A core responsibility of the board is to engage with management in the development of an effective corporate strategy. After all, corporations are managed “under the direction” of boards, according to most state corporate laws—and therefore the board is ultimately accountable for the quality of the company’s management, including any strategic plans made and pursued by management.

As fiduciaries, directors have a duty to protect the corporation against threats to its long-term viability. To be sure, the level of direction provided by a board varies from company to company. Directors can be strategic assets to the corporation in a number of ways: by serving as a sounding board for management; providing performance-enhancing ideas; and offering constructive skepticism. Most importantly, the board can be a source of strategically relevant competencies.

As boards anticipate regulations to come from the new presidential administration, focus on the more intangible aspects of governance, such as strategy, will likely be redirected toward concrete compliance-oriented tasks. In surveys conducted for more than 15 years, NACD has found that director interest in strategy rises and falls in negative correlation to regulatory change affecting boardrooms. Following any period of regulatory reform, interest in strategy tends to wane while interest in compliance rises.

Directors should stay focused on strategy. Principle VII of NACD’s Key Agreed Principles provides the necessary guidance to create governance structures that enhance a board’s ability to maintain this focus. Sustaining and enhancing the value of a company through a well-conceived plan is vitally important. Even the best leaders can fail if they are fulfilling a bad or poorly implemented plan. Boards can veto poor strategic choices and make sure that management’s plans, well implemented, enable the organization to fulfill its highest potential for the benefit of all.

Current Guidance

Existing guidance on the board’s engagement in strategy has been issued by commissions of directors and governance experts, notably in the Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy (issued in 2000 and updated in 2006). We’ll review this universal guidance for engagement and then identify new challenges that boards must address quickly in the current environment.

The nature and extent of the board’s involvement in strategy will depend on the particular circumstances of the company and the industry in which it is operating. While the board can—and in some cases should—use a committee of the board or an advisory board to analyze specific aspects of a proposed strategy, the full board should be engaged in the evolution of the strategy.

The board should be a strategic asset—directors should individually and collectively seek to go beyond mere compliance and add value to the corporation. In general, directors can be effectively engaged in strategy by:

• Providing advice, counsel, and perspective;
• Challenging the underlying assumptions of management;
• Establishing high, realistic standards;
• Identifying additional opportunities and risks associated with the strategies under discussion;
• and Supporting the CEO during challenging periods of strategic implementation.

Corporate strategy is an ongoing process requiring oversight. Management brings vision while boards bring perspective. Management chooses a direction while the board, based on members’ diverse viewpoints, asks: Why? How? What if? As such, boards should be constructively engaged with management on an ongoing basis to support the appropriate development, execution, and modification of the company’s strategy.

Development

To take full advantage of their respective strengths, management and the board can jointly establish the process that the company will use to develop its strategy, including an understanding of the roles of both management and the board.

There is not always a “bright line” between management’s role and the board’s role, and involvement may vary. The role of management, ideally, is to engage the board in the strategic discussion and ultimately obtain board approval. The role of the board is to evaluate the strategy and challenge underlying assumptions. The board can serve best by providing strategic thinking and enhancement, rather than suggesting specific tactics. It is important to bear in mind these distinct roles so that the board does not usurp management’s role or fail to fulfill its own.

Companies can benefit from establishing clear yet flexible procedures whereby management and the board can exchange ideas through constructive interaction. This will help management develop a sound strategy, and help the board ensure the use of appropriate measurement criteria and benchmarks. It will also ensure that both management and the board fully understand and support the long-term direction the company will take. This “team-oriented” or cooperative approach can also foster a higherquality dialogue between management and the board, and enable management to make use of the expertise and experience of board members.

Evaluation and Monitoring

Once a strategy is approved, the role of the board is to provide ongoing evaluation of the strategy by monitoring implementation and encouraging changes, as events require. Therefore, to participate effectively in the strategic process, directors must thoroughly understand the assumptions and analysis upon which the strategy is based. Management should regularly update the board on the implementation and execution of the strategy. Directors should be prepared to ask incisive questions—anticipating, rather than reacting to, issues of major concern.

