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Boards that Deliver

Whether corporate governance is a burden meant to report compliance on companies’ performance, or can it be used as a competitive advantage in view of the changing laws, awareness and scenario is the important question which is present in the minds of those at the top of the company affairs including the CEO, Directors and Boards.
The book under reference, “Boards that Deliver”, by Ram Charan attempts to answer this question in a certain and prudent manner. The author believes that with the right set of practices, any group of directors can become a board that delivers value to the management and to the investors and goes ahead to demonstrate his points giving directions on various steps to be taken to make this happen.

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Boards that Deliver

  1. 1. Some Impressionistic takes from the book of D Dr. Ram Charan “Boards that Deliver” by Ramki ramaddster@gmail.com
  2. 2. About the Author  Ram Charan is a world-renowned business advisor, author and speaker who has spent the past 35 years working with many top companies, CEOs, and boards of our time. In his work with companies including GE, MeadWestvaco, Bank of America, DuPont, Novartis, EMC, 3M, Verizon, Aditya Birla Group, Tata Group, GMR, Max Group, Yildiz Holdings, and Grupo RBS, he is known for cutting through the complexity of running a business in today’s fast changing environment to uncover the core business problem.  His real-world solutions, shared with millions through his books and articles in top business publications, have been praised for being practical, relevant and highly actionable — the kind of advice you can use Monday morning.  Ram has authored over 25 books since 1998 that have sold over 2 million copies in more than a dozen languages. Three of his books were Wall Street Journal bestsellers, including Execution, which he coauthored with former Honeywell CEO Larry Bossidy in 2002, which spent more than 150 weeks on the New York Times bestseller list. He also has written for publications including Harvard Business Review, Fortune, BusinessWeek, Time, Chief Executive and USA TODAY.
  3. 3. Prelude- 1/2  A book that brings the vision of truly good governance down to earth. Ram Charan, expert in corporate governance and best-selling author, packs this book with useful tools and techniques to take boards and their companies to a higher level of performance.  Charan puts his finger on a growing problem for boards: the disconnect between directors' efforts and their results. The added time and attention boards invest is not translating into better governance that is, governance that adds value to the business.  Boards That Deliver gets beyond the rhetoric of corporate governance reform. It captures the tried-and-true practices used by high- performance boards. In contrast to experts who base prescriptions on number-crunching exercises,  Charan identifies the real problems that drain directors' time and suppress their best judgments and explains clearly and succinctly how boards can solve those problems. These battle-tested solutions help boards achieve what rules and regulations alone cannot to get succession right, refine a winning strategy, and design a rational CEO compensation package.
  4. 4. Why the old style “ Ceremonial Board” is outdated How to create a “ Progressive board” How to select, compensate and oversee a CEO What areas the board must monitor. Why the chair and CEO roles should separate Prelude- 2/2
  5. 5. How Boards are Changing ?  After the notorious Enron, World Com, Tyco and Adelphia scandals, and the enactment of the Sarbanes-Oxley Act and other reforms, we would expect modern boards to be more independent.  However, in the wake of many years of dominance by CEOs and combined CEO-chairs, most boards were not immediately equipped to take charge.  Whole Board members try to provide responsible Corporate governance, their individual levels of readiness, experience, talent and ability to collaborate inevitably vary.  Boards tend to pass through the following stages as they evolve from old-fashioned CEO-driven governance to contemporary active oversight.
  6. 6. Ceremonial Board  The first type of board is the Ceremonial Board.  This is often described as a “good old boys” board.  All the board members were friends or former colleagues of the CEO and were there more to rubber stamp the CEO’s strategy and business plan.  This is often the case in private companies, especially when the board is comprised of advisors that do professional work for the company such as a banker, lawyer or CPA.  This type of a board brings little value to the company.
  7. 7. Liberated Board  The Second is a Liberated Board.  This is a more involved board in the true governance of the company.  A Liberated Board is a truly independent group of directors or advisors.  This means that there are no ties to the company and the directors vote and act independently.  This can, at first, be very distracting to the CEO and the company trying to satisfy a variety of independent directors or advisors
  8. 8. Progressive Board  The third and final one is the Progressive Board.  These boards come together as a team but maintain their independent viewpoint.  A telltale sign of a Progressive Board is one that is very diverse. This includes age, gender, race, geography, experience, etc.  Progressive Boards work closely with the CEO and the senior management team inside and outside the boardroom. The board members best represent the stakeholders (ownership, employees, customers, suppliers, communities, etc.)  A Progressive Board is within reach of any company when the benefits achieved help keep the company going steady during stormy times and blossoming in good times
