From the Publisher

This book applies John Carver's highly successful Policy Governance(r) model to corporate boards. Carver and boardroom consultant Caroline Oliver explain the world's only conceptually coherent operating system for boards. This simple yet profound system clarifies roles, empowers directors and senior management alike, and makes accountability feasible to a previously unattainable degree. The authors suggest a redefinition and elevation of the value that boards should create and show how to apply the Policy Governance design to commanding company performance. Corporate Boards That Create Value gives corporate directors and all who care about governance a powerful tool for success.

Publishers Weekly

Here's a timely thought: corporate boards should govern their organizations, rather than simply condoning the antics of aggressive CEOs. While most corporate boards offer their company little more than a group designed to hire and support the CEO, Carver and Oliver outline a broader set of duties for a responsible, more effective board, including the practice of setting management expectations and evaluating performance. The essence of this book is contained in the case the authors make for a chief government officer to replace the traditional chairman position. The point is to create board leadership that lives much closer to the organization's management. Thus, instead of a gap between the CEO and the chairman, there would now be an overlap, which would give the board more governing relevance. Light reading this isn't, but for those serious about changing corporate governance (and who isn't after Enron?), this is an excellent resource. (Sept.) Copyright 2003 Cahners Business Information.

Product Details

• Table of Contents
• Read a Sample Chapter

Table of Contents

Read a Sample Chapter

Corporate Boards That Create Value

John Wiley & Sons, Inc.

Chapter One

If legitimacy is to be restored to the system, the chain
of accountability must be made more effective.
-David S. R. Leighton and Donald H. Thain

• The importance of corporate governance

• The value that boards create

Corporate governance, once overlooked, is now center stage. There is widespread agreement that corporate boards are vital to total company leadership and to the role of corporations in society. Many participants in and observers of the corporate scene believe that corporate governance is of real value in improving company performance and investors' perceptions.

This growing sense of the fundamental importance of good governance is also reflected in the explosion of expectations being placed on boards. These expectations come in the form of advisory guidelines, principles, and codes of practice, along with prescriptive statutes and regulations laid down by governments and their agencies, such as the U.S. Securities Exchange Commission. There are now more than sixty corporate governance codes issued by stock exchanges and other authoritative groups from around the world, in addition to the bewildering array of regional, national, and international statutes. The spotlight has also been intensified by the recent spate of books on governance; by media reports of corporate news, including high-profile disasters, that discuss board action and inaction; and by frequent news of shareholder activism.

All this attention has spurred many boards to make significant improvements. Among these improvements are greater transparency, more independence from management, changes in audit committee composition, and separation of the board chair role and the CEO role. The subject of corporate governance has been opened up as never before, but we make the case in this book that there is yet another, more advanced level of excellence available.

Incidentally, in this book we use the words company and corporation interchangeably. We reserve the word business to mean not an organization but a type of activity in which a company may be engaged.

What Is the Value That Boards Create?

Our title, Corporate Boards That Create Value, begs a big question. Most people agree that in today's challenging marketplace no part of any corporation can be merely ceremonial. In fact, much corporate governance discussion during the past two decades has implored boards to add value. But what value is that to be? We start to answer that question by looking at the responses that could be derived from current board practices:

Expert advice. Directors act as a group of expert advisers to management. They bring skills, knowledge, and experience in relevant management specialties or management in general. Sometimes advice comes from the board as a whole, but often it comes from individual directors, leaving the position of the board as a group unclear. Sometimes the board is proactive in this advisory role; it suggests or probes for subjects on which its advice should be solicited. Sometimes it acts more as a sounding board to which managers can turn when and if they choose. A closely related contribution that the board may make is developing managers.

Safeguards. The board provides security, particularly for investors, through checking that all is well in the company and ensuring proper disclosure of information. To do this, the board typically requires management to bring its major plans and intentions for board approval and to subsequently update the board with progress reports. When the board sees something it doesn't like, it acts as a circuit breaker, either setting existing management back on track or putting new management in place.

Useful connections. Directors' positions and contacts in other settings are used to benefit the company on whose board they sit, in terms of finance, public relations, and potential customers.

These kinds of contributions are not insignificant, and they are being improved upon all the time as boards are introduced to additional best practice codes and advice. This book, however, makes the case that the responsibility and value creation potential of boards goes further. Our thesis is that boards can create much greater value than they do today. However, to understand how this can be done, the value boards contribute and the design of the job that creates that value must be reexamined and reframed. The rest of this chapter will begin this reexamination and reframing, making the case, first, for a new and more ambitious definition of the value boards should create and, second, for a board job redesigned, that is, reengineered, from the ground up with the purpose of creating that value.

Why Do Boards Exist?

To establish a definition of the value of boards requires us to start at the very beginning. So our earlier question-what is the value that boards create?-must be revised too. Instead, we need to ask, where does the board's authority come from, what is the reason for that authority, and what is the nature of that authority? In other words, why do boards exist?

The Source of Board Authority

Companies' owners are the source of board authority, those on whose behalf it does its job. Most boards in most parts of the world consider shareholders their company's owners, but there are exceptions. For example, in some countries the state has legislated that employees are owners. Moreover, there are many who argue that limiting the concept of ownership to shareholders is to accept far too narrow a definition. Some argue that boards in today's global and interdependent world, whatever their legal situation, are morally obliged to include many other groups of stakeholders as owners-groups such as employees, customers, creditors, suppliers, and the community at large. The core of their argument is that these stakeholders have an investment in the company, albeit not one of equity, and that these nonequity investments should also count as an ownership interest.

