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hi my name is Bob Bazi and I'm here
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today with Mike Yim Mike is a professor
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of management and the director of the
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center for leadership and change
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management here at the Wharton School
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we're here with Mike to talk about his
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new book uh boards that lead which he
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recently co-authored with ram Chiron and
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Dennis KY Mike thanks for being with us
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today Bob good to be here so Mike what
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led you to uh write a book on board
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leadership well Bob uh corporate
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governance has been a topic of great
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interest uh for many people including
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myself for a number of years and joining
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with my colleague Ram shiron who is a
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very high-end consultant and Dennis kery
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who's the vice chair of corn Ferry which
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is a very large executive Search firm
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he's worked on many board
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searches we got into a dialogue on what
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exactly is happening in boards these
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days board rooms and as we thought about
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our own experience lots of research
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evidence coming out uh concluded that uh
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a good way to rethink what boards do is
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to uh take the premise that they have to
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monitor and they do that pretty well
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much better after sarbanes Oxley and
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Todd Franks these two legislative acts
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to strengthen the hands of boards of
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directors gotten pretty good at
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monitoring but increasingly directors
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are also exercising a kind of leadership
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function in the boardroom and with top
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management and as we drew Upon Our
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experience and um all three of us have
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been in boardrooms that sort of thing we
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uh did inductively conclude that uh good
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for all of us to rethink what boards do
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from not just monitoring which is what
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they're required to do but to also see
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boards as helping the company to be
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going where it's got to get to called
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that
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leadership so Mike give us a little bit
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of a historical perspective on the role
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that boards have played over time and
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how that role specifically is evolved
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over time Beyond just the monitoring
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function to more of a leadership
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function if we go way back boards were
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aptly described I think by uh again a
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professional colleague Jay lorch on the
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faculty of the Harvard Business School
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with the title of a very well-known book
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which was Boards of directors pawns or
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potentates and he had a bit of a
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question mark there but his conclusion
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was historically 30 40 years ago boards
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tended to be pawns they had become
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passive
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they were really under the thumb of the
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chief executive they met uh had a great
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lunch together and all went home but
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with the rise of big institutional
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investors the California pension fund
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Fidelity Black Rock uh these days hedge
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funds as
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well uh the pressure coming from
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investors for directors to not be pawns
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to get in there and uh keep Management's
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feet to the fire to avoid Mal feance
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think Enron uh and on the affirmative
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side to get great growth at a reasonable
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degree of risk that boards move from
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that pawn rle to a much more active
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monitoring role and we can see that in
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all kinds of Statistics we got a bunch
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of them in the book on the background of
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directors how boards are organized
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virtually all major standard and Po's
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500 boards for example now have an
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independent audit committee an
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independent govern governance committee
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and independent compensation committee
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independent meaning they're not under
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the thumb of the chief executive they
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actually have that relationship turned
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around and with that rise especially in
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the last 10 to 15 years a more call it
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more Vigilant monitoring function pushed
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by the big stockholders out there uh
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reinforced by legislation coming out of
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the early uh part of the last decade
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after the Enron failure
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uh boards in a kind of an unanticipated
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way and a kind of an almost unplanned
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way began to exercise more leadership
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and what we mean by that is that
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directors now often coming from Top
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management positions themselves many
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former CEOs for example occupy
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boardrooms now when they come into a
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board
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meeting they are helping the top
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executive think through a spin-off an
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acquisition they're helping a top
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executive think about how do I develop
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top talent here so I got a great
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replacement uh once my day is up and
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with all that being said and kind of all
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put together in a package we ended up
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entitling this book boards that lead now
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implicit in that is boards also monitor
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on behalf of stockholders that's the
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deal set forward by the SEC and the New
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York Stock Exchange we all want that to
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happen but in addition because of this
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quiet historical and profound
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transformation we think boards now
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increasingly are at the plate helping
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the company to go where it out to get to
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substantively that pretty much sums up
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with the statement boards that lead so
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Mike um one of the issues you identify
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in the book is the tension between
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exercising leadership and crossing the
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line into executive prerogative what
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advice would you give board members to
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make sure that they strike the right
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balance good way to keep this point in
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mind is on key issues the board the
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directors have to be at the table and
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they have to be driving the issues so
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the tenor at the top the commitment to
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ethics and integrity the central idea
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that drives the firm compensation for
