What is wrong with the way corporate boards operate today? In essence, the problem is that they act as though the environment of business were still relatively stable and predictable. Traditional boards therefore remain deferential, reactive, and focused on compliance.

Yet today’s successful competitors are constantly evolving—entering new markets, redesigning their systems, and reengineering their organizations. For businesses that seek to stay in the game, corporate transformations never end. Boards must respond by taking more initiative, becoming more collaborative, and adding more value.

Where boards are weak

Problems with boards arise in three areas: processes, or the way boards are run; people, or the personal and professional backgrounds of board members; and culture, or the relationship between boards and management.¹

Processes

Reviewing history—not creating the future—is the focus of traditional board processes. The cycle of monthly meetings gives managers little time to prepare carefully considered strategy papers, since one meeting has barely ended before it is time to get ready for the next. Moreover, structured agendas leave little room to consider medium- or long-term issues; instead, discussion centers on the last period’s operating results, problems that have arisen since the previous meeting, time-sensitive decisions, and risk management.

Another problem is that directors often receive management information that is a legacy of the past and sheds little light on today’s issues. Boards might ask for additional data but seldom step back to think about which numbers provide real insight, and boards rarely discard a report, even when its information is no longer meaningful. Wedded to processes that look backward, boards have a hard time helping corporations look forward.

People

Executive and nonexecutive directors are almost invariably cut from the same cloth

Most boards include both executive and nonexecutive directors, but they are almost always cut from the same cloth: men who live in the same city and have similar backgrounds. Boards so constituted lack the diverse perspective needed to challenge the thinking of management.

In Australia, 67 percent of nonexecutive directors live in the cities where their corporations are based, according to surveys by the executive search firms Egon Zehnder and Korn/Ferry. Of the 250 nonexecutive directors on the boards of Australia’s top 25 companies, only 9 live outside Australasia (excluding those nonexecutive directors who represent a leading shareholder). Fewer than 10 percent of Australia’s nonexecutive directors are women, while about 60 percent are current or former chief executives. Such uniformity tends to undermine the quality and variety of boardroom debate. Opportunities can be missed because directors lack a diverse or global point of view.

Lack of diversity is a problem in other countries, too, but in some of them it is less severe than it is in Australia. In the United States, for instance, few nonexecutive directors are residents of foreign countries, but 80 percent of all boards do include women (compared with fewer than 40 percent in Australia). As of 1997, British companies had even fewer female nonexecutive directors than their Australian counterparts but engaged more nonexecutive directors from overseas.

Moreover, whatever the sex or residence of nonexecutive directors may be, they often lack the time to become well informed about the businesses on whose boards they serve. At Australian companies, nonexecutive directors average 20 to 30 days a year on board work—mostly preparing for and attending monthly board meetings or formal subcommittees. They have little occasion to mix informally with managers of the business or to talk with customers or suppliers.

Compelled to rely on information formally supplied by executives who report to the board, nonexecutive directors have difficulty arriving at a truly independent view of the company. They are also in a poor position to know which issues that are not on the agenda ought to be or to judge how well top executives interact with their organizations. To be properly informed, a nonexecutive director should spend something like 50 days a year on board business—double today’s average.

Culture

Back in the days when businesses were stable, competitors few, customers loyal, and financial results predictable, the board’s main roles were to appoint the chief executive, approve accounts and capital spending, and ensure that the law was obeyed. Boards had an arm’s-length relationship with management and stepped in as judge and jury only when things went wrong. In reality, they often had little to contribute.

In this compliance-oriented relationship, management learned to behave in a certain way—one that is no longer adequate. Under the traditional model of boards, managers tend to tell them less rather than more: issues are hidden until they become big, hard-to-fix problems. In addition, some organizations waste hours preparing answers to "in-case-they-are-asked" questions, leaving less time for strategic or creative thinking.

Because many executives see the board as a necessary evil rather than a value-adding partner, they do not seek its input or ideas. Executives frequently think a good board meeting is a session at which their proposals are accepted without challenge. Many managers feel threatened by questions or suggestions from boards. Nonexecutive directors sometimes react to this sensitivity by being excessively polite and avoiding tough issues. As a result, proposals may proceed without sufficient due diligence, and critical issues may be ignored.

