Good Governance

Part-1 SAFE HANDS AT THE HELM
Positions of power demand a fine

balance
By Peter Lorange
Published: May 19 2005 17:52 | Last updated: May 19 2005 17:52
In the ideal situation, board directors and chief executive officers should consider themselves as members of one
team, working in a win-win relationship rather than constantly battling for power. The most important issue for all to
agree upon is: “What is the role of the CEO in relation to the board?” I would encourage boards and CEOs to make
this question explicit and to find an answer that suits their specific company situation.
The balance between CEOnand board depends on a company’s key issues
In the past few years, we have witnessed the demise of formerly successful US companies such as Enron, with CEO
Kenneth Lay; WorldCom, with Bernie Ebbers; Tyco, with Dennis Kozlowski; Conseco, with Stephen Hilbert and
Adelphia, with John Rigas. European corporate collapses include Skandia, with Lars-Eric Petersson, Parmalat with
Calisto Tanzi and Swissair with Philippe Bruggisser. Japan has also had its share of corporate scandals with
Mitsubishi Motors under CEO Katsuhiko Kawasoe and, more recently, the controversy at Seibu Railway under
Yoshiaki Tsutsumi, one of corporate Japan’s most influential figures.
The role of the CEOs in these corporate collapses does not follow one specific pattern, except that all have shown, at
the very least, poor corporate governance judgment and, in the worst cases, blatant greed. Taking away CEO
authority and shifting the balance of power towards the board may seem the right response to scandals such as the
above. Reality, however, requires a more sophisticated solution. A workable balance between board and CEO will be
different for every company and mostly depends on its competitive context.
For example, let us compare a shipping company with a bank. In a major shipping company, the board can only lay
out the general premises behind its strategy, such as general attitude towards risk-taking, overall diversity of the
company and so on. It must, to a large extent, delegate the actual decision-making to the CEO, because speedy
execution is required to take advantage of opportunities in shipping markets. Since speed is so critical, relevant
initiatives regarding key decisions must largely come from the CEO. The board can only ask to be kept informed
within the overall general parameters and limitations that have been set for the CEO.
At the other extreme, it is a legal requirement for the board of a bank to play an active role in each major credit
commitment decision. When the Basel II Accord comes into force, which is currently scheduled for 2008, the board
may have to become even more involved! I agree with Jaime Caruana, chairman of the Basel Committee on Banking
Supervision, that implementing the Basel II rules will be “as difficult and as important as drawing up the accord, which
took five years”. One reason why it will be so difficult is that these legal requirements risk ruining a well-balanced
relationship between board and CEO.
Defining the board’s roles and responsibilities by following a standard set of prescriptions - such as those contained
in reports like the Cadbury Report (UK), the Smith Report (UK) or the N¿rby Report (Denmark), or prescribed in
legislation, such as the Sarbanes-Oxley Act (US) - does not always make sense. Instead, the CEO and board should
consider the specific circumstances of their company and identify which types of decisions are vital - these are the
ones that the board needs to address.
Some commentators portray the discussion about who decides what, single-handed or together, as a trade-off
between the CEO’s power and the board’s power. I claim the contrary. The board and the CEO need to implement
decisions on key success factors for the company together. This includes agreeing upon the types of decisions and
issues about which the board expects to be kept informed, so that its members always have up-to-date - and what
they see as relevant - background information to deal with issues as they arise.
Much of the legal drive towards dealing with compliance issues has come from the US. So far, Europe takes a more
judgmental approach, although pressures towards more formal compliance criteria are also growing there. With the
two-tier board system found in certain continental European countries - notably Germany - there is, however, a strong
checks-and-bounds balance already built in, making the quest for further compliance regulations less pressing. In
Japan, which is characterised by very large boards driven by ceremony, one can expect increased pressure towards
more legislation and compliance.
How the CEO and board should build a strategic plan
The first thing a board can expect from a CEO is a sound strategic plan. The plan should emphasise both longer-
term, “top-line” performance and shorter-term “bottom line”. This is a balancing act - not a trade-off - and the CEO
must discuss the right balance with the board. The CEO can facilitate the strategy discussion among the board by
mapping the various activities for each business area.
Some of the activities in a particular business area will consist of focusing on the existing business, in terms of both
established markets and proven competences. This “protect and extend” strategic activity will typically lead to steady
bottom-line results. If the company tries to develop new markets by building on its strengths in this specific business
area, it may then be able to leverage these competences relatively easily. For instance, it can take its successes into
new markets, say new countries, thereby creating longer-term growth, but without necessarily causing too much of a
drain on the bottom line.
It can also build related competences, adding them to the present strengths. Building related competences can
involve resources and typically requires a longer-term focus, but the idea again would be to make sure that the build
activities are realistic when it comes to adhering to the long-term/short-term balance for the company. Finally, we
have the transform activities, which are clearly long term. These must not be allowed to absorb resources to the
extent that they become a threat to the short-term, bottom-line results.
Taken together, these activities can form a framework around which the CEO can build a strategic plan in order to
secure both growth and profits, and gain the board’s full support.
A second strategy issue for the CEO to define, together with the board, is the best number of business platforms in
the company’s overall portfolio strategy. How widely should a company spread itself and what should the relationship
between these business areas be? For instance, the board and CEO of Norsk Hydro, the Norwegian industrial group,
debated for years whether it should maintain the company’s three unrelated business platforms: oil and gas, light
metals and agricultural products. It was widely felt that the market was heavily discounting the Norsk Hydro stock
because shareholders perceived the company as a conglomerate of unrelated activities. It was also felt by both the
CEO and board that too much complexity made strategy execution difficult. Inside analyses - supported by the
findings of consultants - pointed towards splitting up the company. Although this meant saying goodbye to a business
platform that had been there since the company’s origins 100 years ago, the CEO and board in the end decided
unanimously to spin off the agricultural business. This focused the company on two unrelated business platforms,
rather than three.
In all strategic decisions, the CEO and board must discuss and agree on potential risks. Let us look at Kvaerner ASA,
another Norwegian industrial conglomerate, which in 1996 acquired Trafalgar House, the UK shipbuilding and
construction group.
At the time, Kvaerner operated in rather mature markets. It could potentially gain a lot from acquiring a more growth-
oriented business like Trafalgar House. The acquisition did, however, involve taking on a lot of debt and the new
company - now with a much higher breakeven point - became too vulnerable to downturns in revenues. In retrospect,
the CEO and the board may have taken on too much risk, and both were forced to leave. They should perhaps have
resisted the temptation of accelerated growth via the much-larger Trafalgar House.
When it comes to mergers and acquisitions, sentiments of the stakeholders have to be taken into account. The board
must make sure that the CEO and the management will be able to master chemistry issues between the parties. For
example in 1997, Royal Caribbean Cruise Lines, which is based in the US, acquired Celebrity Cruises, which is
based in Greece and the UK. The stakeholder issues were well understood. The majority owner of Celebrity became
a member of the Royal Caribbean board. Two essentially independent divisions - retaining their original commercial
brand names - were set up representing separate growth platforms within the cruise industry. Where synergies could
be achieved, the management consolidated some parts of the operations area. All stakeholders in the two
organisations - owners, investors, boards and employees - seemed to work well together in supporting the CEO of
Royal Caribbean to create a leaner and stronger company.
However, when Royal Caribbean attempted to acquire Princess Cruises from P&O, it ran into problems. Royal
Caribbean’s top management was eager to acquire Princess for the growth and market leadership potential it
provided. Royal Caribbean’s board, however, was not prepared to win this deal at all costs. When Royal Caribbean
made an offer, P&O conditionally accepted. But in the end, Royal Caribbean’s arch-competitor Carnival Cruises
managed to close the deal, in what was seen as a major blow to Royal Caribbean.
Carnival Cruises had offered a higher price and guaranteed to leave Princess Cruises’ organisation relatively intact.
Had Royal Caribbean’s CEO and board perhaps failed to understand fully the sentiments and conditions of P&O’s
stakeholders? At a crucial moment in time, did Royal Caribbean’s board perhaps focus too much on discussions with
its own upper management on price? Even if Royal Caribbean’s top management seems to have done a great job
with the acquisition of Celebrity, we can question how well the team was able to orchestrate the key stakeholder
issues among the boards on both sides for the Princess acquisition.
Royal Caribbean’s CEO faced particular criticism for the failed takeover attempt, but the board members should also
have obtained greater clarity about the stakeholders’ positions, perhaps by becoming more involved in these
discussions and at an earlier stage.
Legal, organisational and ethical issues
The law in many countries is becoming increasingly specific about what constitutes critical governance issues, and is
requiring that such issues be handled by both the board and CEO. This requirement is an attempt to ensure
governance that protects the interests of investors as well as society at large. In many instances, there is a
compliance protocol for the board regarding the various issues that affect the company, such as pollution control,
safety and so on. The CEO must fully support the board in this regard and may be expected to initiate a review of
these issues in the non-executive board meeting at least once a year.
Updates and exchanges on the latest legislation are, however, only one aspect of learning at the top. Learning, for
the board and employees, should be a standard part of the board’s agenda, so that the company can continuously
improve its understanding of the critical issues it faces. Research has shown that, when the board actively stimulates
a culture of organisational learning, the company tends to be more successful.
The CEO and board must also ensure that they have a workable succession plan in place. Even if the board expects
the CEO to make the contingency-based succession plan for the senior management team, the CEO does not
appoint his or her successor - this is the responsibility of the board.
In turn, the CEO should expect the members of the board to be independent and to refrain from cronyism. To prevent
the formation of sub-units within the board, the board should be one team of independent members, and sub-
committees should probably be avoided. Even the formation of the common nomination, compensation and audit
committees might be questioned. Although they may represent efficiency gains, they can also fragment the board’s
responsibilities. The danger is that special interest groups could dominate the board and potentially create an
environment in which politicking thrives.
Board members should be expected to speak up, and not be held hostage by the company due to economic or other
dependencies. If the compensation received by board members becomes too significant, there is a danger that their
desire to keep their seat on the board will outweigh the duty to speak out and rock the boat. The same goes for the
CEO. Too many CEOs become major stockholders. Some borrow extensively to purchase company stocks or
exercise options and may thus become dependent on the company. This may inspire them to take actions that are
not necessarily for the good of the company, but rather in their own interest only.
Traditionally, careers have been managed from an organisational-need perspective but, in today’s brain-driven
organisations, we are starting to see this inverted: individual careers may increasingly be driving the organisation.
Talented executives decide for themselves what types of job assignments they are prepared to hold; most likely, only
those that will enhance their personal and professional development.
The board and shareholders no longer hold ultimate power, nor does the CEO. More and more frequently, it is the
company’s key knowledge or talent holders who do. With the increasing importance of this group of employees, the
governance equation may evolve to become even more complicated than just balancing the roles of the CEO and
board. To ensure ongoing commitment from a wider set of stakeholders, a broader balancing act may be needed.
Time for investors to come in from the

