Session 12
Corporate Governance,
Innovation and
Entrepreneurship
Corporate Governance
Issues discussed in the case or discovered in
your research? If so, recommend corrective
action.
If no, move on to an evaluation of the BOD.
Board of Director Facts & Statistics
The average board size of Fortune 500
companies is 12, of whom 9 are outside
board members
16.9% of board seats in the Fortune 100 are
held by women
Current average tenure of a CEO is between
three to five years
Criteria used in BW’s The Best &
Worst Boards
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shareholder accountability
corporate social responsibility
board quality
board independence
corporate performance
independence
stock ownership
environment
director quality
board activism
Attributes of a Good Board
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INDEPENDENCE
Friends and cronies of the CEO are out.
Crucial panels like audit should contain no
insiders. Cross-directorships are taboo
Attributes of a Good Board
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QUALITY
Board meetings should include real, open
debate. Directors need to be familiar with
managers and conditions in the field
Attributes of a Good Board
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ACCOUNTABILITY
Directors ought to hold serious stakes in the
company. They should also be prepared to
challenge under-performing CEOs
ENHANCING BOARD
EFFECTIVENESS
No More than Two Insiders
No Insiders on Audit, Nominating, and
Compensation Committees
No Outsiders Drawing Fees from Company
ENHANCING BOARD
EFFECTIVENESS
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No Interlocking Directorships
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Outsiders Meet Regularly without CEO
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All Directors Own Minimum of $100k of Stock
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Board Stands for Election Every Year
ENHANCING BOARD
EFFECTIVENESS
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Board’s Evaluate their own Performance
Yearly
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Employed Directors sit on No More than 3
Boards
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Non-Employed Directors sit on No More than
6 Boards
ENHANCING BOARD
EFFECTIVENESS
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At Least One Outsider with Experience in
Core Business
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All Directors Attend at Least 75% of Meetings
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Board Size No Larger than 15
Best Boards of Directors
1. 3M - With just one insider on its nine-member board the
company gets high marks for independence. Outside directors
include the CEOs of Lockheed-Martin, Allstate, and Amgen.
Audit-committee chairman is the former CFO at Sears. No
directors have business ties to the company.
2. APRIA HEALTHCARE - The board includes three top
shareholder activists and features a separate chairman and
CEO, a rarity. It moved quickly to accept the resignation of a
former CEO when directors discovered that his wife had
been hired for a company job.
Best Boards of Directors
3.
COLGATE-PALMOLIVE - Directors are well-invested in the
company and sit on few additional boards. The compensation
committee has awarded premium-priced options to CEO
Reuben Mark, which pay off only if stock appreciates by 10%
to 70%. A new section on governance has been added to the
latest proxy.
4. GENERAL ELECTRIC - This talent-packed board, with an
unrivaled record of creating shareholder value, remains a
favorite with governance experts. it recently added Ralph
Larsen, former CEO of Johnson & Johnson and a longtime
champion of good governance.
Best Boards of Directors
5. HOME DEPOT - With the departure of co-founder
Bernard Marcus, the 12-member board now has
only two insiders. Independent
directors meet
regularly without management. Directors are
required to visit 20 stores a year.
6. INTEL - One of the few boards that have a lead
director. No insiders sit on the audit, compensation,
or nominating committees. The board conducts an
annual self-evaluation. Directors have big stakes in
the company.
Best Boards of Directors
7. JOHNSON & JOHNSON - The high-powered board
includes Delta Air Lines CEO Leo Mullin, Lucent
Technologies Chairman Henry Schacht, and CSX
CEO John Snow. The outside board members own
plenty of J&J stock. Only one director sits on more
than four boards.
8. MEDTRONIC - Governance gurus applaud the
board's practice of holding regular meetings without
the CEO and its performance evaluations for
directors. Members are graded on willingness to
"hold management accountable" and "meaningful
participation" at meetings.
Best Boards of Directors
9. PFIZER - The board was second only to GE in overall approval
by governance experts. Independent directors meet without the
CEO. No Pfizer executives sit on the audit, nominating, or
compensation committees. Stock transactions for directors and
executives are posted on the company Web site.
10.TEXAS INSTRUMENTS - Making its third
appearance on
Business Week's Best Boards list, this highly independent board
boasts a roster of well-invested outside directors, including the
chief executives of Norfolk Southern, Kimberly-Clark, and
Eastman Kodak.
Worst Boards of Directors
1.
APPLE - Founder Steve Jobs owns just two shares in the
company. Recently departed director Larry Ellison had
none and had missed more than 25% of meetings in the
past five years. The CEO of Micro Warehouse, which
accounted for nearly 2.9% of Apple's net sales in 2001,
sits on the compensation committee. Since 2000, the
board has awarded Jobs 27.5 million stock options and a
$90 million jet.
2.
CONSECO - In 2000, the company spent a hefty $45
million to recruit CEO Gary Wendt from GE Capital.
Despite the company's recent slide, in July--with the stock
hovering at $1--the board awarded Wendt an $8 million
bonus. In August, the shares were delisted from the Big
Board and now trade at 7 cents. None is a CEO. The board
doesn't meet without the CEO present.
Worst Boards of Directors
3.
