Foreword TK Kerstetter xxv Preface xxvii I THE BOARD'S RESPONSIBILITIES 1 1 The Handbook of Board Governance: An Introduction and Overview 3 Dr. Richard Leblanc Introduction and Overview 3 Diversity of Authorship 4 Drivers and Impediments to Improved Corporate Governance 4 Precis of This Handbook's Chapters 5 Conclusion: Future of Board Governance and Unresolved Issues 25 2 Boards That Lead 26 Michael Useem, Dennis Carey, and Ram Charan A New Model of Collaborative Leadership 27 "One of the Greatest Business Decisions of All Time" 28 Monitor and Leader 31 Duty of Leadership 34 When to Lead, When to Partner, and When to Stay Out of the Way 35 Recruiting Directors Who Build Value 36 The Director's Checklist 40 Conclusion: Boards That Lead 41 Notes 43 References 43 3 Trends in Corporate Governance 46 Chris Pierce Trend 1: Increased Usage of Corporate Governance Codes 46 Trend 2: Higher Levels of Regulation and Enforcement 48 Trend 3: Greater Board Diversity 49 Trend 4: More Focus on Strategy, Value Creation, and Corporate Responsibility 55 Trend 5: Greater Emphasis on the Governance of Risk 58 Trend 6: Greater Emphasis on Information Governance 60 Trend 7: Greater Emphasis on Compensation Governance 60 Trend 8: Greater Emphasis on Accountability and Responsibility to Shareholders and Other Stakeholders 62 Trend 9: Increased Usage of Board Evaluations and Board Performance Development 64 Trend 10: Director and Board Development 67 Conclusion 68 Notes 68 4 Governance as a Corporate Discipline 70 Drew Stein What Is Governance? 72 Developing the Governance Document 74 Keeping the Governance Document Up-to-Date 75 Who Should Have Access to the Governance Document? 75 What Should the Governance Document Contain? 77 Summary 84 Conclusion 85 5 The Nonexecutive Chairman: Toward a Shareholder Value Maximization Role 86 Henry D. Wolfe Key Responsibilities of a High Performance, Nonexecutive Chairman 87 Characteristics, Experience, and Skills to Look For in a Chair 99 Communication with Shareholders 108 Addressing Concerns of Activist Shareholders 111 Conclusion 117 Notes 118 6 CEO Succession: An Owner's Guide for Directors 120 Mark B. Nadler The Talent Disconnect 123 The Reluctant Retiree 124 The Absence of Human Resources 125 The Assessment Tool Obsession 126 The Irrelevant Criteria 128 The Culture Conundrum 131 The Mysterious Talent Pool 133 The Never-Ending Transition 134 The Forever CEO 136 The Persistent Myth: It's Just for the Big Guys 137 Conclusion 140 References 140 7 CEO Succession Planning 141 David F. Larcker and Brian Tayan The Market for Chief Executive Officers 142 CEO Turnover 145 Incoming CEOs 148 Models of Succession Planning 149 Common Practices in Succession 152 Conclusion 155 Notes 155 II WHAT MAKES FOR A GOOD BOARD? INDEPENDENCE, COMPETENCY, DYNAMICS, AND BEHAVIORS 159 8 Director Independence, Competency, and Behavior 161 Dr. Richard Leblanc The Regulatory Focus on Director Independence May Occur at the Expense of Industry Expertise 161 Moving Beyond Director Independence 162 Regulatory Emphasis on Director Independence 163 Boards Should Collectively Decide: How Much Compromising of Director Independence Is Acceptable? 167 Director Competency 170 A New Requirement: Board Diversity Matrix 174 Director Behavior 176 Assessing Overall Director Effectiveness 176 Conclusion 188 Notes 188 References 190 9 The Criticality of Board Director Team Intelligence (TQ) in Economic Value Creation 193 Solange Charas, PhD The Existing Paradigm Is Long Overdue for a Change 194 Defining and Measuring Team Intelligence Impact on Corporate Performance 196 Findings about the Relationship between TQ and Firm Performance 197 Theoretical Support 198 Recommendations for Boards 198 Conclusion 201 Notes 202 10 Lessons from the Banking Crisis: Leadership and Effective Board Behaviors 204 Dr. Mary Halton Background and Context 205 Learning from the Banking Crisis 206 Leadership in the Boardroom 207 Board Norms 211 Information Flow 213 Board Structure and Process 216 Discussion and Summary 220 Conclusion 223 References 223 11 The Challenge of Director Misconduct 226 Holly J. Gregory Defining Expectations for Director Behavior 227 Forms of Director Misconduct 227 Disclosures of Confidential Information 228 Valued Behaviors for Directors 229 Appropriate Dissenting Director Behavior 230 Strategies to Prevent Director Misconduct 230 Director Resignations: Form 8-K Disclosure Obligations 231 Addressing Director Misconduct 232 Conclusion 234 Note 235 III RISK GOVERNANCE, ASSURANCE, AND THE DUTIES OF DIRECTORS 237 12 The Rise and (Precipitous, Vertiginous, Disastrous) Fall of the Fiduciary Standard 239 Nell Minow Conclusion 246 Notes 247 13 The Duties and Liabilities of Directors Getting the Balance Right 249 Dr. Roger Barker Why Should Directors Have Duties? 