Cranfield School of Management
Professor Andrew Kakabadse
Leading the Board: the Six Disciplines of World Class
Chairmen
SM
Hello, my name is Steve Macaulay from the Learning Services Team at
Cranfield. I am here today to talk to Professor Andrew Kakabadse about a
topic that is of increasing importance, and that is the role of chairman. We
are looking at his book that he wrote with Nada Kakabadse, Leading the
Board: the Six Disciplines of World Class Chairmen. So Andrew, I would
like to start off by establishing just what experience you have got of
working with top teams as a whole.
AK
The experience is extensive – it’s partly research. We now have the world’s
largest database on top teams with about twelve and half thousand
organisations which span 19 countries, a lot of consulting experience and a
lot of working with government, and the one factor that has emerged from
the top team work is continuous diversity. So about a third of the world’s
top teams are permanently divided on the vision and missions – there is
internal tensions and politics – and about two thirds of the world’s top teams
have managers who find it very difficult to speak the truth and speak the
uncomfortable facts. So, what we have at top team level is people who
know what to do, but don’t know how to speak it and that then led to a very
interesting question of who oversees all this and who acts as monitor and
coach to all this? Well it must be the board and the chairman, and hence
that is how we got into chairman of the board research.
SM
It is interesting because many peoples’ perception, certainly at one time,
was the old boy that was kept upstairs or the distinguished person from the
City, or in the US the fact that they merged the CEO role and chairman role
very often. So what has changed?
AK
That has been the case for about forty years, but that history is very short.
The most important role was the chairman. And the chairman’s role first
appeared in 1760 by royal decree and the reason for that was the stock
exchanges of 1760 were London coffee houses, where people with a bright
business idea would go round asking for money and they would give them a
piece of paper in exchange called a share – you have a share of my business
– and it was often handwritten. Now there was such corruption going on
that by royal decree somebody had to monitor this process. And so what
you got was, say if you went to invest in the East India Company or the
Hudson Bay Company, and most of the guys who went out to these very
difficult areas were artisans. So the chairman was called the chairman
because he had to call a meeting at often a rough and ready place, like
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somebody’s workshop, and he was the only one who sat in a chair and all
the others sat on the floor or on stools. And the reason we have a board,
was the only way you could get something to write in these difficult
environments was often you took a slab of wood that was hanging around
somewhere, often an old door, and you laid it out flat and it was called a
board because it was a board of wood.
So the chairman’s role has a long, long history and then something
happened in the early 1970s in the United States – the film star CEO. And
one of the first was the turnaround of Chrysler and with that, and General
Motors and some of the other companies, many of the CEOs said you don’t
have to pay me, but pay me in stock - so I will share in the wealth of the
company. So we got an imbalance after about two hundred years, where the
CEO took over from the chairman and began to drive the business and what
has happened now is – the reason the chairman’s role is becoming more and
more important – is because of governance.
Governance has arisen, not because it is good, it’s always arisen out of
scandal. So we have governance in the US coming out of Enron, we had
governance in the UK coming from the Cadbury Report because of director
misappropriation of funds. So when we have scandal we have governance –
who monitors that? The chairman. And now, where competition is so
difficult and it’s very difficult to tell the difference between one car
company and another, one of your differentiating factors is reputation.
Another differentiating factor is risk. Who manages reputation and risk?
It’s the chairman. So what we have is almost, we are going back in history
to where we originally stood, where the chairman was either on equal
footing to the entrepreneur – and today that is called a CEO – or is on a
slightly larger footing than the CEO and that is where we are. We are
actually going back in history and all we had was a forty year interruption
where dignitaries were appointed to the chair role and they damaged it.
That will no longer be the case.
SM
So do you see things like this merging of the roles of CEO and chairman
disappearing and that you will start to see separate people there again and
that the chair will have a very distinct and important role?
AK
You see it disappearing in different parts of the world, but not the US. In
the US we still have 76 per cent of American corporations where the chair
role, CEO role and president role are all in one. And all our research in the
US suggests that there is no political will to change that.
