The Handbook of Board Governance
A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members
Published on 31. May 2016
Book
Hardback
888 pages
978-1-118-89550-4 (ISBN)
Description
Build a more effective board with insight from the forefront of corporate governance
The Handbook of Board Governance provides comprehensive, expert-led coverage of all aspects of corporate governance for public, nonprofit, and private boards. Written by collaboration among subject matter experts, this book combines academic rigor and practitioner experience to provide thorough guidance and deep insight. From diversity, effectiveness, and responsibilities, to compensation, succession planning, and financial literacy, the topics are at once broad-ranging and highly relevant to current and aspiring directors. The coverage applies to governance at public companies, private and small or medium companies, state-owned enterprises, family owned organizations, and more, to ensure complete and clear guidance on a diverse range of issues. An all-star contributor list including Ram Charan, Bob Monks, Nell Minow, and Mark Nadler, among others, gives you the insight of thought leaders in the areas relevant to your organization.
A well-functioning board is essential to an organization's achievement. Whether the goal is furthering a mission or dominating a market, the board's composition, strategy, and practices are a determining factor in the organization's ultimate success. This guide provides the information essential to building a board that works.
* Delve into the board's strategic role in value creation
* Gain useful insight into compensation, risk, accountability, legal obligations
* Understand the many competencies required of an effective director
* Get up to speed on blind spots, trendspotting, and social media in the board room
The board is responsible for a vast and varied collection of duties, but the singular mission is to push the organization forward. Poor organization, one-sided composition, inefficient practices, and ineffective oversight detract from that mission, but all can be avoided. The Handbook of Board Governance provides practical guidance and expert insight relevant to board members across the spectrum.
The Handbook of Board Governance provides comprehensive, expert-led coverage of all aspects of corporate governance for public, nonprofit, and private boards. Written by collaboration among subject matter experts, this book combines academic rigor and practitioner experience to provide thorough guidance and deep insight. From diversity, effectiveness, and responsibilities, to compensation, succession planning, and financial literacy, the topics are at once broad-ranging and highly relevant to current and aspiring directors. The coverage applies to governance at public companies, private and small or medium companies, state-owned enterprises, family owned organizations, and more, to ensure complete and clear guidance on a diverse range of issues. An all-star contributor list including Ram Charan, Bob Monks, Nell Minow, and Mark Nadler, among others, gives you the insight of thought leaders in the areas relevant to your organization.
A well-functioning board is essential to an organization's achievement. Whether the goal is furthering a mission or dominating a market, the board's composition, strategy, and practices are a determining factor in the organization's ultimate success. This guide provides the information essential to building a board that works.
* Delve into the board's strategic role in value creation
* Gain useful insight into compensation, risk, accountability, legal obligations
* Understand the many competencies required of an effective director
* Get up to speed on blind spots, trendspotting, and social media in the board room
The board is responsible for a vast and varied collection of duties, but the singular mission is to push the organization forward. Poor organization, one-sided composition, inefficient practices, and ineffective oversight detract from that mission, but all can be avoided. The Handbook of Board Governance provides practical guidance and expert insight relevant to board members across the spectrum.
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Richard Leblanc
The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-For-Profit Board Members
A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members
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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.
Content
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
Précis 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. Y?lmaz Argüden
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 Calabrò, 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
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
Précis 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. Y?lmaz Argüden
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 Calabrò, 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