Split A Board In Two: One For Strategy, The Other For Oversight

Tuesday, February 14, 2006

Prof. Yoram (Jerry) Wind, Directors & Boards, http://

Abstracted from: Rethinking The Board
By: Prof. Yoram (Jerry) Wind Wharton School, University of Pennsylvania
Directors & Boards - Vol. 30, No. 1, Pgs. 20-26

Corporate cops.
Increased regulatory scrutiny is quietly transforming the balance between a board's dual roles: to craft strategic direction and to ensure compliance with an ever-expanding roster of legal directives. As pressure mounts to meet the demands of auditors and lawyers, directors have begun to act more like police officers and less like insightful thinkers who design dynamic strategies to drive corporate performance and growth. The prevailing perception is that collegiality between directors and managers will lead to lax oversight and rubber-stamping of proposals. This fear leads many boards to seek independent directors, thinking that they are less likely to be swayed by personal connections. While outsiders may indeed enhance accountability, Prof. Yoram (Jerry) Wind warns that loosening ties between the board and management will impede the flow of information and ideas that produce innovation and originality.

Think beyond the bandages.
The quiet, gradual shift toward oversight and away from strategy is unlikely to appear in headlines or on a balance sheet. Nevertheless, it could have a powerful negative impact on companies and shareholders. Solutions that go beyond the Sarbanes-Oxley Act and other Band-Aids are necessary both to improve corporate governance and to preserve the board's critical role in planning for the future, writes the author, a distinguished scholar of corporate governance. Among the recommended solutions are more active involvement by investors in board nominations, a re-tailoring of performance incentives, and a movement away from compliance and monitoring toward corporate strategizing.

Try a new model.
The author's solution? Change the fundamental governance structure by splitting the board into two. Altering the board's size and composition, increasing its oversight, auditing, and other duties, and separating its chair and CEO are all recent attempts to improve governance. Maintaining two separate boards, each with its own unique mission, provides a way to address directors' divergent, sometimes conflicting responsibilities. The oversight board would consist of a few experts with strong industry knowledge and backgrounds in finance and law. These independent outsiders would report to regulators and shareholders. The strategy board would be charged with maximizing value for stakeholders, identifying growth opportunities, and helping the company become more profitable. Members would be chosen for their diverse insights and ideas, not their independence. The two boards would meet at least annually to collaborate on governance, nominations, and compensation. Both would have independent sources of information and separate budgets for data-gathering.

Challenges and benefits of a two-board system.
While creating a clearer division of roles, using two separate boards might make it easier for companies to recruit qualified candidates. The strategy board might attract candidates from overseas, since it would be meeting less frequently. The system would also pose several challenges, the author acknowledges. To avoid an overlap in roles, the oversight board should have the last word on legal and regulatory compliance, while the strategy board should rule on strategic matters. Another obstacle­the higher cost of supporting two boards­must be balanced against the improved value and effectiveness that such a system can offer. This dual-board model is certainly not the only solution, so companies need to encourage a regular flow of ideas and to test new models. The goal is a structure that encourages corporate success on both the compliance and the strategy fronts.

Abstracted from Directors & Boards, published by MLR Holdings, 1845 Walnut Street, Philadelphia, PA 19103.

Return to Library of Business Information