Owning Up E-Book

Ram Charan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2009

Seitenzahl: 293

Beschreibung

YOUR WORLD AS A DIRECTOR HAS SUDDENLY CHANGED. YOU'VE SEEN MEMBERS OF OTHER boards take the heat when their companies imploded. The managements of Lehman Brothers, Bear Stearns, Merrill Lynch, and Washington Mutual clearly failed, but so did their boards. Now the board of every company beset with problems is coming under scrutiny. The pressure is on. Your board must own up to its accountability for the performance of the corporation. Governance now means leadership. Boards must change their modus operandi to address the new and complex issues that are emerging. These include * ENSURING LIQUIDITY IN THE CONTEXT OF THE GLOBAL FINANCIAL CRISIS * SETTING CEO PERFORMANCE TARGETS IN A VERY UNCERTAIN ECONOMY * ASSESSING STRATEGY AND ENTERPRISE RISK UNDER EXTREME VOLATILITY So what should boards do now? What should they be talking about in their meetings and executive sessions? What decisions must they make? How assertive must they be regarding company priorities and operating goals? In Owning Up, business advisor and corporate governance expert Ram Charan answers these and other burning questions on the minds of directors and business leaders. He describes best practices that are emerging in boardrooms he has observed firsthand. And he provides practical recommendations on a range of issues, from compensation to dealing with external constituencies. Wisely attuned to the human side, he confronts the need for some boards to refresh their composition and for others to rebalance their board dynamics. Directors, CEOs, general counsels, and operating executives will find here the guidance they need to meet the new and rising standards for corporate governance in this demanding business environment.

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

What Boards Need Now

Question 1. - IS OUR BOARD COMPOSITION RIGHT FOR THE CHALLENGE?

How Do We Figure Out What Our Board Needs?

How Do We Get the Right People for the Job?

What Does the Board Succession Process Look Like?

The Governance Committee’s Pivotal Role in Board Succession

Key Points

Question 2. - ARE WE ADDRESSING THE RISKS THAT COULD SEND OUR COMPANY OVER THE CLIFF?

How You Can Use Different Lenses to Examine Risk

How a Risk Committee Helps the Company’s Preparedness

Key Points

Question 3. - ARE WE PREPARED TO DO OUR JOB WELL WHEN A CRISIS ERUPTS?

The Knowable Unknowns

How to Deal with Unknowable Unknowns

Key Points

Question 4. - ARE WE WELL PREPARED TO NAME OUR NEXT CEO?

Selecting the CEO

Spotting High-Potential Leaders Early

Preparing for the Worst

Key Points

Question 5. - DOES OUR BOARD REALLY OWN THE COMPANY’S STRATEGY?

Why Does Management Hesitate to Involve the Board on Strategy?

The Content of Strategy

Engaging the Board: A New Process of Strategy

Flexibility of the Strategy

Management’s Link with Strategy

Key Points

Question 6. - HOW CAN WE GET THE INFORMATION WE NEED TO GOVERN WELL?

What Information Should the Board Be Looking At?

The Information Architecture in Practice

Bring the Outside In

Key Points

Question 7. - HOW CAN OUR BOARD GET CEO COMPENSATION RIGHT?

Determining What Performance You Are Paying For

Balancing Fixed and Variable Pay

Using Your Judgment

Working with Compensation Consultants

Keeping a Strong CEO-Board Relationship

Monitoring Societal Pressures

Key Points

Question 8. - WHY DO WE NEED A LEAD DIRECTOR ANYWAY?

How Board Dynamics Affect Governance

Key Points

Question 9. - IS OUR GOVERNANCE COMMITTEE BEST OF BREED?

Ensure Appropriate Board Leadership

Use Committees Wisely—But Don’t Isolate Them

Ensure the Board Functions Well

Driving for Continuous Improvement and Self-Renewal

Key Points

Question 10. - HOW DO WE GET THE MOST VALUE OUT OF OUR LIMITED TIME?

How Can the Board Stay Focused on Its Priorities?

How Can We Design Board Meetings to Run More Efficiently?

