what makes great boards great

www.hbr.org

B

EST

P

RACTICE

What Makes Great Boards Great

by Jeffrey A. Sonnenfeld

•

It’s not rules and regulations.

It’s the way people work

together.

Reprint R0209H

http://www.hbr.org

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0209H

B

EST

P

RACTICE


by Jeffrey A. Sonnenfeld

harvard business review • september 2002 page 1

CO

PYR

IGH

T ©

200

2 H

AR

VA

RD

BU

SIN

ESS

SC

HO

OL

PU

BLI

SHIN

G C

OR

PO

RA

TIO

N. A

LL R

IGH

TS

RE

SER

VE

D.

It’s not rules and regulations. It’s the way people work together.

In the wake of the meltdowns of such once greatcompanies as Adelphia, Enron, Tyco, and World-Com, enormous attention has been focused onthe companies’ boards. Were the directors asleepat the wheel? In cahoots with corrupt manage-ment teams? Simply incompetent? It seems in-conceivable that business disasters of such mag-nitude could happen without gross or evencriminal negligence on the part of board mem-bers. And yet a close examination of those boardsreveals no broad pattern of incompetence or cor-ruption. In fact, the boards followed most ofthe accepted standards for board operations:Members showed up for meetings; they hadlots of personal money invested in the com-pany; audit committees, compensation commit-tees, and codes of ethics were in place; the boardsweren’t too small, too big, too old, or too young.Finally, while some companies have had prob-lems with director independence because of thenumber of insiders on their boards, this was nottrue of all the failed boards, and board makeupwas generally the same for companies with failedboards and those with well-managed ones.

In other words, they passed the tests thatwould normally be applied to ascertainwhether a board of directors was likely to do agood job. And that’s precisely what’s so scaryabout these events. Viewing the breakdownsthrough the lens of my 25 years of experiencestudying board performance and CEO leader-ship leads me to one conclusion: It’s time forsome fundamentally new thinking about howcorporate boards should operate and be evalu-ated. We need to consider not only how westructure the work of a board but also how wemanage the social system a board actually is.We’ll be fighting the wrong war if we simplytighten procedural rules for boards and ignoretheir more pressing need—to be strong, high-functioning work groups whose members trustand challenge one another and engage directlywith senior managers on critical issues facingcorporations.

The Inadequacy of Conventional Wisdom

Over time, good-governance advocates have


•

•

•

B

EST

P

RACTICE


Jeffrey A. Sonnenfeld

is the associatedean for executive programs at the YaleSchool of Management in New Haven,Connecticut, and the founder of theschool’s Chief Executive Leadership In-stitute in Atlanta. He can be reached [email protected].

developed no shortage of remedies for failuresof governance. Most of these remedies arestructural: They’re concerned with rules, pro-cedures, composition of committees, and thelike, and together they’re supposed to producevigilant, involved boards. However, good andbad companies alike have already adoptedmost of those practices. Let’s take a look atsome of the most common.

Regular Meeting Attendance.

Regular meet-ing attendance is considered a hallmark of theconscientious director. It matters a lot and, still,as shareholder activist Nell Minow comments,“Some big names on the boards…barely showup due to other commitments, and when theyshow, they’re not prepared.” Indeed, someWorldCom directors were on more than tenboards, so how well prepared could they be?

For-tune’

s 2001 list of the most-admired U.S. compa-nies reveals no difference in the attendancerecords of board members of the most- and least-admired companies. Data from the Corporate Li-brary, a corporate governance Web site and data-base cofounded by Minow, show the same “ac-ceptable” attendance records at both kinds ofcompanies. Good attendance is important for in-dividual board members, but it alone doesn’tseem to have much impact on whether compa-nies are successful.

Equity Involvement.

Board members areassumed to be more vigilant if they hold bigchunks of the company’s stock—but data fromthe Corporate Library don’t suggest that thismeasure by itself separates good boards frombad, either. Several members of the board ofGE,

Fortune’

s most-admired corporation in2001, had less than $100,000 of equity,whereas all board members of the least-ad-mired companies held substantial equitystakes. Not only did all but one of the Enronboard members own impressive amounts ofequity in the company, but some were stillbuying as the shares collapsed.

