Best Practices in Corporate Boardroom Leadership

Jay A. Conger
Historically, leadership within corporate boards has
been a lopsided affair. The chief executive officer (CEO) of the company is ofte
n the de facto leader of the board. Board directors rarely assume active leaders
hip roles. They prefer instead to play the role of advisers.When acts of directo
r leadership do appear, they are typically late for example, when an organization
is deep into a crisis. As a result, board members relinquish their leadership ro
le as overseers of both the CEO and the corporation.
Few boards in recent history exemplify the failure of director leadership more t
han did the corporate board of Enron. On the one hand, the nonexecutive director
s comprised a group of sophisticated individuals who could potentially have unra
veled the company s complicated and unethical financial dealings. They included a
Stanford accounting professor, an economist, a global financier, a former nation
al financial regulator, and prominent former CEOs. They could have forced an ear
lier and more public examination of Enron s accounting and finance practices. Inst
ead, they suspended the company s ethics code to engage in controversial partnersh
ips and financial arrangements at the prompting of company officials and externa
l advisors. The directors themselves appeared not to have understood the full co
nsequences of their decisions around the off-balance-sheet deals that inflated t
he company s earnings and hid its debt. On closer inspection, the directors were m
ore passive and accepting of strong leadership on the part of founder Ken Lay an
d CEO Jeff Skilling. Lay did not tell directors about internal whistleblowers war
nings about misleading financial reports. The directors did not receive informat
ion about accountants concerns about third-party transactions. Even as disparagin
g information began to appear publicly from whistleblowers, the directors did no
t initially act to learn about the real nature of the hidden money-losing assets
or to interview employees who could have revealed the truth. Unfortunately, thi
s imbalance in leadership on the Enron board is not uncommon. It is caused by a
set of unique tensions in the degree of leadership that a board requires and how
leadership is distributed across the group of directors.
How do we avoid boardroom leadership failures like Enron? Moreover, how can we e
ncourage directors to assume a far greater leadership role in the boardroom? Man
y of today s best practices in boardroom governance are aimed specifically at ensu
ring a healthier balance of leadership between the CEO and the directors. In pri
nciple, this is how boards should operate. After all, a board s oversight role imp
lies a strong leadership role.
That said, a new generation of boards is asserting greater leadership. They are
experimenting with governance practices that are encouraging them to lead rather
than follow. Alternative forms of leadership, such as nonexecutive chairpersons
and lead directors, are appearing as a counterbalance to the CEO s authority. In
addition, important shifts have begun to occur in the growing leadership role of
board committees. The catalyst for these leadership initiatives has been a rang
e of crises that have unfolded at formerly successful companies like Enron, Mits
ubishi Motors, Parmalat, Skandia, Swissair, Tyco, and WorldCom. In all of these
cases, the boards stood passively by while company CEOs either made poor strateg
ic decisions or undertook unethical activities. As a result, pressure from the f
inancial community and shareholders to adopt stronger governance practices, alon
g with regulations such as the Sarbanes-Oxley Act of 2002 and new stock exchange
listing requirements, are shifting leadership power to the independent director
s in boardrooms. For example, the Sarbanes-Oxley Act requires independent audit
committees and disclosure of which directors on the audit committee are financia
l experts. Formal explanations are required when committee members are not finan
cial experts.
In one recent survey of corporate directors of the largest companies in the Unit
ed States, nearly three-quarters of the directors who responded said that their C
EOs have less control over their boards, and 40 percent indicated that this has h
appened to a great or very great extent. 1 This chapter examines the fundamental dile
mmas of shared leadership in the boardroom and provides a set of best practices
to foster a healthier balance of leadership between the CEO and board members.

