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David A. Nadler
Mark B. Nadler
Mercer Delta Consulting LLC

Every Board Faces a Choice
It’s time for some new math: What value do you create?

By David A. Nadler and Mark B. Nadler

There’s a story once told by Felix Rohatyn, the renowned investment banker who served on literally dozens of corporate boards during his illustrious career. In the 1960s, he joined his first board -- at the Avis car rental company -- and was welcomed by the CEO with this piece of wisdom: “A really good board is one that only reduces the efficiency of the company by 20 percent.”

That pretty well sums up the low esteem in which boards have been held over the years. It certainly captures the disdain harbored by many CEOs who viewed their boards as inconsequential at best, and, at worst, as meddlesome obstacles to the efficient exercise of executive power. The possibility that boards might actually contribute some element of value just didn’t factor into the equation.

It’s time for some new math.

We’ve known for years that traditional boards were generally passive, compliant, and unproductive assemblages of individuals who would gather periodically to rubber-stamp the CEO’s edicts. It turns out that was the best scenario.

The scandals of recent years aimed the spotlight on one board after another where the pervasive cronyism, cowardice, and collusion produced a toxic combination of sloth and sleaze. Those revelations, and the public demand for reform, are forcing boards to look in the mirror and ask themselves profound questions about what role they should play in governing their organizations and how to constructively manage the shifting balance of power between the board and the CEO.

Every board faces a choice. On one hand, it can take the path of least resistance -- minimal compliance with the new technical requirements imposed by legislators and stock exchanges. To be sure, compliance is important, but in our view it represents nothing more than the lowest common denominator of sound governance -- a corporate version of the Hippocratic oath, “Above all, do no harm.”

Our firm belief is that directors and CEOs should choose the more difficult but ultimately more rewarding path of building better boards that actually contribute substantial value to the organizations they serve and the shareholders they represent.

Here’s an example of what we mean by boards adding value.

Henry Schacht, the retired chairman and CEO of Lucent Technologies, recalls that when Lucent was spun off by AT&T in 1995, the new company set up shop in the Bell Labs headquarters, a serviceable but somewhat outdated building that had seen better days. Schacht, something of an architecture buff, asked world-renowned architect Kevin Roche to begin working on plans for a brand-new headquarters building.

After months of planning, Schacht proudly took his proposal to the Lucent board -- which essentially asked him if he was out of his mind in light of all the other issues Lucent was dealing with at the time. “You know what? They were right,” Schacht told us later. “We had a tough discussion, and we ended up making a different decision than I would have made on my own, and that’s a good thing. That’s an operational definition of value-added.”

It’s more than an academic question to ask how much value Enron’s board would have contributed if it had questioned the bewildering off-the-books partnerships management was creating, or if WorldCom’s board had halted top management’s questionable accounting practices or loans to themselves, or if Disney’s board had exercised some control over Michael Eisner’s hiring and firing of top executives, or if Time Warner’s board had stood up to Gerald Levin and blocked the merger with AOL, a move that ultimately erased more than $200 billion in shareholder value. In each of those cases, the board not only failed to add value, it even failed to preserve value.

The good news is that in recent years we’ve seen more and more opportunities where boards have been adding value: at TRW, for instance, where the board stepped in and held the company together following the new CEO’s sudden departure to Honeywell; at Lucent, where the board prevented Schacht’s successor from making a series of potentially disastrous acquisitions; at Best Western International, where a badly fragmented board came together to block the CEO’s proposed spin-off of the company’s non-U.S. operations and then took an active role in working with management to rethink the strategy, design robust new performance metrics, and reshape the corporate culture.

As CEOs experience a diminution of their “imperial” powers and boards contemplate the best way to fill the leadership vacuum, there’s a unique opportunity for directors to commit themselves to a higher standard of performance.

We are absolutely convinced that active and appropriately engaged boards, drawing on their members’ collective experience, insights, and intellect, can partner with senior management in an environment of constructive contention to produce better decisions than management would have made on its own.

David A. Nadler (pictured at left) is chairman and CEO, and Mark B. Nadler is executive editor, of Mercer Delta Consulting LLC, a firm that works with top management and boards on executive leadership, organizational change, senior team development, and board effectiveness. Along with Beverly A. Behan, a partner in the firm’s corporate governance practice, the three served as editors of Building Better Boards: A Blueprint for Effective Governance, a book published in January 2006 by John Wiley & Sons Inc., from which this excerpt has been adapted with permission of the publisher. Copyright ©2006 by Mercer Delta Consulting LLC.

The authors can be contacted at david.nadler@mercerdelta.com and mark.nadler@mercerdelta.com. The book can be ordered through Amazon or the John Wiley websites.