  9. 9. Building a Progressive Board  Board Progressive foster 3 primary characteristics  Group Dynamics – The board cooperates with Managements. Members share a high level of mutual respect & achieve constructive, positive results  Information architecture – The board has access to the current data it needs.  Focus on substantive issues- The board actively participates in running the company rather than being consumed by minutiae and procedural details. The Board & CEO create a 12- month agenda, and the board focuses on specific oversight & value creation rather than just holding the CEO accountable for performance.  A board’s effectiveness strongly correlates to its members’ individual talents & their teamwork.  Everyone must feel free to contribute to the discussion & every voice must be heard.  Each member of the board must understand the rules of engagement, and the expected norms for behavior & productive contributions.  As the members get to know each other & see how their talents are distributed, formal and informal leadership roles will fall naturally to certain members.
  10. 10. Building a Progressive Board  Some boards meet in executive sessions to discuss & investigate issues. As a member , be aware that your Board should handle these sessions carefully, so they do not undermine the CEO or create a difficult working relationship between the board and executive management.  Boards should evaluate their own effectiveness & act on their finding. When a board determines that one or more of its members is a drain on the panel or the company, it must manage these members, or remove them as the situation allows.  No matter how well your board members collaborate, you need the right information to fuel discussions and support decisions can lead to costly mistakes.  Board should balance information that describes what has already happened (i.e. financial reports) against information that looks ahead ( i.e. budgets, forecasts and projections)
  11. 11. Building a Progressive Board  Reports with raw data are much more useful when accompanied by relevant metrics.  Board members are usually part of day-to-day operations, so they need to see at a glance how the numbers relate to performance & projections, and how they affect present & future operations.  Analysts usually design such reports, but board members should feel free to ask questions, request changes, and ask for specific information about their concern & responsibilities.  While many reports are scheduled , others, such as survey for specific purposes or special committee findings, are generated irregularly.  Manage such reports with care so that their cost does not grow beyond their worth & the information is used while it is still timely.  Board should understand the role of strategy and select CEO who can manage the company in the present & fulfill its future promise.  Viewing the company in the context of its market space, determine if the CEO is leading it in a way that exploits opportunities & manages threats.  Of course, the firm’s financial health is pivotal. The board must insist on getting bad news early, without any spin.
  12. 12. Compensating & Containing the CEO  If you doubt that having the right CEO matters, just think about a few high- profile failures, such as Sunbeam, K-mart or Apple consider major firms that were on the ropes until the right CEO revived them, including such success stories at Steve Jobs’ return to Apple and John Akers’ appointment at IBM  Board must define its CEO selection criteria rigorously, and create relationships with likely internal & external candidates before the need to hire arises.  To build future leaders, the board should foster the development of strong management below the CEO level.  Dig down into the firm’s new positions. The state of your corporation’s leadership development is an important indicator of its cultural & competitive strength.  Astute boards notice these indicators & oversee improvements before the need to promote new leaders becomes acute.  Present leaders greatly influence firm’s future , so the board must know if the CEO is managing the leadership pool, developing talent & retaining key people
  13. 13. Compensating & Containing the CEO  CEO compensation goes far beyond being just a large pile of cash. It has a profound impact on the Chief Executive’s incentives to manage a certain way.  The CEO needs to be fairly, but not outlandishly, compensated on a scale that is linked to shareholder benefits, and the company’s success.  To determine the CEO’s compensation, first decide what company needs an dhow it should run.  What is its winning strategy ? How should the board allocate its resources? Who benefits from short-term gains ? Should the CEO get the lion’s share ? What is the proper debt level ? How leveraged should the firm be and what risks does that leverage create?  The board should give the CEO multiple objectives that reflect a balance among the company/s needs, rather than allowing the CEO to manipulate goals for an outsized payday.  Be cautious about planning a huge CEO severance package, because it can create a complex moral hazard, a situation in hard times in which the CEO is better off being fired than trying to fix the company.  How much damage would a CEO willingly inflict on a firm to collect a big severance package ?
  14. 14. Company Performance Challenges  Once a new CEO is in place, the board must support him or her during a minimally disruptive transition period, review his or her performance, and provide ongoing feedback.  A board does not define or implement strategy, though your board must know it, ask questions about it and offer input.  Certainly your board must understand how the CEO's proposed strategy will earn a profit and must settle upon metrics for monitoring its progress.  By doing its own careful analysis and asking questions, the board can help avoid expensive mistakes. Before the company launches a strategy, determine if available resources can support it.  Strategic discussions too often focus only on internal factors, but many of a company's hurdles are external. Board members should bring their experience to bear on how external factors may support or undermine strategic initiatives.  Due diligence may require special sessions and subcommittees that report back to the board. Do not let such fact-gathering slide into becoming antagonistic toward the CEO, and undermining his or her confidence and authority.
