How to Build a Great Board

Assertion: Most CEOs can build a good board of directors within their tenure in office.

Question: So, why don’t more CEOs and companies do so?

The answer is, that until the last few years, the task was not all that urgent. It was easier to drift along in the same old way with the same old kind of directors your predecessor had (and his predecessors, too). Why take the time to find new, independent directors who might rock the boat? Why seek a broad range of talent, experience, background, and representation? Why tamper with your committee organization, your agenda set-up, your board-meeting procedures? “If it ain’t broke, don’t fix it,” was the standard operating procedure. However, unless you have been living in a salt mine, you must have heard that things are different now. Corporate governance has been yanked out of the closet by the institutional investors, by the press, by the U.S. Securities and Exchange Commission, by changing global competition, and, happily, by a large number of enlightened CEOs and corporations.

Last month in CE, Boris Yavitz, former dean of Columbia Business School, and I wrote an article entitled, “America‘s Best And Worst Boards.” It was the culmination of a lot of board watching, proxy reading, and seminar attending. We listed the criteria we thought made for good boards, and we gave examples of companies that met these new standards and those that did not. But the exercise left us with the questions: Why don’t more CEOs and companies have better boards? And, how do you go about creating one?

Here is my suggested seven-step program for executives:

• As CEO, decide resolutely that you want to do it. Don’t wait for someone else to start the process; it works best when you are the catalyst and advocate.
• Appoint a committee on hoard affairs composed of your brightest, most independent, respected directors. You can be an ex-officio member.
• Charge the new committee to construct the framework of an “ideal” board. for your company in terms of size, organization, talent, experience, demographics, and compensation. In addition, advice from an outside consultant may be appropriate.
•  Prioritize and timetable the steps required to make the transition from where you are to where you want to be.
• Recruit the new directors needed. The committee on board affairs also can act as the nominating committee and can actively participate in the recruitment and selection processes. Many companies find it helpful to use a professional director-recruiting firm.
• Determine which of your present directors should retire or not stand for reelection. This is the hardest job of all and may take several years to complete. It might involve the implementation of a director-evaluation program. It requires full accord among the CEO, the chairman, and the committee on hoard affairs.
• Work unceasingly to keep your directors participative and informed, your board meetings pertinent and useful, your governance programs up to speed.

Once you have a well-balanced, conflict-free, independent board in place, it is possible to indulge in a number of advanced exercises favored by many corporate governance pundits. It will he easier to institute an objective board evaluation of the CEO, and, in turn, a continuing assessment of the board itself. A “lead director” can be appointed, or, if the circumstances warrant, a non-executive chairman of the board can be elected. And, certainly, you largely have removed yourself from the target lists of institutional shareholders.

The transformation into a board composed primarily of truly independent directors is not without its problems. Board meetings change from a pattern of information presentations to one of answering difficult questions and defending positions. Preparation for hoard meetings may involve new kinds of data, more justification for proposed projects, and broader managerial participation. At times, the CEO will not get what he or she wants. Experienced, talented directors are not always easy to work with.

This blueprint does not apply to all CEOs and all companies. In their heydays, I simply can’t see Lee Iacocca at Chrysler, Harold Geneen at ITT, or Steven Ross at Time Warner adopting such a corporate program. But their successors will be-and are-different. The newer, younger CEOs coming on board American corporations are much more amenable to a new corporate governance approach.

As a chief executive, if you take the lead and follow these suggestions, I think you have an excellent chance of winding up with a good hoard-even a great board during your tenure. If you don’t do these things, your directors may have to do them for you. As many ex-CEOs will tell you, the first alternative is better.

Formerly the CEO of F.&M. Schaefer (19721977), Robert W. Lear is chairman of CE’s advisory board. He also teaches at Columbia Business School, where he is Executive-inResidence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stow Venture Capital Co.