Board Member Skills.

Patrick McGurn ofInstitutional Shareholder Services, like otherexpert observers, has frequently questionedthe financial literacy of troubled companies’audit committee members. It’s certainly truethat many board members have their jobs be-cause they’re famous, rich, well connected—anything but financially literate. But just asmany board members have the training andsmarts to detect problems and somehow failto do their jobs anyway. At the time of their

meltdowns, for example, Kmart had six cur-rent or recent

Fortune

500 CEOs on its board,and Warnaco had several prominent finan-ciers, a well-known retail analyst, and a top-tier CEO; all those excellent credentials madelittle difference. On this measure, again, wefind that

Fortune’

s most- and least-admiredcompanies alike had board members with thetraining and experience to analyze complex fi-nancial issues and to understand what kinds ofrisks a company is taking on.

Despite Enron’s disastrously complex fi-nancial schemes, no corporation couldhave had more appropriate financial com-petencies and experience on its board. Thelist includes a former Stanford dean who isan accounting professor, the former CEOof an insurance company, the former CEOof an international bank, a hedge fundmanager, a prominent Asian financier, andan economist who is the former head ofthe U.S. government’s Commodity FuturesTrading Commission. Yet members of thisboard have claimed to have been confusedby Enron’s financial transactions.

Board Member Age.

According to one gov-ernance expert, “Enron melted down becauseit lacks independent directors and several arequite long in the tooth.” His remarks reflect ageneral belief that boards become less effec-tive as the average age of their membersrises. My research on executives over the pasttwo decades has shown that, to the contrary,age is often an asset, and this general findingis supported by board data from the Corpo-rate Library. Charles Schwab, Cisco, andHome Depot all have had several boardmembers who are well into their sixties.Michael Dell (Dell Computer placed tenth on

Fortune’

s 2001 list of most-admired compa-nies) told me that when he incorporated in1987, as a 21-year-old college dropout, hefound it invaluable to have then 70-year-oldGeorge Kozmetsky, Teledyne’s visionaryfounder and the former dean of the Mc-Combs School of Business in Austin, Texas,serve on the board; Kozmetsky stayed formore than a decade.

The Past CEO’s Presence.

The complicatedreality is that sometimes a past CEO’s presenceis helpful and sometimes it’s not. In the years Iserved on and even chaired commissions forthe National Association of Corporate Direc-tors (NACD), some commissioners regularly

mailto:[email protected]


•

•

•

B

EST

P

RACTICE


vilified the “old dragons” who haunted succes-sors by serving on boards. In certain cases, thiscan be a problem; one can only imagine boardmeetings at Warnaco, where deposed CEOLinda Wachner voted her 9% of the company’sequity for several months after her November2001 termination. Alternately, a retired CEOcan play an invaluable internal role as a men-tor, sounding board, and link to critical out-side parties. It’s hard to imagine anyone argu-ing that Intel, Southwest Airlines, or HomeDepot would be better off if their legendaryretired CEOs Andy Grove, Herb Kelleher, orBernie Marcus had just gone home to playgolf.

Independence.

Good-governance advocatesand stock exchange heavyweights alike haveargued that boards with too many insiders areless clean and less accountable. Some arguethat Tyco’s confusing spiral of acquisitions andthe apparent self-dealing of the CEO at Adel-phia Communications might have been lesslikely if their boards hadn’t been dominatedby insiders. Indeed, the New York Stock Ex-change’s Corporate Accountability and Stan-dards Committee recently proposed requiringthat the majority of a NYSE-listed corpora-tion’s directors be independent—this in re-sponse to the recent governance disasters.Governance reform proposals are also beingdeveloped by such business groups as the Con-ference Board and the Business Roundtable.Yet again, if you judge the most- and least-admired companies on

Fortune’

s 2001 listagainst this standard, no meaningful distinc-tion emerges. Least-admired companies likeLTV Steel, CKE Restaurants, Kmart, Warnaco,Trump Hotels and Casino Resorts, Federal-Mogul, and US Airways had only one or twoinside directors on their boards; Enron hadonly two. By contrast, at various times in theirhistories, Home Depot had five insider direc-tors on its 11-person board, Intel had three ona nine-person board, and Southwest Airlineshad three on an eight-person board. Typically,half of Microsoft’s board are insiders. Cur-rently, three of Warren Buffett’s seven Berk-shire Hathaway board members have the Buf-fett name, and another is his long-term vicechairman.