The board should ensure that management demonstrates commitment to the strategy, allocates adequate resources to its fulfillment, has a professional and financial stake in its execution, and adequately reports on its progress. The board should additionally monitor execution of the strategy against milestones. On an ongoing basis, the board must be willing and able to recognize whether or not the company has a winning strategy—and, if it does not, must be ready to urge corrective actions. The board should ensure that management makes modifications to the strategy as necessary.

Linking Strategy and Leadership

There is a strong tie between leadership ability and corporate performance. The board must ensure that the CEO has a clear understanding of the corporation’s strategic vision and has concrete ideas on how to implement that vision.

Moreover, the board needs to understand that leadership competencies are not all the same and industry dynamics are constantly changing. The strategic skills that senior managers possess must align with the future strategic challenges they will face. The board should establish achievable executive compensation objectives that reflect the company’s strategy, and define and communicate clear metrics and criteria for CEO evaluation that are tied to long-term strategic goals.

Future Challenges

Directors will always be challenged with finding a winning combination of strategy and risk for their companies. As boards grapple with the current complexities of strategy, the NACD believes the following issues will confront them.

Information is essential but it must be actionable. In strategic planning, the right information can help an organization successfully navigate its way through the marketplace. Directors are generally satisfied with the reliability of information contained in reports they receive from management, but the presentation of that information is often difficult to digest. Management’s main job is to bring the right information to the table. Directors, on the other hand, must then help management determine how the company will act in response to the information over the short, medium, and long term.

Greater Board Engagement

Typically, management develops a strategy with input from the board. In fact, according to the NACD Survey, slightly more than half of companies follow this model, while about 16 percent of boards work collaboratively with management in developing the strategy. Boards and management should consider earlier and greater collaboration when creating, refining, or (in rare cases) overhauling a strategy.

Directors must increase dialogue with management by asking the questions they want answered, rather than receiving information management wants to provide. Finding the right questions to challenge management’s conclusions is a director’s most difficult yet most valuable responsibility. As such, directors can ask management to limit their use of presentations in the boardroom and request unscripted time with the CEO for a free exchange of ideas.

Aligning Board Composition with Strategy

Companies have always tried to recruit accomplished professionals to sit on their boards, but sometimes directors’ backgrounds bore little connection to the company’s strategy. Today, enlightened boards are seeking directors with particular skill sets and expertise to complement their strategic goals. All boards can benefit from continually reviewing and evaluating the board’s size and membership mix to ensure a close fit with the strategic direction of the company.

Directors can develop a matrix of skills and expertise that the board requires in order to identify the leadership needs of the corporation, work with leaders to develop an appropriate strategy, and offer needed perspectives and advice in key areas. For example, a company looking to expand into international markets would seek directors who have business experience in those markets to ensure that the board can appropriately oversee the strategic plans and underlying risks of those plans.

Aligning Goals

The problem of short-termism has been well-established by a variety of studies and commissions, including, most recently, the Aspen Principles (Long-Term Value Creation: Guiding Principles for Corporations and Investors). The Aspen Principles, supported by the NACD, state that companies and investors should recognize that firms have multiple constituencies and many types of investors, and they should seek to balance these interests in accordance with their influence on the corporation’s long-term success.

Generally, companies should not seek short-term profit at the cost of long-term value. To avoid this, boards can develop forward-looking strategic metrics of corporate health. At the same time, boards can emphasize the need to achieve long-term goals while retaining benchmark reviews for the shortand medium-term goals as well.

Conclusion

Corporate performance depends upon corporate strategy. The board’s role in overseeing strategy is crucial. While a number of best practices have emerged, defining appropriate strategic engagement is still among the biggest challenges for boards. Improvement of corporate performance will require board members to become more actively engaged in the process of strategy creation. Directors must begin by requesting both time and information from management.

Boards must request unscripted time with management to probe the assertions and direction of the strategic plan. To foster this dialogue, boards need relevant and concise information—a current snapshot of performance. Improvement will also come from within the board itself. Careful selection of directors with relevant past experiences will enhance the board’s professional skills matrix. Most importantly, boards must have a steady hand to guide the company to long-term success.

Educating directors is vitally important to board success. NACD will deliver the findings in this white paper to boards directly through educational initiatives such as our Director Professionalism Courses and our Board Advisory Services, with the essential goal of empowering directors to act in the face of changing business, economic, and governance conditions.

