dean

Jeffrey A. Sonnenfeld is the associatedean for executive programs at the YaleSchool of Management in New Haven,Connecticut, and the founder of theschool's Chief Executive Leadership In-stitute in Atlanta. He can be reached atjeffrey.sonnenfeid@yale. edu.

of the McCombs School of Business inAustin, Texas, serve on the board; Koz-metsky stayed for more than a decade.

The Past CEO's Presence. The com-plicated reality is that sometimes a pastCEO's presence is helpful and some-times it's not In the years I served onand even chaired commissions for theNational Association of Corporate Di-rectors (NACD), some commissionersreguiariy vilified the "old dragons" whohaunted successors by serving on boards.

What distinguishes exemplary

boards is that they are robust,

effective social systems.

In certain cases, this can be a problem;one can only imagine board meetings atWarnaco, where deposed CEO LindaWachner voted her 9% of the company'sequity for several months after her No-vember 2OO1 termination. Alternately,a retired CEO can play an invaluable in-ternal role as a mentor, sounding board,and link to critical outside parties. It'shard to imagine anyone arguing thatIntel, Southwest Airlines, or Home De-pot would be better off if their legend-ary retired CEOs Andy Grove, Herb Kel-leher, or Bemie Marcus had just gonehome to play golf.

Independence. Good-governanceadvocates and stock exchange heavy-weights alike have argued that boardswith too many insiders are less cleanand less accountable. Some argue thatTyco's confusing spiral of acquisitionsand the apparent self-dealing of theCEO at Adelphia Qimmunications mighthave been less likely if their boardshadn't been dominated by insiders. In-deed, the New York Stock Exchange'sCorporate Accountability and StandardsCommittee recently proposed requir-ing that the majority of a NYSE-listedcorporation's directors be indepen-dent-this in response to the recent gov-ernance disasters. Governance reformproposals are also being developed bysuch business groups as the Conference

Board and the Business Roundtable. Yetagain, if you judge the most- and least-admired companies on Fortune's 2001list against this standard, no meaningfuldistinction emerges. Least-admired com-panies like LTV Steel, CKE Restaurants,Kmart, Warnaco, Trump Hotels andCasino Resorts, Federal-Mogul, and USAirways had only one or two insidedirectors on their boards; Enron hadonly two. By contrast, at various times intheir histories. Home Depot had five in-

sider directors on its 11-personboard, Intel had three on anine-person board, and South-west Airlines had three on aneight-person board. Typically,half of Microsoft's board areinsiders. Currently, three ofWarren Buffett's seven Berk-shire Hathaway board mem-

bers have the Buffett name, and anotheris his long-term vice chairman.

United Parcel Service has ranked highon Fortune's list of most-admired com-panies since the list was started, and halfof the UPS management committee ison its board. Three outside board mem-bers have told me how well plugged-inthey have felt over the years becausethe inside members are very candid andwell informed. From what the outsidedirectors have seen, none of the insidershas ever been afraid to debate a pointwith the boss, the CEO.

Board Size and Committees. A hostof other issues that good-governance ad-vocates propose tum out to be eithernot truly important or already in placeat both good and bad companies. Takeboard size. Small's considered good,big's considered bad. But big boardsexist at some great and admired com-panies - GE, Wal-Mart, and Schwab -along with some poorly performingcompanies like US Airways and AT&T.At the same time, small boards are partof the landscape at good companies likeBerkshire Hathaway and Microsoft andsome not-so-good companies like TYump.

Another area where good companiesdon't necessarily conform to the adviceof good-governance advocates: execu-tive sessions, which give boards thechance to evaluate their CEOs without

108 HARVARD BUSINESS REVIEW

What Makes Great Boards Great • BEST PRACTICE

interference. Executive sessions are alsosometimes coupled with a designatedlead director. But GE, the most-admiredcompany in the country in 2001, didn'tallow executive sessions in Jack Welch'sday. Said Ken Langone, who serves onthe boards of both GE and Home Depot,"Jack will give you all the time inthe world to raise any issue youwant, but he wants to be there dur-ing the discussion." GE's not alone;many good boards never have meet-ings that exclude the CEO.

