Book Review of “Boards That Lead” (Harvard Business Review Press)

 

Authors Charan, Carey and Useem

Authors Charan, Carey and Useem

Boards have been put in place to provide governance for the high level decisions that need to be taken by a company. In fact, the board can be seen as the “head over the head”, with reference to the CEO, and it can make or break the company simply because it appoints the commander-in-chief.

In this book, Charan, Carey and Useem (2013) give readers a peak into the internal processes of boards, their functions and how boards can successfully lead companies to greater heights. One of the defining examples given within the book is that of Motorola’s board’s which made a poor call in replacing its CEO Galvin just before the Razr, which was touted to be the company’s turnaround product, was launched, without giving him the opportunity to prove the success (or failure) of the product. The consequence was that the new CEO was credited for its success, and the company rested on its laurels, while competitors like Samsung and Nokia pushed forward in riding the telecommunication wave of advancing technologies, gnawing away at the lead and market share of Motorola, and making it irrelevant.

Then there are boards that have successfully navigated along with appointing their CEO and in making major decisions that have added tremendous value to shareholders. A defining example of this is P&G and its CEO A.G Lafley and their decision in acquiring Gillette. Lafley had to answer difficult questions from the board with regards to the reasons behind the acquisition since that division that it would fall under was already doing well. The board grounded him with other issues pertaining to whether it would be better for them to “make” (build) rather than “buy” (acquire), the compatibility of cultures to achieve cost synergies, and other areas that involved shareholder returns.

The good: Contains excellent examples of life cases that have passed, and the retrospective layout of those cases that help readers connect with the events that unfolded at the time of those cases. The summarised action points at the end of each chapter allows busy readers to takeaway key thoughts to chew on at their own time of reflection.

The bad: The content could be better packaged in a tighter format. Some of the principles, while worthwhile being elaborated, should be done so in a more concise manner.

This book is meant for those who are already in and aspiring to be in boards. It also provides CEOs an overview of how they can work closely with their boards to achieve the common objective of growing the value of the firms that they are in charge of.

Read an Excerpt:

10 Principles for Finding the Right CEO

When determining suitability to be CEO, directors will want to remind themselves of an obvious premise: no candidate is perfect. The goal is to understand the relative trade-offs among the candidates’ strengths and weaknesses, and to ensure that the prospects’ deficits are not in areas that are especially critical for company performance. While candidates’ visible accomplishments are prerequisites, rigorous referencing goes deeper, exploring how the results were achieved, including leadership style and capacities—all essential inputs. From the directors, executives, and specialists whom we have witnessed, worked with, and interviewed, and from our own search and consulting experience, we draw ten principles for executives and directors to guide the executive succession process.

1. People set strategy.

American baseball legend Yogi Berra warned, “If you don’t know where you’re going, you might not get there.” Berra was famous for his “Yogi-isms,” but this one contained an essential truth: inchoate strategies and ineffectual leadership generally go hand in hand. Conversely, directors and executives who know where the company should be going will be best equipped to guide it there.

2. Implement a CEO and successor evaluation methodology.

Link an evaluation system to the company’s central idea, its competitive strategy, and prospects’ individual capacities and performance, with the latter focusing on their integrity and ethics, team building, execution excellence, shareholder return, and personal gravitas—and ability to work in the boardroom. More generally, the board leader will want fellow directors to be clear-minded and in agreement about the leadership criteria used to compare candidates.

3. Include in the CEO’s evaluation an assessment of how well the company is building a succession plan for the next generation of company leaders.

On this issue, much work is yet to be done. When we asked the chief human resources officers at a number of major companies whether they had a coherent system in place to evaluate and compensate the CEO’s succession performance, most reported that their firm had none. And even those who did have at least the rudiments of such systems in place said that the reward system was still too weak to effectively guide the CEO’s actions.

4. Place the board leader in charge of the succession process.

By tackling the job in partnership with a still-effective chief executive, the board leader can help root the process deeply in the company’s management development, preventing succession from becoming an event-driven crisis. It is also helpful to consider both short-term disaster scenarios—are one or two lieutenants ready now to replace the chief executive if an accident or illness suddenly disabled the top executive?—and long-term outcomes—will a handful of executives be ready candidates to replace the CEO after a planned exit five years in the future?

