NEW CORPORATE GOVERNANCE

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Blackwell Publishing Ltd.Oxford, UK CORGCorporate Governance: An International Review0964-8410Blackwell Publishing Ltd. 2005 September 2005135569581NEW CORPORATE GOVERNANCECORPORATE GOVERNANCE

New Corporate Governance: from good guidelines to great practice*
Martin Hilb**
This paper presents a new, holistic approach to corporate governance, adding simultaneous value to shareholders, customers, employees and society. This new approach to directing and controlling companies integrates components of corporate governance that have historically been treated in isolation of each other in research, teaching and practice. Keywords: Keep it situational, strategic, integrated, controlled

The true lesson from Enron is that until the power of the shareholder value norm is broken, effective reform of corporate governance will be on hold. (Deakin and Kenzelmann, 2004, p. 142)

What’s “new”?
ased on the results of board evaluations we conducted in companies operating in various business sectors (including banking, insurance, chemical, pharmaceutical, biotechnology, information technology and airline services) (see Hilb, 2004, p. 206), we identify the following as the main weaknesses of current corporate governance practices:

B

• most national corporate governance guidelines propose a “one size fits all” approach which is dangerous; it may support good governance, but it does not guarantee that the governance of a firm will become great; • there is a lack of strategic direction in much of board practice; • board selection, appraisal, remuneration and development often lack integration and professionalism; and • there is often a lack of in-depth know-how in auditing, risk-management, communication and evaluation at board level.
© Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

In theory, “one short-coming has been the tendency of textbooks in the area [of corporate governance] to make prescriptions about the ‘best practice’ . . . without providing a credible analytical framework for the students or the practitioners” (Boxall, 1992, p. 60). There is a severe deficit of integrative corporate governance concepts. An analysis of the development stage of teaching shows that the future academic strength of corporate governance “. . . will depend on how effectively present scholars dedicate themselves to building credible analytical frameworks – focused at the level of the firm but with the capability of providing an adequate disciplinary basis [for comparative corporate governance]” (Boxall, 1992, p. 75). This paper presents an integrated corporate governance framework, called “New Corporate Governance”, which is based on a reversed KISS-Principle: Situational Strategic Integrated Keep it controlled This holistic framework for the direction and control of enterprises tries to integrate formerly isolated elements of corporate governance in research, teaching and practice. What

*This paper was presented at the 7th International Conference on Corporate Governance and Board Leadership, 11–13 October 2004, at the Centre for Board Effectiveness, Henley Management College. **Address for correspondence: IFPM Center for Corporate Governance, University of St. Gallen, Dufourstr. 40a, CH9000 St. Gallen/Switzerland. Tel: +41 71 224 23 70; Fax: + 41 71 866 28 11; E-mail: martin.hilb@unisg.ch

Volume 13

Number 5

September 2005

The framework comprises four parts: Part 1: The Situational Dimension (Keep it situational). At the internal con- Table 1: Differences between traditional and new corporate governance Dimension Situational Implementation Strategic direction Traditional corporate governance No difference between national.4 Board Development 4.1 Auditing 1. compensation and development of the supervisory and managing boards (Keep it integrated) Holistic monitoring of results from the perspectives of shareholders.2 Board Culture Figure 1: The New Corporate Governance framework Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . employees and the public (Keep it controlled) Integrated board management Holistic monitoring Controlling the financial dimension only S S 3.1 Board Selection ituational 2.1 External Context 3. At the level of the external normative context.3 Board Structure 4. customers. appraisal.4 Controlling 2. Here we differentiate between external and internal context. employees and the public.2 Internal Context 3.3 Board Compensation 2.570 CORPORATE GOVERNANCE is “new”. corporate governance practice differs with national. you may ask? Table 1 tries to answer that question. customers.2 Risk Mgmt ntegrated ntegrated 2.1 Board Composition K 3. industry and corporate culture Strategic development is not a function of the supervisory board Only isolated nomination and remuneration committees in publicly listed companies New corporate governance Implementation appropriate to the specific context of each firm (Keep it situational) Strategic development is a central function of the supervisory board (Keep it strategic) Integrated and targeted selection.3 Communication 1. The New Corporate Governance framework presented in Figure 1 integrates the interests of shareholders.2 2.4 Board Vision trategic I 4. industrial and organisational culture.2 Board eep it controlled Feedback 4.

