TLFeBOOK Charan.ffirs 12/14/04 10:54 AM Page i Other Books by Ram Charan Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning What the CEO Wants You to Know Boards at Work Books coauthored by Ram Charan: Confronting Reality: Doing What Matters to Get Things Right (a best-seller with Larry Bossidy) Execution: The Discipline of Getting Things Done (a best-seller with Larry Bossidy) The Leadership Pipeline: How to Build the Leadership-Powered Company (with James L. Noel and Steve Drotter) Every Business Is a Growth Business: How Your Company Can Prosper Year after Year (with Noel Tichy) E-Board Strategies (with Roger Kenny) Strategic Management: A Casebook in Policy and Planning (with Charles W. Hofer, Edwin A. Murray Jr., and Robert A. Pitts) Custom books for in-house use: Business Acumen Making Matrix Organizations a Competitive Advantage Action, Urgency, Excellence Charan.ffirs 12/14/04 10:54 AM Page ii Boards That Deliver Charan.ffirs 12/14/04 10:54 AM Page iii Charan.ffirs 12/14/04 10:54 AM Page iv Boards That Deliver Advancing Corporate Governance from Compliance to Competitive Advantage Ram Charan Charan.ffirs 12/14/04 10:54 AM Page v Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or trans- mitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com. Jossey-Bass books and products are available through most bookstores. To contact Jossey- Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986 or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Charan, Ram. Boards that deliver : advancing corporate governance from compliance to competitive advantage / by Ram Charan.—1st ed. p. cm. Includes bibliographical references and index. ISBN 0-7879-7139-1 (alk. paper) 1. Boards of directors. 2. Corporate governance. I. Title. HD2745.C44 2005 658.4’22—dc22 2004025829 Printed in the United States of America FIRST EDITION HB Printing 10987654321 Charan.ffirs 12/14/04 10:54 AM Page vi Contents Introduction: Advancing the Practice of Corporate Governance ix Part One: Boards in Transition 1 1 The Three Phases of a Board’s Evolution 3 2 What Makes a Board Progressive 14 Part Two: The Three Building Blocks of Progressive Boards 27 3 Group Dynamics 29 4 Information Architecture 47 5 Focus on Substantive Issues 61 Part Three: Contributions That Count 73 6 The Right CEO and Succession 75 7 CEO Compensation 94 8 The Right Strategy 113 9 The Leadership Gene Pool 129 10 Monitoring Health, Performance, and Risk 139 Part Four: Maintaining Momentum 149 11 Board Operations 151 12 Working with Investors 167 Conclusion: Leveraging the Board for Competitive Advantage 173 Appendix A: Sample Strategy Blueprint 177 Appendix B: The Research Agenda 183 vii Charan.ftoc 12/14/04 10:55 AM Page vii Acknowledgments 187 About the Author 189 Index 191 viii CONTENTS Charan.ftoc 12/14/04 10:55 AM Page viii Introduction: Advancing the Practice of Corporate Governance Make no mistake about it, corporate governance is on the move. New rules and regulations, along with a genuine desire to improve, have caused a perceptible shift in boardrooms across America and around the world. Most CEOs and directors recognize that the journey has just begun, and that they, not regulators, must now lead the way. This is a book for directors, CEOs, and other business leaders who want corporate governance to be the best it can be. Yes, boards have changed in recent years for the better. But they are not yet fully evolved. Most boards are in flux and still not living up to their potential of providing truly good governance—that is, governance that doesn’t just prevent misdeeds but actually improves the cor- poration. They haven’t figured out the “how” of adding value. That’s where this book comes in. It provides the guidance boards need to go from being merely active and in full compliance to making an important contribution to the business. It is a road map for how boards can make the transition to the next step in their evolution, becoming a competitive advantage for their com- panies. And it is a guidebook for CEOs to see how they can get the most out of their boards. Beginning with my doctoral work on governance at the Harvard Business School more than thirty years ago, I have closely studied the inner workings of boards. I haven’t performed quantitative or statistical correlations between corporate performance and vari- ables of corporate governance. Frankly, such research doesn’t get to the causality of what leads to good governance. Rather, I have ix Charan.flast 12/14/04 10:54 AM Page ix [...]