cold
By Murray Steele
”Cadbury chief slams investor groups for lack of openness.” This headline in the Financial Times of April 22 2005
demonstrates just how fragile the ceasefire in the war of words has become between UK companies and their
shareholders. In a speech to an audience of investor relations executives, John Sunderland, chairman of Cadbury
Schweppes and president of the CBI, the UK employer’s body, attacked institutional investors and hedge funds for
short-termism and lack of transparency compared with listed companies.
In response, Anthony Watson, chief executive of Hermes Pensions Management, the UK’s most active institutional
investor, wrote on April 27 that John Sunderland had posed some good questions. He further suggested that if all CBI
company pension funds were to demand answers to the questions he had raised, then the behaviour of institutional
investors would change, which would be to everyone’s benefit.
It is estimated that institutional investors based in the UK and internationally own just over 70 per cent of the shares
of companies listed on the London Stock Exchange. Estimates for the US present a comparable figure of just over 60
per cent.
While there is no denying the importance of institutional investors, there is a growing difference in the investment
community between long-term and short-term investors. The former are viewed as “renters” of stocks, whereas the
latter are increasingly viewed, and are beginning to act, as “owners” of the companies in which they invest. Evidence
for this trend includes the growing number of investors establishing corporate governance functions to engage more
actively with their investee companies. This article will focus on longer-term institutional investors, such as pension
funds, insurance companies and investment trusts, and will not consider short-term investors, such as hedge funds.
The responsibility of institutional investors
To whom do institutional investors owe responsibility? Well, assuming that you have a pension of some kind, it is to
people like you and me. The workforce of companies and other organisations contribute part of their salary to their
pension fund to provide benefits for the beneficiaries of the scheme.
The fund trustees appoint investment managers, normally institutional investors, to invest funds on behalf of the fund
and its beneficiaries. They typically invest in the shares of listed companies, as history has shown these to be the
optimal long-term investment. Where this circle breaks down is at the interface between the investment manager and
the board of the companies in which they have invested.
If an institutional investor is unhappy with the performance of a company in which it has invested, then it may decide
to sell the shares. However, it could be argued that this is irresponsible, as all the institution is doing is avoiding the
problem and postponing the need to address the issues in the company. Until recently, it was not seen as the
responsibility of the investor to engage with the company and seek to work with it for positive change, and this type of
behaviour was perfectly acceptable. But today, things are changing - and largely as a result of the growth in active
investment by institutional investors, or shareholder activism.
The trend for shareholder activism emerged in the US through the engagement of large institutional investors, such
as the California State Pension Fund (Calpers), the teachers’ pension fund TIAA-Cref, and investment managers
such as Lens, which was founded in 1991 by Robert Monks and Nell Minow. In the mid-1990s, the trend crossed the
Atlantic to the UK. There, the leading active investor has been Hermes Pensions Management, which uses its Focus
Funds to strengthen shareholder involvement in UK companies and, more recently, continental Europe and the Asia
Pacific region.
In general, the issues about which active shareholders seek to engage companies can be summarised as the
following: performance - both operating and in terms of total shareholder return; strategy; governance and
communication, including board constitution; executive remuneration; capital structure; and risk management,
including social, ethical and environmental issues. Most shareholder engagement activity takes place out of the glare
of the media - one recent exception to this was, ironically, the deposing of Michael Green as the potential chairman of
ITV, the UK television company, at the time of the merger between Carlton and Granada.
A frequently posed question is whether or not investor engagement increases shareholder value. There are
numerous examples to support the view that companies with involved shareholders will tend to outperform. For
example, if you had invested $1m in the Lens Fund in August 1992, then by August 1997 it would have been worth
$3.2m, giving a compound return of 26 per cent per annum. By comparison, an equivalent investment in the Standard
Poor’s Index would only have been worth $2.5m. A similar example concerns Calpers which, between 1987 and
1995, actively engaged with 53 underperforming companies in which it had invested. For the five years before
engagement, the collective performance of the investee companies was 75 per cent below the Standard Poor’s Index
and, for the five years after, it was 54 per cent above.
In the UK, Hermes’ original UK Focus Fund has outperformed the FTSE All Share Total Return Index by 4.5 per cent
on an annualised basis since its inception in 1998, during a time of difficult stock market conditions. Further evidence
to support the link between shareholder activism and performance comes from the growth of private equity funds,
which are the ultimate form of institutional investor ownership. For the ten years to 2003, UK private equity funds
outperformed the FTSE 100 by almost 10 per cent per annum.
The role of institutional investors
In recent years, UK regulators have shown growing interest in the role of institutional investors. The 2001
government-sponsored Myners Report concluded that there were a number of areas where decision-making could be
improved. It recommended that institutional investors should:
Set out how they will discharge their responsibilities. Investors are required to create a document, which should be
made publicly available, outlining their policy in a number of areas. This should cover how investee companies will be
monitored; how the investor will require investees to comply with the Combined Code; how they will meet with a
company’s board; how conflicts of interest will be addressed; how they will intervene; the type of circumstances when
further action will be taken and details of what that action may be; and their policy on voting.
Monitor the performance of investee companies and establish, where necessary, a regular dialogue with them.
Investors should try to identify problems at an early stage to minimise any loss of shareholder value. They should
monitor companies regularly, either themselves or via contracted research providers, by considering the annual
report and accounts, circulars and meeting resolutions. If necessary, they should instigate active dialogue with the
company’s board, although they should avoid becoming “insiders”.
Intervene where necessary. Much of this has been covered under the discussion of shareholder activism above. The
primary duty of institutional investors is to those on behalf of whom they invest, and they must act in their best
interests. They should seek to intervene, possibly with other shareholders, when they have concerns about
shareholder value.
Evaluate the impact of their activism. Institutional investors have a responsibility to evaluate the impact of their
intervention - not all of it is welcomed by company boards.
nReport back to clients/beneficial owners. Transparency is an important feature of effective shareholder activism and
institutional investors should communicate regularly with their clients. However, they should not be expected to make
disclosures that might be counterproductive - sometimes confidentiality may be necessary to achieve the desired
outcome.
The January 2003 Higgs Report further crystallised the role of UK institutional shareholders by encouraging them to
take their responsibilities more seriously. The revised Combined Code on corporate governance contained two
relevant recommendations: first, institutional shareholders should enter into a dialogue with companies based on the
mutual understanding of objectives and second, they have responsibility to make considered use of their vote.
In the US, the Centre for Financial Market Integrity published its Asset Manager Code of Professional Conduct at the
end of April 2005. The Code sets out global ethical and professional standards for companies that manage clients’
assets, and its general principles are very similar to those of the Myners Report.
Sadly, few investors appear to have taken these recommendations to heart, with still only 40 per cent of UK
institutional investors exercising their right to vote at both annual and extraordinary general meetings.
Future Trends
Over time, the relationship between corporate executives and institutional investors will become less strained.
Throughout the history of corporate governance, there has always been a strong initial reaction to the introduction of
new initiatives, followed by a cooling off period and gradual acceptance of the change.
As companies are already well regulated through the various recent codes, it is unlikely that there will be further
additions to company regulations. However, it is a different situation for institutional investors. Given the ongoing
pension problems in the UK and elsewhere, and the relative lack of interest from many investors in the roles and
responsibilities described here, it is likely that they will continue to receive attention. If nothing else, the glare of the
media may force them to take their responsibilities more seriously and, in the extreme, government may force them to
be more transparent.
Structures to help directors reach the