Another supposed safeguard ofgood governance - audit and com-pensation committees-tums out tobe near universal. A 2001 survey bythe NACD and Institutional Share-holder Services of 5,000 public com-pany hoards shows that 99% haveaudit committees, and 91% have com-pensation committees. Sunbeam,Enron, Cendant, McKessonHBOC,and Waste Management all hadthe requisite number of committeesand guidelines, yet accounting scan-dals still penetrated this governanceshield. Let's not forget, either, thatthe audit committee at Enron wasconsulted about suspending the conflict-of-interest guidelines and willinglyagreed to it.

The Importanceofthe Human ElementSo if following good-governance regu-latory recipes doesn't produce goodboards, what does? The key isn't struc-tural, it's social. The most involved, dili-gent, value-adding boards may or maynot follow every recommendation inthe good-governance handbook. Whatdistinguishes exemplary boards is thatthey are robust, effective social systems.Let's see what that means.

A Virtuous Cycie of Respect, Trust,and Candor. It's difficult to tease outthe factors that make one group ofpeople an effective team and another,equally talented group of people a dys-functional one; well-functioning, suc-cessful teams usually have chemistrythat can't be quantified. They seem toget into a virtuous cycle in which onegood quality builds on another. Team

SEPTEMBER 2002

members develop mutual respect; be-cause they respect one another, theydevelop trust; because they trust one an-other, they share difficult information;because they all have the same, reason-ably complete information, they canchallenge one another's conclusions

coherently; because a spirited give-and-take becomes the norm, they learn toadjust their own interpretations in re-sponse to intelligent questions.

The UPS board of directors has justthat kind of chemistry, and as a resultmembers have debated strategic deci-sions openly and constructively foryears. The company's 1991 move fromConnecticut to Georgia was hotly de-bated within the management commit-tee, for example, but once the plan tomove was agreed upon, the board chosea new location unanimously and neverlooked back. In the mid-1980s, after forg-ing partnerships with delivery busi-nesses around the world, a revolution-ary concept at the time, the companydecided to reverse course and becometruly global itself. In just two years,UPS was running operations in morecountries than are members of theUnited Nations.This strategic reversal isgenerally considered a brilliant move,one that might never have happenedhad board members not respected and

trusted one another enough to considerthat a smart move could be trumped byan even smarter one. The board eventolerated an open debate in 1992, ledby a former CEO, over the company'swidely recognized corporate color,brown - the hallmark of UPS's current

advertising campaign.A virtuous cycle of respect, trust,

and candor can be broken at anypoint. One of the most commonbreaks occurs when the CEO doesn'ttrust the board enough to share in-formation. What kind of CEO waitsuntil the night before the boardmeeting to dump on the directorsa phone-book-size report that in-cludes, buried in a thicket of sub-clauses and footnotes, the news thatearnings are off for the second con-secutive quarter? Surely not a CEOwho trusts his or her board. Yet thisdestructive, dangerous pattern hap-pens all the time. Sometimes aCEO's lack of trust takes even moredramatic forms. It's stunning thatEnron's chairman and CEO nevertold the board that whistle-blowerSherron Watkins had raised major

questions ahout financial irregulari-ties. It is impossible for a board to mon-itor performance and oversee a com-pany if complete, timely informationisn't available to the board.

It is, I should note, the responsibil-ity ofthe board to insist that it receiveadequate information. The degree towhich this doesn't happen is astonish-ing. Consider Tyco. In recent quarters,it's suffered some ofthe worst strategicconfusion I've ever witnessed: Seem-ingly every single public statement bythe company's senior management hasbeen contradicted by subsequent state-ments. For example, in January 2002,then CEO Dennis Kozlowski announceda plan to split the company into fourpieces, only to reverse that plan a fewmonths later. On a single day, seniormanagers announced first that a finan-cial unit would be IPO'ed, next that itwould be sold to an investment house,and finally that neither would occur.Where was the board? Why didn't di-rectors demand a better accounting of

109

BEST PRACTICE • What Makes Creat Boards Great

the company's direction and well-being? What brought down the CEOeventually was an apparently privatefinancial matter-the board seemed con-tent to keep him on indefinitely.

Another sign that trust is lacking Iswhen board members begin to developback channels to line managers withinthe company. This can occur because theCEO hasn't provided sufficient, timelyinformation, but it can also happenbecause board members are excessivelypolitical and are pursuing agendas theydon't want the CEO to know about. If aboard is healthy, the CEO provides suf-fi,cient information on time and truststhe board not to meddle in day-to-dayoperations. He or she also gives boardmembers free access to people who cananswer their questions, obviating theneed for back channels.