United Parcel Service has ranked high on

Fortune’

s list of most-admired companies sincethe list was started, and half of the UPS man-

agement committee is on its board. Three out-side board members have told me how wellplugged-in they have felt over the years be-cause the inside members are very candid andwell informed. From what the outside direc-tors have seen, none of the insiders has everbeen afraid to debate a point with the boss, theCEO.

Board Size and Committees.

A host ofother issues that good-governance advocatespropose turn out to be either not truly impor-tant or already in place at both good and badcompanies. Take board size. Small’s consid-ered good, big’s considered bad. But bigboards exist at some great and admired com-panies—GE, Wal-Mart, and Schwab—alongwith some poorly performing companies likeUS Airways and AT&T. At the same time,small boards are part of the landscape at goodcompanies like Berkshire Hathaway and Mi-crosoft and some not-so-good companies likeTrump.

Another area where good companiesdon’t necessarily conform to the advice ofgood-governance advocates: executive ses-sions, which give boards the chance to evalu-ate their CEOs without interference. Execu-tive sessions are also sometimes coupledwith a designated lead director. But GE, themost-admired company in the country in2001, didn’t allow executive sessions in JackWelch’s day. Said Ken Langone, who serveson the boards of both GE and Home Depot,“Jack will give you all the time in the worldto raise any issue you want, but he wants tobe there during the discussion.” GE’s notalone; many good boards never have meet-ings that exclude the CEO.

Another supposed safeguard of good gover-nance—audit and compensation commit-tees—turns out to be near universal. A 2001survey by the NACD and Institutional Share-holder Services of 5,000 public companyboards shows that 99% have audit committees,and 91% have compensation committees. Sun-beam, Enron, Cendant, McKessonHBOC, andWaste Management all had the requisite num-ber of committees and guidelines, yet account-ing scandals still penetrated this governanceshield. Let’s not forget, either, that the auditcommittee at Enron was consulted about sus-pending the conflict-of-interest guidelines andwillingly agreed to it.


•

•

•

B

EST

P

RACTICE


The Importance of the Human Element

So if following good-governance regulatoryrecipes doesn’t produce good boards, whatdoes? The key isn’t structural, it’s social. Themost involved, diligent, value-adding boardsmay or may not follow every recommendationin the good-governance handbook. What dis-tinguishes exemplary boards is that they arerobust, effective social systems. Let’s see whatthat means.

A Virtuous Cycle of Respect, Trust, andCandor.

It’s difficult to tease out the factorsthat make one group of people an effectiveteam and another, equally talented group ofpeople a dysfunctional one; well-functioning,successful teams usually have chemistry thatcan’t be quantified. They seem to get into a vir-tuous cycle in which one good quality buildson another. Team members develop mutualrespect; because they respect one another,they develop trust; because they trust one an-other, they share difficult information; be-cause they all have the same, reasonably com-plete information, they can challenge oneanother’s conclusions coherently; because aspirited give-and-take becomes the norm, theylearn to adjust their own interpretations in re-sponse to intelligent questions.

The UPS board of directors has just thatkind of chemistry, and as a result membershave debated strategic decisions openly andconstructively for years. The company’s 1991move from Connecticut to Georgia was hotlydebated within the management committee,for example, but once the plan to move wasagreed upon, the board chose a new locationunanimously and never looked back. In themid-1980s, after forging partnerships with de-livery businesses around the world, a revolu-tionary concept at the time, the company de-cided to reverse course and become trulyglobal itself. In just two years, UPS was run-ning operations in more countries than aremembers of the United Nations. This strategicreversal is generally considered a brilliantmove, one that might never have happenedhad board members not respected and trustedone another enough to consider that a smartmove could be trumped by an even smarterone. The board even tolerated an open debatein 1992, led by a former CEO, over the com-pany’s widely recognized corporate color,brown—the hallmark of UPS’s current adver-