... significant difference The chapters that follow are suggestions to all directors so they can fulfill their responsibility and achieve their opportunity Boards That Deliver Part One Boards in Transition Around the world, boards have accepted a new mandate and are adopting a new mindset toward their work But living up to new expectations is posing a challenge for many boards Understanding the true nature... the boardroom My first book on this subject, Boards at Work (published in 19 98), described what the best boards were doing at that time Since then, through continued research and analysis, I have come to identify three factors that create the foundation for good governance I have also identified the essential practices and collective behaviors needed to build that foundation—and to build on it These are... the quality of dialogue in the boardroom Chapter 5 describes the best practices that Progressive boards use to focus on substantive issues Boards time and attention are very precious The trap some boards fall into is to allow their time to be dominated by routine financial monitoring and compliance activities Progressive boards use simple tools to remind themselves of the most critical areas and improve... the process of defining the package and the framework that links pay with performance Chapter Eight describes how boards can ensure they stand behind the right strategy There are very specific practices that Progressive boards use with great effectiveness to get a full and shared understanding of strategy—a source of misunderstanding on Liberated boards as well as to help shape the strategy Appendix... causal factors that lead to better governance are group dynamics, information architecture, and focus on substantive issues, which I outline Part Two of the book includes a chapter on each of the three building blocks, to present an in-depth look at the practices and collective behaviors that boards can use to transform themselves into Progressive boards Chapter Three describes the practices that are essential... said 3 4 BOARDS THAT DELIVER Then came the punchline: “It’s the board.” I let Jim continue “I took over from Alan three years ago Before that, I was president and I remember how Alan ran board meetings There was essentially no dialogue; communication was a one-way street When I became CEO, I wanted the board to help me I wanted to make it a modern board So we made all the structural changes that have... remains job number one for all boards Every board needs a succession process that draws on the judgments of all directors and leads to high-quality decisions Chapter Seven captures an emerging approach to defining CEO compensation, one that provides true alignment between CEO pay and performance This is an area of critical importance and intense public scrutiny; it behooves all boards to pay close attention... boards find themselves in Chapter One defines the three evolutionary stages of corporate boards: Ceremonial, Liberated, and Progressive It ends with a self-test for boards to evaluate themselves—“Where Does Your Board Stand?” Chapter Two describes the three building blocks that are essential to move from Liberated, where most boards are today, to Progressive These building blocks are not what external observers... will make the CEO succession process more robust in the future Chapter Ten helps boards go beyond the usual in monitoring health, performance, and risk Progressive boards dwell relatively little on routine financial figures that describe yesterday’s performance; they cut to the core issues of financial health, the factors that drive tomorrow’s performance, and the dangerous interactions of risk INTRODUCTION... not all investors are alike Boards should know how to filter the legitimate concerns from the self-serving voices Appendix B is addressed to readers interested in pursuing research in this area I propose an approach that will generate better insights into corporate governance and uncover the real factors that underlie effective governance Resulting research will provide boards with better guidance on . Urgency, Excellence Charan.ffirs 12 /14 /04 10 :54 AM Page ii Boards That Deliver Charan.ffirs 12 /14 /04 10 :54 AM Page iii Charan.ffirs 12 /14 /04 10 :54 AM Page iv Boards That Deliver Advancing Corporate Governance. xiii Charan.flast 12 /14 /04 10 :54 AM Page xiv Boards That Deliver Charan.flast 12 /14 /04 10 :54 AM Page xv Charan.flast 12 /14 /04 10 :54 AM Page xvi Part One Boards in Transition Around the world, boards have. Right Strategy 11 3 9 The Leadership Gene Pool 12 9 10 Monitoring Health, Performance, and Risk 13 9 Part Four: Maintaining Momentum 14 9 11 Board Operations 15 1 12 Working with Investors 16 7 Conclusion: