Adding Muscle in the Boardroom
By Nancy Dunne
October 13, 2003

Following the disgrace of many chief executives and their compliant corporate boards, the rubber-stamp director appears to be a vanishing breed.

The Sarbanes-Oxley Act of 2002 decrees that boards include more independent directors and those with financial know-how. But many companies have gone further. Acting on their own, they are setting in place activist boards whose members advise, scrutinise, debate, suggest and even help close deals.

Directors may provide the companies with daily, weekly or monthly guidance capitalising on lessons from their own successes - and their own failures.

Ram Charan, author of Boards at Work, says the number of activist boards is growing. He has long contended that good boards are a competitive advantage. "In today's complex environment, in which shareholders will tolerate nothing short of optimal performance, this reality cannot be ignored," he writes.

"Investors are already recognising the connection between board effectiveness and optimal value."

In a Boston suburb, Enigma is a rising privately held company that manufactures maintenance software for the automotive and aerospace industries. Jonathan Yaron, its CEO, says he has been increasingly recruiting operations specialists for his board. "I need guys who can help me close deals, who can give me advice on management, R&D and international sales and marketing," he says. "I don't need help in figuring out a balance sheet."

Enigma's board meets six times a year face to face and six times in phone conferences. Once a year the board holds a meeting away from company HQ with all Enigma's management to contemplate the group's future.

Every executive reports on his own department and short-term goals. The directors may respond with criticism or advice. Usually it is effective, says Mr Yaron. "[The directors] can say 'I've been there. This is the right move or the wrong move'. We take seriously their recommendations."

Sometimes directors intervene at critical points in negotiations. "They are putting their reputations on the line for us. Their reputations are the most important thing for these people."

Ray Lane, former president and chief operating officer at Oracle and now a venture capitalist, serves on Enigma's board and talks with Mr Yaron about twice a week. He sits on several boards and grows bored without an activist role to play. "When I find I am just going to committee and board meetings, I generally leave."

He particularly enjoys companies that have recently gone public. "They don't have much history or baggage and they are still enhancing their boards. The directors typically are pretty involved. They think it is their job to counsel the CEOs."

Mr Lane says venture capital companies are increasingly nominating former chief executives and chief operating officers for board seats. Their clout is significant. "It is a different thing when they say, 'This is a risk I would not take'."

Venture capitalists have been more assiduously scrutinising their investments. Bill Bickel, a former executive at Hewlett- Packard, has set up as an adviser to venture capitalists. In July, he was asked by investors to serve on the board of Bristol Technologies, a Connecticut company that provides software and services.

Mr Bickel's expertise is in operations, competitiveness and getting products to market. He works intensely with management, one day advising on sales presentations, the next counselling the CEO on how to communicate effectively with the board. He visits Bristol one or two days a month, joins in a weekly operations conference call and attends monthly board meetings.

Mr Bickel is is also on the advisory board of JBoss, a fast-growing privately held technology services company. Its needs are "more ad hoc", he says. The board includes industry experience and works as a sounding board and forum for generating ideas.

Mr Charan, a New Delhi-born adviser to CEOs and boards, is now at work on another book, The New Board, which analyses developments of the last two years and offers tools to ensure directors' successes. "The whole [board] protocol, in fact, has changed," he says. "[Directors] take their responsibilities very seriously now. If the CEO wants them to participate more, they do." He contends that a CEO's failure means a failure by the board.

"Unlocking the board's intellectual power, wisdom and insight is absolutely essential," he writes. Not doing so should be considered a failure of the CEO, of each and every board member, and of anyone outside the boardroom who does not insist that corporations tap these vital resources. The boards themselves must learn to work together effectively.

"People need to realise that each member of the board is likely to be a fantastic person. But the board is designed for collective action. How good are they in reaching decisions for a collective action?"

The insight and judgment of their fellow board members can be of tremendous value in setting the right goals, pushing back against maverick investors and delivering earnings in the face of structural changes.

"If you are asked to join a corporate board, you check it out completely and you ask challenging questions," says Ed Zander, former president and chief operating officer of Sun Microsystems who serves on several boards. "Directors were always held to account but there is a better awareness of their responsibilities."

He works particularly closely with the management of Netezza Corporation, a Massachusetts- based business intelligence company that has developed a technology to accelerate data analysis. The company's board meets six times a year but Mr Zander is in weekly contact with management to advise on recruiting and sales, as well as providing contacts.

He also sits on the board of Seagate Technology, a fast-growing information storage firm. The meetings are long and intense, he says, while directors look carefully into all aspects of the business. But directors can only do so much. "In the end, it is the management team that has to run the company."