  15. 15.  The board must monitor the company's financial health, performance and risk management. A company's fiscal wellbeing relies in many ways on its liquidity.  Your board must deeply understand the cash situation and how various scenarios affect it. How well can the firm respond to a crisis? While financial leverage can improve the bottom line in good times, it also can magnify problems in difficult times.  When a company has borrowed heavily to finance large new initiatives, it can face a crisis if the assumed growth fails to materialize. The board should examine financial statements thoroughly and consider them under various scenarios.  Careful analysis can help your board evaluate operating performance and market share.  Does the company's growth derive from solid, profitable sales or is it discounting?  Do profits stem from aging products with falling market shares or are new, popular products coming on line? Company Performance Challenges
  16. 16.  Most companies face a variety of risks involving market position, products and services. This includes legal and financial risk and liability. Your board must analyze every risk that can materially affect the company, know how to mitigate it and decide how much risk to take on to gain market rewards. Most boards form a risk committee that reports to the full body.  The board needs a flexible agenda for reviewing these concerns. Twice a year assess financial progress and results, as well as leadership development. Review CEO compensation, corporate risks, strategy and crisis management at least annually, and more as needed Company Performance Challenges
  17. 17. Positive Energy & Direction  For a time, high-profile CEOs also served as board chairs. This dual role fostered the growth of ceremonial boards, because it was all but impossible for the board to oversee corporate management and hire the CEO. Was the chair going to dismiss him or herself?  With the growth of liberated and progressive boards, companies are hiring directors to provide specific expertise, such as accounting and marketing. Just as members of your board should build a pipeline of prospective CEOs, they also should be on the lookout for solid board member candidates to call upon as veteran directors' terms expire.  Even as companies separate the role of board chair and CEO, the CEO should continue to be the corporation's public face. Using the chair in this role diminishes the CEO and creates confusion about the company's leadership. The chair should govern the board, and let the board do its job in overseeing the company.  While your board's primary obligation is to its shareholders, in reality shareholders of widely held public companies rarely speak with a unified voice. They usually form groups and factions with specific interests.
  18. 18. Positive Energy & Direction  The board must monitor the company's financial health, performance and risk management. A company's fiscal wellbeing relies in many ways on its liquidity.  Board must deeply understand the cash situation and how various scenarios affect it. How well can the firm respond to a crisis? While financial leverage can improve the bottom line in good times, it also can magnify problems in difficult times.  When a company has borrowed heavily to finance large new initiatives, it can face a crisis if the assumed growth fails to materialize. The board should examine financial statements thoroughly and consider them under various scenarios.  Careful analysis can help your board evaluate operating performance and market share.  Does the company's growth derive from solid, profitable sales or is it discounting?  Do profits stem from aging products with falling market shares or are new, popular products coming on line?
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  20. 20. Learning’s for Application  Define the roles of your board of directors and build a board that can fulfil it.  Replace a “ Ceremonial Board” of directors with more active “ Progressive board.” Do not let the minutiae of process side track your board members  Board members who work together can provide effective oversight.  Separating the roles of chair and CEO creates more opportunities for the board to have oversight of the CEO, Management and Strategy.  The Board does not create Strategy, but should evaluate it.  The Board needs access to wide variety and range of information.  Board members should develop ongoing relationships with possible future members and CEO candidates rather than beginning to consider succession only when the need arises.  Your Board should monitor the company’s leadership pool as an indicator of its health.
  21. 21. Mail your comments to ramaddster&gmail.com

Whether corporate governance is a burden meant to report compliance on companies’ performance, or can it be used as a competitive advantage in view of the changing laws, awareness and scenario is the important question which is present in the minds of those at the top of the company affairs including the CEO, Directors and Boards. The book under reference, “Boards that Deliver”, by Ram Charan attempts to answer this question in a certain and prudent manner. The author believes that with the right set of practices, any group of directors can become a board that delivers value to the management and to the investors and goes ahead to demonstrate his points giving directions on various steps to be taken to make this happen.

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