Governing boards of large companies are moving from monitoring of management on behalf of shareholders to also leading with management to generate shareholder value. Below, Ram Charan, Dennis Carey and Michael Useem discuss how directors are taking charge of CEO succession and executive compensation, partnering on merger decisions and risk tolerance, and in still other areas including execution and operations are staying out of the way.
We have occupied a front-row seat for seeing the gap between boards that are well led and are boons to the companies they serve, and those that are far less so. We have seen how public agencies and governance activists have sought to close that gap by insisting on tougher rules, check-the-box lists, and tighter regulations. And we have come to believe that much of the variance stems instead from a very different source: the human dynamics, social architecture, and business leadership of the board itself.
As a result, company directors and executives are wise to focus attention on building more engaged leadership in the boardroom. Governing boards, in our view, should take more active leadership of the enterprise, not just monitor its management. This calls for a different kind of vigilance in the boardroom, a deeper kind of relationship between directors and executives, and a new kind of leadership from both.
This emergent model of boards that lead is a result of forces not of their own making. Increased regulation, shareholder pressures, and governance reforms over the past decade were intended to strengthen the board’s oversight function. Yet as boards have become better monitors, they have also become better leaders, delving into a host of other areas that had been delegated to management in earlier times.
We believe that directors can and will want to more actively lead in the years ahead, but that is not a given. Poorly handled, this new board enablement can cause serious damage, resulting in fractured authority and dangerous meddling. We thus seek a practical roadmap for knowing when boards should lead, when they partner, and when they should stay out of the way.