I have to equally say that the country where there is greatest questioning
about board performance and board contribution, even greater than China
and Russia, is the US and my suspicion is because we have not attended
properly to governance in the US – all we have done is punish people more,
but not look at the sources of why problems have arisen – we are likely to
have more corruption in the US than you will ever see in Russia and China.
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And one of the reasons is that we have an imbalance of power, and that is
the chairman is the CEO is the president. Equally in the US you have
legislation called Sarbanes-Oxley which fines you more, which takes you to
prison more easily, which punishes you more, but it equally tries to prevent
corruption from taking place in the first place by having the board not be
influenced by management. So ironically what you have is the guy who
runs the top team is the person who runs the board, and the board have no
way of getting to management other than through the guy who runs the top
team. So they are isolated and it is that more than anything that is causing
problems. So the US is out of step with the world and it is a problem.
SM
Now, I was very interested that you put the microscope on the chairman and
came out with some very distinct disciplines that you felt a world class
chairman needed – of those six, would you pick out one that you would say
“Above all else we need this?”
AK
There are two in fact – and they are the first two. The first is, which is
called in the book setting boundaries, and the second sense making.
Now one of the interesting outcomes from the research was for a long time
– and I have to say we went to over 900 boards, and it was four surveys
over seven years – we could not, for a long time, find out trends. So every
board we went to, every chairman we went to, it was different. So you
could have the chairman of British Airways and the board of British
Airways competing against EasyJet on certain routes with completely
different ways of operating. And you wondered whether this was the board
or that was the management team or vice versa.
So one of the most interesting findings is the tremendous diversity on
boards, and a good board is one that positions itself to have advantage for
the business by asking questions like: What is our competitive advantage?
How different are we? So these are very much business questions that the
top team would ask and the smart chairman is the one who says the purpose
of the board today in this place is … and sets a boundary and then says the
management contribution is … and sets another boundary.
And then they set a very interesting boundary between the role of chairman
and CEO, and we have found direct competitors who would have a
chairman in one place, having the role and contribution of a CEO, and a
CEO in the other place having the role and contribution of the chairman, so
it looked as if the two roles were completely out of balance. What was so
great about them, because these were two very good companies, was that
the chairman and CEO had sat down together and said ‘What’s our job here,
how do we really add value?’ And they came up with a boundary between
them, and a role and contribution between them that made business sense.
So number one, even here at Cranfield where we have Council, have we
really sat down and thought what this Council does, how its adds to the
organisation? And those boards and chairmen that have done that were an
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invaluable resource to the organisation – unfortunately not many did that.
And the second bit about sense making is, we have on a board essentially a
committee and what you really have is a group of part-timers and if you
wanted to get one over on the group of part-timers it’s dead easy. So, it’s
up to the chairman to make sense of the strategy. It’s up to the chairman to
interpret what the markets are doing. It’s up to the chairman to have that
complete broad overview, which stands above the CEO and the driving of
the business, that basically says do we really know what we are doing, and
have we made a contribution, and have we thought about our strategy and
our policies? So that making of sense, which is a highly intellectual
exercise, really denotes that this is not someone who facilitates relationships
and makes people feel good and runs meetings, this is probably the cleverest
role in our corporate hierarchy and so those two went together – because I
have to think about what my job is and what’s yours, and I have to think of
that against the strategic scenario that we face that will make such a
difference for us against our competitors.
SM
Interesting. So, I guess underpinning that are also skills – I noticed one of
them was influencing.
AK
A very important skill. And it is a paradox here because on the one hand
you are trying to get all your board directors to contribute and so you want a
really open debate and dialogue, and yet you still have guide it and this is
the paradox – I want it to be open, yet I want it to go my way. And it was
those chairmen that could handle that paradox well and provided a sort of
nudging to the board members who may be managers as well as non
executive directors, because on British boards you could even have a
balance of executive directors and non executive directors, who would very
cleverly influence the process of discussion and debate to an outcome which
makes sense to everybody.
