Sunday, May 8, 2011

Corporate Governance: Is It Still Mostly Window Dressing?

In a 2002 article in the MIT Sloan Management Review, Lawler, Finegold, Benson and Conger highlight how, “corporate boards in the United States have been experimenting with new governance initiatives. Several have become widespread practices among the largest U.S. companies. Many boards are now composed primarily of outside directors and have a profile that is more representative of society as a whole; they operate according to written guidelines, meet regularly in executive sessions without inside directors, and conduct formal appraisals of the CEO. But have these changes resulted in more effective boards? Regardless of these actual potential changes, we believe boards must have three key ingredients in order to be effective: knowledgeable members, up-to-date company information and the power to counterbalance the CEO,” (p.92).

Of course it’s not enough for corporate governance compliance just to evaluate the CEO’s performance, as there also needs to be an honest evaluation of the individual board members performance, including the chairperson; and then an evaluation of overall board performance as a team.

John Carver mentions in his 2007 article that, “just as with the measurement of CEO performance, the chief utility of evaluation of board performance is not in producing a report card. Although a thorough review of past performance is worthwhile, its core importance is the guidance it can provide for future performance. Thus the real virtue of evaluation of the past is its effect on the future. The purpose of board self-evaluation, then, is the continual improvement of governance,” (p.4).

But what business principles are organisations using to assess the performance of individual board members and are these ‘tests’ being used openly and transparently to improve board effectiveness or being used covertly to simply show some kind of compliance to board evaluation?

Lawler et al found that “a well-informed board is close to useless if it can't act. Effective boards have the power to oppose and challenge the CEO; in our research, such power was the single board attribute with the largest direct impact on company financial performance. To be more specific, boards that conducted a formal evaluation of the CEO, that were made up primarily of outsiders (10 out of 12 directors, say), and that had clear control over the nomination of new directors and the CEO's successor had significantly higher returns on assets, sales and investment than those that did not. We are convinced that these elements of board power will remain essential to effective boards for the foreseeable future,” (p.92).

Just having outside directors that control board nominations and CEO succession is not enough, unless these same board members are being evaluated under the same strict criteria. Otherwise all boards are doing is shifting the ‘power’ from a single CEO to a group of non-executives, who may have their own personal agendas, if not evaluated and kept in check.

What corporate boards need are a group of highly effective individuals who bring their unique skills and experience to form a highly focused and diverse team of professionals, consisting of both non-executive and executive directors, whose sole purpose is the ethical sustainable growth of their organisation into the future and where any personal agendas are left outside the door.

To conclude, Carver states that “although most boards are aware that they have options about how they operate, few inspect whether their practices are any more than a collection of happenstance activities that evolved from organizations or individual board members history and preferences. In other words, even though burdened with the responsibility of governance, board members typically do not study governance. This oversight, one we’d never tolerate in other important jobs, is rarely even noticed either by board members, executives, or those who observe, teach, or criticize them,” (p.5).


Carver, J. (2007). Beyond Board Self-Evaluation. Board Leadership. Jan – Feb, p. 4-5.

Lawler III, E.E., Finegold, D., Benson, G. and Conger, J. (2002). Adding Value in the Boardroom. MIT Sloan Management Review, Winter, p. 92-93.

1 comment:

  1. Thanks Nigel. Although we shouldn't simply abandon perceived best practices it is not a substitute for knowledgeable, engaged, independent (or better yet objective) directors who have the courage of their convictions. To answer the question - I think the attention that governance has gotten over the last several years has created a lot of momentum and we are seeing an authentic improvement in oversight. This is not to say that all governance was weak before - many directors and entire boards have been practicing with high standards and performance before the subject received a lot of media attention. However, it appears that this rising tide has lifted most of the ships.