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the top people in all these areas
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directors are number one and that's
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their job that's their
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calling having said that what is not
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their calling in fact not their place to
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go to at all we put it you know when to
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stay out of the way as our phrase for
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that are the operations that uh a top
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executive
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team are cons is concerned with every
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day uh getting products into the stores
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running a supply chain research and
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development these are really the
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prerogatives of top management and not
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for the board to be concerned with a
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good way to keep that point in mind
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is to remember the challenge of spelling
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the word banana you've got to know when
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to stop when you start spelling that
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word and in a boardroom you've got to be
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very self-conscious about knowing where
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to stop many companies that we describe
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and observed for this book have
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developed devices uh sometimes written
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documents here are the issues that have
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to go to the board and here are the
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issues that have to stay out of the
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boardroom typically it's more formal
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than that but there are a number of call
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them governance and management and
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Leadership devices that help boards get
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their leadership function done without
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micromanaging The Firm okay so if what
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we're looking for or boards that lead
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how can shareholders do a better job of
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identifying the right type of board
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leaders motivating them compensating
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them things like that well it's a really
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timely question because we're going into
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proxy season as sometimes is called this
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over the next four or five months is
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when most companies have their annual
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meeting and what of course that means is
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this is when investors stockholders
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elect their board of directors and it's
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a very timely issue to think about
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because as you are looking if you're an
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investor at the slate put forward now to
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let's say serve as directors of American
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Airlines or City Bank or Proctor and Gam
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you do want directors who are terrific
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at appreciating what it takes to deliver
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total shareholder return stock
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appreciation and dividends now there are
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100 issues within that that you have to
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be very mindful of to ensure that top
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management delivers value to the
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stockholders that's job number one as a
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director but job number two is to
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fulfill this leadership
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obligation and for that uh we recommend
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in the book for example that uh
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investors investment managers those who
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are most responsible for placing money
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in big companies whether at a a college
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endowment or a big money management firm
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like Vanguard or Fidelity that they take
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a close look at the directors are these
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people good at leading Enterprise do
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they have a background in top management
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of another large Enterprise do they have
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a record of being able to work with
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others after all a board really is a
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team of 10 to 12
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people and thus making a judgment call
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as we come into proxy season now new
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slated directors up for election or
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typically reelection really good to take
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a hard look at who is on that slate can
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they monitor can they lead and then the
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flip side of that
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in our view that is the great obligation
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of the what's usually called the
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nominations and governance committee
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within the boardroom to pick people who
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keep the feet to the fire of top
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management who know how to do that but
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also bring content to the table to help
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top management get its job done okay and
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if the board is leading who's monitoring
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the
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board we all have a boss it's a good way
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to put it so top management is monitored
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by the board the board and we need to
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strengthen this is ultimately monitored
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by shareholders after all the board is
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elected by stockholders that's the
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arrangement uh it's a fairly weak
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electoral system and that as we know
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most slates with some exceptions rare
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exceptions have uh 12 people up for
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typically reelection for 12 seats and so
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if you're nominated you're almost always
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going to be elected by the stockholders
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there are exceptions to
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that uh having said
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that big investors that do get more of a
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voice when they approach a company they
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do get their phone calls
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answered uh have an obligation like
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that's the way we put it
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to uh communicate directly with
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directors to ask those two tough
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questions are you monitoring and are you
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leading and so in that sense directors
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ultimately are responsible to the
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stockholders and should be that that's
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that's our free enterprise
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Arrangement Mike Warren Buffett often
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points out that in the tight community
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of corporate directors comedy the notion
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that there should be courtesy in the
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boardroom toward other directors toward
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the executives um often prevails the
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notion that you don't want to rock the
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boat that's a powerful force in a
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boardroom um and sometimes it's one that
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has to be resisted what advice would you
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give board members to you know while at
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the same time exhibiting comedy also uh
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asking tough
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questions Bob I think to pick up in your
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phrase there we want both we want civil
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behavior in the boardroom of course and
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typically if you look at the 10 11 or 12
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directors in the
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boardroom uh they've had 20 30 years of
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experience and working with many people
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and they are very effective in working
