Principles of Corporate Governance

I n its 2004 .Principles of Corporate Governance , . the . international . Or- ganization . for .Economic . Cooper - ation . and .Development . (OECD) . describes . corporate . governance . as .“a . set . of .relationships . between .a .company’s . management, .its . board, .its . shareholders . and . other . stakeholders.” .At . first . glance . this . statement . isn’t .particularly . earth . shattering. .If .anything, .it’s . painfully . ob - vious. . But .if .you .focus .on .the .word .“relation - ships” .— . a .word . that .lies .not . only . at .the . heart .of .the .sentence .but .of .corporate . governance .as .well .— .things .get .more . complicated. .Why? .Because .relation - ships .among .these .groups .are .anything . but .simple. .They’re .what .negotiation .ex - perts .call .“mixed-motive” .relationships, . and .they’re .exceedingly .prone .to .break - down .and .failure. . Consider .a .recent .Booz .Allen .Ham - ilton .study .of .the .world’s .2,500 .largest . publicly .traded .corporations. .Calling . record-high .turnover .among .executives . “the .new .normal,” .this .study .reports .that . forced .turnover .among .CEOs .rose .318% . since .1995. .In .2006, .one .out .of .ever y . three .CEOs .left .involuntarily. .Nearly . a .quarter .of .the .forced .departures .fol - lowed .from .conflicts .w ith .the .board . — .up .from .2% .in .1995. .In .each .case, . shareholders .ended .up .footing .the .bill. These .stat ist ics .reflec t .at .a .macro . level . pervasive . turmoil .at .a .human . level . — . turmoil . that .can .only . be .understood . by .looking .at .the .shifting .relationship . between .boards .and .CEOs. Two .cases .I .studied .illustrate .the .point. . In .the .first, .a .young .entrepreneur ial . CEO .of .a .fast-growing .firm .was .under . siege .from .her .board .after .an .especially . tumultuous .year. .While .the .firm’s .re - sults .were .still .strong, .the .board’s .activ - ist .chairman .quite .rightfully .worried . about .the .organization’s .longer-term . health. .Why .was .there .so .much .turn - over .in .the .higher .ranks? .Why .wasn’t .she . sticking .to .the .firm’s .strategy? .Was .she . too .volatile .and .opportunistic .to .take . the . organization . to .the . next . level? . These . are .exactly .the .kinds .of .questions .boards . are .charged .with .asking .and .CEOs .are . charged .with .answering. . Chairman’s tirade Yet .that .isn’t .what .happened. .Instead, . having .privately .reached .his .own .conclu - sions, .the .chairman .more .or .less .subtly . launched .one .criticism .after .another .at . the .CEO. .Feeling .undermined .and .out - raged, .the . CEO . retaliated . in .kind, .coun - tering .each .“attack” .with .one .defensive . maneuver .after .another. .Unable .to .see . eye-to-eye, .each .brought .the .worst .out . in .the .other, .making .it .impossible .for . them .to .fulfill .their .governance .respon - sibilities. .Indeed, .far .from .creating .value . for .the .organization, .their .relationship . was .systematically .destroying .it. .Had .the . two .not .had .the .good .sense .to .get .help, . the .CEO .might .easily .have .ended .up .as . just .another .statistic. In .the .second .case, .just .the .oppo - site .happened, .but .with .similar .results. . Despite .mounting .worr y .over .an .18- month .period, .the .board .members .of . a .well-known .manufacturing .company . were .unable .to .stop .the .firm .from .slip - ping .ever .further .into .the .doldrums. .The . company’s .CEO, .who .fancied .himself .a . master .at .“managing” .public .boards, . 64 directors & boards endnote The heart of the matter Good governance depends on good relationships between the management and the board. Sounds simple and straightforward? It’s not. By diana McLain smith Continued on page 63 Diana McLain Smith is the author of Divide Or Conquer: How Great Teams Turn Conflict into Strength (Portfolio/Penguin USA) and a part- ner at the Monitor Group, a global manage- ment consulting firm. Her Web site is www. dianamclainsmith.com. Unable to see eye-to-eye, the chairman and the CEO brought the worst out in the other. fourth Quarter 2008 63 endnote Advertiser index Drexel University Corporate Governance Center www.lebow.drexel.edu/centers/corpgov . . . . . . . . . . . . .page 11 Drinker Biddle & Reath LLP www.drinkerbiddle.com.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 3 FTI Consulting www.fticonsulting.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 9 Gevril www.gevril.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 13 Heidrick & Struggles www.heidrick.com .