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Total Number of Subscribers: 426 |
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Date: 13 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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A New Tool for Boards: The Strategic Audit Establishing a formal process will help
directors review a company’s strategy without
undermining the CEO. In the aftermath of the wave of restructuring that peaked in the
1980s, the corporate oversight process has received unprecedented public
attention, and investor activism has resulted in numerous proposals for
reform. Board members, seeing the number of stockholder lawsuits and the
escalating cost of directors’ and officers’ liability
insurance, are feeling pressure from their increased risk as well. Even more important is the pressure from holders of large blocks
of stock (pension and mutual funds), from judicial and regulatory
authorities, and from the financial press—all of whom
are
calling for boards to be more active. This attention has had an impact on the nation’s public corporations and has brought about a change in
boardroom
behavior that is significant, if often imperceptible to outsiders. Outside
board members are now much more willing to stake out independent positions in
boardroom discussions and, at times, even openly oppose the chief executive
when they believe the vital interests of the corporation are at stake.
Recently, directors’ independence led to the ouster of
the
incumbent chairman or the CEO at Morrison Knudsen, W.R. Grace, and Kmart. Efforts to reform the governance process have also intensified.
Investors and investors’ advocates, impatient with the sporadic nature and
rate of change, have proposed legal, regulatory, and structural improvements
in the relationships among shareholders, boards of directors, and CEOs. Some
proposals call for radical changes in the rules governing the election of
directors at public corporations. Some recommend adopting certain attributes of the private
corporation. Indeed, Michael C. Jensen (“Eclipse of the Public Corporation,” HBR September–October 1989) predicted that in such industries as
banking and food processing the public corporation will decline, to be
replaced by new forms of organization, such as the LBO partnership. Other
proposals are designed to address specific issues, such as directors’ compensation or the separation of the offices of board chair and CEO. One problem I see with many of the reform initiatives is that
they are concerned only with the broad principles of governance and offer
little practical guidance. More important, these proposals do not directly
address the fundamental issue at the heart of investors’ concern—namely, the capacity of the board to intervene in the face of an
unsuccessful or ailing business strategy. Proposals to strengthen that
ability are among the most important to consider but are also the most
difficult to gain consensus on and to implement. Board Oversight and Company Strategy
Board involvement in formulating and implementing corporate
strategy has always been a sensitive issue. Although it is standard procedure
for managers to brief directors on the evolving strategy and structure at the
annual meeting dedicated to that purpose, it has always been understood that
the “ownership” of the current strategy remains firmly in the hands
of the chief executive and his or her management team. And for good reason. In order to be effective, every organization requires not only a
clear and unambiguous strategic mission but also the confidence that its top
management has the authority and ability to carry it out. By nature, the
typical board of directors is poorly designed and ill equipped to provide
hands-on product and market leadership. The majority of its members usually lack the industry-specific
experience, the company-specific knowledge, and, most important, the time
necessary to turn broad strategic vision into operational reality. Board
members give their undivided attention at most once a month for six or eight
hours at a time. They can hardly be expected to have the detailed command of
the issues and the requisite independent judgment necessary to make
compelling proposals to counter those of management. In addition, the typical board meeting is an inappropriate forum
for raising serious concerns about a company’s strategic
direction. All who have served as board members know that attending a board
meeting is rather like entering the on-ramp of an expressway at rush hour: You spend half the time getting up to speed and the other half
trying to insert yourself into the bumper-to-bumper boardroom traffic, only
to find that it is time to exit and try again a month later. The customary agenda is set by the chair and invariably focuses
on details of implementing the ongoing business strategy. Presentations
reflect the urgent pursuit of the company’s established
mission, and managers are likely to be impatient with board members who do
not share their total commitment to the chosen path. Therefore, the regular
board meeting is an unsuitable, even hostile, environment for revealing
serious reservations about the underlying strategic assumptions. Of course, individual board members, such as the company’s founder, a major investor, or a former CEO, have often exerted
considerable influence over strategic direction, although usually behind the
scenes. Absent such unique personal prerogatives, board members are expected
to serve as supportive critics of the strategy in place. Those who choose to violate the norms of boardroom debate by
aggressively and persistently challenging corporate leadership, thereby
invading the DMZ between board and executive—run the risk of finding
themselves isolated and, in time, replaced. Without an established forum for
vigorous debate, serious concerns either simmer in one-on-one discussions
outside the boardroom or boil over in messy and destructive confrontations in
front of subordinate managers, who are invariably present at board meetings. Both outcomes are unacceptable. As a result, outside board
members seeking a change in strategy or, perhaps, leadership are wary, and
examples of spontaneous intervention are relatively few and far between. If these interventions occur at all, they seem to do so under
one of three circumstances, as I describe in my book Corporate Restructuring: Managing the Change
Process from Within (Harvard Business School Press, 1994). The
most common is the retirement of the incumbent chief executive, even though
the retiring CEO frequently nominates his or her successor. A second circumstance is a sudden, precipitous decline in
profitability or asset value, as in the case of Morrison Knudsen. A third
occasion that might trigger intervention is an external challenge threatening
a change in control—the classic barbarian at the gates. Such
a scenario was common in the 1980s, the heyday of corporate raiders, and so
weakened incumbent chief executives that there was often an opportunity for
boards to seize the initiative. Coutesy : Gordon Donaldson, Harvard
Business Review. |
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