Another common point of break-down occurs when political factions de-velop on the board. Sometimes this hap-pens because the CEO sees the board asan obstacle to be managed and encour-ages factions to develop, then plays themagainst one another. Pan Am founderJuan Trippe was famous for doing this.As early as 1939, the board forced himout of the CEO role, but he found waysto sufficiently terrorize the senior man-agers at the company and one groupof board members that he was returnedto office. When he was fired again fol-lowing huge cost overruns on the Boe-ing 747 the company underwrote, hecoerced the directors into naming a suc-cessor who was terminally ill.

Most CEOs aren't as manipulative asTrippe, and in fact, they're often frus-trated by divisive, seemingly intracta-ble cliques that develop on boards. Fail-ing to neutralize such factions can befatal. Several members of Jim Robin-son's American Express board were will-ing to provide the advice, support, andlinkage he needed - but the board wasalso riddled with complex political agen-das. Eventually the visionary CEO waspushed out during a business downturnby a former chairman who wanted toreclaim the throne and a former top ex-ecutive of another company who manyfelt simply missed the limelight.

Building an Effective BoardGood board governance can't be legislated, but it can be built overtime. Your best bets for success;

Create a climate of trust and candorShare important information with directors in time for them to readand digest it. Rotate board members through smali groups and commit-tees so they spend time together meeting key company personnel andinspecting company sites. Work to eliminate polarizing factions.

Foster a culture of open dissentIfyou're the CEO, don't punish maverici<s or dissenters, even if they'resometime pains in the necl<. Dissent is not the same thing as disloyalty.Use your own resistance as an opportunity to learn. Probe silent boardmembers for their opinions, and ask them to justify their positions. Ifyou're asked to join a board, say no if you detect pressure to conformto the majority. Leave a board if the CEO expects obedience. Otherwise,you put your wealth and reputation-as well as the assets and reputa-tion of the company-at risk,

Utilize a fluid portfolio of rolesDon't allow directors to get trapped in rigid, typecast positions. Askthem to develop alternative scenarios to evaluate strategic decisions,and push them to challenge their own roles and assumptions. Do thesame thing yourself

Ensure individual accountabilityGivedirectorstasksthat require them to inform the rest of the boardabout strategic and operational issues the company faces. This mayinvolve collecting external data, meeting with customers, anonymouslyvisiting plants and stores in the field, and cultivating links to outsideparties critical to the company.

Evaluate the board's performanceExamine directors'confidence inthe integrity of the enterprise, thequality ofthe discussions at the board meetings,the credibility of reports,the use of constructive professional conflict, the level of interpersonalcohesion, and the degree of knowledge. In evaluating individuals, gobeyond reputations, r^sum^s, and skills to look at initiative, roles and par-ticipation in discussions, and energy levels.

The CEO, the chairman, and otherboard members can take steps to createa climate of respect, trust, and candor.First and most important, CEOs canbuild trust by distributing reports ontime and sharing difficult informationopenly. In addition, they can breakdown factions by splitting up political

allies when assigning members to activ-ities such as site visits, extemal meet-ings, and research projects. It's also use-ful to poll individual board membersoccasionally: An anonymous survey canuncover whether factions are formingor if members are uncomfortable withan autocratic CEO or chairman. Other

no HARVARD BUSINESS REVIEW

What Makes Great Boards Great • BEST PRACTICE

revelations may include board mem-bers' distrust of outside auditors, inter-nal company reports, or management'scompetence. These polls can be admin-istered by outside consultants, the leaddirector, or professional staff from thecompany.

A Culture of Open Dissent. Perhapsthe most important link in the virtuouscycle is the capacity to challenge oneanother's assumptions and beliefs.Respect and trust do not implyendless affability or absence ofdisagreement. Rather, they implybonds among board membersthat are strong enough to with-stand clashing viewpoints andchallenging questions.

I'm always amazed at howcommon groupthink is in corpo-rate boardrooms. Directors are,almost without exception, intelli-gent, accomplished, and comfort-able with power. But if you putthem into a group that discour-ages dissent, they nearly alwaysstart to conform. The ones thatdon't often self-select out. FinancierKen Langone tells the story of a widelyadmired CEO who was invited to jointhe board of a famous corporation thatis suffering great distress today. He wastold that, as a matter of custom, newdirectors were expected to say nothingfor the first i2 months. The candidatesaid,"Fine, I'll see you in a year,"and ofcourse never got the appointment. Lan-gone explained that directors generallyfeel that they are under pressure to fit inso they'll be renominated. As he put it,"Almost no one wants to be a skunk ata lawn party."