The NACD White Paper Series I and Key Agreed Principles are not meant to prescribe a specific course of action; they point toward a direction—one that only the board, with management, can choose. The time to make that choice is now. Directors are leading the way to help restore confidence in the corporate governance of U.S. companies through the Director Challenge campaign. To obtain the Principles and White Papers, along with discussion tools for exploring them in your own boardroom, visit www.nacdonline.org/directorchallenge.

What if General Motors was required to disclose much more about which directors possess skills in sustainability, risk management,labor relations,marketing, and other key competencies and attributes required of the auto industry and integral to GM’s strategy?

What if American corporations assessed their boards, committees, and individual directors, and disclosed with sufficient granularity the key outcomes and processes, in order to inspire confidence in shareholders that a robust self-assessment regime was instituted and the results were acted upon? What if directors were explicitly recruited on the basis of the competencies and skills necessary to direct the company’s strategy and monitor management?

More transparency about skills and backgrounds of corporate directors might not have led us to avoid the financial crisis, but it might have alleviated some of the pressure that directors are now facing.

The answer is that things would be different. More transparency in the way of skills and backgrounds of corporate directors might not have led us to avoid the financial crisis or the collapse of the auto industry, but it might have alleviated some of the pressure that directors now find themselves under. It also might have caused boards to look more closely at their collective skill sets and fill in talent gaps, giving them a better chance at avoiding some of the problems or responding to them more adequately.

To be sure, disclosure in this area is remarkably thin. GM notes in Item 7 of its directors and corporate governance committee charter, only that it will “formally review each director’s continuation on the board every five years.” Exxon Mobil’s corporate governance guidelines, amended last October, include just one sentence under the heading “board self-evaluation,”which reads: “At least annually, the board will evaluate its performance and effectiveness.” It is not clear exactly what that means.

This is not to say that directors at these companies don’t possess the relevant competencies and skills,only that we don’t know, because we simply don’t have the necessary data. However, qualitative data suggests competencies and skills may be lacking in any number of boards. Take the area of risk management,for example. Recent director surveys revealed startling comments on the lack of required skills by some of their director peers:

• “We need a seminar on executive behavior and how to objectively evaluate risk.”
• “Is management overly optimistic?”
• “What’s the link between behavior, results, and action?”
• “For behavioral issues, are we comfortable as aboard versus holding back?”
• “How do we evaluate personalities?”
• “It’s mind boggling. We are not even at zero.We’re probably at minus 40.”
• “No comprehensive understanding at the board level.”
• “We should admit that the training is inadequate.We don’t know what we don’t know.”
• “I have more work to do [in order] to feel more competent.”
• “For risk, we can’t blame management.”
• “Risk management in the company is pretty poor.”
• “We should have had a peer appraisal.”
• “We’re not changing with the times [or] concentrating on the right issues.”

Northern Disclosure
Since 2005, the law in Canada has required the recruitment, education, and assessment of individual public company directors, on the basis of competencies and skills, and disclosure of these activities.Position descriptions are also required for key board leadership roles.

Currently, it is possible in the United States to sit on a risk committee of a public company board and not be risk-literate, or sit on a compensation committee and not possess compensation expertise. It is also possible to sit on these committees without having been recruited for these skills. Regulators do not require boards to disclose whether one or more directors possess such attributes. And the fact that a director may have significant experience—as a former CEO, for example—does not necessarily mean that he or she possesses certain specific competencies. As one director recently remarked: “I believe that our analysis focuses too much on experience and not enough on the actual skills and competencies that directors bring to the table. It may be said that experience and background are a short-cut to determination of skill, but it does not always mean the candidate possesses the skills.”

Chairman Mary Schapiro at the Securities and Exchange Commission is reported to be studying proposals for greater disclosures of the qualifications of board members,particularly those involved in assessing risks and setting executive compensation. Requiring American directors to be recruited and assessed on the basis of the competencies and skills each individual director is expected to bring to the board is probably the single greatest governance reform that Schapiro could make.