as the “New Corporate Governance” framework is attempting to do. adequacy for relevant prediction. We identify four central success factors in corporate governance. listed firms (and hence they are often not suitable for small firms). In adopting corporate governance guidelines developed elsewhere. in prac- tice these components are not always clearly delimited. 1. 1967. which are published in book form in English and German (Hilb. although the following issues should be noted: 1. and feedback functions of the board. good governance guidelines do not guarantee great governance practice. soft-law does not necessarily address the soft dimensions of a firm (in other words. the understanding of the system is altered (Maleztke. and then to investigate the elements of the model in isolation from one another” (McQuail. closeness to reality. one that is comprised of people who act as role models for both share. Many countries that do not actually contract with the IoD for advice nonetheless incorporate aspects of the IoD thinking in their bestpractice guidelines. This dimension refers to the auditing. development level and complexity of the firm. laying down new soft law does not replace the need for integrity and trust in board relationships and processes). remuneration and development of members of the supervisory and managing boards. There are two main limitations of this framework: • my visual representation lends itself to the usual critique of the social sciences. best-practice corporate governance guidelines have been developed in most countries. ownership and power makeup: the size. 2. but also evaluation and development. p. Keep it situational As a result of the many corporate scandals that have taken place around the world. evaluation. Part 3: The Integrated Board Management Dimension (Keep it integrated). p. risk management. These three success factors are prerequisites for the development. Only when we are aware of the limitations of any model. companies should be aware of the fact that best-practice guidelines for: Listed companies π non-listed companies Large companies π small companies Public companies π family-owned companies Bank governance π hospital governance US companies π British companies Start-up companies π mature companies Hence we base our approach on the principle: keep it situational. and 4. Part 2: The Strategic Dimension (Keep it strategic). p. 1979. 3. central components has analytical relevance for our study. Part 4: The Controlling Dimension (Keep it controlled). 2004). p. every firm has a different development level. The danger of simplifying a complex system. 7). © Blackwell Publishing Ltd 2005 Volume 13 Number 5 September 2005 . should not be underestimated: as soon as parts of a system are isolated. This is a positive development. best-practice guidelines are typically designed for large. the Anglo-American model of governance is being promoted as the global standard. There is no “one-size-fitsall” corporate governance approach. can we call our approach scientific (Koenig.and stakeholders.NEW CORPORATE GOVERNANCE 571 text level. and of the dangers of isolating subcomponents thereof. There are a number of overlaps and interdependencies between the factors. the biggest influence on these guidelines has come from the Institute of Directors (IoD) in London. and • while the breakdown of corporate governance into single. In spite of these caveats. and. and the ambitions of the board. 1973. the degree of internationalisation. 1972. This dimension integrates the targeted recruitment. The next sections present the four main parts of the framework. By “framework” we mean “an abstraction that preserves in economical form most of the points that have been developed” (Weick. in an integrated way. internal and external communications. For large. implementation and evaluation of board success measures. clarity and logic of the formal structure. through the advice they provide to other nations. it is important to have a board-management committee which handles not only nomination and remuneration. 1515). “New Corporate Governance” meets the criteria proposed by Brown for the assessment of a [good] model: simplicity. The culture of constructive criticism and trust is implemented through simple networked board structures and processes. which is to “pay lip service to interdependence. 83). adding simultaneous value to shareholders and stakeholders. The first prerequisite for a board culture characterised by constructive criticism and trust is the targeted selection of an exemplary and well-diversified board team. Internationally. public listed companies. therefore. 95).

