From cuckolds to captains

IN 1953 the Himalayan Committee of the Royal Geographical Society met to choose a leader for the latest attempt to climb Mount Everest. Eric Shipton was the obvious man for the job: a gentleman-adventurer who knew the mountain better than anyone. The committee gave him the nod. But then the grandees had second thoughts. Shipton took amateurism to absurd lengths; he had even forgotten to bring a backpack on one expedition. And foreign rivals were threatening to reach the top first. In an inspired move they replaced Shipton with his psychological opposite—a methodical and self-effacing military man named John Hunt—replacing one idea of mountaineering (gentlemanly amateurism) with a very different one (meticulous organisation).

Hunt planned the expedition to the tiniest detail: every ration pack had to include exactly 29 tins of sardines. He also insisted on using a large army of climbers who worked methodically as a team. Tenzing Norgay and Edmund Hillary got their chance at immortality because two other climbers had retreated 300 feet below the summit leaving a cache of supplies (including sardines).

Corporate boardrooms have taken over 50 years to catch up with the Himalayan Committee. For most of their history, boards have been largely ceremonial institutions: friends of the boss who meet every few months to rubber-stamp his decisions and have a good lunch. Critics have compared directors to “parsley on fish”, decorative but ineffectual; or honorary colonels, “ornamental in parade but fairly useless in battle”. Ralph Nader called them “cuckolds” who are always the last to know when managers have erred. The corporate scandals of the early 2000s forced boards to take a more active role. The Sarbanes-Oxley act of 2002 and the New York Stock Exchange’s new rules in 2003 obliged directors to take more responsibility for preventing fraud and self-dealing. This led to a big increase in the quality of boards. But it also wasted a lot of talent on form-filling and box-ticking.

In a new book, “Boards That Lead”, Ram Charan, Dennis Carey and Michael Useem argue that boards are in the midst of a third revolution: they are becoming strategic partners. They base their arguments on detailed knowledge of the world’s boardrooms. Mr Charan is so dedicated to studying the inner life of firms that he spent years without a home, flying from hotel to hotel. Mr Carey is vice-chairman of Korn Ferry, a headhunter, and Mr Useem is a professor at Wharton business school.

The parsley on the fish can make the difference between a delicious meal and a dog’s dinner. In 2006 Hewlett-Packard and IBM had about the same market valuations. By 2013 HP, with revenues of $120 billion in 2012, had a market capitalisation of $52 billion and IBM, with revenues of $105 billion, was worth $192 billion. IBM had a stable board with a successful relationship with the CEO. The board at HP was scandal-riven: bitter disputes, illicit investigations, angry resignations, forced departures and the criminal indictment of the board’s chair (it was later dropped).

How do you make sure that boards can add value rather than subtract it? And how do you make sure that “boards that lead” do not create warring centres of power? Mr Charan and his co-authors lay out two clear rules. The first is that boards should focus on providing companies with strategic advice. This sort of common sense is often in short supply in the ego-driven world of boards. Boardrooms contain too many people with different priorities: corporate veterans who give lectures on how they would have handled things; egomaniacs who like to show how much they know about everything; hobby-horse jockeys who mount the same steed regardless of the race; captives of compliance who are obsessed with box-ticking. The authors say that in their experience perhaps half of the Fortune 500 companies have one or two directors they would regard as “dysfunctional”.

Boards are getting better at dealing with these problems. Nine-tenths of S&P 500 companies have “lead” directors who are responsible for organising the board’s affairs. These directors are getting better at recruiting high-flyers and ditching ground-scrapers. The lead director at one big financial-services firm takes an annual poll of his fellow directors about whom they should keep and whom they should kick out. The Conference Board, a research firm, reports that 90% of big American firms now conduct annual evaluations of boards’ overall performance.

Get on board

The second rule is that boards should focus on getting their relationship with the CEO right. It is not enough to act as monitors in the Sarbanes-Oxley mould. They need to act as personal mentors and high-level talent scouts. As well as giving the boss frank advice they should also prepare for his departure. The board of Ford laid the foundations of its recovery by persuading Alan Mulally to leave Boeing to join the carmaker. The directors of 3M worked closely with its then CEO, Sir George Buckley, to repair the firm’s leadership pipeline and find a successor from within.

There are problems with this new model board. Can directors fulfil their legal duties to monitor performance if they are also responsible for helping to set strategy and appointing the CEO? Are organisations that meet a dozen times a year capable of offering strategic guidance in a fast-paced world? Will CEOs willingly give up more power to boards, or will they fight back? Getting the new model right will entail careful negotiations not only between boards and executives but also between firms and regulators.

The result of these negotiations matters a lot. Successful boards can do an enormous amount to boost corporate performance. Sensible companies are putting a lot of effort into attracting high-quality directors and getting their boards to work smoothly. And investors are paying ever more attention to companies’ boardrooms as well as their corporate suites.

^{Economist.com/blogs/schumpeter}