Boards as Advisors and Bellwethers

In the summer of 2008, Herbert Henkel, the chairman, president and CEO of Ingersoll Rand, was alarmed when he noticed that European orders in the company’s refrigerated transport business had slumped, even as business was still booming in other divisions.

“I couldn’t help thinking, ‘What if that figure really is indicative of what’s out ahead?” Henkel said in one of a series of CEO interviews conducted by Michael Patsalos-Fox of McKinsey & Company, Dennis Carey of Korn/Ferry International and Michael Useem of the Wharton School of the University of Pennsylvania. (The interviews and an analysis were published in a different form in the July 2009 issue of McKinsey Quarterly.*)

Though analysts thought Henkel was misguided, he followed his instincts and forecast zero growth in Europe during the third quarter. He turned out to be wrong: growth actually declined by 15 percent. Nevertheless, as a result of Henkel’s prediction, Ingersoll Rand got a head start in responding to the economic crisis, quickly restructuring, reducing inventory and developing other contingency plans.

The abruptness of the recent downturn has underscored the value of anticipating economic trends, according to the CEOs and chairmen of many of America’s leading companies who were interviewed. The corporate leaders also said it is becoming more difficult to act decisively ahead of trends because they are increasingly reliant on incomplete and rapidly changing data.

Leading chief executives have responded to the challenge by rewiring their organizations’ neural networks, creating mechanisms for rapid communications, constant information flow and the transmission of strategic input throughout their organizations. Some CEOs have focused on fine-tuning their internal monitoring systems to pick up signals of developments warranting quick responses. Many have sharply increased the amount of time they spend communicating with investors — not only to provide information and transparency, but also to be strategically aligned with major investors in times of crisis.

But perhaps the most significant trend emerging from the recent crisis is a growing interest among many CEOs in having more active boards. Many CEOs have come to the realization that if directors are well-informed about their companies’ conditions, the board members are in a better position to offer support and advice.

“There are more surprises brewing in tough times than there are in good, so you naturally end up with more communications,” says George Buckley, the chairman, president and CEO of 3M.

Many CEOs said their full board meetings have been supplemented by exchanges through letters, e-mails, intranet postings, informal discussions and conference calls. At Cardinal Health, Chairman and CEO R. Kerry Clark instituted board updates — conference calls held as frequently as every two weeks — and created a special committee, consisting of three board members, to interface with management and report regularly to the board.

“There are very few barriers and everybody’s very comfortable talking plainly to each other,” says Clark

Even more than the frequency of communication with the board, the content of that communication has changed. Many CEOs described a shift in boardroom discussions from routine annual reporting by division heads to nearly constant war-gaming.

“The world moves at a pace today that requires strategy to be front and center all the time,” says William Nuti, chairman and CEO of NCR. “There are too many variables that come into play in a normal cycle, let alone this one, that can rapidly change the course of your company, so I bring strategy up at every single meeting.”

Nuti uses his board not only as a bellwether, but also as an advisor in the formulation of strategy.

“You get great research when you can pull information from board members, each of whom sits on two or three boards,” says Nuti. “You’re effectively getting the perspective of 18 different boards.”

Many CEOs said that working to get the people with the right experience onto their boards has been a priority for that reason. Nuti credited his board with helping him quickly understand the magnitude of the recent downturn.

Eric Foss, chairman and CEO of the Pepsi Bottling Group, like others, said he welcomed more frequent communication with a talented board not just to build its trust but also to benefit from its experience. He had decided to include strategy discussions in every board meeting at the beginning of 2008, even before the economic crisis hit. It was a fortunate decision as the board made valuable contributions during the past year, according to Foss.

Some CEOs pointed out that it is still important to strike a balance between board engagement and executive autonomy.

“I think boards have to be very careful that they don’t take on the management responsibility,” says A.G. Lafley, chairman of Procter & Gamble. “If you’re doing that, then in effect you don’t have confidence in the chief executive and the management team. I think you have every right to ask any and all questions that are important for the health of the business, but I think you have to be real careful that you don’t get into managing the business.”

Similarly, Phillip Hildebrand, the president, director and CEO of HealthMarkets, believes management’s relationship with the board must remain well-defined if it is to be effective: “Get [board members] into an environment where you can sit and talk through issues, and it’s incredibly valuable. But they are the first to declare that they’re not operators. Realistically, you can’t try every one of their ideas and still run the business. So, you push and pull to prioritize. [If they tell you], ‘This is what we have to do,’ [you tell them], ‘We can do that, but there’s a tradeoff — you need to know that will put pressure on the business.’ I’ve found real balance in them challenging us and pushing us, but at the same time stepping back and allowing us to run the company.”

* These interviews were originally published in the McKinsey Quarterly (July 2009). The authors were Michael Patsalos-Fox, a director at McKinsey & Company, Dennis Carey, a senior client partner of CEO & board services at Korn/Ferry International and Michael Useem, a professor of management and director of the Center for Leadership and Change Management at the Wharton School of the University of Pennsylvania. Dennis.Carey@KornFerry.com