THE BOARD OF DIRECTORS HISTORIC LEADER: THE CHIEF EXECUTIVE OFFICER

In North America, chief executive officers are most often the official leaders o
f the boardroom.2 This is due in large part to the natural advantages of their p
osition. As CEOs, they have far greater access to current and comprehensive info
rmation about the state of their companies. In contrast, given their part-time r
oles and outsider status (in large corporations, the vast majority of directors ar
e not employees of the board s organization), the typical director s knowledge about
company affairs is extremely limited.Most directors are all too aware of this g
ap in their own understanding and therefore concede authority to the CEO. In add
ition, most directors see their first role as serving the CEO and their secondar
y role as providing oversight.Many directors are CEOs themselves, and they share
in an etiquette that suggests restraint from aggressively challenging a fellow
CEO or from probing too deeply into the details of someone else s business. All of
these factors encourage directors under most circumstances to defer to the CEO
when it comes to leading the boardroom. As a result, the CEO usually determines
the agenda for meetings and controls what information directors receive. The CEO
plays a highly influential role in selecting who sits on the board and who is a
member of some of the board s committees. If not the official leader, the CEO is us
ually the de facto leader of the board. The rare times when a board feels that i
t must assume a leadership role typically occur during the selection of a new CE
O, when a change of company ownership is underway, or when a deep crisis grips t
he company and the CEO s leadership is in question.
The CEO s authority is further strengthened by the fact that many CEOs hold the bo
ard s chair as well. From a CEO s vantage point, there are clear advantages to servi
ng in this role of chairperson. First of all, it centralizes board leadership in
to a single individual. There is no ambiguity about who leads the board. Account
ability can be pinned on one person. Second, it eliminates any possibility of a
dysfunctional conflict between the CEO and a board chair. Rivalries that might p
roduce ineffectual compromises or result in drawn-out decisions simply do not oc
cur. Third, it avoids the possibility of having two public spokespersons address
ing the organization s stakeholders. Fourth, certain efficiencies are achieved by
having the most informed individual be the board chair. Otherwise, the CEO might
have to expend significantly greater time and energy updating the chair on issu
es before every meeting. In addition, it may be far easier to recruit CEO talent
given the strong preference of most CEOs to hold both roles.Many CEOs strongly
believe that the CEO should be the board s chair.
Brewing for more than a decade, however, is a growing debate over whether this u
nity of command on the board best serves the company s stakeholders or principally
the CEO. It essentially lacks an effective system of checks and balances. An ea
rly catalyst for the debate was a highly publicized decision in November 1992 by
General Motors to end the CEO s role as the board chair. The impetus for the chan
ge was a crisis during which General Motors had losses approaching some $7.5 bil
lion. Company officer John Smith was appointed CEO with a mandate of running the
company s day-to-day operations, while board member John G. Smale (former chairma
n and CEO of Procter & Gamble Co.) was chosen as board chair. At the time, there
was an enthusiastic reception for the idea among shareholder activists and a gr
eat deal of favorable publicity from the media. Some three years later, CEO Smit
h, however, assumed the board chair position as the crisis subsided. The model o
f the nonexecutive chair was discarded. In recent years, the idea has returned f
ollowing the highly visible corporate debacles of companies like Enron and World
Com. In addition, other models of boardroom leadership are gaining in popularity
.

In the discussion that follows, we examine the three principal alternatives to t

he CEO model of boardroom leadership: the nonexecutive chairperson, the lead dir
ector, and leadership in board committees. We discuss their individual advantage
s, implementation challenges, and the best practices that enhance their viabilit
y.
THE NONEXECUTIVE CHAIRMAN: ARE TWO LEADERS MORE EFFECTIVE THAN ONE?
Though the idea of a separate or nonexecutive chair has been circulating for at
least a decade, only recently has it gained momentum as a practice. For example,
it is estimated that only approximately 16 percent of the United States largest
500 firms have separate chairpersons and CEOs. That said, this statistic is an i
ncrease from approximately 6.5 percent in 1998. The slow inroads made by the pra
ctice suggest strong resistance to the idea. This, however, has not stopped gove
rnance commissions and activist pension funds from promoting the idea. In its st
udy of board best practices, the Blue Ribbon Commission on Director Professional
ism, a prestigious twenty-eight-member group created by the National Association
of Corporate Directors and headed by noted governance specialist Ira Millstein,
concluded that boards should consider formally designating a nonexecutive chair
man or other independent board leader. In the United Kingdom, all but a handful
of the largest 100 firms have a separate CEO and chairperson. Approximately thre
e-quarters have chairpersons who are nonexecutives or who serve part time. The C
EO runs the company, while the chairperson runs the board.