tising campaign.A virtuous cycle of respect, trust, and can-

dor can be broken at any point. One of themost common breaks occurs when the CEOdoesn’t trust the board enough to share infor-mation. What kind of CEO waits until thenight before the board meeting to dump onthe directors a phone-book-size report that in-cludes, buried in a thicket of subclauses andfootnotes, the news that earnings are off forthe second consecutive quarter? Surely not aCEO who trusts his or her board. Yet this de-structive, dangerous pattern happens all thetime. Sometimes a CEO’s lack of trust takeseven more dramatic forms. It’s stunning thatEnron’s chairman and CEO never told theboard that whistle-blower Sherron Watkinshad raised major questions about financial ir-regularities. It is impossible for a board tomonitor performance and oversee a companyif complete, timely information isn’t availableto the board.

It is, I should note, the responsibility of theboard to insist that it receive adequate infor-mation. The degree to which this doesn’t hap-pen is astonishing. Consider Tyco. In recentquarters, it’s suffered some of the worst strate-gic confusion I’ve ever witnessed: Seeminglyevery single public statement by the com-pany’s senior management has been contra-dicted by subsequent statements. For example,in January 2002, then CEO Dennis Kozlowskiannounced a plan to split the company intofour pieces, only to reverse that plan a fewmonths later. On a single day, senior managersannounced first that a financial unit would beIPO’ed, next that it would be sold to an invest-ment house, and finally that neither would oc-cur. Where was the board? Why didn’t direc-tors demand a better accounting of thecompany’s direction and well-being? Whatbrought down the CEO eventually was an ap-parently private financial matter—the boardseemed content to keep him on indefinitely.

Another sign that trust is lacking is whenboard members begin to develop back chan-nels to line managers within the company.This can occur because the CEO hasn’t pro-vided sufficient, timely information, but it canalso happen because board members are exces-sively political and are pursuing agendas theydon’t want the CEO to know about. If a boardis healthy, the CEO provides sufficient informa-tion on time and trusts the board not to med-

What distinguishes

exemplary boards is that

they are robust, effective

social systems.


•

•

•

B

EST

P

RACTICE


dle in day-to-day operations. He or she alsogives board members free access to peoplewho can answer their questions, obviating theneed for back channels.

Another common point of breakdown oc-curs when political factions develop on theboard. Sometimes this happens because theCEO sees the board as an obstacle to be man-aged and encourages factions to develop, thenplays them against one another. Pan Amfounder Juan Trippe was famous for doing this.As early as 1939, the board forced him out ofthe CEO role, but he found ways to sufficientlyterrorize the senior managers at the companyand one group of board members that he wasreturned to office. When he was fired again fol-lowing huge cost overruns on the Boeing 747the company underwrote, he coerced the di-rectors into naming a successor who was termi-

nally ill.Most CEOs aren’t as manipulative as Trippe,

and in fact, they’re often frustrated by divisive,seemingly intractable cliques that develop onboards. Failing to neutralize such factions canbe fatal. Several members of Jim Robinson’sAmerican Express board were willing to pro-vide the advice, support, and linkage heneeded—but the board was also riddled withcomplex political agendas. Eventually the vi-sionary CEO was pushed out during a businessdownturn by a former chairman who wantedto reclaim the throne and a former top execu-tive of another company who many felt simplymissed the limelight.

The CEO, the chairman, and other boardmembers can take steps to create a climate ofrespect, trust, and candor. First and most im-portant, CEOs can build trust by distributingreports on time and sharing difficult informa-tion openly. In addition, they can break downfactions by splitting up political allies whenassigning members to activities such as sitevisits, external meetings, and researchprojects. It’s also useful to poll individualboard members occasionally: An anonymoussurvey can uncover whether factions areforming or if members are uncomfortablewith an autocratic CEO or chairman. Otherrevelations may include board members’ dis-trust of outside auditors, internal company re-ports, or management’s competence. Thesepolls can be administered by outside consult-ants, the lead director, or professional stafffrom the company.

A Culture of Open Dissent.

