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1970-01-01 02:00:00
rlp
Dec 7th 2013 | From the print edition
IN 1953 the Himalayan Committee of the Royal Geographical Society met to choose
a leader for the latest attempt to climb Mount Everest. Eric Shipton was the
obvious man for the job: a gentleman-adventurer who knew the mountain better
than anyone. The committee gave him the nod. But then the grandees had second
thoughts. Shipton took amateurism to absurd lengths; he had even forgotten to
bring a backpack on one expedition. And foreign rivals were threatening to
reach the top first. In an inspired move they replaced Shipton with his
psychological opposite a methodical and self-effacing military man named John
Hunt replacing one idea of mountaineering (gentlemanly amateurism) with a very
different one (meticulous organisation).
Hunt planned the expedition to the tiniest detail: every ration pack had to
include exactly 29 tins of sardines. He also insisted on using a large army of
climbers who worked methodically as a team. Tenzing Norgay and Edmund Hillary
got their chance at immortality because two other climbers had retreated 300
feet below the summit leaving a cache of supplies (including sardines).
Corporate boardrooms have taken over 50 years to catch up with the Himalayan
Committee. For most of their history, boards have been largely ceremonial
institutions: friends of the boss who meet every few months to rubber-stamp his
decisions and have a good lunch. Critics have compared directors to parsley on
fish , decorative but ineffectual; or honorary colonels, ornamental in parade
but fairly useless in battle . Ralph Nader called them cuckolds who are
always the last to know when managers have erred. The corporate scandals of the
early 2000s forced boards to take a more active role. The Sarbanes-Oxley act of
2002 and the New York Stock Exchange s new rules in 2003 obliged directors to
take more responsibility for preventing fraud and self-dealing. This led to a
big increase in the quality of boards. But it also wasted a lot of talent on
form-filling and box-ticking.
In a new book, Boards That Lead , Ram Charan, Dennis Carey and Michael Useem
argue that boards are in the midst of a third revolution: they are becoming
strategic partners. They base their arguments on detailed knowledge of the
world s boardrooms. Mr Charan is so dedicated to studying the inner life of
firms that he spent years without a home, flying from hotel to hotel. Mr Carey
is vice-chairman of Korn Ferry, a headhunter, and Mr Useem is a professor at
Wharton business school.
The parsley on the fish can make the difference between a delicious meal and a
dog s dinner. In 2006 Hewlett-Packard and IBM had about the same market
valuations. By 2013 HP, with revenues of $120 billion in 2012, had a market
capitalisation of $52 billion and IBM, with revenues of $105 billion, was worth
$192 billion. IBM had a stable board with a successful relationship with the
CEO. The board at HP was scandal-riven: bitter disputes, illicit
investigations, angry resignations, forced departures and the criminal
indictment of the board s chair (it was later dropped).
How do you make sure that boards can add value rather than subtract it? And how
do you make sure that boards that lead do not create warring centres of
power? Mr Charan and his co-authors lay out two clear rules. The first is that
boards should focus on providing companies with strategic advice. This sort of
common sense is often in short supply in the ego-driven world of boards.
Boardrooms contain too many people with different priorities: corporate
veterans who give lectures on how they would have handled things; egomaniacs
who like to show how much they know about everything; hobby-horse jockeys who
mount the same steed regardless of the race; captives of compliance who are
obsessed with box-ticking. The authors say that in their experience perhaps
half of the Fortune 500 companies have one or two directors they would regard
as dysfunctional .
Boards are getting better at dealing with these problems. Nine-tenths of S&P
500 companies have lead directors who are responsible for organising the
board s affairs. These directors are getting better at recruiting high-flyers
and ditching ground-scrapers. The lead director at one big financial-services
firm takes an annual poll of his fellow directors about whom they should keep
and whom they should kick out. The Conference Board, a research firm, reports
that 90% of big American firms now conduct annual evaluations of boards
overall performance.
Get on board
The second rule is that boards should focus on getting their relationship with
the CEO right. It is not enough to act as monitors in the Sarbanes-Oxley mould.
They need to act as personal mentors and high-level talent scouts. As well as
giving the boss frank advice they should also prepare for his departure. The
board of Ford laid the foundations of its recovery by persuading Alan Mulally
to leave Boeing to join the carmaker. The directors of 3M worked closely with
its then CEO, Sir George Buckley, to repair the firm s leadership pipeline and
find a successor from within.
There are problems with this new model board. Can directors fulfil their legal
duties to monitor performance if they are also responsible for helping to set
strategy and appointing the CEO? Are organisations that meet a dozen times a
year capable of offering strategic guidance in a fast-paced world? Will CEOs
willingly give up more power to boards, or will they fight back? Getting the
new model right will entail careful negotiations not only between boards and
executives but also between firms and regulators.
The result of these negotiations matters a lot. Successful boards can do an
enormous amount to boost corporate performance. Sensible companies are putting
a lot of effort into attracting high-quality directors and getting their boards
to work smoothly. And investors are paying ever more attention to companies
boardrooms as well as their corporate suites.