Competing in the Global Ideas Economy
March 15 2013 by Jennifer Pellet And C.J Prince
Winning in a Global World: Douglas Oberhleman
The New Calculus of Value Creation: Doug Conant, Kurt Schneider, Murray Martin
Performing while Transforming: Abhi Talwalkar, Bill Nuti, Mark Dorman
How U.S. Companies Can Lead in the New Global Economy: David Novak, Nick Akins, Chris Kearney
Building a Capability for Breakthrough Innovation
What’s Next for Governance?
What’s Next for Governance?
If there is one reliable constant in the field of board governance, it may well be that nothing ever stays as is. The moment CEOs and chairmen arrive at a set of criteria for excellence, the governance game changes once again and the players are left to figure out a new plan forward. Whether the debate is about board size and composition, the CEO-chairman split, outside vs. inside directors or a host of other issues that have arisen over the past decade, tensions have steadily increased between CEOs and their directors, as record numbers of CEO exits in 2011 and 2012 illustrate.
Inherently, the relationship between CEO and board is one of the most challenging to manage in a healthy way. “Board members’ first job is strategy and guidance, but they also have the responsibility of executive compensation and executive development when levels mismatch. So, how, as a CEO, do you manage all those tensions, yet at the same time have enough dialogue with the board that they don’t someday get the question, ‘Where was the board?’” asked Peter Bible, partner with advisory and CPA accounting firm EisnerAmper, which cosponsored a CEO Summit roundtable on the topic.
CEO participants agreed there are no easy answers. But getting the balance right starts with an understanding of the roles of those on both sides of the boardroom table. What are the limits of board responsibility? How involved should directors be in development of the strategic plan? Or in managing plan execution? “For board members, there’s a real friction between keeping your finger out of the business, but having your nose in it enough to really understand what the business should look like and what it should be doing going forward,” noted Joe Slaughter, president of Herff Jones.
When they understand the business, board directors have the potential to be invaluable resources for senior management. Hasnain Merchant, CEO of Kuss Filtration, noted that although the majority of the time he executes strategic initiatives with his management team, on occasion he asks board members to help out. “We can talk about them keeping their fingers out, but there are times where you absolutely want help that you couldn’t have gotten with the [inside] resources and the structure you have.”
One of the biggest complaints around the room, however, was that too many outside directors still don’t really get what their companies do or what they are supposed to be achieving. “On the most global level we have issues where sometimes the board just doesn’t understand the business,” said Sandy Climan, president of Entertainment Media Ventures. “I’m CEO of a company that has a Japanese board. They have no idea what we do in motion pictures. They don’t understand; they don’t want to understand. It’s a very challenging environment.”
The corporate scandals of the early 2000s, which appeared to happen under the noses of board members asleep at the table, ushered in a new era of outside directors. Those with no ties to the company, it was thought, were best positioned to monitor. But that independence is fraught with its own challenges. Doron Grosman, partner with private equity firm Court Square Capital Partners, called the current system of board member selection and composition “arcane.” “Most of the members of public boards, in my humble judgment, have no right to be there,” he said. “They should get thrown out and we should replace them with people whose interests are aligned with their company: employees, many of your customers, many of your suppliers. Who knows the business better than customers and suppliers?”
Abhi Talwalkar, CEO of LSI, suggested that even the most diligent outside board directors cannot retain information about the company in the same way as those inside the company can. “As board members, we forget. We’re not living in the business every day. So, as the CEO, you have to bring that board back into the context every quarter with consistency—consistent charts, data—to get them to snap back in.”
Once there is a healthy understanding of the business and where it’s going, successful boards need to fashion the right culture, which is easier said than done, participants agreed. “How do you create a climate of trust and candor?” asked Jeffrey Sonnenfeld, president of the Chief Executive Leadership Institute at Yale. “Are you giving people information in a timely way? Is there a culture of open dissent? Are you allowed to ask tough questions without looking like you’re a bad team player on the board? Do you take turns asking tough questions? Is there individual accountability?”
To get to that right culture, boards need experienced directors, suggested Jim DeCosmo, CEO of Forestar Group. “Our board is very mature and experienced and they know how to strike the right balance of involvement with the business vs. getting in your business vs. providing guidance. They’ve got teeth and they’ve shown us they can use them.”
Having consistent, transparent metrics for measurement can help both sides stay focused and keep either side from being surprised, noted David Deutsch of David N. Deutsch & Company. “There has to be a relatively simple set of metrics agreed upon by the board by which the CEO manages and by which the board monitors.”
That said, Tahlwalkar pointed out that there’s a lot more to board service than simply monitoring management’s potential missteps. Directors can fulfill their fiduciary responsibilities and, at the same time, be partners to management rather than an adversaries. “You fail to deliver on fiduciary responsibility if you don’t partner and all you do is audit. It’s all about solving problems with management, whether they’re compensation problems, strategic problems, whatever they are.” That communication and partnership is even more important during a turnaround, added Tahlwalkar, whose company has been in turnaround mode for the past five years.
Private company CEOs acknowledged that it was easier for them to manage out of the limelight, particularly in a turnaround. It also allows them to have advisory board members on hand without ceding fiduciary responsibility, noted Jim Rickard of Community Bank Shares of Indiana, whose advisory board consists of three shareholders and four outside members. “It’s not perfect, but it’s very healthy compared to what many of you are faced with because it’s truly advisory. And the shareholders are at the point where they realize the limitations in terms of the growth of the organization.”
All CEOs’ managing boards have to find a way to manage up and create a boardroom culture conducive to honesty and active participation. “People who sit on boards, in many cases, it’s an ego thing. Everyone wants to be on the board, but then in the meeting, they just ask a bunch of tactical questions,” said Tim Lewko of Thinking Dimensions Global. “The CEOs have to be aware that need to really shape those ground rules.”
CEO Roundtable Participants
Daryl Adams, CEO, Midway Products Group • Susan Battley, CEO, Battley Performance Consulting • Peter Bible, Partner, EisnerAmper • Sandy Climan, President, Entertainment Media Ventures • Marshall Cooper, CEO, Chief Executive Group • Wayne Cooper, Executive Chairman, Chief Executive Group • Guillermo De la Viña, CEO, Sigues • James DeCosmo, CEO, Forestar Group • David Deutsch, President, David N. Deutsch & Company • Mike Felmlee, CEO, The Prouty Project • Doron Grosman, Partner, Court Square Capital Partners • William Holekamp, President, Holekamp Capital • Tim Lewko, Managing Partner, Thinking Dimensions Global • James McIntyre, CEO, The Greenheck Group • Hasnain Merchant, CEO, Kuss Filtration • James Post, John F. Smith, Jr. Professor in Management, Boston University School of Management • James Rickard, CEO, Community Bank Shares of Indiana • Kurt Schneider, CEO, Harlem Globetrotters • Ralph Scozzafava, CEO, Furniture Brands • Joe Slaughter, CEO, Herff Jones • Jeffrey Sonnenfeld, President, Chief Executive Leadership Institute, Yale • Abhi Talwalkar, CEO, LSI • Christine Wicks, CEO, Keller Williams • Michael Wolff, Principal, EisnerAmper • Richard Zuschlag, CEO, Acadian Ambulance Service