Overcoming the Obstacles
The belief that it is problematic, from a collegiality point of view, to assess individual directors is flawed, given the number of significant professions that have managed member assessments effectively,including the unpleasant task of counseling out non-performing members. The notion that assessing directors, from a legal point of view, should not happen (for example, concerns that results may be used as evidence in litigation by the plaintiffs’ bar), is not a reason, in itself, to avoid conducting director assessments. Otherwise,fields would never evolve because of litigation fear. That said, regulators should consider a safe harbor or zone of privilege to promote meaningful director review without directors looking over their shoulders,and require disclosure of the evaluation process only, not the results.

Some of the companies that do conduct board evaluations (New York Stock Exchange companies are required to conduct them each year, according to its listing standards) either do a poor job on the individual evaluations or they conduct a blanket evaluation, without assessing the abilities of individual directors. “Some of the board evaluations I’ve seen don’t even rise to the level of awful,” says Kenneth Daly, CEO of the National Association of Corporate Directors. “Essentially, they don’t evaluate how board members are adding value. Because of collegiality, they don’t want to go to somebody and say,‘Look, you’re no longer productive. You’re a dud.’ So what happens is they evaluate the overall board and not whether theyhave the right composition for the company’s strategic needs. I don’t know what good that does for figuring out problems with individuals and director criteria.”

Many corporations, including Pfizer,GM, JPMorgan Chase, DuPont, ExxonMobil, Home Depot, and Disney, don’t evaluate individual directors, according to published reports in the business media.

Evaluation Improvement
A robust evaluation compels a board to look inward and address issues related to leadership, management relationships,reporting, and oversight. The more an evaluation focuses on non-structural factors(for example, competencies, behaviors,and processes of the board; in short,how it acts or fails to act), the better. To make director assessments more effective, consider the following:

1. Robust criteria
The chairman of the board or lead director and the chair of each principal committee should be assessed against key criteria, such as a publicly disclosed position description.Individual directors should be assessed against the competencies and skills each director is expected to bring to the board.

2. Effective leadership
The chair of the nominating and governance committee, in collaboration with the board chair or lead director, should lead or oversee the director-assessment process in a manner acceptable to the board. This could start with some form of shared expectations and an annual one-on-one discussion with the board chair for the purpose of a self and peer review. Competencies, skills,contribution to teamwork, and developmental needs of the individual members should be addressed. The board chair or lead director should also be assessed on key criteria, including leadership and the ability to hold members accountable.

3. Effective follow-through
Boards should be committed to act on the results. An individual director’s peer results should not be shared with other directors,other than the chair or lead director for development and feedback purposes.

The chair of the board should discuss with each director their appraisal and what actions, if any, should be taken. The chair should report back to the board on the process and outcomes. The board and each committee should have a similar discussion on each of their assessments and fashion action plans to address shortcomings,if any, for the following year. Nominating and governance committees should consider linking director evaluation with continued director tenure and hold individual chairs responsible for implementing reforms from the previous year.

4. Effective disclosure
Lastly, reporting on director evaluation to shareholders should be disclosed in a meaningful and reasonably detailed manner to demonstrate that a strong and viable assessment program is in place and the board holds itself, its committees, its chairs, and other individual directors accountable for performance. Best practices include a disclosure of a comprehensive narrative on the process, dimensions of assessment, general outputs, action taken, and what governance improvements, if any, were made over the preceding year. Companies are even beginning to disclose some of the assessment results, scores received, and the number of directors who possess skilled and expert application in the competencies the board deems necessary to oversee the company.

A number of innovative boards have risen to the challenge and have renewed and fundamentally transformed their governance practices. The key for these boards is leadership, transparency,accountability, a commitment to have the best directors possible, and a sincere desire to be proud of their governance and to say to all of their shareholders: “Welcome—this is who we are.” More boards in the United States need to take up this challenge.Great boards don’t just happen. They are designed by great directors.

