Table of Contents

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. Yýlmaz 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

About the Author

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.