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 5 Kroll www.kroll.com . . . . . . . . . . . . . . . . . . . . . . . . . . .inside front cover Navigators Pro www.navg.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .back cover Seyfarth Shaw LLP www.seyfarth.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 7 Sidley Austin LLP www.sidley.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 17 Stanford Law School www.directorscollege.com. . . . . . . . . . . . .inside back cover University of Delaware www.udel.edu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 16 spent .days .every .quarter .preparing .air- tight .presentations .that .anticipated .every . possible .question, .challenge, .or .criticism . that .might .come .his .way. .The .board, .dis - couraged .by .the .CEO’s .pat .presentations . yet .loathe .to .interfere .in .his .management . of .the .firm, .tacitly .complied. .It .wasn’t . until .the .firm’s .stock .price .collapsed .that . the .directors .finally .took .action, .firing . the .CEO .and .half .his .team. In .an .ideal .world, .cases .like .these . would .be .the .exception, .not .the .“new . normal.” .In . that . ideal . world, .boards . and . CEOs . would . jointly . define .their .compa - ny’s .strategic .challenges, .jointly .identify . the .information .needed .to .address .them, . jointly .assess .the .CEO’s .developmental . needs, .and . jointly . ensure . accountability . for .results. .In .the .real .world, .this .hap - pens .all .too .rarely. .Why? B e cause .we .have .our .attent ion .so . squarely .focused .on .individuals .— .on . their .personalities, .their .performance, . and .their .potential .— .that .we .pay .little . attention .to .the .quality .of .the .relation - ship . between . a .company’s . management . and .its .board. .Yet .my .studies .suggest .that . these .relationships .have .a .profound, .even . decisive .impact .on .a .CEO’s .personality . and . performance . and .whether . he .or .she . can .realize .a .firm’s .full .potential. . The .bottom .line .is .this: .good .gov - e r n a n ce .d e p e n d s .o n .g o o d .re l a t i o n- ships. .When .relationships .break .down, . neither .b o ards .nor .CEOs .can .effe c - tively .fulfill .their .governance .duties. . As .boards .continue .to .redefine .their . roles .and .become .more .active, .it’s .im - per ative .that .the y .g ive .relationships . the .time .and .attention .the y .require. . W h e n .t h e .e n t r e p r e n e u r i a l .C E O . a n d .h e r .b o a r d .c h a i r .d i d .j u s t .t h a t , . they .successfully .worked .together .to . change .the .p olar ized .dynamics .that . were .undermining .her .ability .to .lead . and .their .collective .ability .to .govern. . A .year .later, .the .problems .that .so . wor r ied .the .chair man .and .thwar ted . t h e .C E O .w e r e .n o .l o n g e r .a n .i s s u e , . a n d .t h e .t w o .w e r e .a b l e .t o .p u t .t h e i r . a t t e n t i o n .w h e r e .i t .m o s t .b e l o n g e d : . o n .g r o w i n g .t h e .e n t e r p r i s e . . . . . . . . ■ The author can be contacted at dianamsmith@comcast.net. Heart of the matter Continued from page 64 The relationship with the board has a decisive impact on a CEO’s personality.
 


Other related articles

  • Directors to Watch 2021: Ethnic and Racial Diversity in the Boardroom
    Published November 24, 2021
    By Scott Chase
    Ethnic and Racial Board Composition Shows Slow GrowthnbspCompanies that dont accelerate the process will suffernbspnbspnbspA counterintuitive finding from a new study published in October shows effort ...
  • The Legislation That Created Modern Governance
    Published November 23, 2021
    By April Hall
    Three bills aimed to lay the foundation for corporate accountability and transparencynbspnbspnbspThree foundational federal corporate laws passed over the last 45 years shared a key goal to renew the ...
  • The Impact of the Foreign Corrupt Practices Act on Corporate Boards
    Published November 23, 2021
    By Michael Marquardt
    Tone at the top now includes ensuring business dealings are ethical and bribefreenbspnbspThe impact of the Foreign Corrupt Practices Act FCPA on corporations and their boards of directors has been eno ...
  • The Lasting, Positive Impact of Sarbanes-Oxley
    Published November 23, 2021
    By Michael W. Peregrine
    SOXs effect on corporate accountability is farreaching and effectivenbspnbspNext year will mark the 20th anniversary of the passage of the SarbanesOxley Act federal legislation that has had an enormou ...