g. All key role types should be represented in a board team.572 CORPORATE GOVERNANCE In an analysis of the external context. . Therefore we postulate: great strategy follows great people. a constructive and open-minded board culture. marketing). board configuration. success measures are established relating to the important stakeholder groups. shareholder and stakeholder oriented board measures of success. coordinating the efforts of all members. from differences”. Keep it strategic What is the difference between good and great companies? Tim Collins came to a clear result: company success starts with the role models at the top (Collins. Western Europe. risk management. 2009. those they are unable to play and those that their colleagues are likely to play or not to play on a board. At each of the different levels.g. North America. • functional competences (e. 10). In the following sub-sections. The text on the inside of the circle represents the status quo that has to be overcome in many boards: characterised as traditional. Our suggestion for building differences into board composition is to mix demographic variables.g. and • internal and independent members. a strategically targeted composition of the board-team. company development level and degree of internationalisation. we discuss each of the four preconditions for successful (1) (1 Targeted. learning orientation. a constructively open. trusting environment. These four components have to be integrated in a process. p. In an analysis of the internal context. age. a holistic perspective. • business competences (e. secretive and ethnocentric environments. pharmaceuticals. • demographic data (e. and that there have been too many boards that fail to create adequately diversified teams. We propose four main preconditions for success in developing. organisational complexity. A well-diversified board team Peter Senge asked the question: “How can a board of committed board members with individual IQs above 120 have a collective IQ of 60?” The question could be restated as: Where do good ideas on boards come from? In response. Together the above quotes are indicative that differences are an essential part of the strategic potential of a team. and great success follows great strategy (see Figure 1). The chairman should act as “board coach”. and iv. we include the institutional. East Asia). ii. iii. • national cultural competences (e. (2) (2 Co Constructive and d openminded board culture (3 (3) E Efficient board structure Figure 2: Preconditions for successful board management Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . 2. as shown in Figure 2. and a mix of global effectiveness and local adaptability (we refer to this as “glocal”).g. implementing and monitoring corporate strategy: i.g. Negroponte – Founder of the MIT Media Lab – says: “That’s simple . HRM. an efficient board structure. . gender). cultures and disciplines. auditing. confrontational. a creative thinker). and it is also possible for one member to play different roles under different circumstances. mechanistic. consumer products). we include ownership. a controller. Well-diversified board teams consist of members representing all relevant: • team roles (e. It is possible for one member to play a number of different roles. diverse Ta composition of the board team (4) (4 Stakeholder-oriented measures of success A constructive and open-minded board team culture We suggest that an effective board culture consists of five factors: an outward. development and implementation of corporate strategy. a critical thinker. national and normative dimensions. as illustrated on the outside of the circle in Figure 4. a consensus orientation. and then the responses of members of those stakeholder groups are measured periodically to assess the performance of the company leadership. It is useful for the members of the board to know the roles they prefer to play.

it will necessarily reflect both shareholder and stakeholder measures. Nomination or Remuneration committee) or • a small board of professionals. feedback. We recommend a third way: A small. comprising a maximum of seven members (including an independent Chairman. We recommend that the board conducts its activities through only two committees: an integrated audit and risk management com- Co Bo © Blackwell Publishing Ltd 2005 al re oc ltu Gl cu d ar Volume 13 Number 5 September 2005 . • instil confidence and trust in leadership. operating through a number of different committees (such as Auditing.NEW CORPORATE GOVERNANCE 573 Board Levels Firm Strategy Firm Success We set success measures for:. If corporate success is measured against such a vision. • generate excitement about future direction. Individual level 4 1 Board Composition . p... A recent study confirms that higher share price and lower cost of capital are directly linked to good corporate governance (Beiner et al. In addition. in Noetzli. each of which is coached by one of the independent board members. employees and society. 2004... legally accountable. and • offer criteria for success. Anglo-Saxon researchers have been studying the relationship between corporate governance and firm success. remuneration and development of the board and top management. independent members and the CEO). and measure our success by their reactions Shareholders Clients Added Value for Cli en ts Group level Personnel Personnel Th e b Pu lic 2 Board interaction Organisational level Shareholde rs The Public 3 Board Structure Figure 3: Relationship between board strategy and success mittee and an integrated board management committee which is responsible for nomination. Such a vision should: • provide a roadmap for future direction. large public companies can add a large network council (not legally accountable) whose members work in small projects teams.and stakeholder-oriented board vision. The following statement1 can serve as an example of a normative guiding principle: The primary role of the board of this company is to help create long-term value for its shareholders. customers. well-diversified board. (in T r B wa adi oa rd tio rd lo n cu ok al ltu ing re ) ed nt g) ie in or ok re ng lo ltu ni rd u ar wa rd c Le ut oa (o B M Bo ech ar an d cu isti ltu c re Bo Ho ar lis d tic cu ltu re Co nfr o Bo orie ntati ard nte on cu d ltu re Board Culture ns e Bo nsu ard s o cu rien ltu te re d c tri e en ur oc ult hn c Et ard Bo (Secretive) Board culture of mistrust Shareholder and stakeholder board measures of success A combined team of supervisory and managing board members need to develop. The (Constructively open) Board culture of trust Figure 4: Elements of a constructive and openminded board culture An effective board structure Our experience in board management reveals two extreme ways of structuring board teams: • a large board. 24). implement and evaluate a shareholder..