point
By Michael Useem
For more than a decade, investors in the US, UK and other markets have been searching for the outward features of
governance that promise good decisions within the boardroom. What public foundations are required for unbiased,
thoughtful, hard-hitting and timely decisions when boards convene behind closed doors?
The outward signs are important, since directors rarely reveal anything about decisions taken inside the boardroom.
Shareholders learn the directors’ identities from annual reports but virtually nothing about what they have done. In the
absence of direct data, outward appearances have come to serve as useful proxy - if the board includes respected
directors, independent committees and performance-based compensation, then it is more likely, so the argument
goes, to make good and timely decisions.
We define governance decisions as those moments when directors face a relatively discrete opportunity to commit
company resources to one course of action or another. Inaction in the face of such an opportunity should also be
seen as a decision. Taken well, such decisions can drive a company’s growth; taken poorly, they can cause the
opposite. To see this, we begin with a comparison of director decisions at two troubled US companies.
When governance decisions fail
The consequence of sub-optimal board decisions is strikingly evident in the 2001 bankruptcy of Enron. We have
learned more about its governance decisions than at virtually any other US company following the US Senate
subpoenas for director testimony and records, as well as the investigation by Enron’s post-bankruptcy board into
decisions made prior to bankruptcy.
The governing board of Enron met many of the contemporary standards for good governance. Its 13 directors
included just two company executives; the size was small enough to keep directors engaged; the board chair had
been separated from the chief executive; the non-executive directors were largely independent; and the directors had
adopted a strong code of conduct.
Yet the outward signs of good governance did not correlate with good decisions inside the boardroom. Despite
appearances, the Enron directors took a range of decisions that directly contributed to the company’s demise.
In mid-1999, Andrew Fastow, Enron’s chief financial officer, sought board endorsement of a partnership called LJM.
This created a governance problem, since the board’s code of conduct stipulated that “even the appearance of an
improper transaction must be avoided,” and that no employee could receive “financial gain separately derived” from
service with the company. Yet the special purpose entity that Mr Fastow proposed would result in those conditions,
and thus he asked the board to suspend its code.
The board’s audit committee, which was best positioned to make an informed decision on Mr Fastow’s request, did
not vet the request before it went to the full board for approval and neither did the finance committee review the
financial implications. The directors received the proposal just three days before a special board meeting that was to
be held by teleconference on June 28 1999. The agenda for that meeting was also filled with other weighty matters:
authorisation of a stock split; placement of shares in a compensation plan; purchase of a corporate jet and investment
in a power plant in the Middle East. The board completed its review in just an hour and among its decisions was the
suspension of the conduct code to permit the special partnership. It would later approve additional partnerships and
suspensions in a similar fashion.
Since Mr Fastow would now sit on both sides of the table in negotiating transactions between the partnerships and
Enron, the board asked for controls to prevent conflicts of interest in the wake of the code’s repeated suspension.
The directors required that executives review and sign “Deal Approval Sheets” before executing one of the conflicted
transactions. But for many of the deals, the board did not enforce its oversight, allowing executives to either not
prepare or not sign the approval sheets.
When Mr Fastow secretly enjoyed a $30m windfall from his partnerships in 1999-2000, Enron directors became
suspicious, and the board’s finance committee requested that its compensation committee investigate. The chair of
the compensation committee in turn asked Enron’s top human resources officer for data on Mr Fastow’s earnings, but
the officer did not provide the data. When the committee chair asked for it again but failed to receive it a second time,
he dropped the matter.
Members of the Enron board entered meetings ill-prepared to make educated choices. They deliberated so briefly
that informed decisions were unlikely, approved management’s illicit partnerships hastily and exercised faulty
oversight of the conflicted decisions that followed. When Enron directors became concerned about illicit executive
compensation, they decided not to heed the warning signs.
When governance decisions succeed
The Enron board still might have averted bankruptcy had it decided to remove top management once it became
aware of how the partnerships were being misused for executive gain. A decade earlier, that was how the Salomon
Brothers board saved its company from damage brought about by a rogue trader and a chief executive who failed to
take timely action.
On February 21 1991, Salomon bond trader Paul Mozer made an illegal $3.2bn bid for US treasury securities. His
superior, John Meriwether, reported the transaction to top management on April 28, but CEO John Gutfreund did not
take the infraction seriously and failed to report it for more than three months.
Mr Gutfreund was so discredited by the delay when it became public that he appreciated that his career with Salomon
was finished. He called upon Salomon outside director Warren Buffett to step in to resurrect the company and its
shattered credibility.
Two days later, Mr Buffett took the reigns of Salomon with the board’s vigorous backing. He forced out the old
management team and installed his own. Instead of shredding evidence, he turned it over to investigators. Rather
than delegating enforcement to others, he named himself the chief compliance officer. Instead of suspending the
code of conduct, he insisted that any violation of ethical standards, federal regulation or public statute be brought
immediately to his personal attention.
Although Salomon paid dearly for its rogue trader - customers fled, shares dropped and fines topped $290m - the firm
survived, prospered and was later sold to Travelers Group for $9bn. Had Mr Buffett not cleaned house with the
board’s support, 9,000 Salomon employees would almost certainly have lost their jobs and thousands of investors
their equity.
By contrast, no Enron director decided to step forward when the scale of the improper partnerships became known.
Nor had the directors taken earlier decisions that might have stopped the malfeasance in the first place when the
early warning signs were reaching the boardroom.
The primary function of a board is to protect investors’ equity - and to pick quality managers to husband and expand
that equity. The Enron directors, however, approved a chief financial officer who hid critical information from them,
appointed a chief executive who failed to supervise the CFO, and accepted flawed partnerships that they did not fully
understand. When it unravelled, none stepped forward to spearhead a process of housecleaning and restoration.
Building composition and policies for board decisions
Taken together, these examples point to the importance of preparing boards for making good decisions. Composing
the board well and setting the right policies are essential pre-conditions for that.
The oversight team brought in to resurrect Enron took the view that the failure of its directors to protect the company
was partly a product of the shortcomings of those that met in the boardroom, and it replaced all board members. So
too did WorldCom and Tyco in the wake of the decisions by their boards that permitted executives to mismanage
their companies.
Consistent with what academic research would recommend, new directors for all three companies were more
independent of management and brought stronger governance and management backgrounds to their boardrooms.
The new boards were also smaller than those that they replaced, and that too was consonant with what research
studies confirm: namely that smaller teams (and smaller boards in particular) generally make better decisions. As a
foundation for governance decisions, board composition matters.
Had they been in place in 2001, new policy provisions from the New York Stock Exchange and Securities and
Exchange Commission might have prevented the lapses in governance at Enron. For example, the NYSE’s new rules
for listed companies require that:
Non-executive directors must regularly meet without management. Had Enron’s outside directors met without the
CEO from time to time, their private misgivings about the partnerships and the CFO’s personal gains might well have
congealed into a board decision to retract them.
Companies must have audit, compensation, and nominations/governance committees that are comprised of
independent directors. If Enron’s audit committee had not included two directors who were not entirely independent, it
might have earlier questioned the purpose of the company’s increasingly questionable special purpose entities, and it
may have recommended to the full board that it reject management’s request for approval.
Companies must adopt a code of conduct and disclose any waiver of the code for directors and officers. If Enron had
been required to disclose publicly that it had waived its conduct code to allow its CFO to sit on both sides of its
partnership transactions, it might well have pulled back from its decision to do so.
While the US has spearheaded reforms for better decision-making in the boardroom, comparable initiatives have
recently emerged elsewhere. Companies in the UK, for example, have been subject to several waves of reform,
beginning with a 1992 commission headed by Adrian Cadbury, to more recent ones urging greater director
independencce and stronger audit committees. Similar recommendations have been issued by organisations in
Brazil, Canada, France, Germany, Spain and the European Union. India and China are also moving in the same
direction.
Building the process and culture for board decisions
Good governance decisions depend upon a proactive board process and a prescriptive governance culture. These
should be viewed as necessary additions to a board’s composition and policies. They help to ensure that the directors
are asked to make the major decisions but, at the same time, that they do not inadvertently slide into management of
the company.
Many companies are adopting issue calendars and decision protocols as part of a proactive process. The issue
calendar usefully requires that the board address all major decision areas on an annual cycle. The directors of one
major US company, for example, evaluate the strategic plan in January, the annual budget in March, past
performance in May, the operating plan in June, executive compensation in September and succession planning in
November.
The decision protocol, sometimes termed the company’s “delegation of authority”, outlines decisions that the board
must take or delegate to management. One large company, for example, has adopted a decision protocol that
requires directors to decide upon the following issues: the annual business plan; capital structure and indebtedness
limits; officer hiring and compensation; financial risk management; company insurance policy; transactions exceeding
a specified dollar threshold in the areas of acquisitions and divestitures, capital expenditures, litigation settlements,
tax resolutions, fines and penalties, contingent liabilities, pension contributions, restructurings, and changes in
accounting policies that impact revenue or pre-tax income.
HBOS, one of the UK’s largest financial services companies, is one of the few companies that has made its decision
protocol public. The protocol itemises dozens of “matters specifically reserved to [the board] for decision,” including
the company’s financial results, executive remuneration, transactions exceeding £50m, significant changes in internal
controls and any new business that would represent more than 1 per cent of the group’s gross income or expenses.
The issue calendar and decision protocol create a clearer line between the decisions that should be taken by the
board and those that should remain with management. Of course, additional boardworthy issues inevitably arise
throughout the year, ranging from competitor challenges to regulatory reviews, and here a pre-established consensus
among directors and executives is essential for defining responsibilities.
The emerging norm for governance at many companies is to focus on the “materiality” of an issue in deciding whether
it should go to the board for resolution. Materiality is defined by an issue’s potential for substantial gains or losses for
the company; whether the matter is beyond the company’s normal business; and whether it is likely to have an impact
on the company’s strategy and reputation. If the issue is material by any of those criteria, it must go to the board for
review and decision.
To build an appropriate prescriptive culture, directors and executives are increasingly making a habit of openly
reviewing issues about which the directors indicate they want to decide. An executive at a US manufacturing
enterprise spoke for many in saying: “We are continually going back to the board and asking: ‘What do you want to
know more about?’”
The difference good governance decisions make
To illustrate the difference that governance decisions can make, let us turn to the moment 52 years ago when Sir
Edmund Hillary and Tenzing Norgay summited Mount Everest. Behind that accomplishment was an earlier board
decision that was to prove critical.
The UK’s Himalayan Committee originally chose Eric Shipton to lead the assault on the summit. Shipton’s lightly
equipped and nimble climbs had shown creative flair. But he was known to be inattentive to detail and planning, and
the governing body worried that his style might not be up to the competition. A year earlier, a Swiss team had come
within a few hundred feet of the summit; should the British fail this time, there were German and French expeditions
ready to make attempts soon afterwards.
Fearful of another failure and believing that logistics would make the difference, The Himalayan Committee fired
Shipton just six weeks after choosing him. In the resulting uproar, one climber resigned. Others protested about
Shipton’s replacement, a career military man, called John Hunt, who was known for his management savvy but
barely known to mountaineering.
In replacing its expedition CEO, the board had changed its strategy. As expedition leader, John Hunt indeed focused
on logistics. His approach called for an array of climbers and Sherpas who would methodically move up the
mountain, placing supplies at ever-higher camps. The goal was to deliver just two climbers to the summit, although
ten mountaineers were in the running. The final choice, Hunt declared, would depend on who was climbing well and
who was in high camp when the weather cleared. On May 28 1953, Hunt selected two men for immortality and, at
11.30am the next day, Edmund Hillary snapped the iconic photo of Tenzing Norgay atop the summit.
The unsung hero of this heroic achievement was The Himalayan Committee. It had decided that Everest’s conquest
would require a well-organised team to succeed, and decided on a new executive for its new strategy. Whatever its
composition and policies, the board had taken two history-making decisions that reflected governance decision-
making at its best.
Conclusion
Under the attentive glare of investors and regulators, directors of companies ranging from Barclays to Disney and
Toyota have been working hard in recent years to create boards that meet contemporary composition and policy
standards. At the same time, boards are also working to ensure that they make the right decisions and, for that
purpose, they are adopting issue calendars, decision protocols and other governance norms. The result of this should
be greater director vigilance, not only for guarding against company malfeasance but also ensuring that management
has the right strategy and chief executive for reaching its summit.
Part-4 THE PURSUIT OF GOOD GOVERNANCE