Perhaps themost important link in the virtuous cycle isthe capacity to challenge one another’s as-sumptions and beliefs. Respect and trust donot imply endless affability or absence of dis-agreement. Rather, they imply bonds amongboard members that are strong enough towithstand clashing viewpoints and challeng-ing questions.

I’m always amazed at how common group-think is in corporate boardrooms. Directorsare, almost without exception, intelligent, ac-complished, and comfortable with power. Butif you put them into a group that discouragesdissent, they nearly always start to conform.The ones that don’t often self-select out. Finan-cier Ken Langone tells the story of a widely ad-mired CEO who was invited to join the boardof a famous corporation that is suffering great

Building an Effective Board

Good board governance can’t be legislated, but it can be built over time. Your best bets for success:

Create a climate of trust and candor

Share important information with direc-tors in time for them to read and digest it. Rotate board members through small groups and committees so they spend time together meeting key company per-sonnel and inspecting company sites. Work to eliminate polarizing factions.

Foster a culture of open dissent

If you’re the CEO, don’t punish mavericks or dissenters, even if they’re sometime pains in the neck. Dissent is not the same thing as disloyalty. Use your own resis-tance as an opportunity to learn. Probe si-lent board members for their opinions, and ask them to justify their positions. If you’re asked to join a board, say no if you detect pressure to conform to the major-ity. Leave a board if the CEO expects obe-dience. Otherwise, you put your wealth and reputation—as well as the assets and reputation of the company—at risk.

Utilize a fluid portfolio of roles

Don’t allow directors to get trapped in rigid, typecast positions. Ask them to de-

velop alternative scenarios to evaluate strategic decisions, and push them to challenge their own roles and assump-tions. Do the same thing yourself.

Ensure individual accountability

Give directors tasks that require them to inform the rest of the board about stra-tegic and operational issues the com-pany faces. This may involve collecting external data, meeting with customers, anonymously visiting plants and stores in the field, and cultivating links to out-side parties critical to the company.

Evaluate the board’s performance

Examine directors’ confidence in the in-tegrity of the enterprise, the quality of the discussions at the board meetings, the credibility of reports, the use of con-structive professional conflict, the level of interpersonal cohesion, and the de-gree of knowledge. In evaluating indi-viduals, go beyond reputations, ré-sumés, and skills to look at initiative, roles and participation in discussions, and energy levels.


•

•

•

B

EST

P

RACTICE


distress today. He was told that, as a matter ofcustom, new directors were expected to saynothing for the first 12 months. The candidatesaid, “Fine, I’ll see you in a year,” and of coursenever got the appointment. Langone explainedthat directors generally feel that they areunder pressure to fit in so they’ll be renomi-nated. As he put it, “Almost no one wants to bea skunk at a lawn party.”

Even a single dissenter can make a huge dif-ference on a board. Bill George, a former CEOand chairman of the board of Medtronic, re-ported that a lone dissenter had forced hiscompany to reconsider near unanimous deci-sions on several occasions. One pharmaceuticaldirector held out in opposition to Medtronic’sacquisition of Alza, a maker of drug deliverysystems, saying it would take Medtronic intoan area it knew nothing about. He was so con-vincing that the acquisition was abandoned,and in retrospect, that was the right decision.Another dissenter convinced George and theboard to reverse themselves and not to get outof the angioplasty business—and, indeed, tointensify those services—and that shift haspaid off handsomely.

Frequently, executive recruiters looking forleads during board candidate searches willask, “Is this fellow a team player?” which iscode for “Is this person compliant, or does hemake trouble?” If a board member challengesmajor decisions, a company sometimes goesto great lengths to discredit the person. Con-sider Walter Hewlett—an academic; the co-founder’s son, who controlled 18% of Hewlett-Packard stock; and someone with a deep un-derstanding of the computer business—whohad the temerity to question HP’s proposedmerger with Compaq in the fall of 2001. De-spite the fact that technology mergers rarelywork, his point of view was summarily dis-missed internally. When he was forced to gopublic with his objections, he was ridiculedpublicly in a smear campaign.