remuneration and development of board members and top management which will be described in the next section of this paper. to the extent that board members are able to influence the performance of those bodies. After the interviewee has been through at least two rounds of interviews. Phase II: Targeted board feedback After board members have been selected. Targeted board feedback is only suitable if positive performance is rewarded and actions are taken to address development requirements. further investigations are made into the nature of the response. external and corporate benchmarks as illustrated in Figure 8. as illustrated in Figure 7. it is natural to introduce an effective feedback programme for board members using the following performance areas (see Figure 7). the interviewers hold a short meeting during which they attempt to reach agreement on the score awarded for each item on the schedule. 1985). evaluation. In each case. Keep it integrated In order to achieve the conditions required for strategic board management described in the last section. the performance of the managing board and the performance of the company. employees and society as measured over 3 and 5 year periods. four key processes are recommended: targeted selection of board members. We recommend that feedback be linked to the performance of the supervisory board. as well as in voluntary loyalty levels of customers. there are a number of dimensions on which the performance can be evaluated. Where a consensus cannot be met. commenting on key principles and practices that can be used in their implementation. In the following sub-sections we discuss the elements of Figure 5 in more detail. the CEO or other board members). targeted feedback on their performance. This strategic direction function is the basis for the targeted selection. Phase III: Targeted board remuneration Board members should be compensated in such a way that they perceive equity based on internal. 3. The interview schedule presented in Figure 6 follows the targeted interview technique developed by DDI (Byham. A suitability ranking is drawn up on the basis of the final evaluation of each item.574 CORPORATE GOVERNANCE board believes that the company should rank in the top quartile of peer companies in total shareholder return (including the cost of capital). from the perspective of at least two interviewers (at the level of Chairman. Phase I Board Selection Board Vision Phase IV rs Publi c me s er sto ld Cu ho Employees re a Sh Phase II Board Development Board Feedback Phase III Board Remuneration Figure 5: Integrated board management Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . Phase I: Targeted board selection The use of a one-page interview schedule is recommended to guide the specific selection of board members. targeted (performance-related) remuneration and targeted development (illustrated in Figure 5). The interview schedule (see Figure 6) aims to score the potential of the interviewee on a number of criteria.

NEW CORPORATE GOVERNANCE 575 Chairman CEO Board members Evaluation total 9:00-10:00 10:00-11:00 14:00-15:00 Personality competence Integrity Independence Breadth of perspective Professional competence Risk management experience at board level Experience in South East Asia Command of English and Chinese Leadership competence Strategic thinking Planning skills Controlling skills Social competence Constructive openness Listening skills Team role: controller Figure 6: Interview schedule for selecting new board members (an example) Supervisory Board Performance 1 President 2 Committee 3 Members Managing Board Performance 1 CEO 2 Members Company Performance 1 Customer dimension 2 Shareholder dimension 3 People dimension 4 Public company image Figure 7: Performance areas Equity with other board members (1) (2) Equity with external market for board members (3) Equity with company performance Figure 8: Equitable remuneration of board members: the magic triangle © Blackwell Publishing Ltd 2005 Volume 13 Number 5 September 2005 .

