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NEW CORPORATE GOVERNANCE 56

Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 13 Number 5 September 200

Blackwell Publishing Ltd.Oxford, UK

CORGCorporate Governance: An InternationaReview0964-8410Blackwell Publishing Ltd. 200

September 2005135569581NEW CORPORATEGOVERNANCECORPORATE GOVERNANCE

*This paper was presented the 7th International Confeence on Corporate Governanand Board Leadership, 11October 2004, at the Centre fBoard Effectiveness, HenlManagement College.**Address for correspondencIFPM Center for CorporaGovernance, University of Gallen, Dufourstr. 40a, C9000 St. Gallen/SwitzerlanTel: +41 71 224 23 70; Fax: +71 866 28 11; [email protected]

New Corporate Governance: from

good guidelines to great practice*

Martin Hilb**

This paper presents a new, holistic approach to corporate governance, adding simultaneousvalue to shareholders, customers, employees and society. This new approach to directing andcontrolling companies integrates components of corporate governance that have historicallybeen treated in isolation of each other in research, teaching and practice.

Keywords: Keep it situational, strategic, integrated, controlled

The true lesson from Enron is that until thepower of the shareholder value norm is broken,effective reform of corporate governance willbe on hold. (Deakin and Kenzelmann, 2004,p. 142)

Whats new?

ased on the results of board evaluationswe conducted in companies operating in

various business sectors (including banking,insurance, chemical, pharmaceutical, biotech-nology, information technology and airlineservices) (see Hilb, 2004, p. 206), we identifythe following as the main weaknesses of cur-rent corporate governance practices:

most national corporate governance guide-

lines propose a one size fits all approachwhich is dangerous; it may support goodgovernance, but it does not guarantee thatthe governance of a firm will become great;

there is a lack of strategic direction in muchof board practice;

board selection, appraisal, remunerationand development often lack integration andprofessionalism; and

there is often a lack of in-depth know-howin auditing, risk-management, communica-tion and evaluation at board level.

B

In theory, one short-coming has been the ten-dency of textbooks in the area [of corporategovernance] to make prescriptions about thebest practice . . . without providing a credibleanalytical framework for the students or the

practitioners (Boxall, 1992, p. 60). There is asevere deficit of integrative corporate gover-nance concepts. An analysis of the develop-ment stage of teaching shows that the futureacademic strength of corporate governance. . . will depend on how effectively presentscholars dedicate themselves to building cred-ible analytical frameworks focused at thelevel of the firm but with the capability of pro-viding an adequate disciplinary basis [forcomparative corporate governance] (Boxall,1992, p. 75).

This paper presents an integrated corporate

governance framework, called New Corpo-rate Governance, which is based on areversed KISS-Principle:

S

ituational

S

trategic

I

ntegrated

K

eep it controlled

This holistic framework for the direction andcontrol of enterprises tries to integrate for-merly isolated elements of corporate gover-nance in research, teaching and practice. What


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CORPORATE GOVERNANCE

Blackwell Publishing Ltd 2005

Volume 13 Number 5 September 2005

is new, you may ask? Table 1 tries to answerthat question.

The New Corporate Governance frameworkpresented in Figure 1 integrates the interests ofshareholders, customers, employees and thepublic. The framework comprises four parts:

Part 1: The Situational Dimension

(Keep itsituational). Here we differentiate between

external

and internal

context. At the level of theexternal normative context, corporate gover-nance practice differs with national, industrialand organisational culture. At the internal con-

Table 1: Differences between traditional and new corporate governance

Dimension Traditional corporate governance New corporate governance

SituationalImplementation

No difference between national,industry and corporate culture

Implementation appropriate to thespecific context of each firm (

Keepit situational

)Strategic direction Strategic development is not a

function of the supervisoryboard

Strategic development is a centralfunction of the supervisory board(

Keep it strategic

)Integrated board

managementOnly isolated nomination and

remuneration committees inpublicly listed companies

Integrated and targeted selection,appraisal, compensation anddevelopment of the supervisoryand managing boards (

Keep itintegrated

)Holistic monitoring Controlling the financial

dimension onlyHolistic monitoring of results from

the perspectives of shareholders,customers, employees and thepublic (

Keep it controlled

)

