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05.22.09

The Accountability of Boards: A Brief Interview with Ram Charan

A Brief Interview with Ram Charan

SOMETIMES events in our life serve to remind us of what is important. Recent events have reminded us of the importance of accountability. Not so much holding other people accountable, but in holding ourselves accountable. Leadership is serious business. Are we taking it seriously?

Our decisions affect the lives of other people. If we are not qualified to make the right kinds of decisions or are not seeking the advice we need then we can adversely affect the lives of many others. There is no middle ground on accountability.

LeadingBlog: As you point out in Owning Up: The 14 Questions Every Board Member Needs to Ask, the expectations and accountability of boards has changed. In that light, the composition of boards needs to be taken seriously. Although it seems to be more of a non-profit sector phenomenon, too often it seems directors placed on boards as a reward or perk or as a favor or condition of some other performance. Have you found this to be an issue and how would you deal with such a politically volatile situation?

Ram Charan
Ram Charan: We need to look forward, not backward. The debacle of 2008 has clearly proven that many a board failed, particularly in the financial services industry. There is legislation forthcoming in which the proposal is to separate the CEO and chairmanship jobs. People are now looking at the independent directors and especially at the chairs of the committees, and at whether the board chair is separate from the CEO. Investors are now looking at the chair as well. Boards are now squarely responsible for the company’s performance. Make no mistake, the trend has begun where outside interest groups have now forced decisions on directors for reelection and directors' decision on pay.

Going forward, you need people on the board who understand business, who have domain knowledge, and are part of a diversified board. Those days of friends, rewards, and perks are almost over, when people were rewarded for favors, personal contacts, or good things in the past. There may be some remnants, but this all has changed. We now have professional outside agencies that systemically evaluate boards, their composition, and attendance, and those evaluations are circulated widely to investors and analysts. Boards need to take it seriously and be accountable.

LeadingBlog: Obviously, an organization’s vision—and its strategy for executing it—is critical. You say that the board needs to own the strategy. Just how involved should the board be in determining that strategy and ensuring that it is communicated throughout the organization in a way that it can be articulated and specifically or functionally applied by the people in that organization?

Ram Charan: No company can operate successfully without a good strategy. Strategy is proposed by the CEO and his or her team, but in the past, it was proposed, then there was a two-hour and it got approved. Those days are over. Board members want to engage in a discussion of strategy over time, in several iterations, so they understand the competition, the markets, the business model, and the nuances, and through this discussion, they approve the strategy. Anybody who approves it must own it. They don't circulate it. They get the CEO to circulate it and to communicate throughout the iterative process. But boards going forward cannot say strategy belongs to the CEO, not us. That period of lack of accountability is over.

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Posted by Michael McKinney at 10:01 AM
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