30 per cent individual board member performance. The auditing function of the board The central qualities of an auditor are the independence. Modifications of the package above or below fair reward are unlikely to result in better performance. • comparative value indices (e.576 CORPORATE GOVERNANCE Organisation unit: Division Head: Personnel Exec: CEO: Date: Date: Date: Development plan On Near Off the the the job job job Manager's Position Age name Appraisal Years in Salary Past Potential current grade perform position ance Potential successors Possible evaluation scores: P = Performance scores: A = Excellent overall performance (top 10%) B = Very good overall performance C = Good overall performance D = Satisfactory overall performance E = Unsatisfactory overall performance AP = Assessment of potential: I = Immediately promotable. 2004. If an opening arises at the top management level. 50 per cent EVA. the controlling or monitoring board dimension encompasses the auditing. including: • long-term financial performance (3 years). Thus. management and board succession planning is not discussed in depth at the board level. but motivation is primarily affected through immaterial reward of good performance. since board members generally are driven by intrinsic motivations (Frey. Phase IV: Targeted board development Past board evaluations which we have conducted (see Hilb. An important guiding principle in board remuneration is that every board member expects financial compensation to be fair. communication and evaluation functions of the board.g. the board is well prepared and can use the same form shown for the targeted selection of external candidates (in Figure 6). objectivity. All these procedures have to be controlled. 50 per cent corporate performance). 20 per cent customer loyalty. transparency and integ- Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . and • functional performance assessments (20 per cent board committee performance. 2004). risk management. adequate and fair rewards are important prerequisites for good performance. and meet with the board socially.g. Keep it controlled In this integrated approach. The variable component can be made up of several measures of performance. 4. 40 per cent) and variable (e. This procedure creates an opportunity for division heads to make a presentation to the board.2 In this regard the approach of having the CEO and her/his direct reporting managers present their succession plans to the board once a year (following a structure such as that illustrated in Figure 9) has proved successful. 20 per cent employee satisfaction and 10 per cent public image). work out career plan III = Capable of development within a function IV = Potential is satisfied in current position Figure 9: Succession planning at the board level The total net compensation package of a board member can be divided into fixed (e. The board should ensure that development programmes are in place to enable the company to offer 80 per cent (for example) of all key positions in the company to internal candidates.g. 206) have shown that in quite a number of leading companies. work out action plan II = Promotable within 2 years. 60 per cent) components. p.

The following three tasks constitute the main focus of attention: 1. which is equally directed to the realisation of opportunities and which does not constrain entrepreneurial freedom. . guidelines on an international. . The risk management function of the board The task of the board and top management is to define an integrated. Risk management deals primarily with higher assurance in planning. employees.3 The effectiveness of the internal control system and compliance are currently a central focus in corporate governance. In order to ensure the independence of the external auditors. the audit committee (to which it reports) and the internal auditor (which should also report to the audit committee). 7) The communication function of the board The following two functions are most relevant: • Content function: To promote transparency of information at the board level. an industrial or a firm level. p. customers and the public. prevention and management of dangers as well as identification and effective realization of entrepreneurial opportunities . 2002. Operations: Observation of operational targets and assessment in respect of realisation of the targets. the board is responsible for the determination of the strategic risk objectives. 817). It is important “that the auditors have access at all times to all areas of the company – basically nobody may be excluded – and that it extends to all proceedings. and that relates to financial and market performance. regulations. However. . 2003b. At the board level. Compliance: Surveillance of compliance with laws. 2002. The function (which formerly reported to the CFO) reports to the audit committee. top managers. while the quality and integrity of the financial information and the protection of material and immaterial values is a central focus of attention (see Bumbacher. management concept. p. 2003. Financial reporting: Observation of the financial targets (assurance) and consulting regarding the realisation of targets (advisory).4 • Relationship function: To create a real culture of trust and learning through a constant improvement of the relationships between board members. 2003). the demands placed on the internal revision have grown. p. understandable and relevant to board members. and thus the realization of a higher company value. one which is integrated with the existing planning and leadership processes. board committee members. both the auditors and the auditing firm should be changed periodically. p. for the audit committee and the board. “The Turnbull Report of 2000 (in the UK) made the first breakthrough . . shareholders. Everything has to be open to audit revision” (Malik. The subject of the audit is not only the numbers produced by the financial and accounting system. The quality of this ongoing board dialogue is enhanced mainly through active listening and the constructive openness of the chairman and the CEO. the external audit can only contribute to the transparency of financial accounting and to the improvement of the quality of the internal control if effective cooperation is achieved between the external auditor. As in the case of corporate strategy. (this means the conscious) exploration of risks where opportunities can be realized. p. where the anticipated risk outweighs the expected gains. 3. As such. the board. They used to be restricted to the second task (operational compliance). The external auditor is the only external institution that can give an objective view of the financial condition of the company (Vogt and Alresch. through the exchange of information that is comprehensive. future-oriented risk © Blackwell Publishing Ltd 2005 Volume 13 Number 5 September 2005 . and challenges facing divisions within the firm and the firm as a whole. Such a risk management concept should give the assurance that management requires to cope with daily risk (Ernst & Young. 2003. XXII). risk management deals with the process of early detection. p.NEW CORPORATE GOVERNANCE 577 rity that are applied to the production of an audit report (Vogt and Alresch. The task of the internal auditors is to establish a financial supervision function that is as independent and objective as possible. 2. and in the prevention or reduction of risk. 226f). top managers. a national. to dismantle prejudices and to avoid unnecessary confrontations. and a higher probability that company objectives are achieved. (Ernst & Young. shareholders and other stakeholders. by suggesting that boards must report annually to their owners their risk assessment and decision-making processes (not content)” (Garratt. personnel and environmental objectives. true. 2002. operational risk management practices at managerial levels. and for guaranteeing focused. 7) and it should keep the responsibility for directing and controlling within the board. 814). and to deal with conflict in a constructive way.

