|
 |
|||||||
|
|
|
|
|||||||||||||||||
|
|||||||||||||||||||
|
|
||
|
Feature Our results show that having multiple C-suite executives attend board meetings is associated with the most effective board performance. By David Finegold and Edward E. Lawler III The presence of C-level executives at corporate board meetings used to be assured. Several of them were typically on the board and, as a result, had a chance to participate in board discussions and decision making. Thanks to new regulations by the stock exchanges and other corporate governance changes, senior executives are a vanishing breed on their corporation’s board. Today, almost half of Fortune 1000 boards have only one inside director — the CEO. A recent study we did with Mercer Delta of 200 corporate boards found that the CIO and head of marketing were not on any of the boards, the head of HR was on just one board, and the CFO was on seven. But in most companies non-director executives do attend board meetings. Our data show that the CFO is almost always at board meetings as is the chief counsel. The heads of business units, the head of HR, the head of marketing, and the CIO are at board meetings about half the time. The Potential Advantages There are a number of potential advantages to having the non-director C-level executives attend board meetings. They can provide information about how the firm is performing and, more importantly, why it is succeeding (or not) that may be hard for the board to obtain just from reviewing financial statements. Having executives regularly present at meetings can also help build personal relationships and independent lines of communication for directors with top management, which should help with succession planning, provide an early warning system for any ethical issues, and help avoid too much power being concentrated in the CEO. At the same time, it can also help executives better understand the board’s wishes and strategic advice. To test whether these potential benefits occur in practice, we compared the performance of boards with high attendance levels by non-director executives to those with low attendance levels. We based our assessment of board performance on ratings by board members of different board functions. In this analysis we focused on the presence of CIOs and heads of marketing, HR, and business units. Since CFOs and chief counsels are almost always present, we could not determine the impact of their presence/absence. Communications and Monitoring The more frequently CIOs attended board meetings, the better boards function when it comes to communications, independence, and monitoring of corporate performance. Boards also perform better when the heads of HR and marketing attend board meetings, but the relationship is strongest in the case of CIOs. When it comes to issues of communication and monitoring, it is not surprising that the presence of the CIO has a strong positive impact on board effectiveness. CIOs not only are in a position to deliver information to boards, they can potentially work with the board to develop new sources of information and be sure that the board’s needs for information are met. Performance Management An important part of every board’s activity is performance management. Boards need to evaluate CEO performance, but their evaluation activities don’t stop there. As a result of the Sarbanes-Oxley legislation, they are also expected to evaluate themselves, board committees and, in some cases, they have chosen to evaluate individual directors. We found a strong relationship between the presence of C-level executives at board meetings and the effectiveness of the performance management behavior of boards. The more that CIOs and the heads of HR and marketing are present, the more effective the performance management activities of the board are judged to be. This is particularly true with respect to assessing the CEO’s performance. The presence of the CIO seems to make the biggest difference in the effectiveness of the board’s evaluation process. The reason for this may be the ability of the CIO to provide information to the board and provide information technology that supports the evaluation process. Strategy and Succession There are two additional activities that boards engage in which may be performed better when non-director executives are present. One is shaping the long-term strategy of the company, and the second is CEO succession. When non-director executives are present, boards tend to be more effective in shaping long-term strategy, and in planning for CEO succession. One obvious reason why succession may be improved by the presence of executives is that they can be evaluated by the board and this in turn can lead to better decisions on who becomes the next CEO. The relationship with strategy is most likely due to the extra information that is available when the CIO and other executives are present. Overall Effectiveness The most effective boards were the ones that had the greatest attendance by non-director executives. The presence of the CIO had the strongest impact, but the presence of business-unit heads, heads of HR, and heads of marketing had a positive impact as well. Overall, our results show that having multiple C-suite executives attend board meetings is associated with the most effective board performance. Easy Implementation We know of no historical data that track the presence of non-directors at corporate board meetings. Thus, it is impossible to state whether this practice has increased or decreased. Our belief, however, is that it has increased significantly in response to the recent changes in corporate governance. In the past, a significant number of the key executives in companies were on the board, so they were in a position to carry out the decisions of boards and to provide boards with information. Now that fewer executives are on U.S. company boards, a substitute needs to be found for them. The answer is a relatively simple one to implement — have key members of senior management who are not on the board be present at some or all board meetings. Now that boards are so heavily dominated by outsiders, without top management team members present, there may be no one to speak for the inside except for the CEO. There are obvious problems with the CEO trying both to represent and depict what things are like in the organization and to be the only one to carry the message from the board to the rest of the company. A shared leadership model is needed in which individuals who are not on the board help lead the organization in the right strategic direction. The ability to do this is much greater if the leaders of an organization attend board meetings. Not the Cure-All Having non-board members present at meetings is certainly not a cure-all for the ills of corporate boards, but our data suggest that it is one piece of the puzzle that needs to be in place for boards to be effective. When it comes to many decisions that boards make, transparency and implementation are the key issues. Having non-board member executives present is a way to help achieve both these goals. What does the future hold? We think it should involve a critical role in board meetings for senior executives who are not on the board. The advantages are many, and the drawbacks are relatively few. |
||
| David
Finegold is dean of the School of Management and Labor Relations at
Rutgers University. He can be contacted at dfinegold@smlr.rutgers.edu.
Edward E. Lawler III is the founder and director of the Center for
Effective Organizations in the Marshall School of Business at the
University of Southern California. He can be contacted at elawler@marshall.usc.edu. Copyright © 2006 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
|||
