Ram Charan: Bettering the Board

Ram Charan is one of the world’s top advisers to CEOs and boards. He has worked with CEOs such as General Electric’s Jack Welch and Larry Bossidy, and Verizon’s Ivan Seidenberg. Fortune magazine described him as the most influential consultant alive. Charan is known for his relentless schedule, his blue-chip clientele, and his plain-spoken, straightforward approach. He has authored or co-authored 16 books, including The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation and Boards That Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage. Charan, who serves on the boards of Austin Industries, Tyco Electronics, and Emaar MNG, addressed the ninth annual Directorship Institute. Here he covers 10 issues—five external and five internal—impacting today’s boards.

External Forces

1. Call for Transparency

Is your board credible? Given transparency today, it’s not enough that you are following the law and presenting the information you are required to present. Every company action is judged in the court of public opinion. The media, consultants, customers, fund managers, analysts—all these people will stand in judgment. You’ve got to come to terms with the fact that transparency is a reality and the board’s role is morphing. Transparency is now absolutely fundamental.

2. Volatility

When something goes wrong, credibility is questioned, people begin to have doubts, and the stock price reacts very fast. If people have uncertainty about their board and the top people have no credibility, this will have a huge effect on employees and the stock price. Volatility is a reality—stuff happens. But when it does, you can’t hide behind attorneys and publicists: You need to go on the offensive. Politicians do this all the time. Learn how to respond smartly and quickly.

3. SWFs

The trade deficit is beginning to accelerate. A major result of this is buying by state-owned funds. Look at what they are buying and not buying. Are you going to react or be proactive? Are you in the game or on the sidelines? In your strategic discussions, are you talking about how you will respond? Are you actively participating? Are you anticipating? Are you going to seek out those things, are they going to come to you, or do you miss the boat? You see what happened with Citigroup and Dubai’s investment. Boards can’t sit by on the sidelines while deals happen around them. Boards need to get in the game if they are to manage their own destiny.

4. Regulation

Worldwide America dominated regulation for 60 years. The Securities and Exchange Commission is opening offices in Europe and Asia. Think about the following: In 20 years, can you imagine India and China having their own equivalents of the SEC and the FDA? Where will the largest markets for drugs be? And what happens when they set American standards against their own? Boards need to understand the international cultural battle that is going to take place. It will affect all areas of regulation.

5. Risk

I’m not only talking about financial risk. That’s a given. The risk I’m talking about is integrity risk, which may increase, depending on what region you are operating in. Consider the example of a global company with roughly 60 percent of its revenue outside the U.S., where there may be different standards of integrity. What you see in international companies may be the tip of the iceberg, because accounting is not an exact science. You make estimates. Even with the SEC in the United States there are differences of opinion. How would you like to be rewriting statements three times depending on the market? Boards must internationalize and get their own outside experts to help understand the risk.

Those are the five external issues I see impacting boards, but yours might be different. Consider what they are and make your own list. Becoming a Better Board Ram Charan examines the issues that are changing the way boards operate.

Internal Issues

1. Succession

When it comes to succession and finding the right CEO, the accountability belongs to the board. Take hold of this. Don’t let anyone talk you out of this. Have a board discussion, not just a committee discussion. CEO succession is the single most difficult process to manage. But boards need to find a way if they are to fulfill their mission.

2. Strategy