A good measure of the need to improve access to information as a foundation for judgment. p. omitting a phase would result in all development being stalled. the chairman and the CEO discuss all the information arising out of the meeting that should be forwarded to the management (Figure 10). This implies one of the most critical issues. 1998. and 2. 3 and 4) show deficits mainly in the field of control- Chairman Board Members CEO Board evaluation by the media Board evaluation by academics TM TM TM Top Managers Board evaluation by shareholders Board evaluation by top management Board self-evaluation Figure 10: Board–top management communication meetings Figure 11: Board evaluation Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . We have developed two instruments for self. the CEO could report using an information checklist about the most important events of the past period and about the most important objectives of the sub-units of the organisation. The most effective evaluation is based on a comparative evaluation performed by the board members themselves. 2004. and information obtained under circumstances that involve undermining management on the other hand. 193f.) It may also be sensible to formulate some essential questions in a board meeting. by top management. we use the approach illustrated in Figure 12. There are four points that attract attention in these results: 1. the one-page survey with board.and external review of boards and have implemented them successfully in boards in practice: 1. In an extreme case. our corporate image? • How does our strategy differ from that of our competitors? • How is our stock viewed by the analysts who cover us? Last. which is the fine line between justifiable access to suitable information on the one hand. (Malik. For example: • Where is shareholder value being created and destroyed in the company? • What are the major risks to which the company is exposed? • What is the level of employee morale and voluntary loyalty compared to competitors? • What are the threats to customer satisfaction (and customer loyalty compared to competitors)? • What is happening to . the board has an evaluation function. 2. by academics or by the media (Figure 11). all companies (with the exception of company 7 and 9) belong to the most successful companies in their industry.578 CORPORATE GOVERNANCE As part of each board meeting. management and shareholder representatives (see Hilb. To enhance the efficiency of board teams. by the top management and by representatives of the shareholders. is their involvement in projects that are of central and overall importance. p. about which board members should be continually informed. and also to improve board member comprehension about the functioning of the company. the standardised board interview (see Hilb. This spiral diagram should illustrate that the neglect of a phase can seriously impede corporate governance and board development. At the end of the board session. p. the best positioned boards (1. . 192ff). the board also has to obtain information from independent sources. there does not seem to be a dominant industry context. 3. by shareholders. The results of our recent board evaluations are summarised in Table 2. but not least. 196ff). . Besides the formal internal communication processes. The evaluation function of the board Boards can be evaluated by the board members themselves. 2. 2004.

