Boards That Excel: Candid Insights and Practical Advice for Directors

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This is a different kind of corporate governance book. With its vivid stories and conversational tone, Boards That Excel is like sitting down with an astute and experienced friend-one who's passionate about what corporate and nonprofit boards can contribute to their organizations' success when they set high aspirations, are clear on purpose, and do the right things in the right way. B. Joseph White, an experienced corporate and nonprofit director and a distinguished academic, argues that boards can enable organizations to do great things, but only when directors go well beyond their duty to oversee and monitor management. White offers a road map for governance success based on his experience with two of America's most successful companies, one public and one private. He knows governance research and distills it to a handful of truly useful insights for boards and directors. He provides clear guidance on the essential work boards must do, and, drawing on behavioral research, he describes how they can ensure the boardroom is a place of good information, thoughtful evaluation, and wise decision making. The book reports on interviews with more than a dozen high-performance board chairs, CEOs, and directors, including Siebel Systems founder Tom Siebel, legendary real estate investor Sam Zell, former Harlem Globetrotters owner Mannie Jackson, GM board chairman and former Cummins chairman and CEO Tim Solso, and volunteer (University of Illinois, University of Michigan) and corporate (Hershey, Bob Evans) director Mary Kay Haben. All speak with unusual candor on what it takes for boards and directors to excel.

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9 Chapters

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Introduction Pay It Forward The Purpose of This Book

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The Purpose of This Book

We are products of our experiences. Two of mine have greatly influenced the views about governance expressed in this book. In both cases, I was there at the creation. The principals involved had high aspirations and a stewardship attitude toward governance. Results over more than two decades have been strong and positive.

My boss, Dean Gil Whitaker of the University of Michigan Business School, walked into my office in Ann Arbor with a guest. “Hi, I’m Paul Gordon,” he said with a deep voice and a big smile. “We have a little family business in Grand Rapids. I’m wondering if you could help us with governance and a few other things.”

Paul was a graduate of the school where I was a professor and associate dean. He was in his mid-sixties when we met. Paul had recently begun to think deeply about the long-term future of Gordon Food Service (GFS), the growing private company he headed with his brother, John. Gil thought I might be able to help Paul because I had just returned to the school after a six-year stint in the real world at Cummins, Inc., the diesel engine and power systems company in Columbus, Indiana.

 

Chapter 1 High Aspirations and Strong Results The Bookends of Great Governance

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The Bookends of Great Governance

What is great governance? This is a question that boards seldom ask. Perhaps directors assume the answer is obvious and everyone is on the same page. I don’t think that’s the case.

In this chapter, I offer my answer to that question. I make the case that the bookends, or starting and ending points, of great governance are high aspirations for and great results by the company or organization the board is overseeing.

Directors are sometimes like the stone mason who, when asked what he is doing, replies that he is constructing a wall. Less often, they are like the mason who explains that he is building a cathedral.

It’s easy to get absorbed in the work of governance—attending committee meetings; discussing strategy, plans, and results; evaluating the CEO—and lose sight of the larger purpose of board work. There is plenty of wall construction in governance, but directors should always have an eye toward cathedral building over the long term. Asking and answering the question, “What is great governance?” can help.

 

Chapter 2 Understand the Role Stewardship Thinking

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Stewardship Thinking

How a person approaches board service and thinks about the role of director really matters. Is there a proper metaphor to describe the job?

In my experience, the best directors think of themselves as stewards. They ensure careful and responsible management of the company or organization with which they have been entrusted. They are tough-minded monitors of and thoughtful advisors to those charged with managing. As representatives of owners and stakeholders, they insist on high performance and strive to grow value through prudent risk taking. As stewards, they consider matters not through the lens of self-interest but through the lens of what is best for the organization they oversee.

The metaphor of governance as stewardship yields many insights for a director. It has led me to think carefully about the privileges and responsibilities of board work. It has guided me in handling difficult situations like being a director of a failing company and managing a potential conflict of interest. It has helped me clarify what real director independence is and what director effectiveness requires. It has served as a reminder that in the leadership of organizations, there is a distinct difference between governing and managing.

 

Chapter 3 Understand the Enterprise What Is a Company (School, Hospital...)?

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What Is a Company (School, Hospital …)?

The first marketing course I took began with an assignment to read “A Note on the Worldwide Watch Industry,” a dense document describing the global market for watches including market participants, products, price points, volumes, and distribution channels.

My section mates and I went to class expecting a discussion of the watch industry. That didn’t happen. Instead, our professor, Steve Starr, faced the class and asked a simple question: “What is a watch?”

The answer turned out to be anything but simple.

A watch is a way of keeping time and doing so portably. As a young man, this was the only way I had ever thought about watches.

But, as various students pointed out, a watch can be many things, including a piece of jewelry, a fashion accessory, an expression of personal values and taste, a work of art, a collector’s item, a store of value, a talisman, a gift with significance and meaning, a status symbol, a family heirloom, and more. “What is a watch?” turned out to be the best possible introduction to the subject of marketing.

