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Corporate Governance

The Seven Habits Of An Effective Board


Alan Bird, Robin Buchanan and Paul Rogers, 11.24.03, 8:28 AM ET
This essay explores some of the issues addressed in Corporate Governance and Capital Flows in a
Global Economy, a new book from the World Economic Forum and the Oxford University Press.
The book will be launched on Nov. 24 with roundtable discussion hosted by Forbes Global and
moderated by Paul Maidment, the editor of Forbes.com. The topic: "Can regulation alone improve
corporate governance?" At 3 p.m., after the roundtable discussion has concluded, the Forbes.com
CEO Network will host an online chat with Bruce Kogut of INSEAD, who co-edited the book with
Peter Cornelius. Click here for more on the book and on the World Economic Forum's approach to
corporate governance..
Rarely have corporate directors faced such a deep and widespread erosion of public trust. Boards are
seen to provide weak oversight, or worse, to be complicit in allowing executive greed, rewarding
underperformance and failing to prevent corporate excess and even fraud.
Predictably, the loss of trust in corporate oversight has produced two inevitable responses: lawmakers
and regulators push stronger regulation, while activist shareholders strive to exercise greater
influence over corporate governance. Restoring trust is essential, but each of these responses,
however well intentioned, risks creating new problems.
A new era of regulation is consuming directors' attention, focusing them on issues of governance and
the accuracy of the next earnings announcement rather than helping companies to build sustainable
value. The defensive climate prompted U.S. Federal Reserve Chairman Alan Greenspan to comment
recently that "a pervasive sense of caution" is influencing business leaders.

Empowering investors sounds good in principle, but it can backfire. Pressure from investor groups all
too frequently engenders a simplistic "box-checking" mentality to complex governance issues. More
importantly, are investors fit for a more active role? Institutional investors have become so focused on
short-term stock performance and on stock trading rather than stock ownership, their interests no
longer line up clearly with the business fundamentals that make companies successful over the long
term.
The real problem is that boards cannot afford to be distracted from issues of performance.
Collectively, corporate performance is mediocre: only one company in every eight achieves relatively
modest targets for growth. According to Bain & Co. research, just 13% of companies post top- and
bottom-line growth of 5.5% or better over a 10-year period, while also earning back their cost of
capital. Companies like American Express, Dell, Lloyds and Vodafone, to name a few, have managed
to exceed this standard by keeping company performance front and center. Effective boards focus on
sustained value and how they can contribute to its creation.
What can directors do to affirm their role, drive board effectiveness and reclaim control over their own
agenda? They can start by holding up a mirror to their own board performance, as measured against
the "seven habits of an effective board." While these habits may seem straightforward, very few
boards score well in all areas.
1. Own the strategy
Most boards convene special strategy meetings and retreats, but typically they sit through
presentations of the executive team's plans. Effective boards ensure non-executive directors
contribute to developing the strategy, and feel a sense of ownership of the strategy. The more a board
understands and owns the strategy, the more responsive it can be to help seize opportunities such as
major acquisitions when they arise.

2. Build the top team


Boards have a key role to play in selecting, developing, evaluating, and planning the succession for
the executive team. Leading Private Equity firms view their involvement in building the executive team
as a top priority--and a clear factor in creating market value. The challenge facing many directors is
how to be effective in this role in the presence of a forceful CEO or CEO/chairman.
3. Match reward to performance
CEO remuneration is the most controversial issue for most boards: they want to attract the best talent,
and yet the remuneration benchmarks just keep on rising. Part of the solution lies in ensuring that
exceptional pay requires exceptional performance. Effective remuneration systems measure what
matters--and only what matters. They pay for performance, with real downside for mediocre results.
And they ensure that rewards are simple, transparent and focused on sustained value creation,
balancing short-term and long-term focus.
4. Ensure financial viability
Sarbanes-Oxley has had its main impact here, focusing on the probity of financial reporting and the
audit process. Yet beyond issues of process and compliance, boards have a role in taking key
financial decisions, such as ensuring appropriate levels of debt leverage, and scrutinizing major
investments and acquisitions for value. Directors must be able to understand as well as trust the
numbers to provide a challenge where necessary.
5. Match risk with return
Boards typically have formal processes for assessing and managing operational risk that incorporate
commercial, financial and legal considerations. Yet few boards understand the true risks inherent in
their companies' strategies. This is critical: 70% of acquisitions fail to create value and 70% of moves
into new markets away from the core business also fail.
6. Manage corporate reputation
Doing what's right for the board and the company means not succumbing unduly to outside
pressures. If boards are to avoid the trap of "check-box" compliance and short-term focus, they need
to take action to reclaim control over the agenda, and target those investors who are in for the long
term. Transparency and effective communication are key.
7. Drive effective board process
An effective chairman, who values and upholds the role of the board, is vital. The chairman sets the
tone from the top, ensures a governance model that works in practice, focuses the agenda on issues
of performance, builds a team of directors with the right mix of skills and experience, and reviews
board effectiveness regularly. A board's ability to add value depends heavily on how effectively
directors can work with the chairman and CEO.
Directors must overcome diverse challenges and constraints if they are to perform their roles
effectively. Some of these challenges are structural, some arise from wrong-headed external
pressures, while others stem from poor team dynamics or shortcomings in values, capabilities and
focus. What's needed is a robust blueprint against which boards can set their own aspirations and
make progress towards enhanced performance. It will take as much to restore trust in boards and to
ensure that pressures from outside the boardroom focus on the need to perform rather than conform.
Alan Bird is a vice president of Bain & Co. in London. Robin Buchanan is the senior partner of Bain in
London. Paul Rogers is a Bain director and leader of Bain's global organization practice.

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