How Can Management’s Reports Improve Boardroom Dialogue?

How Much Time Should We Commit?

Key Points

Question 11. - HOW CAN EXECUTIVE SESSIONS HELP THE BOARD OWN UP?

What Should—and Shouldn’t—We Talk About in the Executive Session?

Set the Right Tone for Executive Sessions

Should the CEO Ever Be in the Room?

How Do We Loop in the CEO After the Executive Session?

When Should We Hold Executive Sessions?

Key Points

Question 12. - HOW CAN OUR BOARD SELF-EVALUATION IMPROVE OUR FUNCTIONING AND ...

Specify the Outputs

Room for Improvement

Results and Follow-Through

The Importance of Peer Evaluation

Key Points

Question 13. - HOW DO WE STOP FROM MICROMANAGING?

What Is—and Isn’t—Micromanaging?

How Can Directors Curb Micromanaging?

How Can the CEO Keep the Board from Micromanaging?

Key Points

Question 14. - HOW PREPARED ARE WE TO WORK WITH ACTIVIST SHAREHOLDERS AND THEIR PROXIES?

Opening the Lines of Communication with Shareholders

Seeing Through the Eyes of Activist Shareholders

Working with Investor-Nominated Directors on the Board

Working with Shareholder Proxies

Key Points

About the Author

Acknowledgements

Index

Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.

Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741—www.josseybass.com

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax [phone], or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax [phone], or online at www.wiley.com/go/permissions.

Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax [phone].

Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

Library of Congress cataloging-in-publication data has been applied for.

eISBN : 978-0-470-48550-7

Foreword

Societal demands and expectations have caused a tectonic shift in the role of the board. The first shock was felt in 1993 when the board of General Motors broke the mold and forced out a CEO who was not performing. Since then, boards in the U.S. and U.K. have been prodded and pleaded with to take a more active role, and in recent years, indeed they have. Expectations for boards were raised further with the passage of Sarbanes-Oxley in 2002, which erased any doubt that boards must ensure that their companies’ fiscal houses are in order.

Now boards find themselves thrust into the spotlight yet again and challenged to do even more. In the midst of the near total breakdown of the global financial system, shareholders and other constituencies are looking to boards to help their companies find a safe place to land. Even good companies with AAA ratings have been swept up in the tsunami. Surely the board can pick up and patch up what the CEO cannot, the thinking goes. Directors have scrambled to meet this newest demand and fill the void, adjusting their schedules and their priorities and approaching their board work with increased rigor.

With this immense pressure and the sudden surge of engagement by some boards, the break from the past is now complete. Boards are no longer waiting for issues to come their way. They are trying to identify them early and to get ahead of them. This new set of circumstances creates new dynamics between the board and management, between the board and external constituencies, and among the independent directors. No wonder questions are arising in boardrooms nationwide. As if the business issues were not challenging enough, boards are also trying to reinvent their work on the fly.

Fortunately, there are answers. In this succinct and timely book, Ram Charan takes on the questions that are top of mind among directors. A life-long student of corporate governance, advisor to CEOs and corporate boards, and director serving on three boards himself, Ram has an unparalleled experience base from which to provide the answers. He has observed many boards in action and won the confidence of many highly respected directors. He has watched as boards have worked to adjust to the new developments in corporate governance. What he has found, and catalogues so well in this book, is a number of cutting edge practices that are exactly right for the times.

In his inimitable style, Ram provides advice that is both wise and practical. He takes into account the realities of human behavior and group dynamics as well as the ambiguities of running a business in today’s environment. He sees issues in their entirety yet clarifies the way forward. And he does not mask his views about where boards need to take a stronger stance.

Directors, CEOs, senior executives, and anyone else who has a stake in the quality of corporate governance will be interested in the sound advice and insights found here. I encourage you to keep reading, and learning, and making a positive difference to the companies on whose boards you serve.

