The Handbook of Board Governance: Part 1

The Handbook of Board Governance advertised in Times Square

This is the second post in my review of  The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Member. see the introduction. I blabbed on for so long that I made my introduction a separate post. With the current post, I actually start reviewing Part 1 of the book. Yes, this will probably be my longest review ever… but it is for one of the biggest books ever. 

The Handbook of Board Governance: The Board’s Responsibilities

Leblanc first sets out the book’s purpose and highlights the potential importance of each part. Since I’ll be covering some of the same ground in this review, I’ll at least spare you commentary on his commentary.

The Handbook of Board Governance: Boards That Lead

In Boards That Lead, Michael Useem, Dennis Carey and Ram Charan (UCC) highlight the potential leadership that can come from boards, offering many examples. “Smart experienced, and dedicated man and women are ready to serve.” Yet, they are “too often closeted in the boardroom.”  Of course, we seen many instances where they fail even there. UCC provide a brief historical evolution the board from nineteenth century boards with family members, wealthy investors and friends of the founder. Later, “expertise trumped pedigree.”

They also discuss how ownership has shifted to institutional investors, director obligations of care and loyalty were strengthened, executive pay became tied to stock and the growing trend to separate board chair and CEO. Directors have become more effective monitors and are recently more focused on company strategy than other shareholder concerns, despite what the news focuses on. UCC conclude with a handy little checklist for recruiting board members and an admonition about the growing importance of nominations and governance committees and a suggestion that such committees be reconstituted as the “leadership and governance committee,” in recognition of its growing leadership obligations. I would add that companies that fail in this regard will be the first to see how proxy access by shareholders unfolds.

The Handbook of Board Governance: Trends in Corporate Governance

Charles Pierce provides an overview of some of the most important Trends in Corporate Governance towards improving director professionalism. Did your main concern make it to his top ten list?

1. Corporate Governance Codes (Yes, Mr Pierce is from London.)
2. Regulation and Enforcement (pervasive more globally)
3. Board Diversity (independence, gender, ethnicity, national origin, age, competency, time)
4. Strategy, Value Creation and Corporate Responsibility
5. Governance Risk
6. Information Governance
7. Compensation Governance
8. Accountability and Responsibility to Shareholders and Other Stakeholders
9. Board Evaluations
10. Director and Board Development

The Handbook of Board Governance: Governance as a Corporate Discipline

In Governance as a Corporate Discipline, Drew Stein discusses how the concept of governance has evolved, the importance of governance documents maintained by each individual company and what specific elements such documents should contain. I am glad to see him emphasize the need to communicate with shareholders “in an open, transparent, and responsible manner, while providing a channel for shareholders to voice their opinions on critical and strategic issues.”

Let’s linger on that thought. Why aren’t companies taking better advantage of advice volunteered by shareholders and customers that could be easily structured using the internet? Think of the unpaid effort put into Wikipedia and then think how Tesla or Apple could gather great ideas for their next vehicle, while building in even more brand loyalty by people who feel they are part of the process. Stein points out that directors need to pay attention not only to simple financial risk but brand risks as well. How much stronger would brand loyalty be if shareholders and customers felt they were actually part of the corporate community?

The Handbook of Board Governance: The Nonexecutive Chairman – Toward a Shareholder Value Maximization Role

In his chapter, Henry D. Wolf explains that the non executive chairman position is the linchpin to a new model of the board focused on maximizing capital allocation, much like a private equity firm. Of course, boards need to comply with laws and regulations… but their focus should be on value creation. A new chairman should first undertake a due diligence exercise, as if they were buying the company.

In support of his contention that public boards should be more like private equity boards, Wolf cites a study of  70 successful private equity deals by McKinsey, which found value creation was largely driven by a more engaged form of corporate governance… not price arbitrage, financial engineering or sector gains. Having a separate chairman can ensure the board is both engaged and not too close to the executive team.  However, contrast The Governance Story in Private Equity with Are Lower Private Equity Returns the New Normal?

Regardless of debates concerning the success of erivate equity, Wolf’s advice to chairman is valuable in discussing how to promote a more focused, results-oriented and decisive board culture. What to look for in a chairman, what are their key responsibilities, communicating and addressing the concerns of activist shareholders… its all there with plenty of real-world examples. I agree with his basic thrust. Don’t retreat to entrenchment. Don’t let the need for compliance take the focus away from where the company is investing its capital. Focus on capital allocation and operating performance measures.

The Handbook of Board Governance: CEO Succession – An Owner’s Guide for Directors

Mark B Nadler advises readers to approach succession from three dimensions: Rational, Emotional and Political. Then he delves into 10 ways succession planning stumbles: 

1. Talent disconnect
2. Reluctant retiree
3. Absence of human resources
4.  Assessment tool obsession
5. Irrelevant criteria
6. Cultural conundrum
7. Mysterious talent pool
8. Never-ending transition
9. Forever CEO and
10. Persistent myth: It’s just fort the big guys

I’m sure some of these sound familiar. Half the directors surveyed by Stanford were confident their board had an effective succession plan in place but only 40% said they had qualified candidates lined up. What’s effective? At an annual meeting, I asked the Founder/CEO/Chairman about the company’s succession planing and was told we are betting on the founder’s teenage son. Clearly, that company wasn’t putting sufficient effort into developing internal talent. Although flippant, 39% of respondents to a Stanford survey had no better substantive response.

The Handbook of Board Governance: CEO Succession Planning

Two chapters on the same topic isn’t overkill; the problem is that pervasive. Plus the perspectives are different. Nadler writes primarily from the view of a consultant; David F Larcker and Brian Tayan write primarily as academics. Actually, we’ll keep coming back to the topic in future chapters as well. Larcker and Tayan begin with a bit of demographic. What degrees and experience do they have, for example. Telling is the fact that although there are 5,000 CEOs of publicly traded companies, most serve 10-15 years and many of those departures are due to M&A activity. In short, there isn’t much of a market.

How well are boards monitoring and making the tough decision to terminate the CEO? “Firms that rank in the bottom decile in terms of performance are only approximately 4 percent more likely to terminate a CEO that firms in the top decile.” The Miles Group found that only 16% of directors think their performance evaluation process is very effective. How is that meeting their duty? Shareholders should be worried.

The authors weigh the pros and cons of internal promotions versus external hiring. Of course, comparisons are difficult because companies that hire outside candidates are generally in worse shape and have to pay more. Do your succession planning properly and groom those internal candidates. The authors go over various strategies, dos and don’ts.