The main arguments in favor of a separate or nonexecutive chair have to do with
enhancing the ability of the board to monitor the CEO s performance. It is assumed
that directors will feel more at ease to raise challenges to the CEO if the boa
rd is led by a fellow nonexecutive director. In addition, mutual fund managers o
ften assume that CEOs seek first to serve themselves and secondarily the shareho
lders. A nonexecutive chair whose mandate is to enhance shareholder value is les
s likely to be compromised, or so the belief goes.Moreover, to some extent, it f
rees the CEO to focus on leadership of the company rather than on the time-consu
ming demands of leading the board.

Two professors at Indiana University s School of Business, Catherine Daily and Dan
Dalton, have looked at the research to date on whether separate CEO and board c
hair roles do indeed produce better performance outcomes. Examining sixty-nine s
tudies over a 40-year period, they discovered that organizations that separate t
he CEO and boardroom chairperson role do not perform at a higher level than thos
e where the roles are combined.5 So it is clear from this research that the pres
ence of a nonexecutive chairperson is not sufficient in itself to affect perform
ance.
One of the core dilemmas the researchers have argued is that in many cases the s
eparate board chair is a former CEO of the firm, which may explain why performan
ce in many cases does not improve. In one case with which we are familiar, the s
on of the company s founder sits as nonexecutive chairman and is described under t
he company s governance information as a nonemployee chairman. In any case, there is
no independent and objective counterbalance to the CEO given that the chairpers
on is likely to have been the one who chose the CEO and sometimes vice versa. A
CEO whose board chair is the company s former CEO describes the dilemma:
If he [the board chair] has been involved in selecting the new guy to be CEO, th
e chair is in a kind of funny position of not being able to be critical of the n
ew guy for some time.He s got to preserve the honeymoon aspect. If a new guy comes
in and wants to change anything, there is also the unavoidable explicit critici
sm of the old guy insofar as how he did things. If the new guy comes in and want
s to dramatically change direction, he has the old guy who is lurking there eith
er biting his tongue or, heaven forbid, arguing with him about it. If the new gu
y wants to kill some of the pet projects of the old guy, it is an awkward situat
ion.
Interestingly, the rationale for keeping former CEOs on as board chairpersons is
often not based on concerns of leadership. The closest argument made vis--vis le
adership is that the arrangement will assist the incoming CEO in transition to t
he new role. The thinking goes that the new CEO s predecessor is more available as
a coach who can easily share wisdom and insight into company issues by virtue o
f holding the seniormost board role. Oftentimes, the role is bestowed out of a d
esire to reward or placate the former CEO. For example, many directors see the c
hairperson s role as a reward for years of service, especially in the case of long t
enured or highly successful CEOs or company founders. It is an honorarium for th
eir years of contribution to the organization. Just as commonly, retiring CEOs s
imply do not want to let go. Reflecting on his own experiences, Denys Henderson,
the former chairman and CEO of Imperial Chemical Industries (ICI), captured the
dilemma: In my own case [as a former CEO who becomes the board chair], it was di
fficult at first to give up day-to-day control because I was still very energeti
c, and it was clear that further change in the organization was required. I foun
d it a considerable challenge to move from energy mode to wisdom mode. In summary, wh
en boards find themselves creating separate chair positions for former CEOs eith
er to reward or to placate them, they will have compromised the board s leadership
.
On the other hand, a nonexecutive chair who is not the former CEO is a preferred
form of board leadership. That said, it must be an individual who is highly adm
ired by the directors themselves and who has the self-confidence and industry kn
owledge to take a leadership role, especially during times of trouble. The chair
must also be someone who can be dedicated to following both the company and the
industry closely. In addition, the nonexecutive chairperson should not hold boa
rd directorships elsewhere, given the role s potentially high demands. Some estima
te that in large, diversified companies operating under normal conditions, a non
executive chairperson may need to spend up to 100 days a year keeping abreast of
the company. In a crisis situation, however, this could easily be the minimum n
umber of days required. As a result, standing CEOs of other companies are not ap
propriate board chairs given the demands on their time. On the other hand, a rec
ently retired outsider CEO may make an ideal chairperson.
