Building a system to evaluate the leadership's ability to meet corporate goals.
Nominating committees and CEOs need to ask hard, fundamental questions about their own boards and their board's ability to formulate and govern effective and ethical business strategies. One way to know where you stand is to draw a basic matrix chart. Along the top, list the skill sets your board will require to move the company toward its future goals. Down the left-hand column, list each director. Then begin to check the skills that each current director brings to the board. This is a simple way to see if there are gaps in needed areas.
This matrix chart can also apply to fundamental types of skill sets. For instance, are the directors qualified to perform the critical oversight function? Does each director truly understand the business today? Do they have a track record of excellence in his/her own field? Will each be additive to the board culture and make us a more dynamic group given their individual participation?
When you have the appropriate skills in place that reflect the company's long-term strategy, you now need to manage expectations. As a management review process should be in place in the company, so should a formal board review process. However, this concept is not popular.
That being said, a formal board review process helps greatly to formulate a governance strategy that complements established corporate strategy, and it ensures that adherence to both is managed accordingly. Currently, only about 40 percent of North American companies conduct such reviews, and even fewer review individual board members. Further, some companies that conduct reviews do so only as a prelude to removing a particular board member.
In our view, this sells the process short. If your board is willing to be formally and objectively assessed-as every public company board should be-and it is committed to acting on the findings of such a review, good things can come of it. More effective corporate governance, for starters.
Companies evolve, as should the boards that guide them. Without an infusion of new perspectives and skills, boards can become stale and insular. The challenge of this difficult task going forward is knowing when a board member's abilities are no longer relevant or of high value, and then replacing that member with new talent. There are many capable, committed directors whose talents and experience simply no longer meet the needs of the utility served. Their removal is no disgrace-it merely constitutes an acknowledgement that times change and their skill sets may be better suited for a company in a different stage of evolution.
A dynamic, engaged, and well-skilled board is the first step toward better corporate governance. And better corporate governance is the foundation of competitive advantage. Creating this kind of competitive advantage will put competitors in a position of trying to duplicate down the road what your organization is already appraising and implementing today.
Building an Outstanding Board
The governance and accounting scandals that have scarred the business landscape in recent years have had at least one positive effect: Executives, investors, regulators, and the public now have a renewed appreciation for the vital role of corporate boards.
The Sarbanes-Oxley Act and Securities and Exchange Commission decrees did much to radically reshape board structure, composition, processes, and accountability. In effect, they mandated new responsibilities and requirements. This underpinning paves the way for utilities to make their best efforts to build an outstanding board-one that is active, integrated, informed, and independent. This task is an ethical, legal, and business necessity, but it is far from easy.
With all the change the energy industry has seen at the CEO level in the past 12 months, the next generation of leaders is now stepping up to the plate. For example, new leadership has taken the helm at AEP, Great Plains Energy, Progress Energy, Ameren, PEPCO, and Duke Energy (see "CEO Forum," p. 42). This will no doubt bring new thinking to these boards and perhaps new processes for establishing and measuring even better, more effective corporate governance.
Lessons From the Past
Today, change is occurring in the boardroom. Boards are now being scored by such groups as Institutional Shareholder Services and the Corporate Library. Governance Metrics International (GMI), another corporate governance research and rating agency, rates 2,100 global companies, and only 22 received its highest rating. As a group, these 22 outperformed the S&P 500 index as measured by total returns for each of the last one-, three-, and five-year periods by 4.3 percent, 9.2 percent, and 6.9 percent, respectively. Entergy Corp. and Wisconsin Energy Corp. are the only utilities among this group of 22 companies receiving GMI's highest rating.
Now that the issue of compliance is behind most boards, the next test will be one of ethics. The marketplace will reward utilities that meet the demand for integrity (see "Boardroom Revolution," p. 67). Integrity starts at the top with steadfast governance of CEO compensation, succession planning, and leadership development practices setting the tone for the rest of the organization.
Companies whose leaders have the imagination to envision their boards as a unique strategic asset to both management and shareholders will move themselves and their organizations ahead of the pack by being the first to recognize that exceptional governance simply makes companies better.
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