Feedback helps boards to focus on their
roles
By Rob Goffee
Published: June 9 2005 17:08 | Last updated: June 9 2005 17:08
Companies are facing growing demands to evaluate the performance of their boards. The pressure comes from a
variety of sources but, most obviously, it is the regulators who are setting the tone. In 2003, the Combined Code on
corporate governance, revised in the wake of the Higgs Report, made board evaluation mandatory for UK companies
and, the following year, the New York Stock Exchange introduced similar rules for US businesses. Elsewhere, there
is a similar trend as investors, fund managers, insurers, capital markets and the media urge greater levels of
evaluation and transparency.
The problem for boards is that there is minimal guidance on how to carry out an evaluation and no universal
agreement as to when it should take place. The NYSE, for example, politely asks that companies “address”
evaluation annually, while in the UK, the Combined Code leaves the door open to a variety of interpretations. It
advises the board to “undertake a formal and rigorous annual evaluation of its own performance and that of its
committees and individual directors”.
The evaluation process
There are five broad sets of issues that must be decided before embarking on a board evaluation:
1) Who should conduct the evaluation? Should the board evaluate itself or should external facilitators be involved?
2) Who is to be evaluated? Should it just be the board, or should the various committees also be subjected to the
process?
3) What are the issues to be covered? For example, should the evaluation only address one-dimensional hard issues
– such as the meeting schedule, time allocation on the agenda or circulation of papers – or should it also look at
broader questions of culture and trust?
4) What form should the evaluation take? There are two methods that are commonly used – questionnaires and
interviews.
5) How should the information be handled? In other words, what should be made publicly available and what should
be kept confidential?
Who should conduct the evaluation?
Although in the UK, Higgs recommended the use of a third party for evaluation, the extent to which the process is
internal or externally facilitated clearly varies. Internal evaluation usually involves structured discussions between the
chairman and board members, sometimes supported by the circulation of a questionnaire to board members that is
completed confidentially and then discussed by them. The process, which is typically led by the company secretary,
has the advantage of being reasonably straightforward to organise and relatively cheap, but it is prone to being self-
congratulatory. Turkeys, as a rule, do not vote for Christmas.
Internal evaluation remains by far the most popular approach. Research undertaken in 2004 by the consulting firm
Independent Audit found that 73 per cent of UK companies use self-assessment.
At Vodafone, for example, the board, its committees and individual directors are all evaluated annually. The chairman
assesses the non-executive directors; the CEO reviews the executive directors; and the senior independent director
reviews the chairman. According to the company’s annual report: “Each board committee undertakes a review of its
work and in relation to the performance of the board, the chairman invites suggestions from all directors as to ways in
which the board and its processes may be improved.” While Vodafone is developing questionnaires for future use, it
publicly states its faith in an internal process, preferring to administer without the use of external consultants. More
unusually, the retailer Marks Spencer based its own performance review on an employee survey.
The second general approach is to bring in external consultants – typically to conduct interviews and provide
recommendations. While this approach potentially offers greater objectivity, it also has a number of drawbacks. Board
members may be inclined to view the consultants with sometimes ill-disguised scepticism. After all, board evaluation
is a developing and imprecise art (or science depending on your perspective) and consultants may not fully grasp the
nitty-gritty of the business. It is also expensive. One multinational company is believed to have paid £240,000 for an
evaluation.
A third possibility may lie in a hybrid of the two, by combining a self-assessment tool with the involvement of an
external facilitator. This is an approach now being adopted by a growing number of companies. For example, Sonae,
one of Portugal’s largest commercial groups, has recently introduced this type of approach for two of its boards.
Typically, the outsider is an academic or consultant – ideally, perhaps, an independent, but known, quantity.
Who is to be evaluated?
It is common practice to include the entire board of executive and non-executive directors in addition to all the main
committees – audit, finance, nominations and remuneration. For example, Colgate-Palmolive, the consumer products
group, established its evaluation process in 1997. Its board committees conduct self-evaluations that are then
reviewed by the board and the company complements this with evaluations for individual directors.
What are the issues to be covered?
The current tendency is to focus on relatively straightforward, one-dimensional measures, such as the make-up of
committees, length of tenure of board members, regularity of meetings, the background of board members, and the
circulation of meeting agendas. One reason for this approach is that these metrics are easily quantifiable and provide
neat boxes that can readily be ticked. This is useful, but not sufficient.
When Jeffrey Sonnenfeld, a corporate governance expert based at the Yale School of Management, examined the
boards at Enron, WorldCom and Tyco – some of those pilloried for recent corporate scandals – he found no broad
patterns of outward corporate governance failure. In fact, the boards of these companies exhibited some of the best
governance practices in terms of structural and procedural issues, such as board size and composition, attendance at
meetings, the make-up of committees and financial literacy. They also scored highly on accountability mechanisms,
such as codes of ethics and conflict of interest policies.
The uncomfortable fact is that, even if there were external governance checks in place, Enron, in particular, would
have passed with flying colours. As this demonstrates, there is a real danger that corporate governance checklists,
including the requirements of the Sarbanes-Oxley Act, miss a more fundamental issue. The point of evaluating
boards is not simply to ensure they are meeting certain formal targets, but to make them more effective.
Consider the issue of separating the CEO and chairman roles – something recommended by almost all governance
codes. On this issue, there is broad international agreement on governance best practice – even though the working
reality and environment varies considerably across countries.
A recent study by the governance ratings agency Governance Metrics International (GMI) found that 95 per cent of
the UK’s FTSE 350 companies rated by GMI split the role. In Germany, the roles of the chairman as head of the
supervisory board and the CEO as head of the management board are legally separated. In France, where the
combined CEO and chairman has traditionally been a powerful force, there is now a trend towards splitting the role –
with companies such as Renault and Carrefour recently making this division. A similar trend is also emerging in the
US where, until recently, the two roles were commonly combined. A recent survey by GMI found that one-third of US
rated companies had a separate chairman and CEO; in 2002, just 25 per cent split the role. Despite these variations,
there is nothing to indicate whether or not boards are any more effective as a result of splitting the roles.
“Potentially, boards have three resources to use: power, information and knowledge” observes Edward Lawler, the
US academic who specialises in board effectiveness. “When these three resources are present and effectively
directed at, first, handling emergencies; second, making sure an effective strategy is in place; and third, truly
influencing the decisions of the chief executive officer (and whoever succeeds the CEO), then we can say that the
board is acting in a high-performance way. But there’s another key point that should be stressed. A board is a group,
perhaps in some cases, a team. Boards need to be assessed by the same conditions and behaviours that lead
groups to be effective.”
Mr Sonnenfeld agrees. The primary distinctive feature of an effective board, he argues, is the extent to which it
performs as an effective team, or a “high-functioning work group”.
“We need to consider not only how we structure the work of a board but also how we manage the social system a
board actually is,” he observes. “We’ll be fighting the wrong war if we simply tighten procedural rules for boards and
ignore their more pressing need – to be strong, high-functioning work groups whose members trust and challenge
one another and engage directly with senior managers on critical issues facing corporations.” He notes that stock
ownership, financial literacy, attendance records, service of the former CEO and “independence” do not seem to
correlate in a meaningful way to performance of the company or the board.
The best evaluations take a broader perspective. They look at the climate and culture of the board, its team
dynamics, and the levels of trust and relationship between board members. If the point of board evaluation is to
improve performance, such insights into the behaviour of board members, individually and collectively, are crucial.
More enlightened companies are already moving in this direction. Legal and General, for example, has been
conducting this type of wide-ranging survey for several years – well in advance of the recommendations of the Higgs
Report. At the telecommunications company Cable Wireless, according to their 2004 annual report: “The independent
non-executive directors meet privately without the chairman, and as a group with the chairman, as necessary, at least
once a year, and similarly with both the chairman and the chief executive officer, to consider management
performance and succession issues. The independent non-executive directors also review annually the relationship
between the chairman and the chief executive officer to ensure that the relationship is working to promote the
creation of shareholder value.”
Generally, of course, relationships and behaviours will never be as easily measurable as structural and procedural
factors. This suggests that it is wise to consider multiple measures (quantitative and qualitative) as well as a variety of
contexts for feedback and discussion.
What form should the evaluation take?
There are two main methods to generate information on which to base an evaluation – questionnaires and interviews.
The former are quick, cheap and provide comparable data. However, they can appear impersonal, threatening and
may lack depth. The latter are clearly more personal and create a much deeper pool of data. The trouble is that they
are slow, time-consuming, expensive and produce a sprawling mass of data. Good practice often consists of a
combination of the two – a robust questionnaire and carefully constructed interviews – followed by a discussion.
How should the information be handled?
Clearly, there are issues of confidentiality. Without reasonable safeguards, directors are unable to enjoy candid and
productive conversations with outsiders. At the same time, companies are obliged to make some of the information
public. Unless the boundaries are clear, board evaluations are unlikely to generate useful recommendations. Where
outsiders are used, reasonable assurances must also be provided that information gathered through board
evaluations will not be used as a lever to generate additional consulting work.
Once the results have been gathered and analysed, best practice usually involves individual data for all directors
being shared with the chairman and data for the executives being shared with the CEO. This is then discussed in a
follow-up session.
The final stage of the evaluation is a one-to-one session for each board member with the chairman – and sometimes
with the external facilitator available for separate assistance if required. In addition, there are board discussions to
address collective issues – again typically with the facilitator present.
Results of an evaluation
A successful board evaluation is a highly demanding process that requires the full support of the chairman and CEO.
Without their buy-in, evaluation quickly degenerates into a box-ticking exercise that sheds little light on anything.
Directors should be consulted throughout the development and design of the process – indeed, the more involvement
they have, the more likely they are to commit to any action-related outcomes.
A productive relationship between executive and non-executive directors is also essential for an evaluation to
succeed. Indeed, properly structured, the annual board evaluation process should help to raise awareness of
important issues among non-executive and executive directors, as well as improve the relationship between them.
If the board is doing its job, the end result of the evaluation process is unlikely to be seismic. Just as in any formal
appraisal system, there should be no huge shocks. A well-managed evaluation should primarily encourage a board to
focus and adjust its thinking and actions.
Small shifts in thinking and behaviour can produce substantial impacts. “Boards that assess their members and
themselves tend to be more effective than those that don’t,” concluded the US academic David Finegold and Mr
Lawler after extensive research into corporate governance.
In the longer term, it is also important to keep the evaluation process fresh. Any appraisal process fails when it
becomes no more than a routine or ritual. Rob Margetts, chairman of BOC Group, the industrial gases company,
follows up his board’s externally facilitated, questionnaire-based evaluation with appropriate actions. Then, in the
following year’s review, he leads a focused, internal discussion using a series of structured interviews rather than a
survey. Alternating in this way continually refreshes the evaluation process.
But while board evaluation is clearly useful and can improve board effectiveness, it does not necessarily provide easy
answers for investors. Public reporting of board appraisal processes is typically brief and lacking in detail. Using
board evaluations to compare the performance of one board with another is still all but impossible. Here – as in other
areas of board appraisal – there is scope for further development as boards become more comfortable with the
evaluation process and recognise the importance of sharing information in ways that benefit all stakeholders.
A route through the hazards of business
by Didier Cossin
While warranted by past excesses, a narrow focus on compliance in the wake of recent corporate scandals and the
Sarbanes-Oxley reforms has distracted the business world from the broader purpose of corporate governance –
ensuring a balanced risk/return trade-off for shareholders and other stakeholders. It is high time for corporate boards
and managers to return to a wider view of corporate health and sustainability.
