How can corporate boards make a difference?

The principles of corporate governance are just as applicable in the ASEAN region as they are in the U.S. Yet there are subtle differences in implementation. In a panel discussion on corporate governance in the ASEAN region, Michael Useem, professor of management at Wharton and director of the Center for Leadership and Change Management, talks with two senior business executives in Singapore.

Maria Mercedes “Mercy” M. Corrales, is former president of Starbucks Coffee Asia Pacific and representative director and CEO of Starbucks Japan. She has held a number of senior leadership positions in Asia and South America with Levi Strauss. Corrales was also non-executive director of Fraser & Neave (F&N). Lee Hsien Yang is chairman of the Civil Aviation Authority of Singapore. He was previously CEO of SingTel and non-executive director and chairman of F&N. Lee is also director of the Islamic Bank of Asia and the Singapore Exchange. Shareholders cannot look after the company, they tell Useem; rather, it is up to the board to do that.

An edited transcript of the conversation follows.

Michael Useem: Mercy, let me begin with you. I’m thinking about your several board [memberships]. A simple and obvious question to get us going, for effective leadership of your boardroom — either as independent director or, if you have been an executive in your boardroom, or lead director or chair — what do you think it takes to lead a boardroom?

Mercy Corrales: I think it is very important to have a strong board leader — the chairman. You need a chairman who is respected by both the executive team and the rest of the board. You need an alignment between the executive team and the board around the mission, the vision and the strategies of the company. You need very clear delineation of responsibilities between the executive team and the board. But it is also important to know when to get involved … and to take a stronger position in terms of providing direction for the company.

Lee Hsien Yang: Having served on both nonprofits and public-listed boards, let me cite three examples. Early on in my career, I joined a board which had a very distinguished chair, but he was getting on in age. He came to board meetings with a script that the secretary prepared. He read the script. We all respectfully made one or two interjections. Then, he read the conclusion and he left the meeting. I must say my esteem for the chair dropped considerably.

I remember a public-listed board where the chair was very dynamic, hyper-active and made all the decisions before we had even discussed the issue. Again, he was a distinguished business personality. I don’t think he got any value out of the board, but he displayed lots of leadership.

I still serve on the board of the [Singapore] stock exchange with Kevin [Kwok]. I had the privilege of serving with [former exchange chairman J.Y.] Pillay. He was a very distinguished personality in both business and civil service who led the board very ably through sometimes difficult discussions. I learned a lot from watching the way he listened to us. He often had a view, but he would take [into consideration] the directors’ comments. Sometimes, notwithstanding his own reservations, we took a decision which he was not entirely comfortable with. I think that the interaction on the board was better because of that.

Useem: Mercy, let me come back to you on this issue. In learning to lead, we learn from great leaders. But sometimes we learn more from people who are not great leaders. Having worked with such a boss, we swear that whatever the person did we are going to do the opposite. Have you learned something about leading a boardroom from a negative example?

Corrales: I was CEO of a company with two dominant shareholders of equal weight. Both were publicly-listed corporations. They were represented on the board by their most senior executives. Those first few meetings were probably the most difficult situations I ever had to navigate. There were culture clashes, language issues, an obvious lack of trust and an absence of empathy. It seemed like they could not agree on anything. As the neutral board member and CEO, I chaired those meetings. There were days when I shuttled between two buildings trying to clarify issues and get alignment and literally beg one camp to come back to the table. The executive team members were unsure of how to make a presentation that would not set off another round of disagreements.

Useem: You lost some sleep on that.

“In learning to lead, we learn from great leaders. But sometimes we learn more from people who are not great leaders.”–Michael Useem

Corrales: I lost lots of sleep. We had a business that needed to grow profitably and a brand that needed reenergizing. Much energy was being wasted trying to bring the two camps to agree. But I learned valuable lessons. It takes time and lots of humility to build trust. It was only when one camp toned down its superior and aggressive stance and showed some respect and empathy that the impasse was broken.

Useem: Does it have a happy ending?

Corrales: A very happy ending. With everyone pulling in the same direction, revenue doubled in three years and the brand became the undisputed market leader.

Useem: I am going to shift the vantage point here and ask about your service as CEO seen from the standpoint now of a CEO trying to get the most from the board. For the board to “lead” with you, what do you want to see in the boardroom? What kind of directors do you most value in the boardroom?

Lee: It is a very delicate line as CEO of a company between engaging the board and overreaching and managing the board. When one starts as CEO, you tend to be much less experienced and people do not hold you in awe. So it is a different relationship with the board. By the time you finish your tenure as CEO, if you have had a successful time, the board is mindful not to cross you. That becomes difficult both for the board and for the CEO. It is human nature, but bad for the organization. I am not sure what the solution is. I suppose board renewal is one way. But CEO renewal is the other way. I think there is an appropriate tenure beyond which CEOs should realize that change is good for the organization no matter how experienced they are. Then you can continue to have that healthy tension. Shareholders cannot look after the company.