250 The General Duties of Directors under Corporate Law 252 What Objectives Should Directors Pursue? 253 The Business Judgment Rule A Get-Out-of-Jail Card for Directors? 255 Enforcing Directors' Duties 257 Beyond Corporate Law Other Sources of Liability for Directors 259 Directors' Personal Exposure to Financial or Criminal Liability Overwhelming Burden or Empty Threat? 260 Conclusion: The Balance between Personal Accountability and Liability Overkill 263 Notes 265 14 Best Practices in Parent and Subsidiary Governance 269 Poonam Puri Part I: Overview of Parent and Subsidiary Governance 269 Part II: Parent Company Liability for the Actions of Subsidiaries 270 Traditional Exceptions for Holding Parent Companies Liable for Their Subsidiaries 271 Emerging Tort Law Liability as a New Exception 272 Part III: Leading-Edge Practices in Subsidiary Governance 275 How Much Direction and Oversight Should a Parent Corporation Exercise Over Its Subsidiaries? 278 Part IV: Conclusion 280 Notes 281 15 The Role of the Board in Risk Management Oversight 283 John R. S. Fraser The Challenges 287 Risk Management Methodologies 289 ISO 31000 289 COSO ERM 2004 290 What Is Enterprise Risk Management? 292 Accountability for Board Oversight 299 Overview of the Board's Role 303 The Board and Internal Audit 304 Conclusion 305 Notes 305 References 310 Additional Readings for the Serious Researcher 312 16 Board Oversight of Internal Audit: How to Maximize Internal Audit Value 314 John R. S. Fraser The Internal Audit Mandate 315 The Relationship of Internal Audit and Enterprise Risk Management (ERM) 317 The Chief Audit Executive (CAE) 318 The Independence and Motivation of a CAE 319 Planning 320 Reporting Issues 322 Follow Up on Internal Audit Reports 323 Building Trust 324 Conclusion 326 Appendix: Sample Internal Audit Mandate 326 Notes 334 17 Three Lines of Defense versus Five Lines of Assurance: Elevating the Role of the Board and CEO in Risk Governance 335 Tim J. Leech and Lauren C. Hanlon The Origins of the Three Lines of Defense (3LoD) 336 Regulatory Endorsements to Date 339 3LoD Contrarian Positions 341 Suboptimal and Even Dangerous Elements of 3LoD 345 Five Lines of Assurance What Is It? 345 Five Lines of Assurance Why Is It Better? 351 Benefits of the Five Lines of Assurance versus 3LoD 351 Conclusion 354 References 354 18 Commercial and D&O Insurance for Large Corporations: Best Practices in Protecting the Assets and Liabilities of Directors and Officers and Their Organizations 356 Stephen J. Mallory The Key Organizational Risks (Insured and Not Insured) 358 Directors and Officers Insurance 361 Summarizing Insurance and Claims for Board Oversight Purposes 365 Roles and Responsibilities 365 The Insurance Marketing Process 367 Conclusion 368 Appendix A: Checklist of Key D&O Policy Extensions 369 Appendix B: Broker Responsibilities, Sample Broker Services Agreement 374 Appendix C: Checklist The Process for Marketing Large Insurance Programs 378 Appendix D: Director's Questions 381 Notes 382 IV THE RISE OF SHAREHOLDER ACCOUNTABILITY 383 19 The Happy Myth, Sad Reality: Capitalism without Owners Will Fail 385 Robert A. G. Monks Received Wisdom 385 Ownership 387 Free In the Sense of Not Being Accountable Cash 388 Drones 389 Pfizer 390 ExxonMobil 391 Capitalism as Corruption 393 Increased Regulation 395 Better Boards of Directors 396 Enlightened Management 397 Faute de Mieux Back to Ownership 397 Postscript 399 Notes 399 References 401 20 Board-Shareholder Engagement 403 Richard Fields and Anthony Goodman Part I: 2014 The Year of Engagement 404 Part II: Factors Supporting Board-Shareholder Engagement 406 Part III: The Costs and Benefits of Engagement 411 