ffirs.qxd 11/7/05 3:47 PM Page iii David A. Nadler, Beverly A. Behan, Mark B. Nadler, Editors Foreword by Jay W. Lorsch Q Building Better Boards A Blueprint for Effective Governance ffirs.qxd 11/7/05 3:47 PM Page ii ffirs.qxd 11/7/05 3:47 PM Page i Building Better Boards ffirs.qxd 11/7/05 3:47 PM Page ii ffirs.qxd 11/7/05 3:47 PM Page iii David A. Nadler, Beverly A. Behan, Mark B. Nadler, Editors Foreword by Jay W. Lorsch Q Building Better Boards A Blueprint for Effective Governance ffirs.qxd 11/7/05 3:47 PM Page iv Copyright © 2006 by Mercer Delta Consulting LLC. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or other- wise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies con- tained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Building better boards : a blueprint for effective governance / David A. Nadler, Beverly A. Behan, Mark B. Nadler, editors ; foreword by Jay W. Lorsch. p. cm. Includes bibliographical references and index. ISBN-13 978-07879-8180-8 (alk. paper) ISBN-10 0-7879-8180-X (alk. paper) 1. Boards of directors. 2. Corporate governance. 3. Boards of directors—Canada. 4. Corporate governance—Canada. 5. Boards of directors—Great Britain. 6. Corporate governance—Great Britain. I. Nadler, David. II. Behan, Beverly. III. Nadler, Mark B. HD2745.B85 2006 658.4'22—dc22 2005028782 Printed in the United States of America FIRST EDITION HB Printing 10987654321 ftoc.qxd 11/7/05 3:48 PM Page v Q Contents Foreword by Jay W. Lorsch vii Preface ix Part One: Board Leadership and Dynamics 1 A Blueprint for Building Better Boards 3 2 Board Composition 27 3 Director Performance 46 4 Board Leadership: Structures and Roles 67 5 Board Work Processes 84 6 The Role of Leaders in Shaping Board Culture 104 Part Two: Critical Areas of Work 7 Engaging the Board in Corporate Strategy 129 8 CEO Performance Evaluation 149 9 The Board’s New Roles in CEO Succession 172 10 The Board’s Role in Corporate Crises 192 11 Board Assessment 212 Part Three: Emerging Issues Outside the United States 12 Special Issues in Corporate Governance in Canada 233 13 U.K. Corporate Governance 254 Conclusion: Recommendations for Building Better Boards 273 v ftoc.qxd 11/7/05 3:48 PM Page vi vi CONTENTS Appendix: 2004 NACD Blue Ribbon Commission on Board Leadership 279 Notes 283 References 288 Acknowledgments 293 The Authors 295 Index 300 fbetw.qxd 11/7/05 3:48 PM Page vii Q Foreword I am pleased to write this foreword to Building Better Boards for two reasons. First, I have long had a high regard for David Nadler and his colleagues at Mercer Delta Consulting. I first encountered David in 1972 at Harvard Business School, where he was a first-year student enrolled in my course on human behavior in organizations. I soon realized that David had unusual insight and a special skill for under- standing how groups of people function. With a great deal more edu- cation and experience, he has become one of the world’s foremost experts on top management teams and groups. David also practices what he preaches. He has built a first-rate and highly collaborative consulting firm, and he and his colleagues under- stand top management teams very well. Now, in this book, they are applying that understanding to an even higher-level group: boards of directors. This is the second reason I am pleased to be writing this introduc- tion. Boards of directors are critically important institutions to the success of business firms, and in fact, to the global economy. If boards fail, companies fail. We have seen this simple but important truth play out time and again in the United States over the past several years, and there is similar evidence in the United Kingdom and other advanced economies of Europe. Some of these failures are the products of accounting misconduct and fraud, such as Ahold and Parmalat in Europe and Enron, Tyco, and WorldCom in the United States. But there are other, less dramatic examples of the connection between board failures and company failures. The performance shortfalls, man- agement succession problems, and strategic missteps at companies like Hewlett-Packard, Merck, and Morgan Stanley are clear recent indica- tors that when companies have problems, they can be traced back to dysfunction in the boardroom. Most proposed solutions to fix such boardroom failings have been in the form of new laws (Sarbanes-Oxley in the United States), new vii fbetw.qxd 11/7/05 3:48 PM Page viii viii FOREWORD guidelines (the Higgs Review in the United Kingdom), or new regu- lations (U.S. listing requirements at NYSE and Nasdaq). Although new requirements help pressure boards to be more effective, they only take us so far. The real action is around the board table and among the groups of people we call boards of directors. That is what this book is about—how to improve the actual functioning of boards. Like my own recent book Back to the Drawing Board: Designing Corporate Boards for a Complex World (with Colin Carter), David and his col- leagues put the focus on where the real action is—in the boardrooms of the world’s companies. This book presents sound and practical advice about how to build effective boards. It is thorough in that it examines who should be on the board and how to judge the performance of these individuals, the leadership of the board, and the critical activities that boards should perform. In my judgment, the advice is sound. Although each board must adapt these ideas to its own circumstances, I have no doubt that doing so will lead to boards that are truly effective in governing their companies. JAY W. LORSCH, Louis E. Kirstein Professor of Human Relations at Harvard Business School fpref.qxd 11/7/05 3:48 PM Page ix Q Preface It says something fairly significant about the evolution of corporate governance that throughout the first fifteen years of my career as a consultant to CEOs, I hardly paid any attention to boards. They just didn’t matter. For twenty-five years now, my colleagues and I have worked with CEOs on issues of organization, leadership, and change. This is close- in, sometimes intense work on issues at the top of the CEO’s agenda: the design of the organization, change management, leadership devel- opment, culture transformation, and strategy. But for our first fifteen years as a firm, through the mid-1990s, our work never directly involved the board of directors. Sometimes we’d help our clients pre- pare for board presentations on matters such as management succes- sion or changes in the organization or the strategy. But we never engaged directly with the board; in fact, we rarely spent much time talking about the board with our clients. The board, as such, wasn’t an important element of governance; it was just another meeting, a passive audience for presentations. Things began to change in the 1990s. Like everyone else, we watched with considerable interest the dramatic and unprecedented boardroom upheavals of 1992–93, when directors suddenly shook off their lethargy and unceremoniously removed the CEOs of some of the leading U.S. companies. In addition, we had the good fortune to encounter some forward-thinking CEOs who wanted to engage their boards in new and different ways. They asked us to help them figure out how to involve their boards constructively in critical issues such as strategy and CEO succession.