Perspectives from the Boardroom—2009

This post is by Jay Lorsch of the Harvard Business School.

Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future?

This white paper first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement:
1) clarifying the board’s role;
2) acquiring better information and deeper knowledge of the company;
3) maintaining a sound relationship with management;
4) providing oversight of company strategy;
5) assuring management development and succession;
6) improving risk management.

Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders.

The key concepts highlighted include:

· Regulations and laws offer little guidance about what specifically boards should do, and, given this lack of specificity, most boards have gradually developed an implicit understanding of what their job should be.

· Directors expressed strong consensus that the key to improving boards’ performance is not government action but action on the part of each board.

· To improve board effectiveness, each board should achieve clarity about its role in relation to that of management: the extent and nature of the board’s involvement in strategy, management succession, risk oversight, and compliance.

· If, as interviewees insisted, each board’s effectiveness is directly attributable to its activities, it follows that boards have a responsibility to define their own roles with clarity, and to decide how to perform those roles in light of the nature of the firm, its industry, and its particular challenges.

· If boards are to decide on their goals and activities, they must expect to invest extended time in hard-headed discussions of both, leading to concrete and actionable conclusions.

· Boards need to maintain a delicate balance in their relationship with management. They must be challenging and critical on the one hand and supportive on the other. They have to sustain an open and candid flow of communication in both directions. And they must seek sources of understanding their company beyond just management without offending management.

· Issues of executive compensation and the relationship between boards and shareholders cannot be ignored, if only because they affect public perceptions of business and therefore its social legitimacy.

The full paper is available for download here.

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  1. John W. Taylor
    Posted Thursday, October 1, 2009 at 10:51 am | Permalink

    Ultimately, the Board of Directors is the watchdog and advocate for the shareholder. However, it is not clear that many boards embrace this role. Effectiveness of boards is definitely lacking and the key seems to be in providing them with an “incentive to act.” It is just not there. It is easy money, no risk, and a great resume builder for the board members. Until the boards’ allegiance to the shareholder outweighs their existing relationship with management, the boards of most publicly-held companies are not an effective means to exert control and accountability on the corporations of today.

  2. Gillian Lees
    Posted Thursday, October 29, 2009 at 7:17 am | Permalink

    I found this a really interesting paper – not least for the fascinating quotes that brought the issues alive. My own research and conversations with UK board directors reveal very similar concerns, most notably, that boards need to find their own ways to improve performance. There is a distinct lack of enthusiasm in the UK for any further governance regulation – improved behaviours are the key. I have been most struck by the fact that many directors have felt genuinely humbled by their difficult experiences over the last year or so. It seems to me that they are agonising (in a healthy way) about how they can encourage the right culture, how they can challenge effectively and how they can oversee strategy and risk more effectively.

    Gillian Lees
    Chartered Institute of Management Accountants – UK