Since the board chair works closely with the CEO, the selection process itself s
hould involve the CEO. At the heart of this model of dual board leadership is a
balancing act between a chairperson and a CEO. There needs to be strong positive
chemistry between the CEO and chairperson, but at the same time the chairperson
must be unafraid to challenge the CEO. In the selection process, the chemistry
issue is best determined by the two individuals themselves. On the other hand, t
he chairperson s ability to challenge is best determined by the directors. The bes
t selection model is to have the board nominating committee choose from a roster
of candidates after having received input from the CEO.
Another critical factor determining the success of this leadership model of the
nonexecutive chairperson is to develop clear and negotiated expectations about e
ach other s roles from the start. Denys Henderson of ICI outlines what must happen
at the very beginning of the relationship: It s important that the chairman and th
e CEO agree from the beginning what each person s role will be. The last thing you
want is a fight over turf. The agreement should be put down in writing and even
tually approved by the board. But the process of understanding each other s viewpo
int is more important than the final text.
Some of these roles of the nonexecutive chair might include the following:
1. Setting board meeting agendas in collaboration with the CEO, board committee
chairs, and the corporate secretary, along with a yearly calendar of all schedul
ed meetings
2. Governing the board s activities and assigning tasks to the appropriate committ
ees
3. Presiding at the annual shareholders meeting and at all board meetings
4. Facilitating a candid and full deliberation of all key matters that come befo
re the board
5. Ensuring that information flows openly among the committees, management, and
the overall board
6. Organizing and presiding at no less than two executive sessions composed only
of outside directors on an annual basis to review the performance of the CEO, t
op management, and the company
7. Reviewing annually the governance practices of the board
8. Reviewing annually the committee charters
9. Serving as an ex-officio member of all board committees
Despite growing support for nonexecutive chairpersons, they are likely to contin
ue to be a rarity. There are a number of important hurdles to be faced in adopti
ng this form of board leadership all of which are significant. One is the potentia
l for heightened legal liability for the nonexecutive chair. Beyond the legal ri
sks is, of course, the issue of time, as noted earlier. The time investment on t
he part of a nonemployee chair is likely to be much higher than for the average
board member. At a certain point, these investments become impractical for most
directors. You cannot be active in any other company or have any other activity b
ecause this [chair position] becomes a full time job. It almost has to be someon
e who is retired or unemployed, explained one director very familiar with the non
executive chair model. Directly related to the time challenge is the issue of in
formation. The chairperson who is or has been the company s CEO has a much richer
database to draw upon when contemplating the firm s issues. In contrast, a nonempl
oyee chair s knowledge is often similar to that of any outsider director. A former
CEO who has served in the chair s role captures the dilemma: A nonemployee chairma
n is a very stressful position. You have many of the responsibilities and accoun
tabilities [of an employee chairperson]. But you are not in the network . . . no
t in the day-to-day things that happen. You read about them in the newspaper bec
ause you don t expect the CEO to call you every five minutes. Things that happen t
hat you didn t know about you probably would have challenged if they had been brou
ght to your attention before they happened.
In addition, research by Jay Lorsch at the Harvard Business School and Andy Zell
eke at the Wharton School compared U.S. boards with British boards, where it is
standard practice to separate the chairperson and CEO roles. In the United Kingd
om, most of these nonexecutive chair positions are filled by former CEOs from di
fferent companies. They devote up to a 100 days a year to their boards. They typ
ically have an office at the company s headquarters and are there 2 to 3 days a we
ek. In terms of responsibilities, they help determine the board s agenda and suppl
y information for board meetings. They chair the nominations committee and serve
on the compensation and audit committees. They see themselves as the representa
tive of the nonexecutive directors and as the principal representatives of the s
hareholders. What Lorsch and Zelleke discovered in their research was that the n
onexecutive chair was not a panacea to solving leadership imbalances in the boar
droom. For example, they found that the lines of responsibility among the chairs
and the CEOs and the board are not always clear. Sometimes the chair and CEO fo
und themselves tussling over territorial issues and in the worst cases falling i
nto power struggles. When the nonexecutive chairpersons have strong points of vi
ew, they may find themselves directly intervening in their CEOs decisions. What t
he research showed is that a nonexecutive chair must exercise a degree of self-r
estraint. The chair must not fall into management of the company but rather focu
s attention on only leading the board. As noted earlier, the boardroom roles and
responsibilities of the chair and the CEO must be very well defined beforehand.
