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Harvard Business School: Building A Better Board

In a recent article on the Harvard Business School's Working Knowledge blog, Carmen Nobel interviews HBS senior lecturer Stephen Kaufman about the new landscape for public company directors.  Kaufman observes that being a director has changed greatly over the past decade given what has occurred in the markets, and the changes in regulation.

These days, serving on a few boards can comprise almost a full-time job. While quarterly board meetings used to last maybe half a day, including a catch-up-with-the-buddies lunch, meetings now span a day and a half and they happen up to six times a year. While reviewing relevant materials used to mean flipping through the annual report on the plane ride to the annual meeting, it now means spending several hours poring over hundreds of pages of company documents and SEC filings looking for problems, unreasonable risks, or even signs of fraud.

There's a lot more attention paid to non-fun stuff now, much of it being compliance mechanics that add very little to the competitive position or underlying value of the enterprise.

Kaufman's primary focus for improving boards is making it safe to be critical and forthright.

Chief among the responsibilities of a corporate board member is to develop and share an honest assessment of the company's performance, including the performance of the CEO. The problem is that directors sometimes worry that delivering honest criticism will hurt the group's collegiality or, worse, result in reprisal . . .

Kaufman also believes that to be truly effective in oversight, directors must move beyond traditional measures of their company's or company executives' performance.

These days, the assessment is usually much more wide-spread, taking into account both quantitative and qualitative metrics other than just recent financial results, such as customer satisfaction, employee engagement, and even the CEO's leadership style and character. But even these broader assessments can lack accuracy and credibility.

 . . .

Incorporating input from across the company also helps directors to gauge corporate culture in a way they can't from the ivory tower of the boardroom. It's important to ask questions such as, Are employees engaged? Are they enthusiastic? Are all the really smart engineers quitting in frustration? Are the best salespeople looking for new jobs? Are the high-potential, next-generation senior managers energized and growing? The answers can help the board realize whether a company with great financial results today may have terrible results in six months, six quarters, or six years-unless there's an intervention.

Kaufman recommends that board members periodically request that the company conduct anonymous surveys about employee engagement and the company culture, and then ask that the data be shared in raw form, "not the chewed and digested and spun form." He also suggests urging board members to make occasional visits to company facilities and sit in on town hall meetings.

Mr. Kaufman also observes that it is much more challenging for directors to help shape strategy. But the basic method for directors is for them to understand fully their company's business, its products, its customers, and its employees.

"To develop good, actionable strategies you need to understand customer needs, customer behavior, and the technology behind the product or service," he says. "How is the technology developed? What changes or threats are on the horizon? What value does your product create for your customer? If you don't know these things then it's hard to develop strategy because you really don't know what's needed or what's possible. It's relatively rare that many directors really understand the physical technology or how the business operates at the street level. Therefore, it's really hard for a board to be deeply and constructively involved in developing the strategy."

Though Kaufman's obervations obviously are more focused on operating company boards, some of his suggestions may be helpful to mutual fund boards as they work to improve their governance practices.

The full text of Carmen Nobel's article is available at:  http://hbswk.hbs.edu/item/6697.html?wknews=05162011