Governance as Engagement
February 09, 2015
As more than 1,300 corporate directors gathered at the National Association of Corporate Directors for its annual Board Leadership Conference, there were more than a few issues on the attendees’ minds. Not only was there a rich offering of impressive speakers and educational sessions, but also the opportunity for directors to meet with peers. It also marked the release of another Blue Ribbon Commission report, this one on strategy development.
N.A.C.D. previewed the report with a session featuring panelists Raymond V. Gilmartin, a Harvard Business School professor who co-chaired the commission with Frontier Communications CEO Maggie Wilderotter, former U.S. Commerce Secretary Barbara Hackman Franklin and Executive Consulting Group president William E. McCracken. Joann Lublin, the Wall Street Journal reporter who has covered governance for 23 years, served as moderator.
But even more radical than having a journalist moderator was the commission’s recommendation that directors move from a role of reviewing and concurring with management on strategy to much greater engagement in strategy during the formulation process. “As directors we’re responsible for creating shareholder value but also, in my view, for the long-term survival of the firm,” said Gilmartin. “Failure of strategy is the reason companies fail.”
“Boards need to be involved in strategy much earlier,” Franklin added. Boards need to understand and test the underlying assumptions, strategic alternatives and risks involved as well as determining how success will be measured. “Then, there needs to be an update on strategy at every meeting,” she said.
The panelists agreed that this approach will take some adjustment for some boards and management.
“If you’re just reading your board book, you’re not prepared,” said McCracken. “You have to look at the company as activists do,” which means much more independent research and analysis. It prompted Lublin to ask if boards need their own research staff.
McCracken said that management needs to become comfortable with the board asking for more information. At the same time there has to be a high level of trust between the board and management. “Management has to feel that the board is not going to turn on you.”
McCracken knows whereof he speaks, having served as independent chairman of CA Technologies, later becoming CEO. Telling the directors that “it looks different from the other side,” he said boards have to ask probing questions and hold executive sessions before and after the board meeting.
“It sounds to me like you’re saying that the board used to admire the cake,” said Lublin. “Now this [commission] is saying, directors need to get in there and stir.”