Jay W. Lorsch

Robert C. Clark

It’s no exaggeration to say that the governance of companies has moved from the inner sanctum of the boardroom to the white-hot spotlight of public discourse. More is demanded these days from independent directors: They’re expected to ensure their firms’ compliance with an ever-evolving set of regulations, head off executive wrongdoing at the pass, and appease shareholders’ and Wall Street’s never-ending hunger for positive short-term results.

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Reprint: R0804G
These days, boards are working overtime to comply with Sarbanes-Oxley and other governance requirements meant to protect shareholders from executive wrongdoing. But as directors have become more hands-on with compliance, they&#8217;ve become more hands-off with long-range planning. That exposes corporations and their shareholders to another&#8212;perhaps even greater&#8212;risk, say professors Lorsch, of Harvard Business School, and Clark, of Harvard Law School.
Boards are giving the long term short shrift for a number of reasons. Despite much heavier workloads, directors haven&#8217;t rethought their patterns of operating&#8212;their meetings, committees, and other interactions. Compliance has changed their relationship with executives, however, turning directors into micromanagers who closely probe executives&#8217; actions instead of providing high-level guidance. Meanwhile, the pressure to meet quarterly expectations intensifies.
Directors need to do a better job of balancing compliance with forward thinking. Boardroom effectiveness hinges most on the quality of directors and their interactions, the authors&#8217; research shows. Directors must apply their wisdom broadly, handling compliance work more efficiently and staying out of the weeds on strategic issues. Using their power with management to evangelize for long-term planning, they must take the lead on discussions about financial infrastructure, talent development, and strategy. Reserving sacrosanct time for such discussions, as Philips Electronics&#8217; board does at annual retreats, is an effective practice: After one recent retreat, Philips decided to exit the semiconductor business, where it was losing ground. Individual directors also must not shy away from asking tough questions and acting as catalysts on critical issues, such as grooming a successor to the CEO. In short, directors must learn to lead from the boardroom.

Leading from the Boardroom

Reprint: R0804G These days, boards are working overtime to comply with Sarbanes-Oxley and other governance requirements meant to protect shareholders from executive wrongdoing. But as directors have become more hands-on with compliance, they’ve become more hands-off with long-range planning. That exposes corporations and their shareholders to another—perhaps even greater—risk, say professors Lorsch, of Harvard Business School, and Clark, of Harvard Law School. Boards are giving the long term short shrift for a number of reasons. Despite much heavier workloads, directors haven’t rethought their patterns of operating—their meetings, committees, and other interactions. Compliance has changed their relationship with executives, however, turning directors into micromanagers who closely probe executives’ actions instead of providing high-level guidance. Meanwhile, the pressure to meet quarterly expectations intensifies. Directors need to do a better job of balancing compliance with forward thinking. Boardroom effectiveness hinges most on the quality of directors and their interactions, the authors’ research shows. Directors must apply their wisdom broadly, handling compliance work more efficiently and staying out of the weeds on strategic issues. Using their power with management to evangelize for long-term planning, they must take the lead on discussions about financial infrastructure, talent development, and strategy. Reserving sacrosanct time for such discussions, as Philips Electronics’ board does at annual retreats, is an effective practice: After one recent retreat, Philips decided to exit the semiconductor business, where it was losing ground. Individual directors also must not shy away from asking tough questions and acting as catalysts on critical issues, such as grooming a successor to the CEO. In short, directors must learn to lead from the boardroom.

Leading from the Boardroom

Summary.

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