"Corporate Boards that Create Value"

by John Carver and Caroline Oliver (Jossey-Bass 2002)

John Carver is a well-established writer on boards, in the private, public and voluntary sectors. He is active in working with boards, as is his co-author, Caroline Oliver. This book is a distillation of their long experience and a rationalised attempt to return boards to an earlier model in which directors were investors or the representatives of investors.

Experience has taught the authors that current boards do not operate as effective transmitters of the will of investors. In recent times boards have been invaded by executives, who understand the workings of the company and its markets, but who increasingly have their own agendas which are not aligned with shareholder interests. Increasing competition has led to a demand for outstanding chief executives which has encouraged star ratings for those who are most successful in driving increased short term profitability. This phenomenon has been compounded by the pressure on companies to meet the demands of ‘stakeholders’ and external special interest groups. Carver and Oliver propose an entirely new mode of governance – the Policy Governance model – which focuses solely on transmitting the will of owners through to managers. The role of the board is to identify and transmit that will and to protect the interest of owners from other pressures and considerations.

The Policy Governance Board would comprise non-executive directors, with the CEO organising his/her management team separately. The board would focus on shaping and sustaining policies, with a view to protecting the interest of owners and instructing the management on their wishes. The board would also set limits to the means to be used to meet those wishes; within those limits the management would be empowered to act as it saw best in order to fulfil its mandate.

This model is intended to funnel all communication from owners through the board, making it the sole arbiter of the will of owners and rescuing the board from its present marginal role. The model has to be installed ‘in one go’ and the ‘Chief Governance Officer’ (CGO) (formerly chairman) is mandated to build a board capable of directing management to achieve success. Management is accountable to the board as a whole, not to the CGO or any single director. Management is appraised against the policies set by the board and the board is appraised against its own terms of reference (approved by the owners). Board committees may be used but only to develop options for approval by the whole board. Board committees relate to management as a body, and only as necessary eg audit, never as individuals.

The Policy ~Governance model produces a body which resembles the supervisory board of European companies (stripped of union, political and other appointees). This ‘two tier’ board model is now coming under increasing criticism, mainly for being remote from the companies they direct and lacking insider knowledge. Recent scandals at VW have added another cause for concern. Two tier structures add another link in the chain between owners and their ultimate agents and create divisions between policy and executive directors. The Policy Governance Board may be acceptable to owners but it will be remote from customers, employees and other stakeholders. Some owners are institutional investors and do not wish to be briefed by non-executive directors. This model could only work if the non-executives knew the company and its markets in depth in order to protect the interests of owners, including professionals, from the increasingly complex and unforeseeable risks facing the company. The model seems to rely on setting financial targets and monitoring them closely. The impossibility of relying solely on quantified targets has been underlined by the progressive failure of the Blair government to deliver its programmes.

The book assumes that the single tier board, with key executive directors in a minority (as per Higgs) is fatally flawed. Higgs is pushing for more and better non-executive directors, with greater involvement so that boards can be rebalanced and operate as a cohesive whole, not an instrument of the CEO. We need to revert to the Cadbury model of distinct roles for the Chairman and CEO, as separate appointments. It may be that the trend towards part-time chairmen needs to be reversed so that the roles are better balanced and direction can be properly separated from management. The role of chairman needs to be strengthened and that of CEO put in proper context. Both are servants of the board which is primarily the instrument for ensuring the continuity of the company in the interest of owners. That interest can only be served in the longer term by recognising the interest also of customers, employees, suppliers and other key stakeholders. This is not a tidy situation but it can be made to work; the Policy Governance model is very tidy but may not cope with human frailties.

Adrian Davies 24th August 2005