Useem: As CEO, you have a huge stake in how the board operates and who is on the board. But, in a formal sense, it is not your decision to make as to who is in the boardroom unless you are chair. As CEO, how much influence are you in favor of exercising in bringing people on to the board and how does the board operate?

Lee: If you take the sort of governance model we have — an independent chair separate from the CEO — the board composition should be the board’s prerogative and not the CEO’s. I do not think you want to appoint someone who has an axe to grind because that creates a problem. But you do want to appoint people who will speak their mind. In Singapore, many of us know each other and we need to separate our personal friendships from our professional relationship. If you do not separate that, you sometimes make suboptimal decisions because we do not want to be perceived to be difficult.

How much do I want to express a discomfort? Do I want to put down in the minutes of the meeting that I really thought this was a stupid idea; let’s have a vote. Or do I want to say, well, this is dysfunctional. I am going to resign from the board.

Corrales: As CEO, I would like to have members of the board know a lot more than me so that they can guide me. I would like to see diversity and the board should reflect the markets we are dealing with. I would like the board to be very honest and candid and not do something different behind your back. There are some board members who just like to find fault. All they can see are the wrong things and they never see the good things. I think the board should provide a balanced view. I would like my board to be interested in the things we are doing. Not to participate in running the business, but to show real interest, to be scanning the environment, and sharing with us what opportunities they can see in that environment. I would like them to be interested in the people that we have in the organization, especially around succession planning.

Useem: Picking up from what was just said, if we are thinking about leadership in the boardroom, then the choice of a lead director or chair becomes vital. Just to make a statement to sharpen the edge here, a couple years ago I attended an event. It was a one-day college for new chief executives of large U.S. public firms and one of the teachers was no less than Jack Welch. The topic for the 20 brand new CEOs in the room was: When it comes to people heading your audit committee, your compensation committee and your governance committee, what kind of persons ought to be the leaders? Jack Welch was the last to speak. He said that when it came to picking the chair of the compensation committee, it should be somebody extremely wealthy. I am not kidding, he said that; the head of that committee has to be somebody who is not going to be jealous of the fact that you are getting paid a huge amount. What are the qualities most essential for somebody to head one of those committees? Mercy, go ahead.

Corrales: To be effective, you need experience in running compensation programs so that you understand how executives are rewarded. But you must also can scan the environment and know that this is a supply and demand situation; if you want to get the best talent, you better be able to pay.

Lee: We all need to remember that ultimately, we are accountable to the shareholders of the company; not just the dominant shareholders, but all shareholders. The way corporate governance is going, we are going to be asked to justify the remuneration.

Useem: Occasionally in the U.S. I run into senior managers who say that during much of the year, I am actually a bit overpaid. But there are about a dozen times per year when I am actually underpaid. That is a way of saying there are moments when I really do make an enormous difference. Thinking back on your boards, if you could bring out a moment when the board made a very significant difference in where the company was going.

“It takes time and lots of humility to build trust. It was only when one camp toned down its superior and aggressive stance and showed some respect and empathy that the impasse was broken.”–Mercy Corrales

Lee: I think directorships generally are not very well paid. In my view, they should remain not very well paid because, if it is important for you to do the directorship and earn the money, then you should not be doing it. You need to be able to say I am here, but I am prepared to walk away if I do not think this company is doing the right thing.

Going back to the Fraser & Neave takeover, it was a complicated multistage deal because it got started by a shareholder — the large shareholder in F&N, which is Great Eastern Life. That started a chain of events which was complicated and dragged on for a year. One key decision for the board was how do we deal with trying to do the right thing by different shareholders? We were put in a position where we had to agree to a break fee in order to get a second party to the table, which we assiduously refused to do until it became clear that unless we did it there would be no offer. Although given the way events panned out, it was clearly the right decision, it was a controversial decision. Was it right? I think it was. But there are some people who say you should not pay somebody to come to the table, which was effectively what we did.

Corrales: I was fortunate to have been part of that process and [Lee] is no longer my chairman so this is not brown-nosing. But he did a wonderful job chairing the whole process, taking us through the whole process, being very transparent, letting us know, not jumping to any conclusions unless he met with the board. We met at odd hours — every day — many times every day as something developed. I think this is a very good example of a good chairman — an outstanding chairman — calm under a stressful situation who provided great leadership to the board. That was for me the best example of why you need a really good, confident chairman. All this time we were having these conversations about shareholder value. What is best for shareholders?

Useem: [Let us consider another issue] — the merger or separation of CEO and chair. From your own personal experience, just talk through the advantages and disadvantages of having it each way.

Lee: Let me stir the pot a bit. I subscribe to the view that it is good to keep an independent chair from the CEO. Having said that, I think we need to put substance into the titles. When I joined F&N as a director and soon after took over as the chair, my predecessor had gone from being the CEO and chair to being a non-executive chair and finally stepping down. I think the reality was he had relinquished the title in name, but had never really moved into a non-executive chair role. When I stepped in as chairman, the first thing that happened was there was a boardroom bust up between the then nominal CEO and the non-executive chair. The CEO left the company under acrimonious circumstances. We then chose not to replace the CEO for various reasons. The board asked me to be CEO, which I declined because I did not want to be CEO. In the end, it was a sort of hybrid solution where I agreed to do a bit more than what I should be doing as the non-executive chair. But I never became CEO of the company. Was that right? I think it does not tick the corporate governance boxes, but it was what was necessary at that point in time. So there is a dogma and there is the reality of how you make the best of the situation on the ground? But, in principle I think that having a separate chairman and CEO is the right model.