Even a single dissenter can make ahuge difference on a hoard. Bill George,a former CEO and chairman of theboard of Medtronic, reported that alone dissenter had forced his companyto reconsider near unanimous decisionson several occasions. One pharmaceuti-cal director held out in opposition toMedtronic's acquisition of Alza, a makerof drug delivery systems, saying it wouldtake Medtronic into an area it knewnothing about. He was so convincingthat the acquisition was abandoned,

SEPTEMBER 2002

and in retrospect, that was the rightdecision. Another dissenter convincedGeorge and the board to reverse them-selves and not to get out of the angio-plasty business- and, indeed, to intensifythose services - and that shift has paidoff handsomely.

Frequently, executive recruiters look-ing for leads during board candidatesearches will ask, "Is this fellow a team

The highest-performing

companies have extremely

contentious boards that

regard dissent as an

obligation and that treat no

subject as undiscussable.

player?"which is code for"Is this personcompliant, or does he make trouble?"If a board member challenges majordecisions, a company sometimes goesto great lengths to discredit the person.Consider Walter Hewlett-an academic;the cofounder's son, who controlled 18%of Hewlett-Packard stock; and someonewith a deep understanding of the com-puter business-who had the temerity toquestion HP's proposed merger withCompaq in the fall of 2001. Despite thefact that technology mergers rarelywork, his point of view was summarilydismissed internally. When he wasforced to go public with his objections,he was ridiculed publicly in a smearcampaign.

CEOs who don't welcome dissent tryto pack the court, and the danger of thataction is particularly clear right now.Recall that Enron board members Re-becca Mark and Clifford Baxter resignedreportedly because they were uncom-fortable with paths the company hadtaken. And one can imagine a happierending at Arthur Andersen had some-body said, "Wait a minute," when the

document shredding began, or at Tycowhen the board learned of millions inundisclosed loans to the CEO and didn'tquestion them.

The CEO, the chairman, the lead di-rector, and the board in general need todemonstrate through their actions thatthey understand the difference betweendissent and disloyalty. This distinctioncannot be legislated through nominat-

ing committee rules and guide-lines for director r^sum^s; it hasto be something that leaders be-lieve in and model. Home Depotchairman Bernie Marcus notesthat, for one simple reason, he'dnever serve on a board wheredissent was discouraged: Whenhe serves on a board, his reputa-tion and his fortune are on theline. A lost reputation can't beregained, and director's insur-ance won't necessarily protectanyone's fortune, because thereare always exemption clauses.Marcus has remarked,"! oftensay, 'I don't think you want me

on your board. Because I am conten-tious. I ask a lot of questions and if Idon't get the answers, I won't sit down.'That's the kind of board member thatI want on my board.. .because our com-pany needs help. We think we're bright,but we're not the smartest people in theworld." Ken Langone corroborates thisview of the Home Depot board. Bothhe and Marcus describe times when theboard disagreed with managementabout strategic questions-when refor-mulating the small-store concept, for ex-ample, and when revisiting expansioninto Latin America. The upshot wasn'tthat the board won and managementlost, but rather that, after passionate dis-agreements had been voiced, togetherthey arrived at new conclusions.

According to data complied by Kath-leen Eisenhardt and L.J. Bourgeois, thehighest-performing companies have ex-tremely contentious boards that regarddissent as an obligation and that treatno subject as undiscussable. Directorsat these companies scoff at some ofthedevices more timid companies use to en-courage dissent, such as outside directors

111

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asking management to leave while theydiscuss company performance. What'sthe point of criticizing management,they ask, if management isn't there toanswer the criticism? It should be notedthat skepticism and dissent don't con-stitute disagreement for its own sakebut rather are the by-products of a con-stantly evolving view of the businessand ofthe world.

Fluid PortfolioofRoles. When boardmembers don't challenge one another,individual directors' roles-the ruthlesscost cutter, the damn-the-details big-picture guy, the split-the-differencespeacemaker - can become stereotypedor rigid. Effective boards require theirmembers to play a variety of roles, insome cases dipping deep into the detailsof a particular business, in others play-ing the devil's advocate, in still othersserving as the project manager. Playingdifferent roles gives directors a widerview ofthe business and ofthe alterna-tives available to it.