Jack Krol Former chairman and CEO, DuPont Director, Tyco International, Ltd. January 2009

What Boards Need Now

The meltdown in the global financial system in 2007-8 followed by a deep and probably long economic downturn sent a wake-up call to corporate boards. Directors are energized to roll up their sleeves and get to work, yet they have more questions and anxiety than ever.

Their companies are facing unprecedented challenges. Cash vulnerabilities at many companies are revealed daily, and lack of liquidity is in some cases turning into insolvency. In many industries demand has fallen off a cliff. For example, demand for automobiles and parts plunged by more than 30 percent in fewer than 90 days. As recently as late last year analysts and investors were recommending that companies should use cash to buy back shares, and some directors wholeheartedly agreed, even encouraging management to do so more aggressively. One director, chairman of his board’s finance committee, recently remarked, “Why didn’t I move faster to suggest that management ignore the analysts and reverse that decision?” Urgency has taken hold. In September-October 2008, some boards met more than six times on very short notice—and with full attendance.

The business landscape has changed. The game has changed. What boards do needs to change as well. The change is this: Boards need to own up to their accountability for the performance of the corporation. In the past, employees, shareholders, and the press looked to the CEO to ensure that the corporation performed well. Now they have also begun to look to you, the board, to be the leader. You need to own up to this accountability for the business. As one director put it, “Boards can make a company or break a company.”

The financial meltdown has revealed how boards of Wall Street firms and some financial institutions outside the United States have failed in their accountability. Boards are institutions with public constituencies. The public and the watchdogs can differentiate a legitimate explanation (no one could have seen the financial tsunami coming, and besides, everyone is in the same boat) from poor performance. Most directors care about their reputation. It is no fun to be forced to resign from the board through the pressure of public exposure, even though you did nothing illegal.

The role of the board has changed forever. “Governance” now means leadership, not just over-the-shoulder monitoring and passive approvals. Boards must fiercely guard their companies against threats of rapid decline and sudden demise, while at the same time helping management seize the opportunities that tumultuous change presents but are hard to see in the daily fray of running the business. The board that does both turns governance into a competitive advantage.

In my research for this book I have talked one on one with many directors and closely observed almost fifty in the boardroom. I found a very positive and healthy dose of realism. They have begun to search for what works and what does not work. They want to do what is right, but they know they cannot sustain the pace of six short-notice meetings in sixty days and expect full attendance. Directors need to reinvent the content of their work and their modus operandi. They need answers to their many questions.

My observation of boards and interviews with many of you inspired this book. I have designed it to directly and concisely address the burning contemporary issues directors and their boards are wrestling with. The fourteen questions that follow are the ones that I hear from directors most often. My responses to them draw on my forty years of experience advising boards as well as observations of best practices I have seen emerging in recent months and even weeks. The three boards I serve on have also allowed me to see what works and does not work.

The recommendations in this book are meant to be practical and to get to the heart of the unique issues boards are facing now. I recommend that every director, particularly new directors, read the book in its entirety to fully grasp how boards can own up. But I’ve also organized the book so you can quickly access the particular questions or issues that are most urgent for you.

It’s my hope that you and your colleagues will use the content of this book to help your board truly own up to the new role society is demanding of you. As the business environment continues to be volatile, the specific challenges may shift, but there will be no return to board seats as comfortable, prestigious positions to retire to. Directors must face the challenges head on and see to it that their managements do the same.

What is here is a work in progress; it will never be complete. I welcome the chance to learn from you as I continue to gather the messy real-life data that is the foundation of my observational research. Your reading may stimulate more questions. I’d be honored to hear them from you. I’ll do my best to return an e-mail from every director and CEO who contacts me at www.ram-charan.com.

Question 1.

IS OUR BOARD COMPOSITION RIGHT FOR THE CHALLENGE?

The role of the board has unmistakably transitioned from passive governance to active leadership with a delicate balance of avoiding micromanaging. It’s leadership as a group, not leadership by an appointed person. This group needs the right composition to succeed, and that composition will have to change, sometimes abruptly, as conditions do. With the right composition, a board can create value; with the wrong or inappropriate composition, it can easily destroy value.