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directly and collaboratively having said
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that if the people in the room already
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agree let's say with the chief executive
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or kind of cow into agreeing with the
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CEO or with other directors they might
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as well not be in the room they are
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there to bring their own judgment their
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own
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experience and in that sense even though
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there can be a pressure to Comedy to not
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say what you really
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think uh in our observations of how
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boards operate increasingly over the
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last 10 or 15 years a new Norm is
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developed if comedy prevailed many years
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ago back in those Pawn days uh
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today uh directors look a scance on
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other directors who don't say much who
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don't bring a weighty point of view into
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the
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room and uh thus quick summary on that
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one Bob is we want again the 10 to 12
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people on average that are in that
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boardroom to bring that monitoring uh
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judgment cult uh into the room but also
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bring their best judgment as a leader of
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Enterprise as to what should be done
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even if others don't agree with that I
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guess in conclusion Mike can you give us
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some examples of boards that have done a
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good job of executing on their
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leadership role and maybe some boards
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that haven't
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well here's a board to pick one out some
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time ago that really made the difference
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actually in all of our
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Lives if we go back to 1996 and
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1997 uh Alpha was on its last legs Steve
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had gone some years earlier had been
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kicked out quite a few years
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earlier and a uh a former chief
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executive of DuPont now serving on the
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Alpa
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board uh began to ask very tough
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questions of the chief executive so
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think about that non-executive director
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asking very tough questions of the chief
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executive the chief executive then
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9697 was I guess I'll put this in a
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charitable way sanguin about the future
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of Apple thought I was doing well but
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when the non-executive director asked
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the CFO privately what do you really
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think the CFO said we're heading off a
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cliff they got into the numbers and it
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was true and so the chief executive
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sorry the non-executive director on the
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board the former CEO of DuPont said
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we've got a problem he began to ask
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around if anybody might want to purchase
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Apple they approached Dell computer
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Michael Dell famously said forget it why
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don't you just close shop and return the
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money to your stockholders so the
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non-executive director uh modestly paid
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at that time called up Steve Jobs and
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says Steve why don't you come back and
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help us out Steve said no way but this
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non-executive director
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persisted looking for leadership and was
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ready to help a new leader come in to
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turn this company from where it was U
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kining off a cliff to a different
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direction finally persuaded Steve to
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rejoin the
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firm when Steve Jobs came back into the
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company in 97 fully it had a market
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value of about $2 billion
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and when Steve passed away not so long
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ago he because of the intervention of
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the board to pick a great
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leader and then to work with that leader
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over some years that firm went from a
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two billion market value to a one point
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more than $700 billion so here for us
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anyway is an example quite now quite
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some time ago of a board that wasn't
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just there to keep an eye on management
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to tell them deliver shareholder value
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but here was a board and this particular
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member who took in a very active
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leadership role to bring that firm back
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to health to pick another firm just very
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briefly here uh was just announced that
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uh Lenovo the great Chinese PC maker uh
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is acquiring for over2 billion doar a
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major division of
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IBM and this in a sense uh is the second
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such purchase back in ' 05
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Lenovo also bought uh a division the
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personal computer division of IBM at
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that point for a little less than $2
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billion uh we know that company well
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I've talked with uh some of the
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directors I spent time with the chief
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executive and unequivocally the board of
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Lenovo not just top management has
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helped that company go from a company
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we've never heard of 15 years ago to now
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the number one
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personal computer maker in the world so
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it's to hulet Packard it's top Dell it's
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by far number one in China and now it's
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number one in the world partly because
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of the great strategic insights of the
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people that built the company as
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Executives but also very importantly
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because of the leadership that the
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directors brought into the company Mike
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um in the last minute or so one or two
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points that you'd like to leave us
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with m would say number one if you are a
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director good to think of what you're
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doing both as a defender of shareholder
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value and as a leader of the company if
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you're an investor good to look at
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directors do they bring a lot to the
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table both to monitor for shareholder
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value and to lead strategically if
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you're a top executive who do you want
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on your board you want people that can
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do both and as Executives move into the
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top ranks coming up through their own
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ranks increasingly I believe a quality
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of their own leadership will be to work
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extremely well with their board to draw
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the best from the board in their own
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leadership Mike thanks very much thank
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you Bob
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[Music]