Corrales: I agree with [Lee] with that. From a governance standpoint, I think those two functions should be separate. If the CEO as chairman is also recruiting his board of directors, is this board really independent?

Lee: I think there has to be a healthy level of respect between the CEO and the chairman and an ability to engage. I do not think they need to be on the same page. If they cannot disagree, you have a problem. But you also must have an ability to disagree and reach decisions and move on.

Useem: Hsien Yang, let me ask a question. The chemistry between the CEO and the chair is vital. The relationship is complementary. They are two different people; they bring different skills. In your own experience, how have you helped build the relationship?

Lee: It is very hard to make a broad sweeping generalization because to me, the board and senior management are a team. They need to know their roles and perform them properly. Depending on the skills and capability of that team, you need to build around it. Sometimes when you have an inexperienced CEO who needs a lot of coaching and support from the board, the way you interact with the CEO is very different from a CEO who has been in situ for a long time and who is not very open to new ideas and feedback.

Corrales: I have seen tension between CEOs and the chairman and, when that happens, it is very dysfunctional. It is not good for the executive team and it is not good for the board. But I think the most effective chairmen that I have seen are the ones who take the high ground. They stay calm. They try the best they can to coach the CEO.

“I think there is an appropriate tenure beyond which CEOs should realize that change is good for the organization no matter how experienced they are.”– Lee Hsien Yang

There should also be turnover in a board; otherwise, it becomes an old boy or old girl network and there is inbreeding. I think it needs to be freshened ever so often. We need to bring fresh perspectives, fresh experiences [and] fresh talent, so that the board continues to be dynamic.

Lee: Some amount of board continuity ensures that there is some stability in the board.

Useem: I am going to ask a final question [on board diversity]. Mercy, do you want to start?

Corrales: I think that in many parts of Asia, because a lot of businesses are still family owned, you do not get the diversity that boards should have. My experience in Europe is that in the last two boards that I have been on, there were six nationalities on each one of these boards. There was every effort to have gender diversity as well. I find that when there are women on the board, the conversation takes on a different tone because they bring a different perspective as consumers. Also, having people from Latin American, from Africa, just changes the dynamics. That is very healthy. So I do support and believe very strongly in board diversity.

Lee: I think the key requirement for board directors is to have people who are fully engaged and the challenge is if you get geographically dispersed boards it becomes harder to get them together and to participate fully. Being at the end of a teleconference or video conference is not the same as turning up for a board meeting. I think it is good to get geographical diversity and gender diversity onto the board, but you need a level of engagement. Also, serving executives need to really think about whether they have the time and if it is in their own company’s interest for them to go out and spend time on boards outside.

Useem: I have a final question. I would like you to think about your first board meeting. To offer an illustration, a person I know well went to his first board meeting. He walked out of the meeting and turned to one of the long-serving executives and said, “Wasn’t that a great meeting?” He was looking for a compliment. The veteran said, “It actually was a great board meeting — except for you. You were a complete disaster.” The new board member came out of sales and marketing. He behaved like he was on a sales call. [The veteran said,] “The boardroom is not a customer and you acted like you were trying to do the deal.”

When it comes to learning to lead in the boardroom, mentoring and coaching are some of the great ways in which somebody becomes better. So what guidance would you have as a mentor or a coach?

Corrales: Understand that it is very hard work. It is not easy. It is a commitment and you will have to do your homework to be effective. You need to be a speed reader with the amount of board material that you need to go through in order to be able to participate. So it is not something that you tick off and say it looks good on your resume.

Lee: You have to listen carefully and say little — at least until you understand the dynamics of what is happening in the boardroom. You do not want to start on the wrong foot. It sets you back a long way. So I just sit there and keep my ears and eyes open.

Useem: Is there an idea going forward that people ought to hang on to?

Corrales: That you can make a difference. That if you are part of an outstanding board, you can be a source of competitive advantage for your company and make a real difference. Twitter  It does not pay well. It is hard work. Think of it even as a way of giving back — of sharing all the things that you have learned in your lifetime.

Lee: Boards are dynamic and constantly changing. The key thing for boards to realize is they need to provide a constructive partnership to the management. They need to be constantly engaged with the organization. If they need to make difficult decisions, they should do it in a professional manner regardless of the human consequences of having to reshape organizations, redraw turfs, or fire CEOs. Therefore, we need to go in as a professional and not as a friend of the management.

Republished  with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.” Publication does not imply endorsement of views by the World Economic Forum.

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Author: Michael Useem, professor of management at Wharton and director of the Center for Leadership and Change Management.

Image: People stand on a platform at a train station in Tokyo. REUTERS/Yuya Shino.