The trouble, writes Adler, is that when a chief executive achieves fame, it makes his/her post-honor performance poorer. According to a university study, stock value at companies where the CEO is given positive press and awards declined by an average of 60 percent over the next few years. Non-superstars, in contrast, found their companies’ value to decline by “merely” 45 percent.

“It is hard to disentangle why exactly superstar CEOs stumble so badly once they hit star status,” writes Adler. “Maybe they believe their own press, and at some point morph from a human to a brand, always a mistake.”

Such CEOs also found their pay increasing post-honor, magnifying the difficulties with having such a celebrated chief executive.

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).

The number of women on a company’s board is directly connected to the future number of women in its senior management ranks, according to Catalyst’s “Advancing Women Leaders: The Connection Between Women Board Directors and Women Corporate Officers.”

The New York-based advocacy group  says this “compelling predictor shows a way to increase the number of women in leadership.” Its new findings also support earlier research that found a correlation between financial performance and gender diversity.

That analysis revealed that Fortune 500 companies with the largest representation of women board directors and corporate officers achieve, on average, higher financial performance.

Women in corporate leadership can also send a critical message to people entering the workforce. “Women leaders are role models to early- and mid-career women and, simply by being there at the top, encourage pipeline women to aspire to senior positions. They see that their skills will be valued and rewarded,” said Catalyst President Ilene H. Lang.

Catalyst says its latest research “shows a clear and positive link” between the percentage of women board directors in the past and the percentage of women corporate officers in the future:

• Companies with 30 percent women board directors in 2001 had, on average, 45 percent more women corporate officers by 2006, compared to companies with no women board members.

• Companies with the lowest percentages of women board directors in 2001 had, on average, 26 percent fewer corporate officers than those with the highest five years later.

• Companies with two or more women members on a company’s board in 2001 had 25 percent more women corporate officers by 2006 than companies with one woman board member in 2001.

Furthermore, the presence of women on boards had a stronger impact on the growth of women in line positions than in staff positions. Line experience is necessary for advancement into CEO and top leadership positions, and Catalyst’s annual censuses show that women are historically underrepresented in these roles.

The latest research demonstrates the important contribution that women board directors play in making sure women get this critical experience.

“A gender diverse board signals the right tone at the top and the importance that a company places on creating a successful work environment for all employees,” said Lang. “Moreover, this study shows that what’s good for women is good for business. Simply put, more women on corporate boards correlate with more women in the C-suite and better financial performance – a real win/win for companies, shareholders, and talented women seeking companies that support their advancement.”

]]> http://www.directorship.com/exec-pipeline-key-to-diverse-boards/feed/ 0 http://www.directorship.com/many-companies-to-withhold-disclosure-of-performance-goals-in-2008-survey-finds/ http://www.directorship.com/many-companies-to-withhold-disclosure-of-performance-goals-in-2008-survey-finds/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=3612 A significant portion of large U.S. companies are notplanning to disclose performance goals for their executive pay programs intheir 2008 proxy statements, a survey by Watson Wyatt finds.

The leading global consulting firm found only 42 percent ofcompanies plan to reveal their goals for the 2007 fiscal year. Thirty-onepercent of companies, the poll finds, have no plans to disclose their goals,while the remaining 27 percent are unsure.

Meanwhile, the Securities and Exchange Commission adoptednew disclosure rules, effective for the 2007 proxy season, as part of an effortto provide investors with a clearer picture of how a corporation’s executivesare being paid. The rules ask companies to disclose their performance goalsunless providing them would result in competitive harm.

Watson Wyatt’s findings are based on a poll of legal,compensation and HR executives at 135 large, publicly-traded companies.

“Setting sufficiently challenging performance goals andappropriate corporate performance metrics is an extremely important part of theexecutive pay process,” Ira Kay, global director of executive pay consulting atWatson Wyatt, said in a statement. “The SEC has put significant pressure oncompanies to disclose their goals so that shareholders can determine ifprograms are paying for performance. However, companies are still strugglingwith the decision of whether to disclose this information.”

The poll also finds that 68 percent of companies to not planto change their approach to goal setting, though a small but growing number (21percent) intend to modify their pay programs in response to the SEC’s rules, alarge jump from the 5-percent found in a similar 2006 poll.