Corporate governance generally, and boards specifically, have multi-dimensional responsibilities in steering top
management towards the right risk choices. Boards should:
• Monitor the risk situation of the company systematically to identify and evaluate multiple sources of risk
• Understand and influence management risk appetite
• Take a portfolio view of corporate risks
• Be apprised more specifically of the major risks (or major risk combinations) that could significantly alter business
perspectives
• Evaluate the way in which management has embedded risk management within the corporation, asking
organisational questions, such as “Do we need a chief risk officer?” and technical questions, such as “Which tools are
being used?”
• Implement joint decision-making procedures in the case of major deals – acquisitions, significant investments and
the like.
Well-informed risk thinking, as opposed to pure risk avoidance, must become an essential aspect of good corporate
governance. Some companies (most notably in the financial industry) have developed sophisticated risk assessment
tools. Yet, even at international banks and insurance companies, boards are not always up to the task. Risk models
can become “black boxes” hiding the complex reality from board members with limited technical understanding of risk
issues. Boards that want to rise to the challenge of broader risk thinking, as befits their responsibility as guardians of
shareholder interests, need a basic level of understanding of the latest risk assessment and risk management
techniques.
Quantitative risk assessment
As can be expected, the game of risk is highly uncertain. We know in advance that we can never assess risks
exactly. So why should boards (and corporations) spend any effort on quantitative risk assessment? Quantitative risk
assessment, even when it is not as objective as it looks, offers numerous advantages beyond informal risk
discussions.
First, quantitative techniques foster risk thinking. Quantitative methods help boards and management identify the
major risk drivers. Consider the impact of rising oil prices on a car manufacturer such as DaimlerChrysler. The oil
price impacts on a number of variables in the complex web that is the modern economy, including secondary energy
prices, the cost of inputs for production, consumer demand for fuel-guzzling models, as well as general economic
inflation – and, therefore, the interest rates that drive demand for cars by altering leasing or borrowing costs of vehicle
financing. In other words, the impact on car sales is manifold, especially in an industry where financial services often
contribute between 50 and 100 per cent of profits. Resilience to interest rate changes – as determined by financial
leverage, cash flow, protection from exchange rate volatility, exposure to consumer or supplier default risk and so on
– is vital to the company’s competitive position. Awareness of the various aspects of the web of risks and how they
come together is essential to understanding management’s decisions and, possibly, challenging them. The portfolio
view becomes a necessity at board level – and simple numbers help clarify the thinking. For example, what is the
company’s sensitivity to oil prices in the context of its costs? How do funding costs increase when interest rates go up
by 1 per cent? And how many sales would the company lose?
Second, quantitative techniques clarify risk issues by creating a common language: they encourage clearer
communication both between managers and the board, and within the board; allow board members to understand
management’s risk appetite; and stimulate risk understanding by objectifying subjective viewpoints. For example, I
have seen two board members assessing the same situation, with one viewing a project as very risky and the other
as moderately risky, although both agreed that the probability of project failure was 10 per cent. Their assessment
reflected the degree to which they were averse to risk on a personal level, as opposed to deriving from objective risk
evaluation.
Third, metrics encourage better risk management. Quantitative measures help board members focus on major risks.
Without a clear scaling of risks, boards and even management can be overwhelmed by the breadth and complexity of
risks. As a result, there may be a tendency to focus on classic risks, such as currency risk, rather than analysing the
risks that truly impact the business, such as radical loss of market share.
Finally, well-designed quantitative models can help businesses price risks. For example, the 2003 acquisition of
Household International gave HSBC more than just a foothold in the higher-risk, US consumer finance market. In
effect, the deal provides HSBC with a valuable opportunity to apply specific models and skills developed by
Household in the US to understand and price credit risk in markets around the world.
Risk assessment techniques
The most basic risk assessment techniques start with sensitivity analysis (how one value dimension is sensitive to
one risk driver), sometimes organised within a so-called “tornado of sensitivities”. It is surprising how many
corporations do not even use this simple method to evaluate risk.
For example, most investment bankers will now present an acquisition analysis with cross-sensitivities to cost of
capital and growth rates. Most of the time, a normal spread on the sensitivity analysis will bring out negative
perspectives on the acquisition. Many boards have approved acquisitions without paying attention to these and
without questioning future drivers of growth and of costs of capital.
The acquisition of Jaguar by Ford in 1989 was driven on the valuation side by strong growth assumptions. Basic risk
analysis would have shown the board of Ford the high sensitivity of the acceptable acquisition price to the expected
growth rate. Full understanding of this could have led to the board guiding management towards a different
acquisition structure, a different price or no acquisition at all.
Sensitivity analysis methods, however, are poor (if not altogether inadequate) at jointly evaluating multiple risks; nor
do they allow for the assessment of extreme risks.
Scenarios are a good way to encompass multiple and extreme risks. While rising a step above simple risk
identification and basic sensitivities, the technique remains highly subjective.
The Monte Carlo simulation has brought the world of scenarios to a new, scientific age, by combining hundreds,
possibly thousands, of probability-weighted scenarios into one result. The technique, while used frequently in
engineering, is less common elsewhere (except in banks). Its potential and simplicity are strong and can present
boards with a clear overview of the risk situation. Modern software has made the technique user-friendly. Banks, for
example, are switching their Value at Risk (VaR) models, which assess the probability of a certain level of loss or
profit, to Monte Carlo-based VaR models. Since banks make money out of risk-taking, being able to evaluate and
measure risk is a core competence.
Specific tools to address particular situations have also been developed. For example, option pricing, which is used to
calculate the theoretical price of an equity option, has been particularly successful at assessing credit risk, the risk of
default of corporations. It is now possible for a corporation to provide the board with the default risk of a major
supplier or of a major customer in a more precise way than previously. This is all the more important given the current
trend for outsourcing.
It is now also possible to assess the impact of a strategic change on funding costs in much more precise ways. The
EDF™ credit risk measure (from Moody’s KMV), and similar models from competitors, provide investors and
corporations with expected default frequencies based on stock market dynamics that can help steer major corporate
relationships as well as the leverage choices of a corporation (in much more subtle ways than a simple rating).
A good board can expect interesting assessments from these tools. For example, when considering a major joint
venture, acquisition or supply agreement, the board can use an assessment of the credit risk of the other party to
challenge a deal. Better still, it may want to have an assessment of how the joint venture is going to affect the
company’s own position.
Finally, new markets are also providing a wealth of information that goes beyond stock price behaviour. Credit default
swaps, for example, give an assessment of a country risk when one considers opening a new plant there. It allows an
investor to buy protection against default of a party, a corporate or a sovereign, and thus gives a market evaluation of
that default.
Hard-to-quantify risks
Strategic risks are often so complex that even modern tools, such as game theory, are poor at making accurate
representations. Nonetheless, strategic and other hard-to-quantify risks need to be assessed for the board’s overview
of the corporation. For example, in the case of customer demand risk, what is the risk of a major downturn? More
importantly perhaps, how does one prepare for that risk? Is the corporation being run to simply enjoy the heydays of
life, or can it handle the hard knocks as well? Better, can it take advantage of the downturn to steal business from
competitors?
For example, a thorough cost focus helped Dell create a strong margin advantage during the boom years of the tech
bubble (11.2 per cent margin in 1998 versus Compaq’s 4.5 per cent). When the downturn hit, it was able to take over
competitors by decreasing its prices by about the level of its competitors’ margins. While others saw sales going
down by 30 per cent on average, Dell sales were flat in 2001, thus giving it a position of market leader (with a
remarkable return on operating assets of 38.8 per cent) while others were suffering.
A risk, whether strategic or other, can become an opportunity. Just as the downturn proved a great opportunity to
Dell, so boards can help steer highly profitable businesses in the right direction by keeping oversight pressure on the
cost situation.
Integration of risks
Banks have been highly sophisticated at integrating different market risks into VaR models. Some corporations use a
related model, cash flow at risk (CFaR), which assesses the probability of having a cash flow lower than a certain
level. However, these models do not encompass all risks – how many can combine credit risk, operational risk and
strategic risks, with the standard financial risks? Dependencies between these make them extremely complex,
although the latest tools, such as copulas, which assess how risks move together, may reflect new awareness that is
important to consider.
Complexity of risk models
Unfortunately, as risk models become more complex, they become black boxes to most board members. And as
models move to black boxes, they become a risk by themselves. Often, the simpler thinking may then prevail.
Overall, with integrated risk thinking, we are getting to the point where today’s board will rely on its business sense
and on the processes put in place within the corporation. Nonetheless, awareness of all dimensions of risks,
assessed whenever possible with quantitative techniques, will help the best board members’ business sense to be
accurate.
Structuring risks
Once the corporation has adequately assessed risks, a board can be more confident that management is doing a
good job at taking and managing the right risks. For example, should an airline take on the risk of the oil price? Or
should a German luxury car manufacturer take on the risk of the euro/dollar exchange rate? Although absolute
answers (yes/no) are often given, more sophisticated choices are often the winners and will reveal management
sophistication to the board. One may decide to cap risks that could put the company in jeopardy rather than hedge
the whole risk. Or one may decide to just take on the risks, hopefully informing investors so that these risks are
transparent.
In a complex global company, any risk programme should be designed with value creation in mind. Often, value for
the company is created when one can provide customers with added value or when one can strengthen a competitive
situation. Structuring risks has become the name of the game for top-quality management.
In the mid-1980s, Disney was heavily criticised for hedging the yen royalties of its Tokyo theme park at the peak of
the US dollar, thus depriving shareholders of valuable foreign exchange gains. Disney’s assessment was that the
foreign exchange business was quite far from the Mickey Mouse business, its core competence. One has a hard time
assessing what the value of currency management to Disney shareholders could have been. On the other hand,
Vodafone, a truly global company, has chosen to minimise foreign exchange hedging, assessing that its exposures
are quite transparent and that shareholders are aware of the risks they take (and can diversify or hedge on their
own).
Companies must be aware of risks that will inevitably accompany innovative business models. For example,
Syngenta, the leading agrochemical company, has provided yield guarantees to farmers in Latin America, thus
providing integrated agrochemical solutions and consolidating market share in a low-growth, competitive industry.
Boards at companies like Syngenta should be in a position to understand both the risks and opportunities of new
approaches.
Schlumberger, the leading oil services company, has started complex projects in which it shares revenues with
clients, instead of going for straight sales. By doing so, it is creating new opportunities that enhance profitability – but
also lead to new and/or higher risks. A good understanding of the risks taken may lead to new risk management
programmes, such as hedging for oil price risk.
Structured deals in acquisitions (such as earn-outs, in which the acquisition price is paid on the earnings realised
after the acquisitions) have become commonplace. Few acquisitions can justify being straight deals any more.
Typically, sharing structures are like call options, while support agreements are like put options. Basic option thinking
is thus also at the basis of risk thinking for board members. For example, Holcim, a leader in cement, has been
building its global presence through joint ventures followed by acquisitions, while major competitors have grown
through outright acquisitions. This is typical risk thinking: in a high-risk environment with little cost to time delay, why
not get a foothold in the door with an option to expand? The option is all the more valuable when the risk is higher (as
option traders know well). Boards that have that basic understanding will supervise effectively the acquisition
programme.
Conclusions
Models can be very complex – and can appear to be black boxes to board members who fail to keep up with
progress in risk methodology. Just as a patient is unlikely to accept being operated on with medical technology from
the 1960s, so corporations today require board members who have a solid grasp of modern risk evaluation and
management techniques. Short training courses, coaching and some reading will take most board members a long
way. It is not a matter of board members acquiring an in-depth understanding of technical subtleties; it is a matter of
leveraging their deep knowledge of business to engage in competent risk thinking as required by the modern
corporation.
Why good causes need governance