CEOs who don’t welcome dissent try to packthe court, and the danger of that action is par-ticularly clear right now. Recall that Enronboard members Rebecca Mark and CliffordBaxter resigned reportedly because they wereuncomfortable with paths the company hadtaken. And one can imagine a happier endingat Arthur Andersen had somebody said, “Waita minute,” when the document shredding be-gan, or at Tyco when the board learned of mil-

lions in undisclosed loans to the CEO anddidn’t question them.

The CEO, the chairman, the lead director,and the board in general need to demonstratethrough their actions that they understandthe difference between dissent and disloyalty.This distinction cannot be legislated throughnominating committee rules and guidelinesfor director résumés; it has to be somethingthat leaders believe in and model. HomeDepot chairman Bernie Marcus notes that,for one simple reason, he’d never serve on aboard where dissent was discouraged: Whenhe serves on a board, his reputation and hisfortune are on the line. A lost reputation can’tbe regained, and director’s insurance won’tnecessarily protect anyone’s fortune, becausethere are always exemption clauses. Marcushas remarked, “I often say, ‘I don’t think youwant me on your board. Because I am conten-tious. I ask a lot of questions and if I don’t getthe answers, I won’t sit down.’ That’s the kindof board member that I want on myboard…because our company needs help. Wethink we’re bright, but we’re not the smartestpeople in the world.” Ken Langone corrobo-rates this view of the Home Depot board.Both he and Marcus describe times when theboard disagreed with management aboutstrategic questions—when reformulating thesmall-store concept, for example, and whenrevisiting expansion into Latin America. Theupshot wasn’t that the board won and man-agement lost, but rather that, after passionatedisagreements had been voiced, together theyarrived at new conclusions.

According to data complied by KathleenEisenhardt and L.J. Bourgeois, the highest-performing companies have extremely conten-tious boards that regard dissent as an obliga-tion and that treat no subject as undiscussable.Directors at these companies scoff at some ofthe devices more timid companies use to en-courage dissent, such as outside directors ask-ing management to leave while they discusscompany performance. What’s the point ofcriticizing management, they ask, if manage-ment isn’t there to answer the criticism? Itshould be noted that skepticism and dissentdon’t constitute disagreement for its own sakebut rather are the by-products of a constantlyevolving view of the business and of the world.

Fluid Portfolio of Roles.

When board mem-bers don’t challenge one another, individual

The highest-performing

companies have

extremely contentious

boards that regard

dissent as an obligation

and that treat no subject

as undiscussable.


•

•

•

B

EST

P

RACTICE


directors’ roles—the ruthless cost cutter, thedamn-the-details big-picture guy, the split-the-differences peacemaker—can become stereo-typed or rigid. Effective boards require theirmembers to play a variety of roles, in somecases dipping deep into the details of a partic-ular business, in others playing the devil’s ad-vocate, in still others serving as the projectmanager. Playing different roles gives direc-tors a wider view of the business and of thealternatives available to it.

Occasionally board members can so thor-oughly transcend their normal roles thatthey’re able to change their minds about some-thing they once built their lives around. Thishappened at PepsiCo in 1997 when the boarddecided to sell the various components of itswell-run restaurant group. CEO Roger Enricohad previously turned around the unit—which had been the brainchild of two of En-rico’s predecessors, Don Kendall and WayneCalloway—and must have felt great pride ofownership. Yet he eventually convinced allthat the restaurant unit should be sold so thatit could flourish freely beyond the controls ofthe parent company. It’s proved to be a bril-liant decision.

Individual Accountability.

Board account-ability is a tricky problem for CEOs, as a 2002survey by the Yale School of Managementand the Gallup Organization underscores. Inthat survey, fully 25% of CEOs claim thattheir board members do not appreciate thecomplexity of the businesses they oversee. Inaddition, we’ve all seen instances when indi-vidual responsibility dissolved in largegroups. This certainly appears to have hap-pened at Enron: Practically everyone in-volved has pointed the finger of blame at oth-ers or proclaimed his or her ignorance as abadge of honor. The fact that many boardmembers were financially sophisticatedseemed to have encouraged the other boardmembers to defer to their expertise.