Both individuals must be able to immediately address conflicting expectations.

The final hurdle to the nonexecutive chair role is the CEO. Most CEOs consider t
he idea of sharing leadership on the board cumbersome and inefficient. Their bia
s is toward a single leader themselves. This view is perhaps the greatest single r
eason why it is unlikely that many boards will adopt the leadership model of a n
onexecutive chair. One recent survey confirms that even directors on large U.S.
corporate boards feel similarly that a nonexecutive chairman would make it more di
fficult to attract good CEO candidates. Nonetheless, for boards who find themsel
ves in a position where a nonexecutive chair seems impractical, there are other
forms of board leadership. A lead director position and/or strong committee lead
ership vested in outside directors can be reasonable substitutions. Next we expl
ore these two forms of board leadership.

THE LEAD DIRECTOR: ONE STEP TOWARD AN INDEPENDENT BOARD

A more acceptable form of board leadership to many CEOs is the concept of the le
ad director. The popularity of this alternative form of leadership has grown dra
matically. In a 2004 survey of the boards of large U.S. firms, 84 percent of the
directors responding said that their board had a lead director. This compares t
o 36 percent in 2003. Companies such as Intel,Merrill Lynch,Microsoft, Office De
pot, and Raytheon have adopted lead directors.
While the lead director does not assume the role of chairperson, he or she is in
essence the directors representative to the CEO. The lead director is both an om
budsman and a facilitator of the governance process. The role can include prepar
ing the agenda for board meetings to chairing meetings of the independent direct
ors to raising controversial issues one on one with the CEO. In the case of a ma
nagement crisis, the lead director is likely to take over as the board s formal ch
air. The more restricted role for the lead director recognizes two realities. On
e, the CEO is the boardroom leader, and two, all of the directors are responsibl
e for the governance of the corporation.
In the ideal case, the lead director is a highly respected member of the board w
ho also serves in another leadership capacity such as chair of a board committee
. The lead director should naturally be an outside director whose strength of pe
rsonality and background experiences can effectively challenge those of the CEO.
Similar to the nonexecutive chairperson model, however, the lead director shoul
d also have significant executive experience but should not be chosen merely on
the basis of seniority. For example, sometimes boards wish to honor a longstandi
ng member or an elder statesperson with a lead director position, but this criterio
n determines little about the individual s ability to lead.Moreover, longstanding
members may have lost a measure of their objectivity given their long-term relat
ionships with the CEO.
It is important to draw a clear distinction that the lead director leads in terms
of boardroom process rather than in taking a stand on various issues. An effecti
ve lead director s role in most cases is not to be a sparring partner. The role is
to ensure that the board approaches its responsibilities in a manner that guara
ntees the board s independence and provides a complementary source of leadership t
o the CEO s. A number of the functions that a lead director might play in this reg
ard include:
1. Setting the board s agenda in collaboration with the CEO, board committees, maj
or shareholders, and other major stakeholders to ensure that multiple and indepe
ndent perspectives are represented
2. Acting as an intermediary between the outside directors and the CEO such that
 sensitive issues or concerns might be raised in a manner that provides voice fo
r directors who might not otherwise raise an issue or who might wish not to have
a subject discussed publicly
3. Organizing sessions of the independent members of the board to privately revi
ew company performance, management s effectiveness, and the CEO s performance
4. Conducting exit interviews of executives who resign from the corporation to d
etermine whether such resignations reflect problems within the organization or w
ith the CEO s style and approach
5. Occasionally meeting with major shareholders to ascertain their concerns and
expectations (Such smaller meetings where company management is not present unle
ss requested might encourage more open discussion than public annual meetings.)