In February, the company became the first in the United Statesto adopt a resolution giving shareholders this type of advisory vote oncompensation.  At the time, Aflacindicated the first advisory vote would take place in 2009  because it is the first year that executivecompensation tables in the proxy statement will contain three years of data reflectingthe Security and Exchange Commission’s new compensation disclosure requirements.

After evaluating Aflac’s compensation disclosures in the2007 proxy statement, though, the board decided that two years of comparablecompensation data would be adequate for shareholders to make an informed vote,prompting the board to move the timing of the first say-on-pay up one year.

“We believe that our shareholders have embraced expanded disclosureon executive compensation and it gives them the information they need to makean informed decision n as they weigh pay versus performance,” Dan Amos, Aflacchairman and CEO, said in a statement.  “Aflachas a long history of generating strong returns for its shareholders and weremain committed to being transparent and responsive to our owners.”

The new contract is performance focused, withperformance-based cash bonuses, performance-based restricted stock units, andstock options with a strike price of $15, substantially above the currentmarket price.

“Since his arrival just three years ago, Mike has deliveredon his commitment to grow the company’s core handgun business, to diversify thecompany, and to lead the company to new markets with new and existing products,”Chairman Barry M. Monheit said in a statement. “He developed the strategy and provided the leadership for itssuccessful execution.”

Golden became president, CEO and board member of Smith &Wesson Corp. in December 2004 to reposition the Company to be a global providerof products and services for the safety, security, protection and sport markets. 

At the request of the Hershey Trust, the company’scontrolling shareholder, six independent directors resigned from the board asof yesterday: Jon A. Boscia, Robert H. Campbell, Gary P. Coughlan, HarrietEdelman, Mackey J. McDonald, and Marie J. Toulantis.

In addition, two directors elected separately by the company’scommon stock shareholders – Bonnie G. Hill and Alfred Kely, Jr. – also resigned. 

“After careful reflection and consideration of ourresponsibilities to the Trust, and the best interests of all Hershey Companyshareholders, we determined to electnew directors to aggressively pursue addressing the company’s businesschallenges.” — LeRoy S. Zimmerman, The Hershey Trust.

Accompanying the appointment of Kenneth L. Wolf asnon-executive chairman, which will take effect on January 1 upon the retirementof current Chairman and CEO Richard H. Lenny, the Trust appointed seven newindependent directors:

• Charles A. Davis – Chairman and CEO, Stone Point Capital; Director, Media General, Merchants Bancshares, and Progressive Corp.
• Edward J. Kelly III – Managing Director, The Carlyle Group; Director, The Hartford Financial Services Group, CSK Corp.
• Arnold G. Langbo – Director, Johnson & Johnson, Weyerhaeuser, and Whirlpool
• James E. Nevels – Chairman, The Swarthmore Group; Member, Hershey Trust Company Board and Board of Managers of Milton Hershey School
• Thomas J. Ridge – President and CEO, Ridge Global LLC; Director, Exelon Corp. and Vonage
• Charles B. Strauss – Director, The Hartford Financial Services Group and Aegis Group
• LeRoy S. Zimmerman – Senior Counsel, Eckert Seamans Cherin & Mellot; Chairman, Hershey Trust Company Board; Chairman, Board of Managers of Milton Hershey School; Chairman, Hershey Entertainment & Resorts Company board.

Remaining on the board are Lenny through December 31; DavidJ. West, who will take over as CEO on December 1; and Robert Cavanaugh, aHershey Trust board member. The moves signal the result of the Trust buttingheads with management over the company’s performance.

“The Hershey Trust, which is obligated to manage its assets solely for thebenefit of Milton Hershey School, a school for children in need, has made clearit has not been satisfied with the Company’s recent results,” said Zimmerman ina statement. “After careful reflection and consideration of ourresponsibilities to the Trust, and the best interests of all Hershey Companyshareholders — and after a due-diligence period in which we investigated andascertained the considerable interest of best-in-class directors who were eagerto work with the Trust to benefit all shareholders — we determined to electnew directors to aggressively pursue addressing the company’s businesschallenges.”

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.