June, 1997 - Vol. 1, No. 9

The Worth of the Board of Directors

McKinsey & Company collaborated with Institutional Investor magazine to survey 69 company executives and 50 institutional investors on better governing board practices. Effective boards of directors are viewed as incorporating these features:

• A majority of the directors are from the outside and are independent of management
• Directors have substantial stockholdings in the company and are paid in stock
• The board formally evaluates both the chief executive and the directors
• The board is responsive to investor requests.

More than half of the investors are willing to pay more for stock of a well-governed company with these features. Their overall stockprice premium is 11 percent. Said one investor who specializes in picking undervalued companies: "A good board may help lift an underperforming stock and capture hidden value." More generally, the institutional investors say they will pay a premium because companies with good governance perform better over the long-term and rebound from setbacks more quickly.

Company executives are prepared to pay even more for stock of well governed firms: they set their own stockprice premium at 16 percent. One chief executive explained why: If "two companies are in a daytime race -- nothing goes wrong -- they they're evenly matched. If the race goes past dusk, however, the company with good governance has the headlights to deal with the problem."

Source: Robert F. Felton, Jennifer van Heeckeren, and Alex Hudnut, "Putting a Value on Board Governance," McKinsey Quarterly, Number 4, 1996, pp. 1-8.

Organizational Redesign for Competitive Advantage

David A. Nadler and Michael L. Tushman argue that how you design your organization has decisive impact on how it performs. And if your firm's performance is languishing, there are few better tools for recovery than redesigning how the firm fits together its jobs, teams, divisions, compensation, and information. "With the possible exception of individual leadership," Nadler and Tushman write in Competing by Design, "no management tool offers so much potential for fomenting substantive change."

Redesigning a firm's organizational architecture itself depends on individual leadership. For managers to drive the redesign effectively, Nadler and Tushman first urge articulating the new architecture and winning over key power groups to back it. Then, they say, build a momentum for change but also preserve anchors of stability within it so that all know what is to be altered and what is to be preserved.

Source: David A. Nadler and Michael L. Tushman, Competing by Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997)

Making Good Decisions

Wharton Executive Education is offering an open-enrollment course, "Critical Thinking: Real-World, Real-Time Decisions," on August 3-6, 1997, and March 18-20, 1998.

Information:execed@wharton.upenn.edu and http://www.wharton.upenn.edu/execed

Newsletters: Corporate Governance

Several newsletters provide frequent updates on trends in corporate governance:

• Corporate Agenda: The Newsletter for Corporate Executives about Corporate Governance (P.O. Box 3000, Denville, N.J. 07834-9926).
• Corporate Examiner (Interfaith Center on Corporate Responsibility, 475 Riverside Drive, Room 550, New York, New York 10115).
• Corporate Governance Advisor (Aspen Law & Business, 270 Sylvan Ave., Englewood Cliffs, N.J. 07632).
• Corporate Governance Bulletin (Investor Responsibility Research Center, 1350 Connecticut Ave., N.W., Suite 700, Washington, D.C. 20036)
• Director's Alert: Your News From Other Boardrooms (211 East 43rd Street, 20th Floor, New York, New York 10017).
• Directors and Boards (Investment Dealers' Digest, 2 World Trade Center, 18th Floor, New York, New York 10048).
• Directorship (Directors Publications, 3 Sound Shore Drive, Greenwich, Ct. 06830)
• Director's Monthly (National Association of Corporate Directors, 1707 L Street, N.W., Suite 560, Washington, D.C. 20036).
• Issue Alert: The Monthly Corporate Governance Review (Institutional Shareholder Services, 7200 Wisconsin Avenue, Suite 1001, Bethesda, Md. 20814).

"Change is all about critical mass. If you get a critical mass of real change leaders in the middle, you have a much better change of leading a successful major change effort. You cannot do it alone -- and while there are isolated examples of the dynamic CEO driving change from the top, these are few and far between.... However you do it, you eventually need a critical mass of real change leaders throughout the organization."

Source: Jon R. Katzenbach, Frederick Beckett, Steven Dichter, Marc Feigen, Christopher Gagnon, Quentin Hope, and Timothy Ling, The Real Change Leaders: How You Can Create Growth and High Performance at Your Company (New York: Times Business/Random House, 1995).