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Harvard Business Review, April 2007. Letters to the Editor
How Well-Run Boards Make Decisions
In “How Well-Run Boards make Decisions” (November 2006) Michael Useem underlines the
importance of deciding what matters are reserved for the board, but gives managers no tool to help
make this crucial decision. Focusing on “large-impact decisions” or those that “will change the
future” or “any issue that could have a material impact on the company, from either a financial or a
public perspective” are rather vague concepts that would not have ensured that Enron’s off-balancesheet partnerships were brought to the board’s attention.
We need a set of criteria for deciding what needs to go to the board and some examples
demonstrating why items like off-balance-sheet accounting would make the list. Having spent 20
years studying the relationship between corporate centres and their subsidiary companies, I offer
four suggestions.
First, the board should authorize all significant governance decisions concerning how the company
records what it is doing, presents itself to outsiders, make decisions, and assesses risks. Given the
importance of financial accounting, for example, the board should authorize all accounting changes,
specifically those that are not conservative. This category is about the probity and integrity of the
company.
Second, the board should authorize all decisions with material risks.
Third, the board should get involved in other decisions only when the probability that the discussion
will add value (result in a better decision) outweighs the probability that it will destroy value (result
in a worse decision, delay, or undue cost). Boards can add value if directors have special
knowledge or expertise that his relevant to the decision or if the managers proposing the decision
are likely to be biased (consciously or subconsciously) in their thinking. Otherwise, boards are
likely to destroy value by wasting time and money or giving bad guidance due to ignorance of the
details.
Fourth, the board should appoint the CEO and CFO and authorize other senior appointments.
Useem’s case studies address the third point but raise some concerns. The board of Universal
Investments seems comfortable encouraging its CEO to present the decision about the diamond
fund. On what basis does the board believe that it can add more value than it destroys with this
decision? Surely the management team is best placed to examine the options and identify the best
solution. The role of the board in this kind of decision should be to review the criteria the CEO is
using to choose between options, not make the choice itself.
In the Tyco example, the board reviewed the 60 recommended divestments and decided that in six
instances the case for divestiture was not strong enough. This would add value only if the board
had some special expertise with regard to these six companies or if the directors believed
management was biased toward selling too much. Both reasons seem unlikely. Instead, the board
might have better used its time to review the 50 businesses that management recommended
keeping. Tyco’s history suggests that management would probably be biased towards keeping too
much rather than selling too much.
Andrew Campbell, Director, Ashridge Strategic Management Centre, London
Useem responds: Andrew Campbell has called for tools to help governing boards make decisions.
That is indeed a useful next step.
This content is explored in Ashridges Business Strategy course.
http://www.ashridge.org.uk
In my article, I set forward a set of principles to guide directors’ decision making. The principles
range from the preparation of a protocol specifying which decisions should be taken up by the
directors to the creation of a governance culture that mandates director engagement in the
company’s major decisions. Once these principles are in place, boards then need to develop more
specific guidelines for deciding what to delegate to management and which issues to reserve for
themselves.
Campbell helpfully offers four such tools, and they are, in fact, widely recognized as constituting
good governance guidelines. While he quarrels with the boards’ decisions at two of the companies
described in my article, his commentary reminds us how important it is for directors to become
explicit about their principles and tools – and how difficult it can be to reach agreement on them.
Corporate boards are moving toward greater engagement in major company decisions, and
establishing the right principles and tools will require continuing appraisal and debate.
http://www.ashridge.org.uk