How to make corporate board more effective, Prof. Krishna G Palepu,Harvard Business School

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How to make corporate board more effective, Prof. Krishna G Palepu,Harvard Business School - Presentation Transcript

1. Making Corporate Boards More Effective Professor Krishna Palepu Harvard Business School Copyright Professor Krishna Palepu, Harvard Business School
2. “A” Grade Board Members … “B” Grade Boards? Potential issues  Role of directors  Board information  Board agenda  Boardroom discussion dynamics  Board leadership Copyright Professor Krishna Palepu, Harvard Business School
3. Key Board Functions Role: Protect the long-term interests of the corporation and external investors  Oversight of Strategy  CEO Appointment and Succession Planning  Performance monitoring and Compensation  Firm  Management  Oversight of financial reporting and legal compliance Copyright Professor Krishna Palepu, Harvard Business School
4. New US Board Governance Requirements Focus: independent and empowered oversight and prevention of fraud  Board independence  Majority of independent directors  Strict definition of independence  Key board committees of independent directors  Audit Committee – Financial expertise and oversight  Compensation Committee – Compensation Disclosure and Analysis  Nominating and governance committee – New director selection, and existing director evaluation  Executive session of independent directors  Auditor independence – appointment by audit committee, limit on consulting activities, partner rotation  Internal controls audit (section 404 in the US)  Management certification of financial statements Copyright Professor Krishna Palepu, Harvard Business School
5. Effective Board Practices  Appropriate Board composition - right skills and capabilities  Board size – large enough to staff committees, but not too large to prevent good discussions  Board leadership – Chair/CEO, Lead director Copyright Professor Krishna Palepu, Harvard Business School
6. Effective Board Practices (continued)  Board information – streamlined information focusing on strategic performance metrics  Board agenda – focus on key strategic issues and risks  Time commitment – Board members’ ability and willingness to commit adequate time to prepare for and attend meetings  Board meetings – adequate time allocation, and discussions that promote healthy debate  Board retreats – annual retreats to focus on strategy and board evaluation Copyright Professor Krishna Palepu, Harvard Business School
7. McKinsey Study Survey of 824 US outside directors  Two of the top three priorities – approving strategy and tracking progress against strategy … But  Only 52% say they are satisfied with their access to strategic information Copyright Professor Krishna Palepu, Harvard Business School
8. A Potential Framework  Focus Board’s agenda on key drivers of value and key risks that can derail the strategy (the 80-20 rule)  Create a strategic board information system that allows tracking these key drivers on a regular basis Copyright Professor Krishna Palepu, Harvard Business School
9. A Framework For Boards (2)  Focus on strategic drivers in  approving strategic initiatives and resource allocation  on-going performance evaluation and compensation  oversight of financial reporting and disclosure Copyright Professor Krishna Palepu, Harvard Business School
10. Strategy: Five Key Questions  What is the customer need we seek to satisfy?  What is the competition?  How do we differentiate ourselves?  What are the key capabilities and processes to successfully differentiate?  What are potential threats to our differentiation? Copyright Professor Krishna Palepu, Harvard Business School
11. Will our Strategy Create Value? Strategy Organizational Capabilities Business Processes Customer Value Shareholder Value Copyright Professor Krishna Palepu, Harvard Business School
12. Two Key Questions on Execution  Are we investing in the right capabilities and processes to execute our strategy?  Do our customers experience the promised differentiation? Copyright Professor Krishna Palepu, Harvard Business School
13. A Simple Strategic Board Information System  “One-pager” on strategy (for each business)  “One-pager” on customer metrics & related strategic initiatives during the year  “One-pager” on key process and capability metrics & related strategic initiatives during the year  “One-pager” on key competition and industry developments Copyright Professor Krishna Palepu, Harvard Business School
14. Strategic Agenda for Board Retreat  Reaffirming the current strategy or discussing potential changes to it  Discussing strategic initiatives for the year  Shore up key capabilities related to our competitive advantage  Expand into new geographies  Enter new businesses  M&A, partnerships Copyright Professor Krishna Palepu, Harvard Business School
15. Strategic Agenda for Board meetings  Tracking the progress of the strategic initiatives identified in the retreat  Drilling deeper into one aspect in each meeting  Customers  Competition  Key Capabilities and processes  Key strategic business risks Copyright Professor Krishna Palepu, Harvard Business School
16. Potential Pay-offs  Focus limited Board time on what is strategically critical  Add an external market focus to Board’s agenda  Identify problems early on, so they can be discussed and corrected  Linking Resource Allocation choices, Audit and Compensation committees’ work with the broader Board work Copyright Professor Krishna Palepu, Harvard Business School
17. Process Issues  Initiating the process - board evaluation, board retreat, external facilitators as triggers  Bringing the CEO/Management on board  Articulating the role of management versus Board - avoiding micromanagement but performing the oversight role  Role of the Board Leader in board information design, agenda setting, and board discussions Copyright Professor Krishna Palepu, Harvard Business School