Figure 1: The New Corporate Governance framework

K

I ntegrated

S

S

2.2

K

4.1

Auditing

eep it

controlled

I

3.1 Board

Selection

3.4 Board

Development3.2 Board

Feedback

3.3 Board

Compensation

ntegrated

S

S

trategic

ituational

1.1

External

Context

1.2

Internal

Context

2.3

Board

Structure

2.4

Board

Vision

2.2

Board

Culture

4.2

Risk

Mgmt

4.3

Communi-

cation

4.4

Control-

ling

2.1

Board

Composition


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NEW CORPORATE GOVERNANCE

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text level, every firm has a different develop-ment level, ownership and power makeup: thesize, development level and complexity of thefirm, the degree of internationalisation, andthe ambitions of the board.

Part 2: The Strategic Dimension

(Keep itstrategic). We identify four central success fac-tors in corporate governance. The first pre-

requisite for a board culture characterised byconstructive criticism and trust is the targetedselection of an exemplary and well-diversified

board team

; one that is comprised of people whoact as role models for both share- and stake-holders. The culture

of constructive criticismand trust is implemented through simple net-worked board structures and processes

. Thesethree success factors are prerequisites for thedevelopment, implementation and evaluationof board success measures

, adding simultaneousvalue to shareholders and stakeholders.

Part 3: The Integrated Board ManagementDimension

(Keep it integrated). This dimen-sion integrates the targeted recruitment

,

evaluation

, remuneration

and development

ofmembers of the supervisory and managingboards. For large, public listed companies, it isimportant to have a board-managementcommittee which handles not only nomina-tion and remuneration, but also evaluationand development, in an integrated way.

Part 4: The Controlling Dimension

(Keep itcontrolled). This dimension refers to the audit-ing

, risk management

, internal and external

communications

, and feedback

functions of theboard.

By framework we mean an abstractionthat preserves in economical form most of thepoints that have been developed (Weick,1979, p. 95).

The danger of simplifying a complex sys-tem, as the New Corporate Governanceframework is attempting to do, should not beunderestimated: as soon as parts of a systemare isolated, the understanding of the systemis altered (Maleztke, 1972, p. 1515). Onlywhen we are aware of the limitations of anymodel, and of the dangers of isolating sub-components thereof, can we call our approach

scientific (Koenig, 1967, p. 7).There are two main limitations of thisframework:

my visual representation lends itself to theusual critique of the social sciences, whichis to pay lip service to interdependence,and then to investigate the elements of themodel in isolation from one another(McQuail, 1973, p. 83), and

while the breakdown of corporate gover-nance into single, central components hasanalytical relevance for our study, in prac-

tice these components are not alwaysclearly delimited. There are a number ofoverlaps and interdependencies betweenthe factors.

In spite of these caveats, New CorporateGovernance meets the criteria proposed byBrown for the assessment of a [good] model:simplicity, clarity and logic of the formal struc-ture, closeness to reality, and, therefore, ade-quacy for relevant prediction.

The next sections present the four mainparts of the framework, which are publishedin book form in English and German (Hilb,2004).

1. Keep it situational

As a result of the many corporate scandalsthat have taken place around the world,best-practice corporate governance guidelineshave been developed in most countries. Inter-nationally, the biggest influence on theseguidelines has come from the Institute ofDirectors (IoD) in London, through theadvice they provide to other nations. Manycountries that do not actually contract withthe IoD for advice nonetheless incorporateaspects of the IoD thinking in their best-practice guidelines.

This is a positive development, although thefollowing issues should be noted:

1. the Anglo-American model of governanceis being promoted as the global standard,

2. soft-law does not necessarily address thesoft dimensions of a firm (in other words,laying down new soft law does not replacethe need for integrity and trust in boardrelationships and processes),

3. best-practice guidelines are typicallydesigned for large, listed firms (and hencethey are often not suitable for small firms),and

4. good governance guidelines do not guaran-tee great governance practice.

In adopting corporate governance guidelinesdeveloped elsewhere, companies should beaware of the fact that best-practice guidelinesfor:

Listed companies

non-listed companiesLarge companies

small companiesPublic companies

family-owned companiesBank governance

hospital governanceUS companies

British companiesStart-up companies

mature companies

Hence we base our approach on the principle:keep it situational. There is no one-size-fits-all corporate governance approach.


