Boards think they're doing a good job ... but CEOs disagree. What directors can do to bridge that disconnect.

• Author: Meyer, Keith B.
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

SOME 95 PERCENT of directors rate their boards as either effective or very effective overall. That was the finding of a recent study of board effectiveness conducted by Heidrick & Struggles in conjunction with the Center for Effective Organizations at the University of Southern California's Marshall School of Business. The study incorporated responses from 768 directors, nearly 75 percent of whom are outside directors, at approximately 660 of the 2,000 largest publicly traded companies in the U.S.

CEOs tell a different story.

In our extensive work with boards, CEOs in informal conversations almost universally confide that they have at most one or two very effective directors who provide wise counsel, offer advice on key issues, and contribute both formally and informally to the direction of the company. A fortunate few CEOs say they have as many as three or four such directors.

Roughly, then, only about 10-20 percent of directors are seen by CEOs as effective. Further, say CEOs, their top management team often regards working with the board as a demotivating experience.

The good news is that this disconnect is of relatively recent making; its causes are clear, and there are readily available remedies to repair it.

Converging culprits

A number of policies, practices, and philosophies have converged in recent years to create the current disparity between the views of boards and CEOs. Among the most prominent:

* Differing Definitions of Success. In part, assessments of board effectiveness diverge so dramatically because CEOs and boards define success differently. CEOs say they want directors who don't meddle in the day-to-day running of the business, offer a strategic sounding board for management, and bring to bear their wisdom and experience when the company encounters extraordinary circumstances such as hostile takeovers, shareholder activism, and significant business challenges. In short, they want independent directors who can help them make better, faster, and wiser decisions.

Meanwhile, many directors define success in terms of committee work, fiduciary responsibility, and keeping the company in compliance with legal, regulatory, and other oversight requirements. In our study, they gave themselves high marks in many of these areas. Some 95 percent of respondents rated their monitoring of the company's financial performance as effective or very effective; 92 percent said that their representation of the shareholders is effective or very effective, and 90 percent said that they were similarly effective at ensuring ethical behavior.

Yet in the strategic and advisory areas that CEOs value, directors gave their boards much lower marks. For example, only 59 percent of the directors responded favorably when asked to rate their boards' effectiveness in shaping long-term strategy. Only 61 percent said that their boards were good at identifying possible threats or opportunities critical to the future of the company. Less than two-thirds of directors reported that their...