A Checklist for Assessing Director Leadership, Competencies, and Effectiveness

- THE BOARD CHAIR HAS AN EFFECTIVE PERSONAL LEADERSHIP STYLE

Sets a good example; is courteous, inclusive,sensitive, yet decisive; and establishes,inspires, and holds directors and management accountable to high standards

- THE BOARD CHAIR CARRIES OUT THE ROLE WELL

Sets agendas; ensures appropriate information is available;marshals resources and expertise;and ensures that the boundaries between board and management responsibilities are clearly understood and respected and that relationships between the board and management are conducted in a professional and constructive manner

- THE BOARD CHAIR HAS A CONSTRUCTIVE WORKING RELATIONSHIP WITH THE COMPANY’S CEO

Is supportive and collaborative, yet is independent

- THE BOARD CHAIR CONDUCTS AN EFFECTIVE DECISION-MAKING PROCESS

Ensures that, for crucial decisions, alternatives are generated, a thorough discussion and analysis ensues,relevant perspectives are brought to bear, the best decision is made, and the decision is supported

- THE BOARD CHAIR BUILDS HEALTHY BOARDROOM DYNAMICS

Relates well with directors and management,deals effectively with dissent, and works constructively towards consensus

- THE COMPETENCIES (FINANCIAL LITERACY, EXPERIENCE, SKILLS,KNOWLEDGE OF THE BUSINESS) OF ALL MEMBERS OF THE AUDIT COMMITTEE ARE APPROPRIATELY MATCHED WITH THE REQUIREMENTS OF THE COMMITTEE

All members, at a minimum, have a full understanding of how the company earns income and how these transactions impact the accounting judgments made by management

- THE FINANCIAL EXPERTISE ON THE AUDIT COMMITTEE AS A WHOLE MATCHES THE COMPANY’S FUTURE FINANCIAL OVERSIGHT NEEDS

Capital and balance sheet management,accounting, financial control and assurance, financial markets, treasury,funds management, investment banking,taxation, and risk management, as required

- INADEQUATE PERFORMANCE OR LACK OF COMMITMENT BY DIRECTORS IS PROMPTLY ADDRESSED BY THE BOARD CHAIR

Takes appropriate action, including developmental suggestions,peer remediation, member rotation or retirement, and other timely,corrective action as required

- RIGOROUS SUCCESSION PLANNING OCCURS FOR ALL MEMBERS OF THE COMMITTEE

Includes, with due consideration by the nominations committee,a formal and transparent process,identifying gaps between current member competencies and skills and committee requirements, a pool of directors possessing desirable qualifications to serve on and chair the committee,and, where appropriate, retaining a search firm to identify such a director

Richard Leblanc, a professor of corporate governance at York University, can be reached at rleblanc@yorku.ca. He is the author of the chapter, “Getting the Right Directors on Your Board,” from Boardroom Realities: Building Leaders ACross Your Board (Jossey-Bass, 2009).

Still, Drucker, often called the father of modern management, knew that the board should actively participate in the strategic agenda of the company. In helping it fulfill this vital role, Drucker’s primary tools were a set of well-directed questions and thought-provoking suggestions—the kind of tools for which he is famous. As Drucker correctly predicted, this role of constructive adversary of top management is increasingly critical in the “Lego World.” Legos were a favorite analogy for Drucker to demonstrate how the pieces of a company—its people, products, ideas, and physical assets—fit together and connected and interconnected to build out the two-dimensional proposition of “what products at what price?”

Serving more than seven decades as our leading observer and strategic adviser to business—and as the author of 39 books on management—Drucker, who died in 2005 at age 95, developed a unique perspective on the healthy balance between preservation and change. His theories still revolutionize the way companies operate in the age of the Internet, changing demographics, and the knowledge worker (a term Drucker coined).

The timelessness of Drucker’s thinking continues to amaze even his newest readers. Nobody knew how to capitalize on the past and make way for the future like Drucker. His writings are all about business as an innovative agent of change; he provided solid, practical advice on how to succeed with start-ups as well as with established companies. Should a business stick to what it knows best, or should it take a risk and make a foray into a different area? His laser-like, penetrating questions helped management and the board see their challenges in a new perspective and arrive at innovative answers to strategic dilemmas. Here are some of Drucker’s thoughts, questions, and the cases he referenced as he took on the art of boardroom strategy.

