By Michael Useem
An excerpt from Michael Useem’s 2011 World Economic Forum - Report from Davos
The governing board is potentially one of the most pivotal places for the introduction of risk management practices in the view of those attending an annual-meeting session on “Redesigning the Board.” Chaired by Berkeley professor Laura D’Andrea Tyson, who serves on the boards of several publicly traded companies, the dialogue drew on the experience of Donald Gogel, CEO of Clayton, Dubilier & Rice; Richard Haythornthwaite, chair of MasterCard Worldwide; Kevin Kelly, CEO, Heidrick & Struggles; Davide Serra, managing partner of Algebris Investments, and Daniel Vasella, chair of Novartis.
Leaving aside the question of whether company boards contributed to the recent financial crisis, the boardroom could serve as a barricade against the next crisis — if properly redesigned. The board’s traditional focus has been on compliance, control, and compensation, fulfilling the oversight function mandated by both government regulators and listing requirements. But, that is no longer sufficient, suggested several panel members. Directors should also be engaged in “company strategy, talent development, and risk management,” they said. It is a matter of not only “feeding the beast” — providing investors with expected quarterly returns — but also “building the business” — advising executives on strategic direction and appropriate risk.
To that end, directors should bring not just oversight capabilities to the boardroom. They should also be ready to challenge management practices, exercise independent judgment, and resist when executive actions pose excessive risk. It goes the other way, too, suggested one veteran board member: “The worst thing is when a management team does not speak out.” Directors, another participant pointed out, “want management to speak up with its concerns.” For both sides to speak up, however, smaller boards make better forums. “Seven to 8 people can debate strategy,” noted one governance veteran, “the way a board of 15 cannot.”
Board Member Performance Appraisals
Once boards were more ceremonial than substantive, more honorary than productive, but that is a dying tradition in an era when directors are increasingly called — or demanded — to serve as strategic advisors. Several directors reported that their boards regularly conduct 360-degree feedback surveys of one another, inviting company executives to appraise their individual performance as well. One board chair even interviews all board members, asking for their appraisals of the other directors, and he then circles back with feedback, commending each director for his or her contribution to the boardroom but also citing one area for the director’s improvement. Another director with extensive boardroom experience found that the one best question to ask of each director about the others is, “If you were the only shareholder of the company, would you want this person on the board?”
If well redesigned, company boards can thus help their companies in “a race to the top” — building long-term value and avoiding excessive short-term risks — rather than permitting a “race to the bottom” that had driven some companies into the cauldron of the crisis. In another session, JPMorgan Chase CEO James Dimon reported that his own board had played just such a role when the more recent European sovereign crises materialized. With billions of dollars of European exposure and short-term losses likely, his board had advised against pulling back. “Let’s be rational and careful,“ he said the directors told him. “We’re in Europe for the long term; we serve a lot of European companies,” and staying invested despite the crisis was the right thing to do.
The annual meeting in Davos was attended by approximately 2,500 people, including business executives and political leaders. The annual meeting serves to reinforce a host of messages and provide for better ways to anticipate, mitigate, and even prevent a variety of global events.
Reprinted with permission from Knowledge@Wharton, http://knowledge.wharton.upenn.edu
Michael Useem is a Wharton management professor and the director of Wharton’s Center for Leadership and Change Management.