In April 2008, Citigroup added an extraordinary job posting to its website, seeking individuals with “a particular emphasis on expertise in finance and investments.” What made the post so unusual were the positions Citigroup was trying to fill: directors. It took $18 billion in write-downs in the fourth quarter of 2007 and capital infusions of over $20 billion for the largest bank in the world to realize its board lacked finance and investment know-how.

The financial services meltdown in the fall of 2008 exposed the stark reality that Citigroup was not an isolated case of a board lacking the crucial expertise it needed to act like an owner. As we now see all too clearly, Bear Stearns and a host of boards in the financial services industry did not have enough depth of knowledge or experience to ensure their companies stayed on track. It has been a devastating lesson for those companies, some of which are now extinct.

But don’t be fooled into thinking it’s them, not us. The lesson applies beyond financial services to all boards: directors as a group must have the specific skills and perspectives needed to carry out their responsibilities. These skills must match the needs of the company in its current macro-economic and competitive context, and they must evolve with the times.

Too many boards don’t know what they’re missing until it’s too late. A great board grabs hold of its own composition and does succession planning for the board itself. It objectively examines the membership of the board to ensure it has the skills that are needed, periodically asking, “If we owned this business, what expertise would we need to govern it? And how will that change in the next few years?”

How Do We Figure Out What Our Board Needs?

Functional expertise—accounting, marketing, and technology, for example—or CEO experience are crucial and expected. But you can’t just run through a generic checklist to figure out what your board needs. Boards have to ensure their members have the specific expertise to ask the right questions to make a good CEO better, to affect the company’s choice of short- and long-term goals, to judge and approve the strategy, and to maintain relationships with stakeholders like activists and regulators. For instance, a company that is planning a footprint in the Chinese market will benefit from having at least one board member who is an expert on the political workings of China and its culture.

Few boards consider the expertise they need with such clarity and specificity. In 2002, the collective lack of boards’ audit abilities so appalled regulators that Congress rushed through the Sarbanes-Oxley Act, which included the requirement that every board have accounting expertise. Uncertainty over how it would be interpreted and implemented prevailed for many CEOs and CFOs, who now had to personally sign off on financial statements. And it set off a rush of searches for new directors who qualified as accounting experts under the new rules.

General Electric was ahead of the curve. A year earlier, the GE board, along with CEO Jeff Immelt, anticipated the growing importance of board accounting expertise and recruited Bob Swieringa, a professor of accounting who had also served as chairman of the Financial Accounting Standards Board. Swieringa’s command of the evolving vagaries of financial reporting was a vital addition to the board’s expertise—and the GE board was ready for Sarbanes-Oxley before its rules came into force.

Similarly, a Fortune 500 company in a low-margin, highly capital-intensive business, in which logistics is the third highest cost component, had a high-powered board of retired CEOs and CFOs but lacked expertise to add value in the logistics area. They actively recruited a director who had a CEO viewpoint and also had deep knowledge of global logistics. That director has spent a lot of time getting to know the managers and processes involved in the supply chain, and now asks questions and makes suggestions the other directors would not have thought of.

Initially, management was apprehensive about whether the director would micromanage, as might be the case any time a director with deep expertise in a subject or domain joins a board. But he was not intrusive. He handled himself as a coach and helped management see a different view. This effort resulted in better cash flow and cost productivity in logistics. Management has come to regard him as a highly valuable resource. His inclusion has made a huge difference in the board’s ability to monitor operations and add value. That board also continues to discuss what expertise it should look for in future directors.

The governance committee plays a central role. It should help the board do the careful thinking needed to pinpoint and anticipate future needs based on how the business and the external environment are changing. Directors should think not only defensively—on risk and compliance—but also offensively, about areas where a board must add value. It takes time to search for and vet candidates, so the board should start looking for such director candidates right away and plan three to five years ahead.

