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Board Games

Corporate Governance: From golden rules to golden principles Add to ...

This article is the final part of a series that profiles boards that stand out for their drive to constantly raise their game. The authors, who are partners at Guided Futures, have interviewed over 75 directors, chairs and CEOs on how boards must evolve to make a real difference to their company’s future success. Read part one Taking on global leadership at Methanex, part two EPCOR tackles hard choices with ambitious board and part three Raising the bar at CN Rail.

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At Guided Futures, our search for boards committed to raising their game has kept us fascinated. For over a year, we have been interviewing some of Canada’s most admired directors, chairs and CEOs to uncover what makes for board excellence.

The challenge in measuring quality and value inside a boardroom comes down to this. In governance, measures of goodness are utterly different from measures of excellence.

Yes, we need a gold standard to gauge how well a board performs. The problem is that governance gurus place greatest stress on " table stakes," perhaps because they seem hard-edged. Separate chair and CEO? Check! Do meetings include in camera sessions? Check! Have we disclosed our compensation policies? Check!

But what do these goodness measures say about whether a board follows the spirit, or just the letter? About whether it excels in outcomes or just in process? About whether it is vigilant or complacent? What do they signal about whether board and management collaborate or merely tolerate each other? How do they show whether a board adds value to the business? In our view, the box-factors are like the exterior of a flashy new car. It’s high time to look under the hood.

To that end, we asked leading directors: which boards are known for making a real difference? Which boards – far from perfect – nonetheless display a constant thirst to deliver their best contributions to their company? Out of several deserving candidates, the boards of Methanex, EPCOR and CN rose to the top.

What makes these diverse boards instructive are some practices that they share:

1. A board chair who excels in judgement, discernment and tact: All three boards have been guided by longstanding chairs throughout extended eras of performance and growth. (Although at Methanex, Tom Hamilton recently succeeded Pierre Choquette, their consistent styles both focus on drawing the most out of each director.) They, David McLean (CN), and Hugh Bolton (EPCOR) earn high praise for their interpersonal skills – achieving independence from, yet close partnership with, Senior management; setting a tone that fosters candour, critical thinking, and mutual respect; and managing high expectations for each director, accepting no weak links on the team.

2. A constant tending to culture and composition: Each of these boards invests heavily in ‘getting to know each other’ and developing board chemistry. This allows directors to work in high trust, say what they think, debate differences openly, and reach consensus through compromise. They often say, “Differences never get personal”. Recruiting new directors addresses, but goes far beyond diversity of skills in a matrix. New members must also be seen by their colleagues as true peers, as independent thinkers who differ constructively, and as contributors to overall performance. Contrarian perspectives, yes – lone wolves, no.

3. Senior managements equipping directors to make their highest contributions: A professional board that lacks management support is like the sound of one hand clapping. These three boards express full satisfaction at the quality of management pre-work, the advance notice preparing them for major decisions, their CEO’s transparency in raising unresolved issues, and his willingness to seek the advice of individual, expert directors. Most of all, these boards feel their counsel is highly valued. One CN director explains: “We believe management really want us to give them our absolute opinion”. directors on all these boards share that conviction.

4. A bias favouring forward-looking insight over rear-view judgements: Methanex, EPCOR and CN directors are all seized with how to prepare their Company to thrive in a challenging, changing future. That is why we have labelled boards like these “future-shaping”. Shaping is not the same as determining – they expect management to do that. Still, they regularly debate the alternative futures their company faces. They seek to add new, external insights to management’s view of the future. They constantly test their company’s capacity to meet potential demands on its talent, capital, and competitive advantage. Tom Hamilton wants his board to help Methanex “look over the horizon and around the corner”. The CN board has added separate committees for strategy and finance over the years, both helping to emphasize a forward-looking perspective. EPCOR’s board organizes deep discussions on emerging issues, such as its future sources and uses of capital, well before they become critical.

What unites these four attributes is that none can be reduced to a yes-or-no box to tick. None can be simplified into a golden rule that every board or company must follow. To us, however, they evoke a wider set of golden principles or practices without which no board can excel.

That leads us to a final distinction between these three boards and many others. Each of them is prepared to question conventional thinking about governance, rejecting mindless adherence to rules, in favour of what makes sense. Each insists on looking to the principle behind the rule. Do we agree to "say on pay?" Let’s take time to understand its impact. Should our former CEO become chair? Let’s understand whether the benefits outweigh the costs. Should we refresh the board by turning over its membership or keep our best members on through several terms? Let’s retain their knowledge, while maintaining high standards for each director.

Where next? About these three boards, we can venture one strong prediction. They will spend the next several years striving to raise their game still further, while never believing that their job is done.

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