Location, Location, Location

John Bachman, the retired managing partner of the financial services firm Edward Jones, remembers how Drucker got into a contentious discussion with Ted Jones, the chairman of the board. The discussion began with Drucker asking Jones, “How do you decide where you put your offices?” Jones, being clever, said, “Well we do it like the baseball player, Wee Willie Keeler. We hit ‘em where they ain’t.” He went on to explain that they targeted cities where there were no competitors and Edward Jones would be the only game in town. Drucker, pushing him, asked, “Why would you do that?” Jones responded, “Because we do better.” Drucker asked how much better and suggested that they look at the facts. When they did, they found that Edward Jones did 25 percent better where there were competitors. Jones had parsed the market geographically and had defined the customer as the rurally located American with no alternative access to the stock market. After some persistent challenging by Drucker, Edward Jones came to see that its customers were actually people who wanted personal service and relatively low-risk investments, regardless of location. Drucker’s questions fundamentally changed the board’s understanding of the Edward Jones customer and hence, the company’s value proposition.

Early Warnings to DEC About Tsunami

In a 1985 letter to a member of the board of Digital Equipment, Drucker asked if they had thought about the assumptions the business was built upon: “I have a strong feeling that the company—and indeed every other second-tier computer company in the United Statess—has to rethink its basic business assumptions and strategies. I have the distinct impression that the basic rules of the game have changed. First, that the Japanese have decided to adopt IBM as the standard has simply made IBM the standard. The basic strategy of a company like DEC…was to offer an alternative to IBM and thereby [try to] prevent the establishment of one standard in which a DEC would not have a separate identity but would be another IBM-compatible supplier. When the Japanese decided…to adopt IBM as their standard, they…made obsolete the basic assumptions of the smaller American computer companies…But perhaps more serious is…that the entry of the three Japanese companies on the world market has freed IBM from all restraints…Up until a year or two ago IBM very carefully nurtured enough competition to avoid accusations of being a monopoly. It seems to me dangerous to depend on mistakes made by the big competitors especially if the competitor’s pockets are so deep that they can write off a mistake without much pain. What does this mean, assuming my reasoning is correct, for DEC? Can they maintain a traditional strategy or is it time to think through the basic assumptions on which their business rests? Do let me know what you think of my questions.”

The DEC board chose not to question the assumptions underlying the company’s “traditional strategy” despite new external realities. DEC was acquired by Compaq in 1998 after years of poor results.

How P&G Lost Its Way

In 2001, during a period of performance decline at Procter & Gamble, Drucker was asked by the board to review a position paper that was meant to address this decline, which had preceded a broad slow down in the U.S. economy. Drucker followed up his review with a letter to the board:

“In a consumer boom you actually lost market share in some of your most important brands. There are three plausible explanations:

“Incompetent people can be dismissed out of hand. The same people, who today do not produce results, performed magnificently only yesterday.

“The basic assumptions and strategies on which the business operates no longer fit reality. P&G is already re-thinking its basic theory of business, adapting it, changing it, re-focusing it.

“The knowledge, the competence, and drive of performing people are misdirected or inadequately utilized.

“Your position paper is concerned primarily with explanation number three. Your paper argues that traditionally P&G has focused on optimizing its market capital–brands–and has treated the information, knowledge, and passion of people as an ‘input,’ that is, the traditional economist’s ‘labor’ and a ‘cost.’

“It makes no sense, however, to look for an explanation of P&G’s recent malperformance in faulty or inadequate utilization of the intellectual capital. There has never…been a company that has done a better job than P&G in developing people, putting them where the results are, and making high performers out of them. Rather, it may be precisely the very perfection of the P&G system that has become a straightjacket and tends to imprison the individual’s knowledge in the silo of a specialty, a brand, or a market segment, rather than allow it to become a company asset. That approach is, so to speak, a ‘planned economy.’ Worse, it does not utilize the individual’s motivation and passion, the ‘fire in the belly.’ As in any planned economy, performance standards are minimums below which the individual is not allowed to fall. The exceptional performer does so despite them rather than because of them. And he or she is thus also encouraged by the system to keep his or her information and knowledge to themselves rather than contribute them to the company.”

Under the leadership of then P&G CEO A.G. Lafley, who worked closely with Drucker, P&G effectively turned itself around by listening to the exact prescription Drucker advised—it abandoned its rigidity and enabled everyone to recognize the consumer as the ultimate boss.