Of course, you have to understand what skills you already have in order to figure out what skills you need. Hellene Runtagh, director of Lincoln Electric, Harman International, and NeuStar, describes a successful practice: “Some of my boards employ a simple but effective process. They have each board member complete a skill assessment matrix. They then aggregate this input and get a good overview of where the board is strong, as well as where they would benefit from additional talent. A board may find they are light on consumer industry experience, technology, or strategic skills. The board can then target those weaknesses as they select new board candidates. The Nominating and Corporate Governance Committee usually owns this process.” Some other boards use this same idea of a skills matrix (see Table 1.1 at the end of the chapter). The governance committee chair or Lead Director can ensure that the matrix accurately reflects each director’s skills, expertise, and experience.

The process is important because a board full of generalists is not good enough anymore. Boards still need generalists, directors who have a broad perspective on the business, but they also need domain expertise, be it in IT, logistics, or Indian culture. True, sometimes the need for domain expertise is only temporary, in which case a consultant could provide advice to the board. But if it’s a critical, ongoing issue, a director must bring that expertise to the board.

Consider what new skills will be needed as times change. It could be new knowledge—of structured credit, global logistics, or accounting standards. Or it could be specific experiences, like a turnaround or cross-industry disruption. The combination of Google’s ascendance and Apple’s ubiquitous iPod digital music player have completely rewritten the rules for different parts of the media industry, such as music labels, newspapers, television networks, and ad agencies. In one of those sectors, a board with an ownership viewpoint might consider adding someone with insights on rapidly shifting alliances with partners in their ecosystem, or someone with experience acquiring and integrating companies such as social networking startups that embody the new media landscape. One respected newspaper chain is seeking directors who understand the technologies that are driving cross-industry disruptions in that business.

The knowledge of talent evaluation and compensation that a human resources professional brings is especially important for some boards. Deep understanding of capital markets, IT, logistics, consumer behavior, retailing, innovation processes, or how policy is evolving might be important for others. So, too, might deep knowledge of the business and political climate in a region or a country.

You also need to find the right balance among those skills, which a skills assessment matrix helps you see holistically. Most directors have a particular expertise or orientation—be it finance, branding, or manufacturing—that they bring to the dialogue. Every board benefits from a diversity of perspectives. Too many directors with the same orientation can skew boardroom dialogue, even bogging down in minutiae as they talk among themselves.

Group discussions often gravitate toward certain bents. For instance, a board that has several vocal directors with deep operating experience and limited exposure to strategy naturally skews toward productivity or cost cutting and could neglect other fundamental areas requiring investments, areas like innovation and future market development. A board with an overly domestic orientation might miss out on asking vital questions about the global context, such as what global drivers affect currency volatility and inputs like commodity prices. Thus, a balance of skills and expertise is needed so that a board does not develop too strong a bent in a single area. Boards have to be conscious of their bent and seek new directors who can keep it balanced.

The governance committee needs to be observant and reflect upon the bent that emerges in board or committee meetings. It only takes one or two members who are powerful or personable to influence the bent. It’s a natural phenomenon of any group.

Given the surprises that any corporation can face, a board might even consider ensuring it has directors who can quickly take an interim corporate leadership role if the executive team falters badly. The fallout from the subprime mortgage debacle drove the boards of several banks and financial services firms to take interim leadership positions. It’s not an ideal circumstance, but boards need to be prepared for virtually any possible eventuality.

How Do We Get the Right People for the Job?

Candidates need to be assessed not only for their skills and experiences, but also for how their personalities gel with the other directors. Different backgrounds will lead to different questions and points of view, but directors must be able to express their views without offending others or shutting down debate. They must also be willing to be influenced by others if the board is to get anything done.

There are a couple of things to watch out for. As J.P. Millon, a director of CVS Caremark, Cypress Bioscience, and InfuSystem, for example, says: “When you have eight to twelve people around a table, group dynamics and chemistry are fundamental. You don’t want two extremes: first, the hyper-interventionist and disruptive person who because you say one thing is going to say exactly the contrary; second, somebody who never opens their mouth.”

A few other personality traits are generally a negative to the group dynamic. Some people are too narrow in their thinking: they can’t get away from talking about their bent. Others are too controlling: they are so used to being in charge that they unconsciously begin to assert power in the boardroom and put the management team on the defensive.