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In an analysis of the external context, weinclude the institutional, national and norma-tive dimensions. In an analysis of the internalcontext, we include ownership, board con-figuration, organisational complexity, com-pany development level and degree ofinternationalisation.

2. Keep it strategic

What is the difference between good and greatcompanies? Tim Collins came to a clear result:company success starts with the role modelsat the top (Collins, 2009, p. 10). Therefore wepostulate: great strategy follows great people,and great success follows great strategy (seeFigure 1). We propose four main preconditionsfor success in developing, implementing andmonitoring corporate strategy:

i. a strategically targeted composition of the

board-team,ii. a constructive and open-minded boardculture,

iii. an efficient board structure, andiv. shareholder and stakeholder oriented

board measures of success.

These four components have to be integratedin a process, as shown in Figure 2. At each ofthe different levels, success measures areestablished relating to the important stake-holder groups, and then the responses ofmembers of those stakeholder groups aremeasured periodically to assess the perfor-

mance of the company leadership.In the following sub-sections, we discusseach of the four preconditions for successful

development and implementation of corpo-rate strategy.

A well-diversified board team

Peter Senge asked the question: How can aboard of committed board members with indi-vidual IQs above 120 have a collective IQ of

60? The question could be restated as: Wheredo good ideas on boards come from? Inresponse, Negroponte Founder of the MITMedia Lab says: Thats simple . . . fromdifferences.

Together the above quotes are indicativethat differences are an essential part of thestrategic potential of a team, and that therehave been too many boards that fail to createadequately diversified teams. Our suggestionfor building differences into board composi-tion is to mix demographic variables, culturesand disciplines.

Well-diversified board teams consist of

members representing all relevant:

team roles (e.g. a controller, a criticalthinker, a creative thinker),

functional competences (e.g. auditing, riskmanagement, HRM, marketing),

national cultural competences (e.g. NorthAmerica, Western Europe, East Asia),

business competences (e.g. pharmaceuti-cals, consumer products),

demographic data (e.g. age, gender), and internal and independent members.

All key role types should be represented in a

board team. It is possible for one member toplay a number of different roles, and it is alsopossible for one member to play different rolesunder different circumstances. It is useful forthe members of the board to know the rolesthey prefer to play, those they are unable toplay and those that their colleagues are likelyto play or not to play on a board. The chairmanshould act as board coach, coordinating theefforts of all members.

A constructive and open-minded boardteam culture

We suggest that an effective board culture con-sists of five factors: an outward, learning ori-entation; a holistic perspective; a consensusorientation; a constructively open, trustingenvironment; and a mix of global effectivenessand local adaptability (we refer to this asglocal), as illustrated on the outside of thecircle in Figure 4. The text on the inside ofthe circle represents the status quo that hasto be overcome in many boards: characterisedas traditional, mechanistic, confrontational,secretive and ethnocentric environments.

Figure 2: Preconditions for successful boardmanagement

(2

Cod

(3

E

(4

(1

Ta

(2)

Constructiveand open-

minded boardculture

(3)

Efficientboard

structure

(4)

Stakeholder-orientedmeasures of success

(1)

Targeted, diversecomposition ofthe board team


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An effective board structure

Our experience in board management revealstwo extreme ways of structuring board teams:

a large board, operating through a number

of different committees (such as Auditing,Nomination or Remuneration committee)or

a small board of professionals.

We recommend a third way:A small, legally accountable, well-di-

versified board, comprising a maximum ofseven members (including an independentChairman, independent members and theCEO). We recommend that the board conductsits activities through only two committees: anintegrated audit and risk management com-

mittee and an integrated board managementcommittee which is responsible for nomina-tion, feedback, remuneration and develop-ment of the board and top management.

In addition, large public companies can adda large network council (not legally account-able) whose members work in small projectsteams, each of which is coached by one of theindependent board members.

Shareholder and stakeholder boardmeasures of success

A combined team of supervisory and manag-ing board members need to develop, imple-ment and evaluate a shareholder- andstakeholder-oriented board vision. Such avision should:

provide a roadmap for future direction, generate excitement about future direction, instil confidence and trust in leadership,

and offer criteria for success.