Occasionally board members can sothoroughly transcend their normal rolesthat they're able to change their mindsabout something they once built theirlives around. This happened at PepsiCoin 1997 when the board decided to sellthe various components of its well-runrestaurant group. CEO Roger Enrico hadpreviously turned around the unit -which had been the brainchild of two ofEnrico's predecessors, Don Kendall andWayne Calloway - and must have feltgreat pride of ownership. Yet he even-tually convinced all that the restaurantunit should be sold so that it could flour-ish freely beyond the controls ofthe par-ent company. It's proved to be a brilliantdecision.

Individual Accountability. Boardaccountability is a tricky problem forCEOs, as a 2002 survey by the YaleSchool of Management and the GallupOrganization underscores. In that sur-vey, fully 25% of CEOs claim that theirboard members do not appreciate thecomplexity ofthe businesses they over-see. In addition, we've all seen instanceswhen individual responsibility dissolvedin large groups. This certainly appearsto have happened at Enron: Practically

HARVARD BUSINESS REVIEW

everyone involved has pointed the fin-ger of blame at others or proclaimed hisor her ignorance as a badge of honor.The fact that many board memberswere financially sophisticated seemedto have encouraged the other boardmembers to defer to their expertise.

There are various methods for en-forcing accountability. Home Depot'sboard members are expected to visit atleast eight stores outside their homestate between board meetings; GE'sboard members dine with the com-pany's largest suppliers and distributorsthe night before the annual meeting.Perhaps the most effective enforcementmechanism, though, is old-fashionedpeer pressure. Directors who take theirduties seriously, and let their fellow di-rectors know they're expected to do thesame, are the best insurance against aboard whose first question, upon receiptof the quarterly earnings report, is,"When's lunch?"

Performance Evaluation. I can'tthink of a single work group whose per-formance gets assessed less rigorouslythan corporate boards. In 2001, theNACD surveyed 200 CEOs serving asoutside directors of public firms. Sixty-three percent said those boards hadnever been subjected to a performanceevaluation. Forty-two percent acknowl-edged that their own companies hadnever done a hoard evaluation. A 2001Korn/Eerry study of board directorsfound that only 42% regularly assessboard performance, and only 67% regu-larly evaluate the CEO.

This lack of feedback is self-destruc-tive. Behavioral psychologists and orga-nizational learning experts agree thatpeople and organizations cannot learnwithout feedback. No matter how gooda board is, it's bound to get better if it'sreviewed intelligently.

A performance review can include afull board evaluation, individual direc-tors' self-assessments, and directors' peerreviews of one another. Most often, thenominating or governance committeedrives these evaluations. A full boardreview can include an evaluation of suchdimensions as its understanding and de-velopment of strategy, its composition,

SEPTEMBER 2002

its access to information, and its levelsof candor and energy. In individual self-assessments, board members can reviewthe use of their time, the appropriate useof their skills, their knowledge of thecompany and its industry, their aware-ness of key personnel, and their generallevel of preparation.

The peer review can consider the con-structive and less constructive roles in-dividual directors play in discussions,the value and use of various board mem-bers' skill sets, interpersonal styles, indi-viduals' preparedness and availability,and directors' initiative and links to crit-ical stakeholders. This process is oftenbest driven by a board committee suchas a nominating or governance com-mittee, which is assigned the executionand follow-through responsibilities forthis process.

Annual evaluations led PepsiCo andTarget to change their processes forreviewing strategy with their boards.Instead ofthe mind-numbing, back-to-back, business-unit dog and pony showsthat boards often suffer, each companydecided to spend a full day of each boardmeeting looking in depth at the strategicchallenges of a single business unit

We al! owe the shareholder activists,accountants, lawyers, and analysts whostudy corporate governance a debt: Inthe 1980s and 1990s, they alerted us tothe importance of independent direc-tors, audit committees, ethical guide-lines, and other structural elements thatcan help ensure that a corporate boarddoes its job. Without a doubt, thesegood-governance guidelines have helpedcompanies avoid problems, big andsmall. But they're not the whole story oreven the longest chapter in the story.If a board is to truly fulfill its mission-to monitor performance, advise theCEO, and provide connections with abroader world-it must become a robustteam-one whose members know howto ferret out the truth, challenge oneanother, and even have a good fight nowand then. ^

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