CORPORATE GOVERNANCE Hard Facts: Soft Behaviours Why balance beats regulation

Companies are falling over themselves to institute visible and verifiable changes in board composition and structure.

Meanwhile, boards have CEOs on the run. According to Booz Allen Hamilton study, CEO churn at the world’s 2500 largest publicly traded companies increased by 53 percent between 1995 and 2001.

Are these changes in the structure of business necessary? Probably. Are they sufficient? Certainly not.

Current attempts to embed irreproachable business behaviour in the composition and structure of corporate boards are, we believe, doomed to fail.

The fixes many firms are rushing to institutionalise may even be naively counterproductive. The drive to more tightly regulate the membership and functions of corporate boards is already encouraging companies to view governance as legal challenge rather than way to improve performance.

Moreover, evidence exists that such externally imposed governance requirements may compromise long-term performance. The outcome of many studies on whether good governance translates into superior returns is both inconsistent and conflicting.

In short, hard or regulatory solutions will not resolve the challenges companies face in simultaneously serving the interests of shareholders and other stakeholders. By reducing the critically important issue of corporate governance to box-checking exercise, corporate directors and executives are addressing the symptoms not the root cause of the governance crisis.

Our extensive experience concludes that governance begins at home – inside the boardroom among the directors. It is embedded in the how, when and why they gather, interact and work with one another and management. In other words, it’s the “soft” stuff that counts. But qualitative reforms to the behaviours, relationships and objectives of the directors and the CEO are meaningless unless they are subjected to the “hard” mechanisms of performance, criteria, processes and measurements.

The combination of soft and hard solutions can turn governance from vague concept into means of delivering organisational resilience, robustness and continuously improved corporate performance.

Qualitative reform: the 7 steps
It was perhaps inevitable that the bubble economy of the late 1990s would be followed by both decline and introspection, but the degree of soul-searching today is striking nonetheless.

The problem is reflection does not necessarily lead to action – situation that almost begs governments to step in with regulatory solutions.

What distinguishes superior performance among boards is the ‘qualitative’ reforms companies put in place between the structural boxes and the lines of legislative mandate. While the recipe for reforming the ‘soft’ side of governance will need to be customised for individual companies, our experience suggests the following best practices can and should cross borders.

1. Select the right directors.
2. Train them continuously.
3. Give them the right information.
4. Balance the power of the CEO and the directors.
5. Nurture culture of collegial questioning.
6. Gain from directors an adequate commitment of time.
7. Measure and improve.

Although these principles seem self evident, our experience suggests they are too often honoured in the breach. Firms often assume that soft reforms cannot be assessed or implemented rigorously. But if company aims to serve shareholders’ interests better and adapt to the rigours on an increasingly competitive global economy, it must address board culture and behaviour through systematic and solution-oriented approach.

Selecting the right people
Changing the insider/outsider mix to meet regulatory requirements won’t necessarily improve board effectiveness. diverse array of skills and knowledge is needed and the central test for director is: does he or she add value?

Recruit directors with the courage to challenge the CEO.

Look for self-confident CEO-level candidates who can engage in real debate without dragging in their egos.

Train the watchdogs
A director requires thorough understanding of the company’s past, present and potential performance to ask intelligent questions. But most companies fail to furnish the necessary training.

Orient new directors by arranging face-to-face meetings with all the top executives. Provide briefing books, arrange site visits and factor in time to build relationships. Remember – ongoing education for all directors.

Inform and empower
Most of the information reviewed by the board is provided by management generally week to 10 days before the board meets. It is too little, too late.

A steady supply of credible and comprehensive information is the foundation of an effective board’s power to govern competently. Deliver relevant information early and in multiple formats. Leave time on the agenda for open discussion.

Counterbalance the CEO
Balancing the power of the CEO with that of the board is critical to effective governance but takes more than optimum insider/outsider ratios to establish equilibrium. Companies benefit when the roles of CEO and chair are split – and not just to enhance governance transparency. non-executive chair can become the confidant and coach many CEOs need.

Make sure only independent directors recruit new directors, control the committees’ chairs; hold meetings without the chief executive, and control succession.

Nurture constructive scepticism
Balance works both ways. Although it’s important to empower directors with the information and arm them with the authority to make tough decisions, boards should not get into the habit of openly vying with the CEO.

Hire CEOs who value teamwork and want feedback. Establish tone of collegiality and constructive scepticism. CEOs and directors must establish culture of listening.

Watch the time
To participate constructively in strategic and other board discussions, directors need to do lot more than just attend meetings.

Board membership requires time to prepare, to discuss, to develop relationships. All directors must open up their schedules to absorb information and make decisions.

Measure performance
Although surveys of directors reveal plenty of scope for self and board improvement, few companies have in place mechanism for defining or measuring the performance of boards or indvidual directors.

Establish tradition of continual improvement. Evaluate the CEO, evaluate the board, and evaluate individuals.

Strategy and oversight
A shared understanding of ethical behaviour is one of the critical elements that bind society together. But good corporate governance transcends ethics. It is crucial operating system for companies in complex, competitive, fast moving industries and thus an important component of economic stability and growth.

Legislation can stiffen penalties for directors, executive and firms straying from the path of good governance – but only the CEO, chair and their board can choose to govern well. To do that they must master the soft art of balancing power, nurturing collegial culture, promoting continuous improvement and educating and informing each other.

Extracted with permission from “Corporate Governance: Hard Facts about Soft Behaviours” by Paul Kocourek, Christian Burger and Bill Birchard, in strategy+business, Issue 30, Spring 2003,

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