If corporate success is measured against sucha vision, it will necessarily reflect both share-holder and stakeholder measures.

Anglo-Saxon researchers have been study-ing the relationship between corporate gover-nance and firm success. A recent studyconfirms that higher share price and lowercost of capital are directly linked to good cor-porate governance (Beiner et al.

, in Noetzli,2004, p. 24).

The following statement

1

can serve as anexample of a normative guiding principle:

The primary role of the board of this company isto help create long-term value for its share-holders, customers, employees and society. The

Figure 3: Relationship between board strategy and success

2

1

3

4

22

11

33

44

2

1

3

4

Board Structure

Organisational level

Board interaction

Group level

Individual level

Board Composition

We set success

measures for:...

ShareholdersTh

ePu

blic

Personnel

Clien

ts

Added Value for

Shareholders

Clients

Personnel

The Public

Board Levels Firm Strategy Firm Success

... andmeasure oursuccess by their

reactions

22

11

33

44

Figure 4: Elements of a constructive and open-minded board culture

Holistic

BoardcultureLe

arning

orie

nted

(outwardlo

okin

g)

Boardcultu

re

Mechanistic

BoardcultureTr

aditi

onal

(inwardlo

okin

g)

Boardcultu

re

Confrontation

oriented

Board

culture

(Secretive)Boardculture of

mistrust

Ethnocen

tric

Boardcu

lture

Glocal

Board

cultu

re

(Constructively open)Board culture of trust

Consensus

oriente

d

B

oard

cult

ure

Board

Culture


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board believes that the company should rank inthe top quartile of peer companies in total share-holder return (including the cost of capital),as well as in voluntary loyalty levels of custom-ers, employees and society as measured over 3and 5 year periods.

This strategic direction function is the basis forthe targeted selection, evaluation, remunera-tion and development of board members andtop management which will be described inthe next section of this paper.

3. Keep it integrated

In order to achieve the conditions required forstrategic board management described in thelast section, four key processes are recom-mended: targeted selection of board members,targeted feedback on their performance,targeted (performance-related) remuneration

and targeted development (illustrated inFigure 5).In the following sub-sections we discuss the

elements of Figure 5 in more detail, comment-ing on key principles and practices that can beused in their implementation.

Phase I: Targeted board selection

The use of a one-page interview schedule isrecommended to guide the specific selectionof board members. The interview schedule(see Figure 6) aims to score the potential of theinterviewee on a number of criteria, from theperspective of at least two interviewers (atthe level of Chairman, the CEO or other board members).

The interview schedule presented inFigure 6 follows the targeted interview tech-nique developed by DDI (Byham, 1985). Afterthe interviewee has been through at least tworounds of interviews, the interviewers hold ashort meeting during which they attempt toreach agreement on the score awarded foreach item on the schedule. Where a consensus

cannot be met, further investigations are madeinto the nature of the response. A suitabilityranking is drawn up on the basis of the finalevaluation of each item.

Phase II: Targeted board feedback

After board members have been selected, it isnatural to introduce an effective feedback pro-gramme for board members using the follow-ing performance areas (see Figure 7).

We recommend that feedback be linked tothe performance of the supervisory board, theperformance of the managing board and the

performance of the company, to the extent thatboard members are able to influence the per-formance of those bodies. In each case, thereare a number of dimensions on which the per-formance can be evaluated, as illustrated inFigure 7.

Targeted board feedback is only suitableif positive performance is rewarded andactions are taken to address developmentrequirements.

Phase III: Targeted board remuneration

Board members should be compensated insuch a way that they perceive equity based oninternal, external and corporate benchmarksas illustrated in Figure 8.