If Only GM Had Listened

Beginning in 1939, Drucker and Alfred Sloane, then CEO and chairman of the board of General Motors, had a running disagreement. Sloan believed that management was a science. He saw General Motors’ success as a result of the company’s ability to optimize its distinctive economies of scale, manage the flow of money and investments, and provide an expansive dealer network that encouraged trade-ins while selling new cars. Drucker, on the other hand, believed that management was a practice and that the practitioner’s job was to continually challenge the theory and bounds to redefine the “what,” not the “how.”

By failing to reassess its “what,” today’s GM is a sickly shadow of the robust corporation that Sloan built and that thrived for 70 years. Its market share in the United States exceeded 55 percent through 1960. Today, it is less than half of that. In 1980, GM was still the most sought after company to work for by college engineers, according to MIT’s placement office. Today, it is not even in the top ten.

What happened? Customers’ values changed to reflect major shifts in society, taste, and culture. Americans wanted convenience, safety, fuel efficiency, and commuting comfort. Rather than listening and connecting with these values, GM invested in quick fixes and patches—solutions built from their old way of doing business—while the company continued to decline.

Meanwhile, Toyota quietly adopted the Drucker approach, continuously redefining their approach to “what.” At the time, the idea of a Japanese auto running in NASCAR would have been unthinkable. Toyota passed GM last year as the number one automobile company in the world; it’s expected to become number one in the U.S. market this year.

In one of his last conversations, Drucker shared what his advice to the GM board would have been. He would have told them: “Lock yourselves up in a room and assume in two years that you will not make another car anything like the ones you make today.” Then, he would have asked them, “‘how can you use your strength, your position, and your scale to redefine the transportation industry?’ Are they asking those questions?”

The Art of the Boardroom

Anyone reading today’s headlines would conclude that boards need Drucker’s advice more than ever. They need his clarity and often his ethical guidance. To perform effectively, Drucker would say that a board should:

• Understand and embrace the board’s unique mission to be a constructive adversary, even towards the CEO and his or her executive team.
• Guard the ability to have a truly external and longer-term perspective, one that, for example, values innovation and the development of human capital.
• View social responsibility as a necessary, engrained characteristic of the organization. Directors should focus on activities that enhance their organization’s knowledge and abilities in production and marketing but they should also realize the wonderful opportunity to bring responsibility to an organization.
• Balance their role as overseers of the executive team with their critical role as a valuable “sounding board.”
• Challenge their own assumptions and biases—and check the date stamp on their frame of reference—that might otherwise preclude their effectiveness as directors.
• Help ensure thoughtful and sensible succession planning from one era of management to the next.
• Establish effective methods of reporting and communications up and down the organization.
• Conduct detailed self-performance monitoring and tracking evaluations with metrics tied to targeted results.

Elizabeth Haas Edersheim is author of The Definitive Drucker: Challenges for Tomorrow’s Executives—Final Advice from the Father of Modern Management. She is the founder of New York Consulting Partners and a former partner at McKinsey & Co.

Sidebar – P&G’s Lafley on Drucker: curiosity and humility were two of his greatest assets

As I’ve looked back on the conversations and countless hours spent reading Peter Drucker’s books and articles, I’ve thought about what made him so extraordinary. For me, it comes down to five things.

First and foremost, Peter’s basic rule was the importance of serving customers. “The purpose of a business is to create and serve a customer,” he said. Plain and simple. Second, Peter insisted on the practice of management. He had little patience for detached theory and abstract plans.

The third characteristic was his gift for reducing complexity to simplicity. His curiosity was insatiable, and he never stopped asking questions. The fourth defining Drucker strength was his focus on the responsibility of leaders. “The CEO,” he said, “is the link between the inside, where there are only costs, and the outside, which is where the results are.” For many reasons, businesses become inwardly focused. The CEO has primary responsibility for bringing the outside in, for ensuring that the organization understands the views of the market, current and potential customers, and competitors.

The fifth and most important of Peter’s many attributes was his humility. He treated everyone with deep respect. “Management is about human beings,” he wrote. “Its task is to make people capable of joint performance, to make their strengths effective, and their weaknesses irrelevant.”

- From the forward of The Definitive Drucker: Challenges for Tomorrow’s Executives—Final Advice from the Father of Modern Management.