Now we use the word influencing. It is in fact historically oratory and this
is one of the most complex skills that many politicians have not been able to
develop. What we found was being a minister of state in terms of skill was
the equivalent of being an outstanding chairman, and the oratory to
influence and yet allow room for open discussion, and still influence the
outcome, was so important and there was one clue – and the clue was the
outstanding chairman could see almost step by step how they were
influencing the process and they would tell you meeting by meeting where
we are likely to be – and some of these guys actually thought fourteen to
fifteen months ahead – at each meeting they would tell you what is going to
happen and we traced some of them, and blow me they were 90 per cent
accurate. I remember one member of the House of Lords who is an
outstanding chairman; he said we will be at this point, to have agreement on
this which the shareholders will like, and the press will love, about sixteen
months from now and it will be that date in November – and actually he did
it.
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SM
Interesting. So, I mean I guess hand in hand with that is the idea of
interrogating the argument, which I guess is incisiveness, is it?
AK
It is incisiveness. It is robustness and it has a great deal to do with courage
because the argument that needs to be interrogated is the project and
proposal that is put forward by management, and the board now has to go
into depth to see whether through their interrogation this proposal is either
going to bankrupt the company, it’s going to enable the company. Have
management thought through sufficiently?
So the academic equivalent is called peer review of articles, where you have
a group of strangers basically saying does this article make sense and should
it go forward to be publicly acclaimed, and the board is the same. So being
tough and rough, which is part of interrogation, is not good enough. You
have to be clever. So, it’s how do you cleverly make comments which
doesn’t have people losing face, but is so insightful that people are almost
motivated by the fact that their proposal has just been rejected. It’s a very
difficult thing. Now as a board it’s difficult to do, it’s the climate or the
way of operating that the chairman creates for that interrogation to take
place that makes the difference. So you can see the chair has a whole load
of soft skills, but they are very subtle soft skills.
SM
Yes, I can imagine that. The other one that you have identified is being
somebody, personally that people can look up to and embody the values of
the organisation.
AK
Yeah, and it was in our generations history, forty years of the CEO, it never
was historically. And all that we are doing now is going back to the point
where both government, shareholder and member of the community, citizen
stakeholder now looks to the chairman – does the chairman live those
values? If we have values of transparency, or values of the highest moral
ethical behaviour – who lives it? And the switch is going from the CEO,
almost the artisan who is doing the work, to the person who can live and
stand above all that and has total responsibility for the corporation and all its
problems, but still lives those values and that is what it was from 1760 to
1960 – two hundred years of that. And if you go back in history, you will
find that there were some outstanding chairmen who became government
ministers and one of the reasons was that people trusted them and the reason
they trusted them was they lived the values they said they were going to
live.
SM
Now, I guess one other aspect of that is how they are able to transmit that to
their colleagues on the board – so developing the board as a whole.
Traditionally I suspect that has not been an area that much attention has
been paid to?
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AK
It hasn’t and it is being paid more attention to and if you go to some of the
requirements of the codes from the stock exchanges – New York or London
– or in this country the Higgs Code, board development and review is
important. So part of board development is now the formal process of
review which could be just formal interviews, or it could be a questionnaire
list that you go through. Interestingly many board development reviews are
conducted by the chairman. So the chairman needs feedback and gets
feedback while he is also reviewing somebody else’s performance and it
takes quite a skilful chairman to get to the heart of things. We don’t have,
unfortunately, sufficiently skilful chairmen to do that, so we are getting
more and more consultants – the professional consulting firms. The
academics who understand boards are involved in this game, but it is still
not good enough because when there is something uncomfortable to discuss
– and one of them is chairman succession, another is deep rooted problems
with the chairman’s performance – the consultants don’t know what to say
in many ways because the person who is paying them is the person who is
going to receive the feedback. So, we are beginning to learn that board
review is not board development – board development is an attitude of mind
and that attitude of mind is so much dependent on the chairman’s
development and our gaping hole is our chairmen are developed
idiosyncratically.