Figure 5: Integrated board management

Employees

Custo

mers Public

Shareh

olde

rs

Board Vision

Board

Selection

Board

Feedback

Board

Development

Board

Remuneration

Phase I

Phase IV

Phase III

Phase II


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Figure 6: Interview schedule for selecting new board members (an example)

Chairman CEOBoard

membersEvaluation

total

9:00-10:00 10:00-11:00 14:00-15:00

Personality competenceIntegrityIndependenceBreadth of perspective

Professional competenceRisk management experience at board level

Experience in South East AsiaCommand of English and Chinese

Leadership competenceStrategic thinkingPlanning skillsControlling skills

Social competenceConstructive opennessListening skillsTeam role: controller

Figure 7: Performance areas

1 President

2 Committee

3 Members

Managing

Board

Performance

1 CEO

2 Members

Company

Performance

1 Customer dimension

2 Shareholder dimension

3 People dimension

4 Public company image

Supervisory

Board

Performance

Figure 8: Equitable remuneration of board members: the magic triangle

(3)

Equity with company

performance

(2)

Equity with external market

for board members

Equity with other

board members

(1)


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The total net compensation package of aboard member can be divided into fixed (e.g.40 per cent) and variable (e.g. 60 per cent)components. The variable component can bemade up of several measures of performance,including:

long-term financial performance (3 years), comparative value indices (e.g. 50 per cent

EVA, 20 per cent customer loyalty, 20 percent employee satisfaction and 10 per centpublic image), and

functional performance assessments (20per cent board committee performance; 30per cent individual board member perfor-mance; 50 per cent corporate performance).

An important guiding principle in boardremuneration is that every board memberexpects financial compensation to be fair.Modifications of the package above or belowfair reward are unlikely to result in better per-formance, since board members generally aredriven by intrinsic motivations (Frey, 2004).Thus, adequate and fair rewards are importantprerequisites for good performance, but moti-vation is primarily affected through im-material reward of good performance.

Phase IV: Targeted board development

Past board evaluations which we have con-ducted (see Hilb, 2004, p. 206) have shownthat in quite a number of leading companies,

management and board succession planningis not discussed in depth at the board level.The board should ensure that developmentprogrammes are in place to enable the com-pany to offer 80 per cent (for example) of allkey positions in the company to internal can-didates.

2

In this regard the approach of hav-

ing the CEO and her/his direct reportingmanagers present their succession plans tothe board once a year (following a structuresuch as that illustrated in Figure 9) hasproved successful.

This procedure creates an opportunity fordivision heads to make a presentation to theboard, and meet with the board socially. If anopening arises at the top management level,the board is well prepared and can use thesame form shown for the targeted selection ofexternal candidates (in Figure 6).

All these procedures have to be controlled.

4. Keep it controlled

In this integrated approach, the controlling ormonitoring board dimension encompasses theauditing, risk management, communicationand evaluation functions of the board.

The auditing function of the board

The central qualities of an auditor are the inde-pendence, objectivity, transparency and integ-

Figure 9: Succession planning at the board level

Organisation unit: Division Head: Personnel Exec: CEO:

Date: Date: Date:

Manager's

name

Position Age Years in

currentposition

Salary

grade

Past

performance

Potential Potential

successors

On

thejob

Near

thejob

Off

thejob

Possible evaluation scores:

P = Performance scores: AP = Assessment of potential:

A = Excellent overall performance (top 10%) I = Immediately promotable; work out action plan

B = Very good overall performance II = Promotable within 2 years; work out career planC = Good overall performance III = Capable of development within a function

D = Satisfactory overall performance IV = Potential is satisfied in current position

E = Unsatisfactory overall performance

Appraisal Development plan


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rity that are applied to the production of anaudit report (Vogt and Alresch, 2003, p. 814).The external auditor

is the only external institu-tion that can give an objective view of thefinancial condition of the company (Vogt andAlresch, 2003, p. 817). However, the externalaudit can only contribute to the transparencyof financial accounting and to the improve-

ment of the quality of the internal control ifeffective cooperation is achieved between theexternal auditor, the board, the audit commit-tee (to which it reports) and the internal audi-tor (which should also report to the auditcommittee).

In order to ensure the independence of theexternal auditors, both the auditors and theauditing firm should be changed periodically.

The task of the internal auditors

is to establisha financial supervision function that is as inde-pendent and objective as possible, for theaudit committee and the board.

The following three tasks constitute themain focus of attention:

1.

Financial reporting

: Observation of thefinancial targets (assurance) and consultingregarding the realisation of targets (advi-sory), while the quality and integrity of thefinancial information and the protection ofmaterial and immaterial values is a centralfocus of attention (see Bumbacher, 2003).