reform
by Bruce Kogut
Interest in corporate governance has waxed and waned for more than 50 years, driven by recurrent cycles of “big
business” scandals. Against the backdrop of this battlefield is a seemingly more serene landscape of non-profit
institutions. However, despite outward appearances, non-profits often present splendid dramas of spoiled and
conflicting ambitions.
Non-profits consist of all organisations that provide services or products to a community or association without the
purpose of distributing a profit. This innocent definition poses a myriad of trivial to major complications and
implications. The definition is sufficiently broad to cover not only classic non-profits, such as private schools and
universities, hospitals and charities, but also co-operatives and mutuals, non-governmental organisations and
industry associations. Despite the stipulation of “no profit distribution”, the potential still exists for profit-like payments
to be captured by various groups – for example management, workers, suppliers and board members – or that
ineptitude may waste the volunteered time and money.
These dangers are surely cause for concern in the context of the massive outpourings of generosity in response to
disasters, such as the donations to non-profits in the wake of the recent tsunami. How do donors know if their
contribution will reach the needy? How efficient is the organisation to which they are giving? And how does the non-
profit make decisions?
A standard treatment of governance for the profit organisation is the principal-agent model. For publicly traded
companies, owners are the principals and employees (including the CEO) the agents. However, this model is highly
contested in the sphere of non-profits. I isolate three constituencies in non-profits: donors, volunteers and employees,
and customers. In an environment where donors are often members of boards, employees and volunteers have
active voices in decision-making and “customers” care deeply about the rendered services, who is the principal, who
is the agent and whose benefit should we care about?
Donors and taxes
The literature on governance for profit-seeking organisations can often be summarised by the advice to “follow the
money”. However, this advice can seem ill-placed amid the many life-critical services provided by non-profits. For this
reason, it is arguably all the more valuable to travel along this trail in order to understand how governance in non-
profits works.
A starting place for tracing the money trail in a non-profit begins with the tax treatment of a donation. In many
countries, donations are deductible for donors and can be offset against income. For example, in the US, the
deductible is generally 100 per cent, whereas in India, it is usually 50 per cent. The tax deduction can be further
leveraged by, for example, donating appreciated stock to a non-profit. In this case, the donor realises a tax deduction
(by deducting the total donated value from income) plus avoids capital gains tax on the appreciated value.
Although the donor benefits from tax deduction, in many countries the non-profit itself does not gain directly from its
non-tax status (an exception is the UK, where the Gift Aid scheme provides benefits for both non-profit and higher-
rate taxpaying donors). Consider, for example, a non-profit in France, which must pay approximately 20 per cent
value-added tax on non-salary expenditures. The organisation recovers the tax it paid on its purchases by treating it
as an expense, pays the government a value-added tax and charges the consumer the price that includes the
cumulative tax.
However, if the non-profit does not pay taxes, it can neither charge the consumer for the VAT nor recover the VAT it
paid on its purchases. Here is the rub: since corporate income tax is on profits but VAT is on non-salary expenditures,
it is easily conceivable that a non-profit in such an environment ends up paying more tax than a for-profit company. In
general, all the talk about the unfair advantage of tax advantages of non-profit organisations obscures the basic
observation: tax deductibility is more pertinent for the donor than for the non-profit.
The donor benefits even more if the effect of the donation is to lower prices for services that he or she consumes. For
example, in most countries, private tuition or museum entry fees are not tax-deductible, because the public does not
want to encourage private education or subsidise consumption of luxury cultural goods. If the effect of a donation is to
lower tuition prices or to allow for membership benefits, such as free entry to museums, then non-profit status in this
way represents a veiled instrument to provide tax deductibility for services that generally do not receive public favour.
The conventional wisdom is that a non-profit board should consist of those who give generously and have the time,
competence and wisdom to donate. All too often, however, boards consist of neither major donors nor competent
workers; or if they do, they consist of donors who are individually and collectively dysfunctional. Incompetence or
negligence are commonly justified by the excuse that “We are volunteers after all”. Removal of board members is
difficult for all the reasons found in profit businesses: election dates are staggered, voters are poorly informed and do
not vote, and members are social acquaintances and, therefore, hard to evict.
Volunteers and employees
The importance of donations to non-profits varies widely by the type of organisation. In the US, donations make up 10
to 15 per cent of the budgets of educational and health establishments, but the vast bulk of the budgets of religious
and charitable organisations. It is a logical corollary that a significant form of giving in the case of the latter
organisations will also be “in kind”, namely through volunteer labour. If they are paid, many workers will accept lower
wages than they would normally expect given their qualifications and experience.
Volunteers are heterogeneous in their motives. For cultural organisations, people may volunteer because they enjoy
art or music and they want to be near the objects they love and to those who share their interest. Volunteers may also
be motivated by political and social passions, by deep sympathies for the less fortunate, or by the desire to consort
with the wealthy or “society”.
Regardless of whether the reward is found in the act of volunteering or in the acquisition of social status, volunteering
is a donation of time. The difference is that a donation of money leads to the eventual parting of donor and gift,
whereas a donation of time always accompanies the volunteer.
This generosity endorses a culture of giving that stands in opposition to the culture of business. It is passion that
generates the governance problem in this domain. Since volunteers care, they may be too motivated. They will
disagree and not be reconciled to compromise. Convinced they are right, they may obstruct or appeal to external
donors for support. These are the people whose passion powers the organisation and whose passion can often
destroy it.
Consider, for example, the International Federation of the Red Cross (not to be confused with the Swiss Red Cross).
The Federation consists of 178 national societies whose general assembly elects a governing board. The board
comprises the president, five vice-presidents, 20 national societies and the chairman of the finance commission, all
elected for a four-year term. The board meets only twice a year and yet has the formal authority to govern the
Federation in between sessions of the General Assembly. Speaking multiple languages, with few meetings, it cannot
be a very effective instrument of governance. Nor can it legitimately respond to the arguments of national
organisations that are far more knowledgeable of local conditions.
The Federation may appear an unusual case, but the issues are common to many non-profits. Consider the second
example of Pratham, a trust set up by the government of Maharashtra, the municipal corporation of Greater Bombay,
and Unicef, to provide educational opportunities for almost 200,000 children. It has a similar structure to the
Federation, since it is also a federation of local organisations. The central company, consisting of 20 to 25
professionals, provides three services: it helps set up proper auditing and accounting processes; formalises
objectives and establishes central programmes; and raises funds. Given that it can only succeed through the active
participation of teachers, Pratham’s leadership has sought to decentralise power to local communities. It took the
view that, while the top-down control of governments often lacks accountability, local control assures accountability
by giving decision-making rights to communities.
The cost of this delegation is a lack of focus. With an estimated 70m Indian children either illiterate or semi-illiterate,
there are overwhelming choices concerning where to spend the money. In this environment, passion speaks for a
policy of a little everywhere; the governance problem is to persuade teachers and fieldworkers to focus resources to
assure quality results without losing legitimacy for neglecting the poor.
This conundrum between passion and reason is echoed throughout non-profits: in hospitals where routine decisions
are made regarding the allocation of vital resources; in universities that can no longer support all disciplines; and in
museums that cannot serve all constituencies.
All too often, however, the real governance problems emerge as non-profits become richer. According to one school
of thought, growth leads to capture by specialised employees, such as doctors in hospitals, teachers in schools, or
professors in universities, who become the de facto principals given the very weak governance capabilities of non-
profit boards. Thus, passion becomes rationalised, and the principals establish the professional rules by which to
evaluate the agents, who happen to be themselves.
The customer
No doubt, many non-profits would protest to label those whom they service as customers, yet every one serves a
community of users, and it is their welfare that should be the goal of governance. A non-profit receives its legitimacy
from its claim to provide a trusted service. In many cases, it provides a service whose quality is hard to measure,
such as education, health delivery or prison “care”. For-profit organisations are often not allocated these services
because they are not trusted to maintain quality or to make the “right” decision if faced with a trade-off against profits.
The credibility of the non-profit is based around the compassion of constituents: donors who give money to a cause;
volunteers who donate their services; or employees who provide high levels of commitment. Yet, as we have seen,
passion engenders its own governance problems. In many cases, the social entities that are best placed to judge
quality are the users or customers themselves.
Through her detailed studies of the management of water resources in California, Sri Lanka and elsewhere, Elinor
Ostrom, a professor at Indiana University, concludes that the best-governed facilities utilise users as monitors. In an
entirely different context, communities of “open source” computer programmers, such as Apache (which is organised
as a non-profit foundation), rely upon users to write and debug code.
Another example is the Grameen Bank, a for-profit entity set up to provide microcredit loans to the rural population of
Bangladesh. The loans are generally made through non-profit organisations or organisations owned by the
borrowers. Founded in 1976, the Grameen Bank now has 4.35m customers, 96 per cent of whom are women. It is
currently self-sufficient and does not accept donations. Despite charging close to market-rate interest rates, the bank
has low rates of default due to intensive education and the use of co-operative groups to provide help, monitor
finances and facilitate collection.
This model has been adopted by many other organisations, such as the Self-employed Women’s Association (Sewa),
an Indian trade union that offers microcredit to more than 250,000 women through a co-operative bank.
However, relying upon local initiatives and monitoring for governance may not be enough. The Women’s World
Banking is a non-profit financial institution that consists of a network of affiliates and partners, such as Sewa, that are
engaged in microlending to women. Funding and advising the network are a few national governments, international
institutions and qualified individuals. Implicitly, the network is engaged in diffusing self-regulatory guidelines by
establishing success and performance factors, because local governance by mutual monitoring does not seem
sufficient, at least to large donors.
Social entrepreneurship
The Grameen Bank represents a hybrid of for-profit and non-profit organisations and is more correctly an example of
social entrepreneurship than the classic non-profit. It is easy to understand why social entrepreneurship is in vogue.
The past decade has generated considerable wealth through venture capital and new businesses, and many of the
founders of these businesses, keen to “give something back”, feel at home funding organisations that understand
their language. At the same time, the many governance problems that plague non-profits are easier to control in for-
profit companies pursuing social objectives.
Why should this claim be true? There are several reasons. One is that for-profit companies are constrained by a more
tested body of law and regulations that require greater transparency. Economic performance measurement focuses
the attention of the board and management on achieving self-sufficiency and establishes a culture that attends to
efficiency and to the analysis of trade-offs among objectives. And perhaps most importantly, it encourages the
employment of professionals, paid appropriately for their services, who are rewarded for innovative solutions to social
ills.
These new hybrid organisations pose their own unique governance problems. The most obvious conflict is the
potential that social entrepreneurial enterprises will attract capital investment donations aimed at improving social
welfare, but that passion will eventually succumb to profit and permit “excessive” remuneration. Whether such an
evolution is intrinsically bad so long as the “job gets done” will be the explosive question of this organisational form.
Summary
A surprising fact about non-profits is that they largely work without major scandals. One study found only 152 cases
of alleged criminal wrongdoing by the primary fiduciary individual among US charitable non-profits between 1995 and
2002. Given the many governance problems noted above, this figure is either encouraging or a reason for scepticism.
There are many governance practices that should be standard policies among non-profits. In general, there should be
a strong bias towards transparency. Since non-profits pursue social objectives, they are under greater moral
obligation to reveal relevant information. Although non-profits often rightfully care about competition, the resistance to
release information due to competitive pressures is relatively harder to justify.
Board members should be rigorously scrutinised and easily replaced should the need arise. It is particularly important
that practices such as staggered elections are curtailed, and that there should be transparency around board
appointments and expenditures. External board members who donate neither money nor time and competence
should quickly exit. Boards should meet standards of competence in audit and compensation committees, or lacking
such competence, they should pay for the appropriate counsel. They should establish quantitative and qualitative
performance measures, tied to social objectives, and report the success annually.
The weakness of boards provides ample opportunity for management and specialised employees to operate without
oversight. For this reason, it is critical to declare top management compensation relative to total compensation, and
also to relate compensation to the achievement of strategic goals, such as educational or achieved health quality, or
charitable payouts.
It is often forgotten that a primary purpose of governance is not simply control, but to provide inspiration with
guidance. A great enterprise is marked by vibrancy at all levels, and the mark of a good governance system is a
balance between control and inspiration, oversight and innovation. To some sceptical observers, it is surprising just
how well non-profits generally succeed in delivering cultural, welfare, and co-operative services, despite many
obstacles. Perhaps the governance advantage of non-profits is nothing other than the stubborn passions of wanting
to contribute and to change the world for the better. In this case, the best metaphor for good governance of the non-
profit is the sensitive plumber who installs a few pipes and regulators here and there without wasting a reservoir of
passion on the kitchen floor.
Shuffling the deck for boardroom

