In previous blogs on corporate boards, I addressed selecting the board chair, succession planning, and replacing the CEO. Here, I consider measuring the effectiveness of the board.
When it comes to corporate governing boards, no news is good news. Typically, the only time a corporate governing board is the subject of news coverage is when something bad happens and the governing board is blamed. When Enron failed, when Theranos failed, when GE’s stock price plummeted, and when many other corporations failed, many asked, “Where was the governing board?” Seldom are governing boards credited for corporate success. In some sense, a board’s effectiveness is inversely proportional to the news coverage it receives.
It’s difficult to understand why the Theranos board didn’t act. Its story is well documented. Its first board was an advisory board, not a fiduciary board, and consisted of a number of luminaries, including among others former U.S. Secretary of State Henry A. Kissinger, former U.S. Senator William H. Frist, former U.S. Senator Sam Nunn, former U.S. Secretary of Defense William J. Perry, former U.S. Secretary of State George P. Schultz, retired U.S. Navy admiral Gary Roughead, retired U.S. Marine Corps general and former U.S. Secretary of Defense James N. Mattis, former Net App CEO Daniel Warmenhoven, former Director of the Centers for Disease Control and Prevention William H. Foege, former Wells Fargo CEO Richard Kovacevich, and former Amgen Executive Vice President Fabrizio Bonanni.
The house of cards created by Theranos’ founder, Elizabeth Holmes, started crumbling when Wall Street Journal reporter, John Carreyrou, broke the story in 2015. On March 14, 2018, the Securities and Exchange Commission charged Holmes with fraud. Holmes is currently in a federal prison in Bryan, Texas.
How should the effectiveness of a governing board be measured? Should the measure of effectiveness for a CEO be applied to the governing board? Although their responsibilities overlap, there are significant differences. To abide by noses in and fingers out, governing boards aren’t responsible for day-to-day activities of the corporation. However, they’re responsible for the overall effectiveness of the CEO—after all they’re responsible for hiring and firing the CEO.
Recalling Peter Drucker’s definition of effectiveness, how well the right things are done, shouldn’t the effectiveness of a corporate governing board be based on how well it fulfills its responsibilities? The basic responsibilities of a governing board are to set goals and define obligations, appoint top executive officers and design the top administrative structure, assess total performance of the institution, take appropriate action based upon what has been found in the assessment, ensure succession planning occurs for the top executive officers, and ensure comprehensive risk assessments are performed. Fiduciary responsibility to shareholders is a primary responsibility for corporate governing boards.
Interestingly, recent surveys of governing boards and CEOs indicate both CEOs and board members are concerned about the effectiveness of governing boards. Not surprisingly, CEOs are more critical of the board’s effectiveness than are the board members themselves. For example, PWC’s 2022 Annual Corporate Directors Survey found that 49% of directors believe at least one fellow directors should be replaced. In a 2020 survey of CEOs PWC found that 82% percent believed at least one director should be replaced and 43% believed two or more should go; nine out of ten CEOs believed board members understood the company’s strategy, key business risks, the competitive landscape, the company’s culture, its shareholders, and its talent development. However, 40% of CEOs indicated their boards were doing only a fair or a poor job overall. CEOs expressed concerns regarding “corporate directors’ lack of preparedness, the number of boards on which they serve (overboarding), and their overall effectiveness.”
Boards on which I served performed self-assessments, as well as assessments of fellow directors. I found them to be informative and useful. Directors tended to be quite candid and concerns were brought to the attention of the board chair. Based on feedback provided, a number of directors were replaced. When a director was not effective, it was obvious to fellow directors and to management.
Managing expectations is a challenge, especially in an environment of changing conditions. A CEO’s expectations of a director, as well as directors’ expectations of one another and the CEO must be aligned. For this to occur, open communication is needed. What Warren Bennis called a culture of candor and Mary Pat McCarthy and Timothy P. Flynn called a culture of dissent are essential for a corporate board to be effective.
Next Week: Corporate Boards—Part 5