The authoritarian manner of many chairmen exacerbates these problems. Some actively discourage open debate in the boardroom. Decisions are made and deals done before board meetings begin. There is no collective thinking that can generate creative solutions or directions. Such rigidity is the antithesis of the environment many companies are trying to create in the workplace. Flexible, collaborative organizations get more work done, are more innovative, and make decisions more quickly. Companies increasingly recognize that the top team—not just the chief executive officer—must be first-class to deal with the complexities facing them. Why should boards be different?

Like all cultures, board culture is slow to change. Does this matter? Do we really need a new kind of board? The answer to both questions is yes. With better governance, some companies might have averted fiascoes, and more companies could become world-class competitors.

An alternative model

More and more boards are shifting from the traditional minimalist model

There are signs that more and more boards are shifting from the traditional minimalist model toward a significantly more active role. The board of Lend Lease Corporation is among them. A real-estate and financial concern based in Sydney and one of Australia’s biggest companies, it has progressed further than most in changing the role of its board, which aims to be an effective partner with management in order to achieve the highest level of corporate performance.

Lend Lease has made several innovations in its processes. The company’s formal board meetings are held quarterly rather than monthly so that the board can focus on such long-term issues as strategy, corporate culture, and initiatives for change. All board committee meetings take place during the week of the quarterly meeting to permit directors from other countries and Australian states to participate in them fully. Meetings to handle operational issues requiring board input are held informally as needed, by telephone or videoconference. (Video cameras have been installed in the home offices of all directors who live outside Sydney.)

One quarterly meeting every year is held overseas, with a range of guests (including customers, suppliers, and outside speakers) present to stimulate the board’s thinking. This overseas gathering, which typically lasts a week to ten days and involves up to 40 executives from around the world, is intended to give nonexecutive directors and managers opportunities to get to know one another in a social as well as a business setting.

Besides the main board, Lend Lease has business boards to oversee regions or large divisions: Lend Lease USA, Lend Lease Asia, Lend Lease Europe, MLC Limited (a large financial-services business), and the Australian Property Services Group. Each of these business boards includes several nonexecutive directors from the main board (one of them serves as chairman), two executive directors, senior executives from the businesses in the region or division concerned, and, occasionally, outside directors. The business boards have normal board responsibilities, such as assessing strategy, managing risk, reviewing compensation, and approving capital spending for sums up to AU $10 million.

Separate boards for individual businesses help give them more attention from directors

The chief purpose of the business boards—a particularly helpful one for a company as diverse as Lend Lease—is to see that each main division of the company receives adequate attention from directors. In addition, the business boards help ensure that several nonexecutive directors understand in depth the business strategies and related proposals that each division presents to the main board. Finally, they teach executives down the line how to interact with a board and how to create useful partnerships with nonexecutive directors.

What can business board structures achieve? At Lend Lease, the corporation’s Australian property services board supported the chief executive of the Project Management Division in his efforts to reengineer the business and develop a global strategy. As a result, a division once thought to be going nowhere is now a profitable core business with an exciting future. Without the business board, it would probably never have received enough attention to effect such a change.

This kind of interaction between nonexecutives and executives also helps a board identify trouble spots early on. Nonexecutive directors on the central board, for example, were the first to recognize the need to recruit people with international experience in information technology and human resources and to support proposals to upgrade the company’s skills in these areas.

Lend Lease has also worked hard to make its board one of Australia’s most diverse: it boasts three non-Australian directors, from three continents, as well as two women. The resulting variety confers many advantages on the company, including the ability to put out global antennae that pick up trends, threats, and opportunities. This wide-ranging mix of nonexecutive directors was recruited through an executive search procedure, not personal relationships.

Directors are expected to spend about 80 days a year on Lend Lease business—30 devoted to the main board and the rest to business boards and special subcommittees. The nonexecutive directors receive a lump sum fee of AU $70,000 for their duties on the main board and AU $2,500 a day for the other 50 days.

Active partnerships between boards and management involve more risk of personality conflicts than the traditional model does

The essence of the Lend Lease model is a partnership between the board and management, with the aim of gaining competitive advantage. The company does not pretend that trying to operate in this way generates no tensions: on the contrary, the model involves more risk of personality conflict than does the traditional board structure. Nonexecutives are included to raise issues and suggest ideas but should not give management directions or take offense if it chooses a different path. Management, for its part, must not abdicate its responsibilities or create a vacuum of accountability. In such an environment, only self-confident and open-minded executives can operate successfully; insecure or highly territorial men and women struggle.