diversity
By Val Singh
A key feature of corporate boards in western countries is that their members are predominantly white males from
similar corporate, social and educational backgrounds.
Such homogeneity does not reflect the modern perspective on stakeholders or the changing nature of the business
world. Diversity is important, so what impact is it likely to have on issues of corporate governance and how can
increased diversity on boards be achieved?
The business case for diversity
Diversity refers to the characteristics by which individuals categorise their social identity or are categorised by others.
The most obvious of these are sex, race, age and ability/disability. But there are many other differences that
individuals bring to their jobs, such as their human capital qualities (education, skills, work and other experiences,
personalities, managerial style, thinking style, learning style, judgment and values) and their social capital (access to
resources from their social and business networks).
Diverse board appointments, including of women and ethnic minorities, make best use of the entire talent pool.
Women have different experiences of the workplace, marketplace, public services and community to men, and this
perspective allows insights that facilitate deeper discussion and creative solutions. Similarly, individuals from ethnic
minority backgrounds offer a unique perspective on cultural differences. In turn, this can facilitate the building of long-
term relationships in a rapidly globalising world.
Board heterogeneity may mean that new people take longer to settle. But if the culture is welcoming and open, there
can be group-level learning that has a positive impact on team behaviours and outputs. Nanette Fondas and Susan
Sassalos, US-based gender diversity experts and business writers, say that women directors prepare conscientiously
for board
meetings and are especially keen to make an impact, in part because they are aware of the increased scrutiny of
their performance due to gender stereotyping. In a study of 115 large US companies, they found that boards with
women directors had significantly more influence over management decisions than all-male boards.
The presence of women directors can lead to more civilised boardroom behaviour, a more interactive and
transformational board management style and sensitivity to other perspectives, such as employee and community
concerns, business ethics and environmental impacts. Studies have consistently shown that women directors have a
positive effect on recruitment and retention of women employees, symbolising the possibility of advancement.
Proponents of the business case for diversity advocate that modern boards should be representative of their
customer and employee base. So, companies employing many women or those selling products targeted at women
are likely to be challenged about lack of diversity on their boards.
In the US, such challenges are starting to come from stakeholders such as large pension fund investors. In the UK,
female shareholders have started to make similar comments at annual general meetings, and chairmen need
plausible answers. While some merely see this as feminist activists pushing their cause, it should lead chairmen and
CEOs to consider why fewer women than men have not made it to board level in their organisations after 30 years of
equal opportunities. The “women are still in the pipeline” theory should be well past its sell-by date – and it reflects
badly on leadership.
Barriers to change
The business world has been slow to recognise the talent of women other than in support roles. Part of the reason is
that those in power tend to appoint people like themselves. Thus, leaders become stereotyped as male, with
masculine ways of leadership.
Aspiring women have to break down these obstacles, but with fewer female role models, some turn to a masculine
style, emulating successful men. But leadership should encompass both masculine and feminine styles for the
advantages of diversity to be achieved.
Women’s contributions are often invisible – they are good organisational citizens but tend not to promote their
contributions and, thus, are not recognised as potential leaders. Moreover, their different ways of doing things are
sometimes seen as weaknesses by male counterparts.
If women are not offered challenges, then their ability and confidence do not develop and they will be less qualified
for promotion. When they do break through to senior roles, they are often marginalised, cut off from social support,
and risk being seen as only representative of women rather than as individuals. Many turn away and seek satisfaction
from other parts of their lives. Thus, much talent is wasted by companies who do not facilitate a return to the high-
flying career track for women after maternity leave or after a year or two of part-time work.
Research consistently reveals a wide divergence between how women perceive the obstacles to becoming directors
and the views of senior males. Senior women identify persistent sex-role stereotyping and the old boys’ club nature of
top management. Meanwhile, male CEOs see it as a lack of relevant experience and the pressures of family
commitments. What is more, they think that the best women will eventually appear in the pipeline.
The Higgs Report
The Higgs Report of 2003 made a series of recommendations on the role of non-executive directors, including how to
improve diversity. Although the report focused on UK companies, the broader lessons of how things have developed
since its publication are relevant wherever there is persistent homogeneity in the boardroom.
More female directors
The 2004 Female FTSE Report, an annual assessment of women’s progress in the boardroom, revealed there were
110 women directors on FTSE 100 boards, compared to 84 in 2002. But when it comes to executive positions the
barrier has not been lifted, and women account for only 4 per cent of all executive directors in the FTSE 100.
Initiatives to address the pipeline question are also growing. For example, Sir Roy Gardner, CEO of Centrica, a UK
energy provider that topped the 2004 Female FTSE Index with a 33 per cent female board, has been championing
diversity strongly and the company now has 13 women just below board level.
Sir Roy is one of 24 FTSE 100 chairmen and CEOs who work with Women Directors on Boards, a consortium of
senior women from industry, academia and government. Each FTSE 100 leader volunteers to mentor a woman
executive from the “marzipan” layer (for example, deputy directors) of a non-competing company, and nominates a
senior woman from their own company, with a view to supporting preparation for non-
executive positions. Both mentors and mentees in this innovative scheme network as groups, to share experiences
and identify best practice.
Evaluating board skills, knowledge and experience
Assessing the balance of board skills, knowledge and experience “is an obvious but frequently neglected part of
ensuring that the right people are appointed”, according to John Roberts and Philip Stiles of the Judge Institute at
Cambridge, and Terry McNulty of Leeds Business School.
The Female FTSE Report showed that 84 per cent of top companies now have a process to review regularly the
balance of skills, knowledge and experience of their directors, and particularly when appointing a new director.
Diversity should be one of the indicators but companies with all-male boards were significantly less likely than
companies with female directors to review regularly the balance of skills and experience of their board.
The director appointment process
The appointment process has become more transparent. By late 2004, 77 per cent of FTSE 100 companies had put
details of the appointment process in their governance statements online, including terms of reference for the
nomination committee. Some even noted the appointment process of individual directors, to show due diligence.
Another feature of governance statements is formal approval of use of search consultants, reported by 72 per cent of
top companies. Search consultants are actively engaged in identifying talented women and ethnic minority directors,
as well as potential directors from the wider sources of public and voluntary organisations.
But in March this year, Korn/Ferry International’s Annual Board of Directors study across 14 countries reported that
new “diverse” appointments were still coming from the “familiar corporate club” circles. Luke Meynell of Russell
Reynolds Associates, an executive recruitment company says that, as the role of non-executive directors becomes
more complex, “[it] looks less and less like one that people without specialist knowledge can take on”.
To some extent, this could be addressed by training non-executive directors, but this raises another challenge for
would-be directors coming from other sectors. There has been an increase in companies reporting induction for new
directors, up from 63 per cent in 2003 to 81 per cent in 2004, and 69 per cent also reported offering ongoing training.
Training would be good for women and minority directors to get off to a good start and to be integrated in team
development. An inclusive board that welcomes diversity is more likely to tap into the additional resources that the
newcomers bring, as well as learn from their differences.
Diversity and good governance
In the Female FTSE Report, 13 indicators of good governance were studied in relation to gender diversity.
Businesses with women directors, especially those with multiple directors, had significantly higher governance scores
overall (see figure 2). There was a strong correlation between female representation with review of board
performance and balance of skills, knowledge and experience, as well as with board independence measures, board
development processes and succession planning.
Of course, this does not prove a causal link between appointing women and better corporate governance. But it does
show that the companies that have instigated the structures and processes recommended by the Higgs Report for
better corporate governance are those that benefit from diversity.
How to manage diversity for better corporate governance
To achieve improved diversity, there are three key areas that companies must address.
• Change the culture
It is not enough to say that a company values diversity. The real benefits that diversity can offer come when
individuals are valued and differences respected, when access to developmental opportunities is open to all, and
when different voices are allowed to make a contribution from which the organisation, including the board, can learn.
This is not a “tick-box” exercise. It requires genuine understanding, openness and a positive attitude to change.
Therefore, chairmen and CEOs need to champion the change and hold managers to account for their own diversity
management performance.
• Review the director appointment process
To move things forward, any unintentional bias against candidates with diverse characteristics needs to be identified.
This includes review of the composition of the nomination committee, the involvement of search consultants and the
final selection interview. Are the listed requirements really essential? Do they discourage applications from those with
non-traditional backgrounds or from women? Are the search consultants charged with actively seeking diverse
candidates? Are those creating the shortlist only choosing people like themselves? Is the interview long and friendly
enough for women candidates to relax and overcome stereotyping based on first impressions? Are the candidates
offered feedback to help them retain their place in the talent pool? Is mentoring offered to new directors?
• Manage the pipeline
If the pipeline is treated as a supply chain, then sustainable change can occur at executive levels that in turn leads to
a wider talent pool for non-executive director positions. Talent management and leadership programmes can help.
Women’s corporate networks are starting to show results, with senior women engaging in mentoring and networking
events, helping talented women to show their potential to their corporate leaders.
Conclusions
Diversity is valuable, but only those with the appropriate skills, knowledge and experience should get a directorship; it
makes little sense to lower standards to address a lack of diversity on boards.
Action is needed to ensure that the best talent from across the whole pool is stretched, challenged and prepared for
leadership, and that the appointment process is genuinely open and based on merit rather than on informal
connections. Only then will the diverse ways of being, thinking and doing help boards to govern more independently
and effectively.