2.

Operations

: Observation of operational tar-gets and assessment in respect of realisa-tion of the targets.

3.

Compliance

: Surveillance of compliancewith laws, regulations, guidelines on aninternational, a national, an industrial or afirm level.

As such, the demands placed on the internalrevision have grown. They used to berestricted to the second task (operationalcompliance).

3

The effectiveness of the internal control sys-tem and compliance are currently a centralfocus in corporate governance. The function(which formerly reported to the CFO) reportsto the audit committee.

It is important that the auditors have accessat all times to all areas of the company basi-cally nobody may be excluded and that itextends to all proceedings. The subject of theaudit is not only the numbers produced by thefinancial and accounting system. Everythinghas to be open to audit revision (Malik, 2002,p. 226f).

The risk management function ofthe board

The task of the board and top management isto define an integrated, future-oriented risk

management concept; one which is integratedwith the existing planning and leadership pro-cesses, which is equally directed to the realisa-tion of opportunities and which does notconstrain entrepreneurial freedom. Such a riskmanagement concept should give the assur-ance that management requires to cope withdaily risk (Ernst & Young, 2002, p. 7) and it

should keep the responsibility for directingand controlling within the board.As in the case of corporate strategy, the

board is responsible for the determination ofthe strategic risk objectives, and for guarantee-ing focused, operational risk managementpractices at managerial levels. The TurnbullReport of 2000 (in the UK) made the first breakthrough . . . by suggesting that boardsmust report annually to their owners their riskassessment and decision-making processes(not content) (Garratt, 2003b, p. XXII).

At the board level, risk management dealswith the

process of early detection, prevention and man-agement of dangers as well as identificationand effective realization of entrepreneurialopportunities . . . (this means the conscious)exploration of risks where opportunities can berealized, and in the prevention or reduction ofrisk, where the anticipated risk outweighs theexpected gains. Risk management deals prima-rily with higher assurance in planning, and ahigher probability that company objectives areachieved, and thus the realization of a highercompany value. (Ernst & Young, 2002, p. 7)

The communication function of the board

The following two functions are most relevant:

Content function:

To promote transparencyof information at the board level, throughthe exchange of information that is compre-hensive, true, understandable and relevantto board members, top managers, employ-ees, shareholders, customers and the public,and that relates to financial and market per-formance, personnel and environmentalobjectives, and challenges facing divisionswithin the firm and the firm as a whole.

4

Relationship function:

To create a real cul-ture of trust and learning through a constantimprovement of the relationships between board members, board committee mem-bers, top managers, shareholders and otherstakeholders, and to deal with conflict in aconstructive way, to dismantle prejudicesand to avoid unnecessary confrontations.

The quality of this ongoing board dialogue isenhanced mainly through active listening andthe constructive openness of the chairman andthe CEO.


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As part of each board meeting, the CEOcould report using an information checklistabout the most important events of the pastperiod and about the most important objec-tives of the sub-units of the organisation. Atthe end of the board session, the chairman andthe CEO discuss all the information arising outof the meeting that should be forwarded to the

management (Figure 10).Besides the formal internal communicationprocesses, the board also has to obtain infor-mation from independent sources.

This implies one of the most critical issues,which is the fine line between justifiable accessto suitable information on the one hand, andinformation obtained under circumstances thatinvolve undermining management on the otherhand. A good measure of the need to improveaccess to information as a foundation for judgment, and also to improve board membercomprehension about the functioning of the

company, is their involvement in projects thatare of central and overall importance. (Malik,1998, p. 193f.)

It may also be sensible to formulate someessential questions in a board meeting, aboutwhich board members should be continuallyinformed. For example:

Where is shareholder value being createdand destroyed in the company?

What are the major risks to which the com-pany is exposed?

What is the level of employee morale andvoluntary loyalty compared to competitors?

What are the threats to customer satisfac-tion (and customer loyalty compared tocompetitors)?

What is happening to . . . our corporateimage?

How does our strategy differ from that ofour competitors?

How is our stock viewed by the analystswho cover us?

Last, but not least, the board has an evaluationfunction.

