How do boards add value?

• Author: Heidrick, Robert L.
• Position: Role of corporate boards

Also, what limits their ability to do so? Directors give candid answers to these two tough questions.

It's no secret that a well-constructed and smoothly operating board adds tremendous value to a company. Nonetheless, exactly how a board adds value, what specifically that value is, and what can prevent a board from delivering maximum value are topics of great debate. Recently, I asked nine clients, who serve as both CEOs and outside directors, to share their thoughts on these issues. Our discussions were both intriguing and insightful. And while there is little similarity between the businesses these executives oversee, there was a surprising level of consistency in their answers.

How directors add value

The executives I spoke with said boards can add tremendous value in the following five ways:

1. Bringing an Objective, Outside Perspective to Decisionmaking. Across the board, CEOs and directors responded that the way in which directors add the most value is by bringing an objective, outside perspective, and sometimes even a different focus than management brings, to discussions related to strategy, and to acquisitions in particular.

   "I don't think boards initiate very much, nor do they kill very much. How they guide the CEO through major business decisions is how they really add value. In the case of Whitman Corp., the board played a big role in helping management spin off Midas and Hussman. The board worked very hard at making sure the deal was priced right and that the right people were in place to run the companies. We helped management to select CEOs for the two spun off companies as well as a non-executive chairman for Hussman who came from the Whitman board. There were a jillion meetings to accomplish all this, but the market responded by giving good values to the new spinoffs and the Whitman stock has held up pretty well."

   - Herbert M. Baum, Director, Whitman Corp., and Chairman and CEO, Quaker State Corp.

   [Author's Note: Subsequent to my discussion with Herb Baum, he left Quaker State to join Hasbro Corp. as president and chief operating officer.]

   "Within the last year, we presented two major acquisitions to the board. They were both very interesting, but we were focused on the first one because of the opportunity to create synergy value. The board looked at the data - presented by the same individual - and said the second company was a more attractive acquisition based on the fundamentals of the business. The board thought that management had its priorities reversed. On reflection, we agreed with the board and refocused our efforts. Now to me, that is a great example of an intelligent board looking at a business and saying in terms of what you'd rather own, you should always opt for the stronger company. It was very useful, good input that was delivered in a way that was constructive."

   - Stephen R. Hardis, Chairman and CEO, Eaton Corp.

2. Bringing a Shareholders Perspective to the Decisionmaking Process. Oftentimes, a board delivers its greatest value by helping management and even employees to see a situation through the eyes of shareholders. A. Maurice Myers, chairman and CEO of Yellow Corp., succinctly summed it up when he said to me, "That's what a board is supposed to do, take a shareholder's perspective."

   "Over the last year or so I have been a member of Navistar's strategic initiative committee. It is a committee of outside board members formed to review what Navistar ought to do going...