Part IV: Responses to Increasing Engagement 414 Part V: Questions for Further Research 417 Conclusion 418 Notes 420 21 The Individual's Role in Driving Corporate Governance 425 James McRitchie From Robots to Democracy 426 Companies without Owners 428 Taking Responsibility 430 Life-Affirming Foundations 432 When Humans Bring Their Values to the Corporation 432 Current Pay Practices Work Against Creating Long-Term Value 433 Status and Power 435 The Example of Norway 436 How Much Will Government Help? 436 Fiduciary Duty 438 Research Points to Public Opinion as a Driver 440 Retail Investors Who Made a Difference 441 Conclusion 445 Notes 446 22 Thoughts on the Origins and Development of the Modern Corporate Governance Movement and Shareholder Activism 450 Jon Lukomnik Welcome to the 1980s 451 Big Daddy and the Birth of the Council of Institutional Investors 455 The 1990s: The Transition from Defense to Offense 457 The Birth of Activism 458 Notes 459 V THE UNSOLVED GOVERNANCE PROBLEM: PERFORMANCE MEASUREMENT AND EXECUTIVE PAY 461 23 Peer Groups: Understanding CEO Compensation and a Proposal for a New Approach 463 Charles M. Elson and Craig K. Ferrere Peer Benchmarking 463 CEO Successions 465 Empirical Support 466 What This Means for CEO Pay 468 Conclusion 471 Notes 472 24 The Effective Compensation Committee 474 Steven Hall, Nora McCord, and Steven Hall Jr. Keys to an Effective Compensation Committee 475 Compensation Committee Charter 482 Compensation Philosophy 482 Aligning Pay with Performance 483 Compensation Committee Calendar 485 Aligning Pay to Performance: Best Practices 492 Succession Planning and Talent Development 496 Say-on-Pay and Shareholder Engagement 496 Conclusion 499 Notes 499 25 Human Resource Management: The Role of Boards 501 Jay A. Conger and Edward E. Lawler III Human Resources Information Available to Boards 502 Human Resources Expertise on the Board 503 Monitoring Human Resources Effectiveness 504 Sources of HR Information and Knowledge Gap 504 What Price Do Boards Pay for the HR Gap? 506 How Boards Can Address Their HR Effectiveness Gap 507 Establish Quadruple Bottom Line Public Reporting 508 Capacity Development 510 Conclusion 512 References 513 26 Designing Performance for Long-Term Value: Aligning Business Strategy, Management Structure, and Incentive Design 514 Mark Van Clieaf Defining Performance and Missing Metrics 516 What About Earnings per Share (EPS) as a Performance Metric? 519 Connecting Current and Future Value to Total Shareholder Return 520 Aligning Management Structure with Innovation and Future Value 525 Current Value, Future Value, and Rethinking Long-Term Incentive Design 528 Explaining Performance and Pay for Performance 530 Conclusion 531 Glossary 532 Notes 534 27 Measuring and Improving Pay for Performance: Board Oversight of Executive Pay 536 Stephen F. O'Byrne The Three Basic Objectives of Executive Pay 537 A Brief History of Executive Pay 537 Why Percent of Pay at Risk Is Not a Meaningful Measure of Incentive Strength 539 Measuring the Three Basic Objectives of Executive Pay 540 The Design Implications of the Measurement Analysis: Perfect Pay Plans 544 Benchmarking Pay for Performance 547 Why Say-on-Pay Approval Rates Are So High 548 Why the Guidance from CalPERS, NACD, ICGN, and ISS Is Not Very Helpful for Directors 549 The Challenge Facing the Individual Director 551 Conclusion 552 Notes 553 VI GOVERNANCE OF INFORMATION TECHNOLOGY 555 28 Information Technology and Cybersecurity Governance in a Digital World 557 Bob Zukis The Nature of Information Technology 559 The Evolution of Corporate IT Risk 561 Effective IT Governance in Practice 563 The Never Ending Cybersecurity War 567 Conclusion 571 Notes 572 29 The Board's Role in the Governance of Enterprise Information and Technology 574 Elizabeth Valentine, Steven De Haes, and Greg Timbrell The Skill Shortage 575 What Is Governance of Enterprise Information and Technology (GEIT)? 576 How Bad Is the Board Capability Problem? 