Hurdles

Corporations that want their boards to take more initiative must clear many hurdles. The first is the idea that a board should offer support and avoid taking the initiative until management has clearly failed. Directors who hold this view fear that a more active partnership would blur the distinction between the board and management. But in declining to act until the company’s performance deteriorates, these directors are ignoring the common purpose that binds directors to management and creates value for shareholders. Boards that take an active role in the affairs of their companies become alert to problems before results start to suffer. Such boards can communicate their findings to the chief executive in time for problems to be addressed deliberately and creatively—an unlikely outcome when directors and executives see the board primarily as a necessary evil.

Of course, boards and management do play different roles. The board’s is to ask questions, to ensure that important issues are addressed, and to see to it that the company has the strategy and organization needed to deliver the performance shareholders expect. Management’s is to provide the answers, to develop a strategy and organization with the board’s concurrence, and to operate the business.

The second hurdle companies must tackle is compensation. Fees to nonexecutive directors of Australia’s largest corporations come in lump sums that are less than half the amounts senior corporate executives or professionals in law, accounting, and consulting firms earn when calculated on a per diem basis. In general, directors of US companies earn a third again as much, and they also receive share options, which can make a big difference in their overall compensation. Given the fee structure in Australia, it is not financially worthwhile for nonexecutive directors who are not retired or independently wealthy to increase the number of days they spend on board business.

True, fear of criticism from shareholders makes corporations reluctant to raise the compensation of directors. Yet these same critics rightly demand that nonexecutive directors be more accountable for corporate performance and complain that some of them serve on too many boards. Unfortunately, the equation doesn’t add up. If shareholders want a top-quality board to spend the time needed for independence and accountability, they should be willing to pay professional-level compensation. But shareholders also have the right to expect that board members, including nonexecutives, will undergo regular performance reviews to ensure that they provide value for the fees they earn.

The third hurdle involves perceptions of independence. Well-known cases of self-serving arrangements between directors and executives who were old friends make shareholders worry when nonexecutive directors appear to be too close to corporate executives. Although it is reasonable to worry about such abuses, close involvement by directors in the work of a company doesn’t necessarily generate this kind of dependence.

My involvement with Lend Lease, for instance, gives me access to a number of sources of information about the business and therefore makes me more rather than less independent. The real test is whether a director has the intelligence, the information, and the courage to raise issues that challenge management—and the stature to defend shareholders’ interests if they are not being served. Rather oddly, outside directors who are not deeply involved with a company experience greater difficulty acting independently because they have little information besides what executives spoon-feed them at board meetings.

Many board members believe that chief executives of other companies are ideal directors, but they can’t really spare the time

Stereotypes about what background outside directors should have are yet another obstacle to the creation of really effective boards. Many board members believe that chief executives of other companies are ideal for the purpose, but in reality such people can’t spare the time an active board demands. Retired chief executives can, and also have valuable experience making tough decisions, but some lack substantial exposure to a wide variety of markets and industries, while others have difficulty making the transition from managing a company to exerting influence in it by asking questions. Many identify with the CEO and are therefore reluctant to raise thorny issues.

The final hurdle is the fear of meddling. Many chief executives and senior managers do not see their boards as a source of active support or ideas. They value neither the skills nonexecutives can bring to a board nor the concept of a partnership with it. Nor do they see how executives and managers whose boards afford them access to lessons from different places, industries, and experiences can more effectively identify opportunities or avoid mistakes. From this perspective, greater involvement by nonexecutives merely means more work for top management.

What should companies do?

Investors ought to be more inquisitive about such subjects as a board’s contribution, the way directors spend their time, the incentives for nonexecutive directors to increase their involvement with the company, and the barriers to this kind of participation. The quality and contribution of nonexecutive directors should be more important than their fees. Executives should work harder to educate nonexecutive directors about the business, to get them actively involved in important issues, and to learn more about them—their backgrounds, experience, and skills. Those executives should approach board meetings with a desire for input, not just approval.

Directors need to change the way boards work—meetings, agendas, papers, and debates. They should discuss the board’s role with executives, be explicit about the need to change the board’s culture and approach from a reactive to a proactive partnership, and explore ways to foster cooperation and creativity. And they should think about whether their boards have the right composition to provide the diverse perspectives that today’s businesses require.