5. Retain a high-performing chief executive, but also work to keep capable successors.

Able executives who have learned how to run an enterprise are likely to be itching for a CEO opportunity. Effective succession also requires offering incentives to these potential chief executives—including extra compensation—to retain their presence as CEOs-in-waiting if a well- performing chief executive still has ample energy in the battery.

In the wake of Johnson & Johnson chairman and CEO William C. Weldon’s decision to step down as CEO in 2012, for instance, the directors and CEO first settled on two final candidates—Alex Gorsky and Sherilyn S. McCoy—and then arranged to appoint them both as company vice chairs of the executive committee, pending a final succession decision. In the end, they opted for Gorsky, who had returned in 2008 from a stint as head of Novartis’s North American pharmaceuticals, in part because his execution credentials were deemed particularly important at time when the company had been plagued by execution shortfalls. Whichever way the board went, it had cultivated two strong successors well before the succession event.

Efforts to retain prospective successors do not necessarily end when the succession itself concludes. Those who are passed over are still among the firm’s topmost talent; after all, they had just been considered viable corner-office candidates. Both the new chief executive and the directors have their work cut out for them to retain an executive who has been visibly passed over, especially with executive search firms perceiving a recruitment opportunity.

6. Seek candid comparative data on inside CEO candidates from those who have worked with all of them.

GlaxoSmithKline’s 450-degree assessment, which confidentially vetted the views of all company executives who had worked with the three final candidates, is a useful illustration of this data-seeking process. Administered by either a trusted insider or a third party, the 450 yields comparative data on finalists, all of whom are obviously very strong leaders in their own right. Using such data sometimes yields surprising results. At GSK, the dark horse emerged as the best choice by a wide margin once the additional comparative data was compiled.

7. Make direct contact with both sources and candidates to verify information.

Even when engaging a third party, boards cannot fully hand off the vetting process. Directors will want to personally check on references, especially valuable where they have a preexisting tie with referees. A few trusted sources can yield far more useful data than a large number of less certain sources. In the absence of a trusted relationship, references can sometimes reveal little inside information or, sometimes, false information. As an example of the latter, one source claimed that a top candidate was an alcoholic, but when further vetting with more trusted sources confirmed no such behavior, the company chose the falsely accused candidate as its chief executive. In the end, a personal meeting of directors with the finalists can yield still further information, especially around whether the candidates are likely to prove strong partners with the directors.

8. Review outside consultants carefully to prevent conflicts of interest.

Intentionally or not, executive search consultants hired to help with a CEO search can sometimes offer an overly affirmative view of a candidate they have sourced or an overly skeptical view of one they have not had a hand in finding. In one instance of the latter, a board’s external search led directors to identify an executive at a Fortune 100 company who was ready to accept the job. As a final step in the process, the board retained an outside consultant to make one last evaluation of the candi- date that the board, not the consultant, had identified. This consultant, however, reported a serious defect in the candidate and urged against the executive’s appointment. When the board then turned to one of us, we found no evidence of the alleged shortcoming and recommended the executive’s appointment. We also found reason to believe that the first consultant had hoped for a new CEO search assignment if the candidate he opposed was rejected. The company finally went with its initial preference, and the new chief executive performed exceptionally well over the next five years.

9. Maintain confidentiality.

We have seen stellar CEO candidates drop out of consideration when their identity is inadvertently revealed, especially if they are serving as a chief executive elsewhere. Journalists inevitably circle during a high- profile external search, and communicating orally and avoiding media contact can help preserve confidentially. One way to prevent a damaging revelation is to ask outside references for guidance on a candidate not for a CEO position but rather for a board seat. Now that boards increasingly partner to lead the enterprise, not just monitor management, many of the same leadership qualities that make for an effective director also make an effective chief executive. Thus, board-seat evaluations can provide a veiled but useful appraisal of CEO-related competencies.

10. Embed succession planning in corporate culture.

Creating a culture of executive succession entails many steps, including performance incentives for executives to build the system, a development capability that repeatedly reaches large numbers of managers, coaching and mentoring by both directors and executives, and an openness to both inside and outside candidates. Above all, it requires an active partnering between the directors and the chief executive to preemptively ensure that their pipeline is full and its occupants are developing in the upward direction.

Reprinted by permission of Harvard Business Review Press. Excerpted from Boards That Lead by Ram Charan, Denis Carey and Michael Useem. Copyright 2014. All rights reserved.

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5 thoughts on “Book Review of “Boards That Lead” (Harvard Business Review Press)

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