There are various methods for enforcing ac-countability. Home Depot’s board membersare expected to visit at least eight stores out-side their home state between board meetings;GE’s board members dine with the company’slargest suppliers and distributors the night be-fore the annual meeting. Perhaps the most ef-fective enforcement mechanism, though, isold-fashioned peer pressure. Directors whotake their duties seriously, and let their fellow

directors know they’re expected to do thesame, are the best insurance against a boardwhose first question, upon receipt of the quar-terly earnings report, is, “When’s lunch?”

Performance Evaluation.

I can’t think of asingle work group whose performance gets as-sessed less rigorously than corporate boards.In 2001, the NACD surveyed 200 CEOs servingas outside directors of public firms. Sixty-threepercent said those boards had never been sub-jected to a performance evaluation. Forty-twopercent acknowledged that their own compa-nies had never done a board evaluation. A2001 Korn/Ferry study of board directorsfound that only 42% regularly assess boardperformance, and only 67% regularly evaluatethe CEO.

This lack of feedback is self-destructive. Be-havioral psychologists and organizationallearning experts agree that people and organi-zations cannot learn without feedback. Nomatter how good a board is, it’s bound to getbetter if it’s reviewed intelligently.

A performance review can include a fullboard evaluation, individual directors’ self-assessments, and directors’ peer reviews of oneanother. Most often, the nominating or gover-nance committee drives these evaluations. Afull board review can include an evaluation ofsuch dimensions as its understanding and de-velopment of strategy, its composition, its ac-cess to information, and its levels of candorand energy. In individual self-assessments,board members can review the use of theirtime, the appropriate use of their skills, theirknowledge of the company and its industry,their awareness of key personnel, and theirgeneral level of preparation.

The peer review can consider the construc-tive and less constructive roles individual direc-tors play in discussions, the value and use ofvarious board members’ skill sets, interper-sonal styles, individuals’ preparedness andavailability, and directors’ initiative and linksto critical stakeholders. This process is oftenbest driven by a board committee such as anominating or governance committee, whichis assigned the execution and follow-throughresponsibilities for this process.

Annual evaluations led PepsiCo and Targetto change their processes for reviewing strat-egy with their boards. Instead of the mind-numbing, back-to-back, business-unit dog andpony shows that boards often suffer, each com-


•

•

•

B

EST

P

RACTICE


pany decided to spend a full day of each boardmeeting looking in depth at the strategic chal-lenges of a single business unit.

• • •

We all owe the shareholder activists, ac-countants, lawyers, and analysts who studycorporate governance a debt: In the 1980sand 1990s, they alerted us to the impor-tance of independent directors, audit com-mittees, ethical guidelines, and other struc-tural elements that can help ensure that acorporate board does its job. Without adoubt, these good-governance guidelineshave helped companies avoid problems, bigand small. But they’re not the whole story

or even the longest chapter in the story. If aboard is to truly fulfill its mission—to mon-itor performance, advise the CEO, and pro-vide connections with a broader world—itmust become a robust team—one whosemembers know how to ferret out the truth,challenge one another, and even have agood fight now and then.

Reprint R0209H;

Harvard Business Review

OnPoint 2365

To order, see the next pageor call 800-988-0886 or 617-783-7500or go to www.hbr.org

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0209H

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=2365

http://www.hbr.org

Further Reading

To Order

For reprints,


OnPoint orders, and subscriptions to

Harvard Business Review:

Call 800-988-0886 or 617-783-7500.Go to www.hbr.org

For customized and quantity orders of reprints and


OnPoint products:Call Frank Tamoshunas at 617-783-7626, or e-mail him at [email protected]


OnPoint articles enhance the full-text article with a summary of its key points and a selection of its company examples to help you quickly absorb and apply the concepts.


OnPoint collections include three OnPoint articles and an overview comparing the various perspectives on a specific topic.

page 9


is also part of the


OnPoint collection

Building the Best Boards

, Product no. 6948, which includes these additional articles:

Building Better Boards

David A. Nadler


May 2004Product no. 693X

The Board’s Missing Link

Cynthia A. Montgomery and Rhonda Kaufman


March 2003Product no. 3183

http://www.hbr.org

mailto:[email protected]



http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=693X


what makes great boards great

Documents