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The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members

The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members

Richard Leblanc (Editor)

ISBN: 978-1-118-89550-4

May 2016

888 pages

In Stock

CAD $90.00



"Professor Leblanc's Handbook comes forth at an integral moment in the evolution of corporate governance. In the midst of increasing global demand for corporations to be responsible to employees, civil society, and the environment, the role of directors and shareholders in the creation of sustainable long-term value sits at center stage. The EU Directive, OPP21, and laws requiring quotas for women on boards are only the latest examples of citizenry demanding corporate sustainability and inclusion. Intolerance for the role corporations played in the financial crises of 2002 and 2008 now requires boards to go beyond consideration of strategy and C-suite succession planning and rise to the outcry for integration of nonfinancial impacts into the stewardship of long-term capital and value creation. Dr. Leblanc has assembled a first-rate list of global authors to explain why this movement is here to stay."
—CHRISTIANNA WOOD, Chairman, Global Reporting Initiative; Institutional Investor; Nonexecutive Director; and Former Chair, International Corporate Governance Network

"The board of directors sits at the center of the governance framework in a wide range of organizations. This new Handbook will be an invaluable reference for both board members and academics seeking to deepen their understanding of boardroom functioning. The breadth and depth of the volume's coverage is both impressive and indicative of the challenges and risks faced by the modern director."
—LADY BARBARA JUDGE, Chairman, Institute of Directors

"This Handbook is a truly comprehensive and invaluable compendium of governance best practices and insights. I have worked with Dr. Richard Leblanc for close to 20 years and have had the privilege to see him develop into a foremost mover and an informer of key governance practices and trends in Canada and internationally. He proves this again with the publication of The Handbook of Board Governance, which is a brilliant piece of work by contributors who span the who's who in the world of governance subject matter expertise. I think it should be on every director's and corporate secretary's desk."
—LYNN BEAUREGARD, President, Canadian Society of Corporate Secretaries

"Professor Leblanc has put together a very impressive array of authors for this Handbook, including Michael Useem, Dennis Carey, and Ram Charan, among many others. The field of governance is constantly changing, and wise directors should keep abreast of changes and their responsibilities. This Handbook is highly recommended to directors who wish to do that!"
—JOHN A. KROL, Former CEO of DuPont; Former Chairman of Delphi Automotive, Dupont and Pacolet Milliken; Former Lead Director of MeadWestvaco and Tyco International; Former Director of Ace Insurance, Armstrong Flooring, JPMorgan and Milliken Company; and Former Director of Bechtel Corp., and Teijen Ltd. Advisory

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Foreword TK Kerstetter xxv

Preface xxvii


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


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


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


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


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


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


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


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