576 Benefits of Boards Building IT Leadership Capacity 577 Winners and Losers 578 Areas of IT Risk Boards Must Capably Govern 580 Three Barriers to Effective GEIT 584 Are Current Governance Oversight Practices Serving Your Board When It Comes to Technology Risk? 586 IT Governance Reporting to the Market and Investors 586 The Role of Audit in IT Risk, and the COBIT5 Control Framework 588 Board Accountabilities and New Competencies 590 Practical Steps to Get Started Transforming Your Board 592 Conclusion 594 Notes 594 References 595 VII GOVERNANCE OF SUSTAINABILITY: BOARDS' CHANGING ROLES 597 30 Responsible Boards for a Sustainable Future 599 Dr. Yylmaz Arguden What Do All These Developments Mean for the Corporate Boards Around the World? 600 Role of the Board of Directors 603 Emerging Standards of Sustainability 606 Responsible Boards 617 Crafting the Sustainability Vision 622 Building Sustainable Boards 625 Integrating Sustainability into the Organization 629 Conclusion 632 Notes 636 31 The Board's Role in Sustainability Governance: Connecting Long-Term Value Creation and Executive Compensation 639 Douglas Y. Park What Is Sustainability? 640 The Relationship between Sustainability Performance, Value Creation, and Executive Compensation 640 The Current State of Sustainability Governance and Compensation on Sustainability Performance 647 Action Steps 649 Conclusion 656 References 657 32 Board Governance for a Better World 659 Alice Korngold Chocolate Is Bittersweet 659 Volkswagen: A Cautionary Tale 661 COP21 661 Boards Build Shareholder Value 663 Global Challenges Present Opportunities for Businesses 668 Boards That Lead 675 Society Holds Business Accountable 678 Boards Must Build a Better World 679 References 679 33 Corporate Governance: Ethics and Legal Compliance, Risk Management, and Political Activities 683 John M. Holcomb Legal Compliance and Ethics 684 Risk to Reputation 686 Board Role and Legal Incentives 689 Board Committees 691 Corporate Political Role 694 Conclusion 697 References 698 VIII GOVERNANCE OF DIFFERENT FORMS 703 34 Transforming Nonprofit Boards to Function in the Twenty-First Century 705 Eugene H. Fram EdD Improving Board Structures and Seeking the Best Board Members 705 Improving Board Operations 708 Fundraising A Team Effort 711 How Does Your Nonprofit Retain Termed-Out Board Members? 712 Strategic Planning Long Term Pays Off 714 Evaluating the CEO Rigor Required 715 Board Compliance More Than Financials 718 Conclusion 720 Notes 721 35 Startup Boards All In for the Company 723 Adam Quinton Startup Board Evolution 724 Boards That Are All In 725 The Cash Nexus 725 The Path to Exit 726 Venture Capitalist Conflicts of Interest 728 Startup Board Diversity 728 Startup Board Mechanics 729 Conclusion 730 Notes 730 36 Systemically Overlooked Anomalies of Governing Small-Cap Companies 731 Adam J. Epstein One Size Fits All 732 Conflicts of Interest and Needlessly Dilutive Financings 734 The Epidemic of Asymmetric Information and Groupthink 738 When the Selection and Management of Professional Service Providers Creates Enterprise Risk 742 Conclusion 747 Notes 747 37 Boards and Value Creation in Family Firms: An Extended Team Production Approach 748 Drs. Jonas Gabrielsson, Andrea Calabro, and Morten Huse Understanding Values and Value Creation in Family Firms 750 Boards and Value Creation in Family Firms 751 The Extended Team Production Approach for Understanding Boards and Governance 752 The Contribution of Boards in the Value Chain 754 Board Competences, Core Capabilities, and the Value Chain 756 Developing Boardroom Dynamics in Favor of a Team Production Culture 758 Conclusion 760 References 761 38 Succession in Family Businesses 764 Ronald I. Zall Introduction 764 The Succession Plan 765 The Prodigal Child System 767 Qualifications and Employment 768 The Gender and Age Issues 770 The Nonfamily Successor (the Hired Gun) 771 The Family Owners 772 Conclusion 774 Notes 774 39 From Regulation to Enforcement of Corporate Governance in the Middle East and North Africa 776 Alissa Amico Capital Markets Supervision Framework 777 Corporate Governance Enforcement 781 Priorities for Reform 786 Conclusion 796 Notes 798 References 800 About the Editor 803 About the Authors 804 Index 835
PROFESSOR RICHARD LEBLANC, CMC, BSc, MBA, LLB, JD, LLM, PHD, is one of Canada's leading experts on corporate governance and accountability. He is an award-winning teacher, researcher, lawyer, public speaker, consultant, and specialist on boards of directors.