BOARD COMMITTEE LEADERSHIP: WHERE THE REAL LEADERSHIP CAN OCCUR

Some of the greatest emergence of boardroom leadership in recent years has come
from boardroom committees in other words, individual committees making decisions w
ith a high degree of independence from company executives. This has been, in par
t, driven by the presence of a far greater number of outside directors who sit o
n board committees and act in the capacity of committee chairpersons. This is re
inforced by one important by-product of governance reform: board committees now
choose their chairpersons, whereas in the past CEOs often hand-selected the comm
ittee chairs.
In some ways, this shift in power is not entirely surprising. CEOs rarely have t
he time to be active members of all of their board committees. As a result, this
is one of the boardroom activities in which CEOs feel comfortable playing more
of a consultative or advisory role, allowing the committees to lead themselves.
Reinforcing this is the fact that the board governance movement has discouraged
CEOs from playing a directive role in committees and has placed a strong emphasi
s on outside directors assuming key leadership roles. This is also a by-product
of the corporate scandals at Enron, Tyco, and WorldCom, where senior company lea
ders strongly shaped the agendas and decisions of board committees.
There are, however, a number of steps that board committees should proactively u
ndertake to ensure they not only retain their leadership but enhance it. For exa
mple, in order for outsiders to take advantage of their majority positions in co
mmittees, they often need to develop action plans and positions of their own rat
her than be guided by those of the CEO. Since the outside directors may not have
a reason to get together independently of their board activities, it is importa
nt that their board committee activities provide them with this opportunity.Meet
ings held without company executives, where directors can discuss sensitive issu
es concerning executive succession and corporate performance, need to become a n
orm. These may also be the only opportunity a committee has to develop strong po
sitions that are contrary to the stated preferences of senior management. In add
ition, it is critical for committees to have the ability to meet when they feel
that events call for it. They must be able to call these meetings on short notic
e when they feel that a crisis or rapidly developing change requires it. It is a
lso critical that board committees have a vehicle for placing issues that they i
dentify on the board s agenda without significant advance notice. As well, board c
ommittees must be in a position to seek outside specialists who can make objecti
ve assessments about the company s operations, and they must be able to do this wi
thout management s prior permission.
One clear way that committees can hold a CEO accountable is through an annual re
view of performance. In essence, an effective evaluation process is an act of le
adership on the board s part. Such assessments should include goals for the annual
performance of the CEO as well as the systematic evaluation of how well these g
oals have been accomplished. Goals need to include both the personal development
goals for the CEO and the organizational performance targets that the board dee
ms as critical for the year. They need to be clear and specific as well as chall
enging but realistic. Timelines, wherever possible, are important. The results o
f this annual review should be tied to determining the CEO s total compensation le
vel. It is very important that the evaluation include constructive and detailed
feedback to the CEO concerning the outcomes of their objectives. The evaluation
process itself is best controlled by the compensation committee.
The membership of committees is critical in determining the degree of leadership
that independent directors can have over the operation of the corporation. One
committee that should be completely made up of outside directors is the compensa
tion committee. Beyond the compensation committee, the committee of the board (u
sually a nominating or corporate governance committee) responsible for selecting
new directors should also be predominantly, if not exclusively,made up of outsi
de directors. The historical norm has been for the CEO to be a very active parti
cipant in the selection of preferred directors. The concern here is that while t
he CEO may not be a member of the nominating committee, the CEO may essentially
select the new directors with the committee then rubber stamping this choice. From
the standpoint of best practices in corporate governance, the nominating commit
tee should establish specific criteria for filling any board vacancies. These cr
iteria are then submitted to the full board for approval before a search is unde
rtaken.While the CEO is consulted during the process, the committee makes the fi
nal judgment on nominations, which are voted upon by the full board.
There is, however, one potential problem associated with a nominating committee
composed of outsiders. By placing selection in the hands of a few, these directo
rs can profoundly shape the makeup of the board itself. This might result in pro
blems if this group had very strong biases about appropriate directors. One relati
vely easy way to overcome this problem is to set term limits on committee member
ships and to rotate all the outside directors in and out of the committee.