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Good Governance

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Part-1 SAFE HANDS AT THE HELM

Positions of power demand a fine

The balance between CEOnand board depends on a company’s key issues

How the CEO and board should build a strategic plan

Legal, organisational and ethical issues

Time for investors to come in from the

The responsibility of institutional investors

The role of institutional investors

Structures to help directors reach the

When governance decisions fail

When governance decisions succeed

Building composition and policies for board decisions

Building the process and culture for board decisions

The difference good governance decisions make

Part-4 THE PURSUIT OF GOOD GOVERNANCE

Published: June 9 2005 17:08 | Last updated: June 9 2005 17:08

The evaluation process

Who should conduct the evaluation?

What are the issues to be covered?

What form should the evaluation take?

How should the information be handled?

Published: June 9 2005 17:08 | Last updated: June 9 2005 17:08

• Understand and influence management risk appetite

• Take a portfolio view of corporate risks

Quantitative risk assessment

Risk assessment techniques

Why good causes need governance

Published: June 9 2005 17:08 | Last updated: June 9 2005 17:08

Donors and taxes

Volunteers and employees

Shuffling the deck for boardroom

Published: June 9 2005 17:08 | Last updated: June 9 2005 17:08

The business case for diversity

The Higgs Report

More female directors

Evaluating board skills, knowledge and experience

The director appointment process

Diversity and good governance

How to manage diversity for better corporate governance

• Change the culture

• Review the director appointment process

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