The evaluation function of the board

Boards can be evaluated by the board members themselves, by top management, byshareholders, by academics or by the media(Figure 11). The most effective evaluation isbased on a comparative evaluation performedby the board members themselves, by the topmanagement and by representatives of theshareholders.

To enhance the efficiency of board teams, weuse the approach illustrated in Figure 12. Thisspiral diagram should illustrate that theneglect of a phase can seriously impede corpo-

rate governance and board development. In anextreme case, omitting a phase would result inall development being stalled.

We have developed two instruments forself- and external review of boards and haveimplemented them successfully in boards inpractice:

1. the standardised board interview (see Hilb,2004, p. 192ff); and

2. the one-page survey with board, manage-ment and shareholder representatives (seeHilb, 2004, p. 196ff).

The results of our recent board evaluations aresummarised in Table 2.

There are four points that attract attentionin these results:

1. there does not seem to be a dominantindustry context,

2. all companies (with the exception of com-pany 7 and 9) belong to the most successfulcompanies in their industry,

3. the best positioned boards (1, 2, 3 and 4)show deficits mainly in the field of control-

Figure 10: Boardtop management communicationmeetings

Chairman

Board Members

CEO

Top ManagersTM TMTM

Figure 11: Board evaluation

Board evaluation by top management

Board evaluation by shareholders

Board evaluation by academics

Board evaluation by the media

Board self-evaluation


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ling, e.g. in the implementation of deci-sions. The companies placed in the middleof the field reveal a deficit in issues relatedto the shaping of the future of the company.

The lowest ranked board reveals the great-est deficit in the culture of trust in theboard, and

4. it is interesting that the best ranked boardreveals room for improvement concerningcorporate governance transparency accord-ing to important guidelines, whereas thecompany ranked last belongs to the groupof leading companies concerning transpar-ent reporting.

When in the worst case, as already men-tioned, one of the four development factors

(see Figure 12) is non-existent (

=

0), no boarddevelopment happens. This means, forexample, that even if the level of dissatisfac-tion has been diagnosed without doubt and

the ideal state is known, there is no develop-ment if no real steps for improvement aretaken.

Thus we come to our conclusions: fromgood to great corporate governance.

From good guidelines togreat practice

This paper presents a BothAnd approachcalled New Corporate Governance. The

Figure 12: Spiral concept of corporate governance and board development

Existingsta

te

Obstacles

Desired state

B.I

C.I

D.I

D.III

C.III

B.III

D.II C.II B.IIB.IV C.IV D.IV

Phase A.II:

Performance targetsfor board andmanagement teams

Phase A.III:

Identification of possibleresistance in moving fromexisting to desirable states

Phase A.IV:

Actions to overcomeresistance and to realisedevelopment targets

Phase A.I:

Periodic diagnosis of boardand management teams

Interventions

Table 2: Results of our recent board evaluations

CG practice ranking Firm Branches Highest deficit value

5

Number of deficits >

1

1 A I 0,9 02 B II 1,0 13 C V 1,0 14 D III 1,3 2

5 E IV 1,4 26 F V 1,4 27 G IV 1,4 58 H II 1,4 79 I III 1,5 10

10 J II 1,6 11


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objective of this approach is to overcome theEitherOr thinking that currently dominatescorporate governance theory and practice, based on the principle espoused by F. S.Fitzgerald that: The test of a first-rate [board]intelligence is the ability to hold two opposingideas in mind at the same time, and still retainthe ability to function.

Successful boards strive to deliver both:

Shareholder value . . . and

. . . value for

clients, employees and the public. Entrepreneurial action . . . and

. . . checksand balances.

Legality . . . and

. . . legitimacy. Short-term results . . . and

. . . long-term sus-tainability.

A culture of trust . . . and . . . controls. Global integration . . . and . . . local

relevance. Comprehensive transparency . . . and . . .

necessary confidentiality. Performance orientation . . . and . . .

cooperation.

Strategic direction . . . and . . . monitoring. Keeping its nose in . . . and . . . its hands outof company activities.

It remains to be seen if boards have the willand resources to transform themselves intotrue directing and controlling teams; changingtheir orientations from corporate governanceto corporate control-preneurship (Figure 13).The result of this challenge will determinewhether companies will be among the win-ners or the losers in the face of global changeand competition.