In conclusion, strong committee leadership is where some of the greatest progres
s has been made to date in terms of corporate governance practices that balance
out the CEO s leadership and authority. This is also where we can expect the progr
ess to continue given the many hurdles facing the alternative of instituting non
executive chairs. By relying solely on committee leadership, however, certain im
portant trade-offs are made. For example, leadership is splintered across a numb
er of individuals. No single director has overall responsibility for the board a
nd for ensuring that its range of activities is both well coordinated and meets
high standards of corporate governance. Given their more narrow focus, committee
s can at best only shape portions of the overall agenda. Under a system reliant
upon committee leadership, there may be no central ombudsman to give the full bo
ard a collective voice. All of these factors suggest that committee leadership i
s only a partial solution to building truly effective board leadership.
SUPPORTIVE GOVERNANCE PRACTICES
In addition to the leadership roles described in this chapter, there are several
additional governance practices that may facilitate a better balance of leaders
hip in the boardroom. The most common practice is to ensure that the majority of
directors are true outsiders in other words, they hold no positions within the co
mpany nor possess any financial ties or consulting relationships with the compan
y. Formal governance guidelines can also play an important role. In one study by
researchers Edward Lawler and David Finegold, only the adoption of formal gover
nance guidelines proved to be significantly related to board effectiveness and l
eadership.12 Guidelines essentially provide a structure for boards to make them
more effective in their decisionmaking and leadership dynamics.
Several other practices can help in the leadership equation. For example, there
should be two or more sessions of the board held annually with only outside dire
ctors present. The CEO would not attend these meetings. These sessions can encou
rage directors to speak candidly among themselves without the direct influence o
f the CEO. Regular channels of information to the board that are independent of
management need to be in place for example, direct communication links with employ
ees, customers, suppliers, and investors. As mentioned earlier, the CEO typicall
y controls the quality and quantity of the information that the board receives.
Board directors need to be able to access information independently should the n
eed arise. It is also important that the board has staff and an independent budg
et so that it can conduct its own analysis of issues where and when it feels the
need. Finally, it is critical that boards promote an environment at meetings wh
ere discussion and debate are the norm, versus formal presentations by managemen
t and rigid and packed meeting agendas.
EXECUTIVE SUMMARY
The foundation for a balance of leadership in boardrooms is a set of governance
practices that provide the basis for a strong and independent board one that provi
des a healthy counterbalance to the power and influence of the CEO. From this pl
atform of independence, directors can exercise far greater leadership. The follo
wing will be the characteristics of well-led boards of directors as we move into
the twenty-first century:
Independent directors (with no formal business or family ties to the firm prior
to joining the board) constitute a clear majority (at least two-thirds) of all b
oard members.
The knowledge and abilities of these directors are assessed regularly against th
e firm s changing market and technological demands to ensure that they have the sk
ills necessary to effectively oversee the firm s actions and provide leadership.
Independent directors chair and control all key committees compensation, audit, a
nd nominating/corporate governance. The compensation committee consists solely o
f outside directors.
The board has clear leadership by separating the chairman and CEO roles, or appoin
ting a lead director and/or having regular executive sessions where no inside di
rectors are present.
Candidates for either the nonexecutive chairperson or the lead director role are
chosen carefully with the following criteria in mind: they are company outsider
s and are not holding a fulltime executive role in another organization nor serv
ing as directors on other boards; they are highly admired by fellow directors an
d the CEO, and they have significant company and industry knowledge; they are ca
pable of challenging the CEO when required.
Several sessions of the board are held annually with only outside directors pres
ent. The CEO does not attend these meetings.
Regular channels of information to the board that are independent of management
are in place for example, direct communication links with employees, customers, su
ppliers, and investors.
The board has staff and/or resources so that it can conduct its own analysis of
issues when it feels the need (for example, in benchmarking executive compensati
on). A regular CEO and executive succession planning process is conducted on an
annual basis at a very minimum. It is a rigorous review of talent that reaches d
own several levels. It also exposes directors to company executives on both a fo
rmal and informal basis.
By following these types of boardroom governance practices, boards can ensure th
at they will possess the capability for greater leadership.