DILLARDS - Before his death in February, Chairman William
Dillard presided over a board that included seven directors with
ties to the company, including four of his children. No
nominating committee--allowing the CEO to hand-pick
directors. With two-thirds of board elected by holders of
privately held Class B shares, Dillard's is exempt from NYSE
governance rules.
4.
GAP - Self-dealing includes contracts with the chairman's
brother to build and remodel stores and a consulting deal with
the__chairman's wife. Slow to replace outgoing CEO Mickey
Drexler as performance declined. Interlocking directorship with
Drexler sitting on the Apple board, while Apple's Steve Jobs
sits on Gap's.
Worst Boards of Directors
4. KMART - The board's woes include multiple investigations of
company accounting, a $501 million profit restatement, and a
federal grand jury probe into pay practices. The board was
passive as the company's performance deteriorated before a
bankruptcy filing in January. Meanwhile, the board approved $28
million in retention loans to 25 top executives.
6. QWEST - Founder Philip Anschutz has extensive dealings with the
company and sits on compensation and nominating committees. The
SEC is probing whether Qwest used "swap" transactions to boost
revenue. The compensation committee--described as "comatose" by
one expert--awarded ex-CEO Joseph Nacchio an $88 million pay
package in 2001, one of the worst years in the company's history. No
outside director has operating experience in company's core business.
Worst Boards of Directors
7. TYSON FOODS - Out of 15 board members, 10 have ties to the
company, including seven who have extensive business
dealings. CEO John Tyson got a $2.1 million bonus for
negotiating the acquisition of meatpacker IBP--which Tyson
Foods tried unsuccessfully to back out of--in a year when net
income fell 42%. Feds say the company for years conspired to
smuggle workers from Mexico for its U.S. poultry-processing
plants, a charge Tyson denies.
8. XEROX - The bungled succession of Paul Allaire, accusations of funny
accounting, billions in shareholder wealth up in smoke, and a decadeslong failure to keep up with changing technology add up to an
ineffectual board. With departures of Allaire and CFO Barry Romeril,
the board is far more independent. But too many directors sit on too
many boards. Director Vernon Jordan's law firm provides legal services.
Incremental Innovation
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Toyota’s CCC21: construction of cost
competitiveness for the 21st century
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Six Sigma is a rigorous and analytical
approach to quality and continuous
improvement with an objective to
improve profits through defect
reduction, yield improvement, improved
consumer satisfaction, and best-inclass performance
10 Essential Elements that
Lead to Incremental Innovation
1.
2.
3.
4.
5.
Define quality and
customer value
Develop a customer
orientation
Focus on the
company’s business
processes
Develop customer
and supplier
partnerships
Take a preventive
approach
6.
7.
8.
9.
10.
Adopt an error-free
attitude
Get the facts first
Encourage every
manager and
employee to
participate
Create an atmosphere
of total involvement
Strive for continuous
improvement
Breakthrough Innovation
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A breakthrough innovation is an
innovation in a product, process,
technology, or the cost associated with it
that represents a quantum leap forward in
one or more of those ways
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Breakthrough approaches to innovation are
inherently more risky than incremental
innovation approaches
Risks Associated with Innovation
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Innovation involves creating something that
doesn’t now exist
Long odds for success
Market risk
Technology risk
Idea Factors
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Need spotting
Solution spotting
Mental inventions
Random events
Market research
Trend following
Treacy’s Useful Points about Managing
Risks
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The point of innovation is growth
Get the most from the minimum innovation
Incremental product innovations can lock in
existing customers
Incremental business process innovations can
generate more revenue gain or cost savings
with less risk than radical ones
Radical innovations are often too radical
The time to launch breakthrough innovations is
when they are essential to the marketplace
Ways to Lower Risk
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Product teams
Cross-functional groups
Joint ventures
Cooperation with lead users
“Do it yourself” innovation
Acquiring innovation
Outsourcing innovation
Entrepreneurship
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Entrepreneurship is the process of bringing
together creative and innovative ideas and
actions with the management and
organizational skills necessary to mobilize the
appropriate people, money, and operating
resources to meet an identifiable need and
create wealth in the process
Inventors
Promoters
Administrators
Entrepreneurs
Who Is the Entrepreneur?
Three Elements Central to
Entrepreneurial Process
1.
Opportunity
2.
Entrepreneurial Teams
3.
Resources
Resources
1.
2.
Debt financing is generally obtained from a
commercial bank to pay for property,
equipment, and maybe provide working
capital
Equity financing is usually obtained from
one or more of three sources: friendly
sources, informal venture investors, or
professional venture capitalists
Intrapreneurship
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Intrapreneurship, or entrepreneurship in
large companies, is the process of
attempting to identify, encourage, enable,
and assist entrepreneurship within a
large, established company so as to create
new products, processes, or services that
become major new revenue streams and
sources of cost savings for the company
Pinchot’s 10 Freedom Factors
1.
2.
3.
4.
5.
Self-selection
No hand-offs
The doer decides
Corporate “slack”
End the “home
run” philosophy
6.
7.
8.
9.
10.
Tolerance of risk,
failure, and
mistakes
Patient money
Freedom from
turfness
Cross-functional
teams
Multiple options