Notes

1. This opinion contrasts with the usual share-holder-value maximisation statements made, forexample, by Pitman, in Garratt (2003a, p. xxv).

2. Every one of the top ten on the list of theworlds most admired companies . . . has a bosswho was appointed from inside (Economist,2004, p. 61).

3. When we call for public reporting on internalcontrols (i.e. internal auditors), we have to be

ready to furnish boards with the informationthey need to make informed decisions and dis-closures Bockal (2002, p. 47).

4. The greatest frustration of board members isnot that they get too little information, but thatthey get too much information that is neitherwell organized nor well summarized (Carterand Lorsch, 2004, p. 27).

5. In general, where deficit values between impor-tance and satisfaction are greater than 1, there areimportant opportunities for board development.

References

Bockal, L. E. (2002) Internal Auditors: Integral toGood Corporate Governance, Internal Auditor,August, 4449.

Boxall, P. F. (1992) Strategic Human Resource Devel-opment: Beginning of a New Theoretical Sophis-tication,Human Resource Journal, 2, 6074.

Bumbacher, R. J. (2003) Interne Revision und RiskManagement. Vortrag am 1. DocNet-Symposium,St Gallen.

Byham, W. C. (1977) Targeted Selection. Pittsburgh:NN.

Collins, J. (2001) Good to Great. New York: HarperBusiness.

Figure 13: From administrative or supervisory board, to strategic direction and control; from administra-tive governance to corporate control-preneurship

Personal

Entrepreneurship

Strategic direction

function of the board

Control function of the board

The board in anEntrepreneurial Function

The board in an

Administrative Function

Corporate

Administration

The board in aDirecting and Controlling Team

Corporate

Controlpreneurship

The board in a

Supervisory Function

Corporate

Control


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Bl k ll P bli hi L d 2005 Volume 13 Number 5 September 200

Deakin, S. and Kenzelmann, S. J. (2004) Learningfrom Enron, Corporate Governance: An Inter-national Review, 12, 134152.

Economist (2004) Another Enron? The Economist, 6March, 61.

Ernst & Young (2002) Verwaltungsrat und Umgangmit Risiko. Handbuch fr den Verwaltungsrat.Zrich: Bilanz.

Frey, B. S. (2004) Die Wirtschaft soll vom Staet

lernen.Harvard Business Manager, 3, 9495.Garratt, B. (2003a) The Fish Rots from the Head: the

Crisis in Our Boardrooms, 2nd edition. London:Profile Books.

Garratt, B. (2003b) Thin on Top Why Corporate Gov-ernance Matters and How to Measure and ImproveBoard Performance. London: Nicholas Brealey.

Hilb, M. (2004) New Corporate Governance. NewYork: Springer.

Koenig, R. (ed.) (1967) Handbuch der empirischenSozialforschung. Stuttgart: Enke.

Maletzke, G. (1972) Massenkommunikation. In C. F.Graumann (ed.)Handbuch der Psychologie. Gttin-gen, pp. 10111538.

Malik, F. (1998) Wirksame Unternehmensaufsicht.Frankfurt am Main: NZZ.

Malik, F. (2002) Die neue Corporate Governance: Rich-tiges Top-Management Wirksame Unternehmen-saufsicht. Frankfurt am Main: FAZ.

McQuail, D. (1973) Soziologie der Massenkommunika-tion. Berlin: Fischer.

Noetzli, U. (ed.) (2004) Checks and Balances inUnternehmen. Das zweite Heft zur Corporate Gover-

nance. Zrich: NZZ-Fokus.Vogt, U. and Alresch, M. (2003) Die Revisionsstelle

als wirksames Instrument der Corporate Gover-nance, Der Schweizer Treuhnder, 10, 811818.

Weick, K. E. (1979) The Social Psychology of Organiz-ing. Reading, MA: Addison-Wesley.

Martin Hilb is a Professor of Management atthe University of St Gallen, Switzerland. He isManaging Director of the Institute for Leader-ship and HRM, and its Centre for CorporateGovernance (http://www.ccg.ifpm.unisg.ch).
http://www.ccg.ifpm.unisg.ch%29./http://www.ccg.ifpm.unisg.ch%29./

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