The picture is further complicated by the fact that shareholders range from the small individual investor to the large institutional investor. They range from those with little or no power to those who, because of the size of their holdings, have a controlling interest. They range from those who vote only by assigning proxies to those who turn up at every annual general meeting. Further, subject to the current ownership's agreement, boards have the power to create different classes of ownership (differentiating, for example, between owners of common and preferred stock) with different voting rights and therefore different levels of power within the overall ownership.

The board's role as arbiter among various interests is certainly more important today than ever before. Legal owners are, of course, the only ones who have the power to overrule the board. But with the legal ownership's consent, the board can affect the composition of investors to whom the company will be attractive, thereby exercising a proactive role in deciding who the owners will be. All we need to recognize for the purposes of this discussion is that owners, however they are defined, are the source of the board's authority.

The Reason for Board Authority

Incorporation gives a company a distinct legal identity separate from the people who own and operate it. This separation, the extent of which varies across the world's jurisdictions, provides protection from risk for owners and freedom to act for operators. The extent to which public policy should control matters such as company size, power, political involvement, and impact on the environment will likely always be the subject of debate. Although boards have no authority over the legal framework in which they operate, they do have enormous power in bridging the gap between the company's owners and operators.

Because owners are the source of a company's authority, it follows that the need for a governing board arises only when the owners are too numerous to direct and control the company themselves. Therefore, the notion of board authority as a distinct kind of authority occurs only when there is a gap between the ownership of assets and the management of those assets. That is, this gap between the ownership of assets and the management of those assets has led to the notion of a distinct kind of authority-board authority. The board's position is, therefore, to act as the link between owners and management, directing and controlling the company on the owners' behalf. Put another way, the reason owners grant such authority is to enable the board to act as the ownership in microcosm.

The Nature of Board Authority

An examination of the nature of board authority must start, then, with the board's position in the sequence of legitimate corporate authority. A proper chain of accountability guarantees legitimacy, a legitimacy that is essential for corporate governance. How the board is thus situated has far-reaching implications for the design and duties of governance.

Highest Authority. In any company the board is at the top in the chain of accountability and therefore at the top of the chain of command. The phrase chain of command, with its hierarchical connotations, is not used casually here. We use it to describe a rank of authority, not a desirable management style. We use it to indicate the fact that authority is the power to command (to direct and control) and passes sequentially from the source of authority to the outermost reaches of its expression.

The accountability chain is weakened when the board fails to recognize that it has the obligation, not just the authority, to command. As the owners' representative, the board has no right not to exercise those owners' rightful prerogatives. The board has no responsible alternative but to be authoritative in its role, lest owners lose their voice.

Initial Authority. The board cannot abdicate its prerogatives. That means it cannot allow them to be defined or assumed by the CEO or by any of the company's employees or by any subcomponent of the board, including the chair. These assertions are inescapable-all authority exercised in the company flows initially from the board, even if by default. As the supreme authority (after the owners), the board must be in full control of its own job before presuming to control anything else. This requires that the board as a group be responsible for its actions, its omissions, its agendas, the delegations it makes, and the corporate values it imposes.

Management doesn't work directly for owners; only the board does. Therefore the board makes demands on management performance from an independent position. This means that the board is authoritative, not advisory. It also means the board has a specific, definable job and is not just the overseer of someone else's job. Because the board is the sole source of on-site corporate authority, no person or groups of persons (except owners) can have any authority whatsoever unless the board grants that authority. Proper governance, therefore, must be proactive in distributing authority, establishing expectations about the proper use of that authority, and then demanding performance. In this way the board is transformed from today's frequently reactive final authority into the highest and initial authority.

Accountable Authority. Because the board is the overall authority in a company, it is accountable to owners for its own performance and that of the company. And because no one has any authority unless the board has granted it, the board has control over how well all authority is exercised. Consequently, the board cannot blame poor board performance on its chair, on the chief executive, or on any of its committees. Poor chair performance indicates a poor board. Poor chief executive performance indicates a poor board. Poor audit, executive, or compensation committee performances indicate a poor board. And of course poor company performance indicates a poor board. Accountability is a harsh concept indeed. But it is an inescapable element in any legitimate system of authority.

Group Authority. The board possesses authority only as a group. Individual directors, including the chair, have no authority unless specifically given it by the group. In later chapters we examine how a group can perform this first cause role. For now we simply want to underline the principle that board authority is group authority.

Empowering Authority. One of the central challenges for boards is how to command in such a way that management is optimally empowered and challenged at the same time. Good governance must integrate a compelling approach to delegation-one that is rigorous in safeguarding the board's own accountability yet as freeing and empowering of others as it can responsibly be. When the board underplays its role, owners are cheated in that their only legitimate and authoritative representative has a weak voice. When a board overplays its role, owners are cheated in that their only legitimate and authoritative representative does not know how to get the most out of management.

The Value Boards Should Create

The logical conclusion from this examination of universal principles of governance (summarized in Exhibit 1.1) is simply this: a board is a body accountable to the owners as a whole that operates as the highest, initial authority in a company, and therefore the value it creates is translating owners' wishes into company performance.

Looking Back, Moving Forward

In this chapter, from a consideration of the fundamental reasons boards exist, we proposed a definition of the value that boards should create: translating owners' wishes into company performance. This sounds like a very tall if not impossible order for a small group of part-time people. Yet this is the responsibility that belongs uniquely to boards and that beyond all other grounds justifies their existence. How boards can deliver on that responsibility is a matter of job design-a challenge to which the rest of this book is devoted.

Exhibit 1.1. Universal Principles of Accountable Governance.

• The board governs on behalf of all owners.

• The board is the highest authority, under owners, in the company.

• The board is the initial authority in the company.

• The board is accountable for everything about the company.

Continues...

---

Excerpted from Corporate Boards That Create Value by John Carver Caroline Oliver Copyright © 2002 by John Wiley & Sons, Inc.
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

---