But the biggest red flag is a big ego; I remember how a search consultant was told by a governance committee chair why a person on his list would be unsuitable for that board because the potential director wouldn’t be able to contain his ego in the boardroom. Successful people have sizable egos, but an egomaniac will almost certainly destroy boardroom dynamics.

On the other hand, some personality traits are indicators that a director could make great contributions. For example, does a director have the humility to invite a counterpoint in a manner that is constructive and not argumentative? Will she put herself in the company’s shoes and not just expound on her own successes? Will he have the courage to engage in debate with a fellow director or the CEO? Will she have the temperament to make her point and be willing to accept that not all her fellow directors will agree with it or even be willing to debate it? Will she have the inner humility to invite opposite viewpoints and be willing to change her mind?

Appearances can be misleading. Directors should have the ability to speak up, for example. Yet I would take a quiet director who spoke infrequently but with great wisdom and authority over a well-spoken director with a compulsion to talk. I observed one board meeting in which one director spoke probably only three times. But when he said something, it was always a powerful observation or an eye-opening question. Other board members are all ears to this director’s discourse.

Success or failure as a business leader is not necessarily a telling indicator, either, of whether that person will become an effective director. I met one person who had been forced out of his job as CEO but was a great director on a different company’s board. He’s a powerful thinker who was humble and articulate; he just couldn’t execute when he held the chief executive’s role.

Getting at those personality traits takes time. Governance committees might be accustomed to interviewing candidates over dinner and doing background checks to ensure compatibility. Those can be revealing, especially if the right questions are asked and the interviewer is a keen listener. In one case, the governance committee chair asked a director candidate to give an example of how she had helped the CEO of another board she sat on. She said she had recalculated the cost of capital. She was proud that through her persistence, she had been able to get the CFO to change the cost of capital from 7.2 to 8.2 percent. The governance committee chair had served on many boards, and during this interview he sensed that she might be a nit-picker and probably lacked the broad strategic thinking the board was looking for. The more the chairman continued to ask questions, the more he became convinced that she did not have the altitude of thinking his board was looking for.

Standard reference checking is not enough. Governance committees must make the commitment to vigorously check a candidate’s references by talking to other people in the board’s own social and professional networks.

You’d be surprised what turns up. Asking questions about a potential candidate such as whether he or she can disagree without being disagreeable, pushing a personal agenda forward, or feeling the need to show off their knowledge in a narrow area of expertise goes a long way toward uncovering a candidate’s true colors. “Somebody who might seem easygoing and personable in the interviews,” says Millon, “could be described as being pretty disruptive in interactions with a group.” That’s somebody you don’t want on your board, regardless of their skill or expertise.

What Does the Board Succession Process Look Like?

If finding the right directors sounds like a lot of work, consider what it takes to construct a board from whole cloth. That’s what Jack Krol did as Lead Director of the Tyco International board (the post-Dennis Kozlowski Tyco, by the way) when he built new boards for spin-outs Covidien and Tyco Electronics. That meant identifying and selecting twenty directors in six months and ensuring they would provide the kind of effective governance needed to restore credibility—an intense, pressure-cooker version of the board succession process. His approach is instructive for every board.

The traditional approach would have been either to let the CEO nominate a few of his or her trusted peers and then let those peers bring in a few directors from their cliques or to get a headhunter to bring a full slate to him. And while those approaches might have produced lists of smart and experienced individuals, they would not have resulted in high-functioning groups.

Krol took a different and more time-consuming course. He was very attuned to how personalities would combine to yield the most effective CEO/board relationship and group dynamic. So he dedicated himself to interviewing, checking references, and ensuring that the mix of both skills and personalities was appropriate.

The CEO works closely with the board, so it stands to reason that he or she would need to be comfortable with the individuals involved. So Krol talked with Tyco International’s CEO and chair, Ed Breen, about what they wanted for their new boards, in terms of background, expertise, and types of personalities. He also involved the incoming CEOs of the spin-offs, both of whom were divisional heads at Tyco International. Together, they constructed a matrix of criteria against which potential directors could be viewed as a group. There was quite a bit of up-front work before any candidates were considered. And the CEO was kept apprised throughout the process.