 

Chapter 4 Do The Right Things The Substance of Great Governance

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The Substance of Great Governance

Earlier I asked the question, “What is great governance?” In this chapter and the next, I answer the question in detail.

Experience and research point to a top-ten list of things a board must do for management and the organization to thrive:

1. Set high performance aspirations and a proper tone at the top

2. Appoint an excellent leader and plan for succession

3. Help develop and approve a winning strategy

4. Approve annual and long range plans and monitor results

5. Create incentives for desired performance

6. Ensure quality financial reporting and effective internal controls

7. Oversee a balance sheet with ample liquidity and prudent debt

8. Oversee enterprise risk

9. Be vigilant about capital investments, especially acquisitions

10. Assist management in uniquely useful ways

There is one additional thing that directors must do for themselves:

• Renew the board

These items compose a board’s vital checklist of the right things to do.

In Chapter 1, I discussed the importance of high aspirations for an organization. I quoted the late CEO of Motorola, Bob Galvin, who said that the very least leadership can do is to set high aspirations because they are antecedent to high performance.

 

Chapter 5 Do Things Right The Process of Great Governance

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The Process of Great Governance

A board is a work group—senior, consequential, and privileged—but a work group nonetheless. As such, the determinants of its effectiveness are well known: people, structure, and process.

Work Group E[f_f]ectiveness

People

Directors themselves are surely the most important determinant of board effectiveness. Dean Gilbert R. Whitaker Jr., my boss at the University of Michigan, once remarked that if you have a great faculty, they attract great students. Gather them together under a tree and great education will occur. In general, I think the same is true of boards. Great directors will, most of the time, be good stewards, whatever the board’s structure and process.

How important is the human makeup of the board? The late J. Richard Hackman, arguably the world’s leading expert on teams, advised that individuals destructive to a group’s work process literally must be forced off. I have certainly found this is true on boards. Hackman came to other conclusions that board chairs, lead directors, and governance committees should keep in mind. For example, small teams are generally more effective than large ones; he suggests no more than nine members. Stable and experienced teams are more effective than those newly formed or comprising many new members; this should give pause about mandatory retirement based on term limits or age. Deviants (members with critical and different perspectives) are important to challenging the team’s tendency toward homogeneity.36

 

Chapter 6 Embrace the Best of “Good Governance” Emerging Orthodoxy

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Emerging Orthodoxy

A book on governance would be incomplete without taking note of the search for good governance practices over the last thirty years. It began with the shareholder rights movement of the 1980s and 1990s and accelerated with federal legislation following the corporate failures and scandals of the last fifteen years. We have seen good governance initiatives on the part of legislators and regulators, reformers, stock exchanges, activist and institutional investors, and proxy advisory services. Corporate boards have been much affected by these initiatives, and much has changed in boardrooms as a result. The initiatives have spilled over into the nonprofit world as nonprofit boards adopt committee structures and board practices, such as regular executive sessions, that mimic those in the corporate world.

As a result, there is today emerging orthodoxy (accepted wisdom) as to what constitutes good governance. In this chapter, I describe and evaluate that orthodoxy then highlight practices that experience and research suggest are most valuable. My advice to boards and directors is to embrace what’s best and be skeptical of the rest.

 

Chapter 7 Other Voices Interviews with Board Chairs, CEO’s and Experienced Directors

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Interviews with Board Chairs, CEOs and Experienced Directors

To this point, I have shared with you my thoughts on governance. Now I want to report what I learned from interviews I conducted with experienced board chairs, CEOs, and directors of public and private companies, all of whom also serve on nonprofit boards. Because these are people I know personally, I was confident they would be candid. Because I respect them professionally, I knew their views would be worth hearing.

Equity Residential (EQR) and Gordon Food Service (GFS) figure prominently in my board experience and in this book. Therefore, I report first on interviews with trustees and directors of these two companies, the former public, the latter private.

I interviewed

• Sam Zell, chairman

• David Neithercut, president and chief executive officer

• Chuck Atwood, lead trustee

The board takes responsibility. I have thrown out the rope. People either make a lasso or hang themselves. What you have at EQR are people who are really interested. They are there because they have a significant connection to the company. Strong ownership. Generally long tenure.

 

Chapter 8 Conclusion The “Vital Few” for Boards and Directors

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The “Vital Few” for Boards and Directors

When Kaoru Ishikawa, Japan’s great quality expert, visited Cummins to share his thinking with senior management, he introduced me to a term I’ve never forgotten: the vital few versus the trivial many. Quality, Dr. Ishikawa told us, always depends on focus on the former and not being distracted by the latter. This is as true for boards as any other work group.

In the preceding chapters, I have shared my thinking on how corporate and nonprofit boards and directors can be good stewards and achieve great governance. To summarize my vital few messages:

• Be great cathedral builders in addition to competent bricklayers.

• Maintain the organization’s ability to control its destiny (i.e., its right of self-determination).

• Maximize long-term economic value creation (companies) and efficient mission achievement (nonprofits).

• Insist on a foundation of broad excellence and pursue high aspirations and vision.

• Understand the role of directors and the board. Practice stewardship thinking. Govern rather than manage. Help as well as monitor.

 

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