The lowest ranked board reveals the greatest deficit in the culture of trust in the board. for example. it is interesting that the best ranked board reveals room for improvement concerning corporate governance transparency according to important guidelines. The companies placed in the middle of the field reveal a deficit in issues related to the shaping of the future of the company.4 1. From good guidelines to great practice This paper presents a “Both–And” approach called “New Corporate Governance”.9 1.0 1.III: Identification of possible resistance in moving from existing to desirable states Figure 12: Spiral concept of corporate governance and board development Table 2: Results of our recent board evaluations CG practice ranking 1 2 3 4 5 6 7 8 9 10 Firm A B C D E F G H I J Branches I II V III IV V IV II III II Highest deficit value5 0.II C. there is no development if no real steps for improvement are taken.III Obstacles C.III Phase A.4 1.6 Number of deficits >1 0 1 1 2 2 2 5 7 10 11 ling.II B.I D.I C. and 4.II: Performance targets for board and management teams D.0 1.IV Desired state D.NEW CORPORATE GOVERNANCE 579 Phase A. e.IV D. When in the worst case. The © Blackwell Publishing Ltd 2005 Volume 13 Number 5 September 2005 . no board development happens. as already mentioned.IV C.g. that even if the level of dissatisfaction has been diagnosed without doubt and the ideal state is known.4 1.I: Periodic diagnosis of board and management teams Existing state B.5 1.3 1.III B. This means.4 1.II Phase A. whereas the company ranked last belongs to the group of leading companies concerning transparent reporting. one of the four development factors (see Figure 12) is non-existent (= 0).IV: Actions to overcome resistance and to realise development targets Interventions B.I Phase A. Thus we come to our conclusions: from good to great corporate governance. in the implementation of decisions.

(2001) Good to Great. . and . . • Comprehensive transparency . . 60–74. 5. from administrative governance to corporate control-preneurship objective of this approach is to overcome the “Either–Or” thinking that currently dominates corporate governance theory and practice. . . Internal Auditor. L. xxv). Vortrag am 1. in Garratt (2003a. . • Entrepreneurial action . monitoring. we have to be ready to furnish boards with the information they need to make informed decisions and disclosures” Bockal (2002. DocNet-Symposium. for example. Human Resource Journal. its hands out of company activities. legitimacy. . but that they get too much information that is neither well organized nor well summarized” (Carter and Lorsch. . . . . long-term sustainability. . .” Successful boards strive to deliver both: • Shareholder value . Pittsburgh: NN. • Strategic direction . internal auditors). W. and . J. . there are important opportunities for board development. changing their orientations from corporate governance to corporate control-preneurship (Figure 13). 44–49. . • Global integration . C. References Bockal. to strategic direction and control. . St Gallen. and . by Pitman. J. P. Boxall. . 2004. (2003) Interne Revision und Risk Management. . (2002) Internal Auditors: Integral to Good Corporate Governance. employees and the public. Byham. cooperation. . F. 2004. . This opinion contrasts with the usual shareholder-value maximisation statements made. . R. August. p. and still retain the ability to function. . The result of this challenge will determine whether companies will be among the winners or the losers in the face of global change and competition.580 CORPORATE GOVERNANCE Strategic direction function of the board The board in an Entrepreneurial Function “Personal Entrepreneurship” The board in a Directing and Controlling Team “Corporate Controlpreneurship” The board in an Administrative Function “Corporate Administration” The board in a Supervisory Function “Corporate Control” Control function of the board Figure 13: From administrative or supervisory board. checks and balances. . (1992) Strategic Human Resource Development: Beginning of a New Theoretical Sophistication. New York: Harper Business. and . • Performance orientation . . . . • A culture of trust . (1977) Targeted Selection. . . S. controls. necessary confidentiality. . 3. The greatest frustration of board members “is not that they get too little information. 61). Fitzgerald that: “The test of a first-rate [board] intelligence is the ability to hold two opposing ideas in mind at the same time. Volume 13 Number 5 September 2005 © Blackwell Publishing Ltd 2005 . and . 4. . It remains to be seen if boards have the will and resources to transform themselves into true directing and controlling teams. In general. p. . and . has a boss who was appointed from inside” (Economist. and . E. and . and . . Collins. 2. . Notes 1. “When we call for public reporting on internal controls (i. . local relevance. . 47). Bumbacher. . . . . p. 27).e. . value for clients. and . • Short-term results . . 2. • Legality . based on the principle espoused by F. p. “Every one of the top ten on the list of the world’s most admired companies . • Keeping its nose in . . where deficit values between importance and satisfaction are greater than 1.

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