In our survey, whether you are US, Russia or UK, most chairmen said they
needed development and most of their developments were at dinners. So
occasionally they were sitting next to somebody, or there was an interesting
presentation at the dinner, or there was an elite group and they’re sitting
together sharing ideas, but it is idiosyncratic, it is hit and miss – it’s then
experience. So we are at the point of needing chairmen mentoring
chairmen. We are at the point of chairman development is as much an
executive development activity as any of the activities we do here at
Cranfield or INSEAD or the other schools – we need a chairmen’s institute.
It is a big, big need.
SM
Interesting. So in answer to the question who develops the chairman, the
answer is probably nobody at the moment, or it is done informally and
haphazardly, but this needs to change.
AK
Yeah, and usually if it is done by another party which would be in the UK
the senior independent director, and we have a role on British boards called
the SID – the Senior Independent Director – it’s the wise owl, someone who
could even be a chairman in another company or has loads of experience.
But the problem there is, you still face the same dynamics. If this chairman
doesn’t want to listen, and you may be the most independent and wisest of
the members of the board, do you have the guy lose face? Would you say
nothing? Do you cause a disruption on the board? Do you have to resign
and that becomes public and damages the company and damages your own
reputation? So we still have a problem, even with the most experienced
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board members.
SM
Is there such a thing, from your research, as a typical chairman? Obviously
there must be a whole spectrum, but I wonder whether there are some
characteristics that came out?
AK
In terms of qualities that are not inborn, that are developed, yes. One of
them is humility. Tremendous humility to appreciate a broad spectrum of
inputs and also allow people to critique, even the chair. The second is a
very, very relevant skill – you do not sit on boards today if you don’t have
finance skills; you are legally at risk. The third is broad experience of
business. So many good chairmen, even when they were managers held a
non executive director role and that gave them the experience. Until very
recently the CEO then became the chairman of their own company or
somebody else’s. It’s very interesting now – that is falling off in
popularity.
The most recent development – and I think it will continue – is some of the
most effective chairs have come from finance directors, ex-finance
directors, who did not become CEOs but who were members of a board for
two or three years and then became chairman of that board.
So if we take the qualities of influence, humility, robustness, a smart way of
thinking – the other route is experience and the most valuable route for
experience isn’t the more tough aggressive CEO, it’s the subtle finance
director who knows how to manage the figures and influence people more
from the back rather than the front.
SM
Interesting. So finally, are you optimistic or pessimistic about the chair and
the way this role is going to develop?
AK
Oh, very optimistic. We have particular problems in the UK because since
the book was written we have just completed a survey – in fact the statistics
are coming on my desk today – whereby, chairmen rate themselves higher
than other board members do and here we are talking about every director
of the FTSE 350, so we have a big database. And the second statistic we
have in the UK is the executive managers, the executive directors who sit on
boards value the contribution of the chairman of the board less than
anybody else. So in the UK we have a problem of needing boards and
needing high quality chairmen, but those chairmen need development and
they are slowly losing the trust and faith of their management, so something
needs to be done.
We have just completed a comparable survey in Australia and we have none
of that. We have chairmen who are more in touch with their board and
their business, we have executive managers who more respect the chairman
of the board and the interesting thing is, because of detail in Australia, there
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are fewer directors who hold a number of board positions – they only hold
two, three, one perhaps – but they get into such detail, their work is through
sub-committees. So the outstanding chairmen and board directors, on top
of everything else we have said, do a lot of sub-committee work, so the role
of board and chairman is almost full-time now.
Now we Brits and Australians are nothing like what is happening in the
States where we have a board demographic configuration problem – the
structure of boards requires unbelievable attention. The irony in the US is
that the public sector boards – health, education and so on – are outstanding
and so we have in the US structures of boards for public monies given by
government, and the citizen for our communities really contributing, and
our corporations – which is equity money – not doing so. So there is a very
good example in the US; we should only look to the other side, the public
sector side, but as I said there is no political will. But despite these
problems we are in a situation of having no choice; we need this monitoring
role. So I am very optimistic and despite what I have said, I am even more
optimistic because it is really a development opportunity, and that is what
we have.
SM
That sounds a great agenda and may be a useful follow up for another book
on the subject. Thank very much, Andrew.
AK
My pleasure.
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© Cranfield University 2008