Using a search firm to come up with a list of candidates was important at this point. “It used to be that the CEO selected his or her buddies [for the board],” says Krol. “What we’ve got to watch for now is that the Lead Director or nonexecutive chair doesn’t select his or her buddies. We don’t want to transfer the buddy system from the CEO to the nonexecutive chair or Lead Director. We need to find the best people and the best mix, and make sure they’re independent, so we use a third party to come up with the candidate list for us.”

On other boards, I’ve seen four or five directors who worked together in some past capacity form cliques because of their particular bent and comfort level working together. At times, these cliques can unintentionally evolve into a shadow board. They often begin to draw more attention from management and disrupt the functioning of the full board. To minimize that risk, it’s a good idea to reach beyond personal networks to find candidates.

In Krol’s case, there were twenty positions to fill, so a search firm was essential. One note on using search firms: it can be a tricky business using a large search firm that is conducting simultaneous searches. How will the firm balance among its clients when a candidate emerges with the right skills and experiences for more than one active search? The governance committee and the search firm should talk through potential conflicts before they emerge.

Boards have to work closely with their search firms to personally vet candidates. They can’t fall into the trap of deferring too much of the process to the headhunter. As candidates emerged, Krol used references to personally test each individual’s personal make-up and character. “A lot of times, the people that I talked to had experiences with [the candidate] on another board,” Krol says. “That was very important because they could tell me what the personality of the person was like. ‘Were they just sitting there and saying nothing?’ ‘Were they antagonistic?’ ‘How did they make suggestions to the board?’ ‘Were they a good listener?’ ‘Did the candidate push the board’s effectiveness and dialogue forward?’ ‘Did the person help crystallize the important issues?’ Those things are important in terms of what your relationship is going to be with your other directors and with management.” He had to rule out many people after these interviews, including one candidate who was imminently qualified on paper and had a great reputation as a leader but was antagonistic toward the CEO on other boards he sat on. Krol and the search firm were in constant contact as new candidates emerged and were assessed.

The references had to come from individuals within personal social networks—that feedback is the most candid and frank you can get. The more trusted the individual the better. “There’s always somebody that I knew well and so I could have a confidential conversation with them,” Krol says. “You’d be surprised how much comes out just by asking them to talk. And you should go to at least two people when you’re doing this, because you never know when somebody has a bias that might be unfair.”

In the end, Covidien and Tyco Electronics both got strong, independent boards with a range of expertise, effective leaders, and cohesive group dynamics. To be clear, I’m one of the directors on the Tyco Electronics board and a member of its governance committee. I can genuinely say that board is among the highest-functioning boards I’ve observed. In less than ten months and fewer than five board meetings, the camaraderie of the directors is palpable and the discussion gets right to the critical issues and has, in the view of the CEO, added value. This information is based in part on feedback from management to the board about the board’s functioning and contribution.

Although spin-outs and other events that call for new boards are not that uncommon, Krol’s challenge was not something that most boards experience. Still, the steps he took are an accelerated version of what every board must do: treat board succession as a process, identify the board’s needs, plan several years ahead, vet candidates through social networks over time, and be diligent in assessing candidates for their fit in terms of experience, expertise, and personality.

The Governance Committee’s Pivotal Role in Board Succession

Organizing board succession is one of the central responsibilities of the governance committee and it should be part of its charter. It must take this role very seriously; if the composition of the board is not appropriate, it is a failure of the committee. The board must empower the committee to actively shape the board composition.

In many cases, the CEO still has a lot of influence over the selection of directors, points out Roger Kenny, president of Boardroom Consultants. But if the board is to grasp the reins of governance, the governance committee and not the CEO must have the ultimate say in director nomination.

Ever since Sarbanes-Oxley, companies have complained about the lack of availability of good directors. Many sitting CEOs, for example, have reduced the number of boards on which they sit to just two, and some sit on no boards but their own.