For more than four decades, Ram Charan has been working with boards and CEOs at public companies, private equity companies and family companies. And he’s done it in nearly every country on earth where free market capitalism is practiced—and at least a couple where it is not.
This work and his decades on the faculty of prestigious business schools, including Harvard and GE’s Crotonville, has resulted in a strong following among top leaders, as well as a slew of business must-reads, including the classic Boards That Lead, widely considered the most essential text for any new public company board member.
Even now, in his mid-80s, Charan—a longtime contributor to Corporate Board Member and sister publication Chief Executive—continues a grueling always-on-a-plane-to-somewhere schedule in pursuit of his life’s work: helping companies and the people who manage and govern them become more effective stewards of capital.
It is for these decades of effort helping build better leaders, better boards and better strategies that the selection committee honored Charan with this year’s Greatest Impact on Corporate Boards award. Dan Bigman, editor of Corporate Board Member, asked Charan to talk about what’s changed and—even more important—what has not when it comes to being an effective public company director. Here’s an excerpt of the conversation, edited for length and clarity:
You’ve been coaching boards for 40-plus years. What’s changed, and what hasn’t, about being a public company director?
Forty years ago, the external circumstances were very different. In the 1980s, we were just seeing the emergence of activist shareholders—under different names. Publicly held companies didn’t really pay much attention to the public. There were royal CEOs, and the boards did very little. Succession was done by outgoing CEOs. ISS was emerging. There was huge internal trading, with no real way to control it.
Today, the job is just much more complex. The reason for the complexity is external. The emergence of active shareholders. The Russia-Ukraine war, interruptions in supply chains, energy flows, inflation, uncertainty about the Fed. The election. All these uncertainties have increased.
Here, there’s a difference between what a board does and what a board should do. Today, boards can have more than 10 people and have difficulty having a good dialogue. There are just four eight-hour meetings a year, plus committee meetings. That’s just not enough time.
But some boards do very well. They have a strong outside chairman, a strong lead director or a strong CEO who knows how to bring the best out of the board in building the future of the company. Their focus is shareholder value, on a long-term basis, and a few key issues: diversity, cyber-attack protection. There are a host of issues that bombard the board today. To manage, they have to rearrange their way of doing things, how they operate, how they focus.
What’s the challenge that comes up the most? Why do folks bring you in, and what do you tell them?
There are three challenges. The most difficult challenge, on which many boards fail, is picking the right successor to the existing CEO. A large number of boards fail to spot a failing CEO and take action. Investors know it before them; the press knows it before them. The probability is high they know it too, but they don’t act. That’s one.
Number two is they fail to have a board that really works together—they won’t deal with a board member who is ineffective or toxic. And number three, they have CEOs who become imperial CEOs, and the boards don’t act when they should act and take action to have the imperial CEO do what he needs to do.
The rest is taken care of by management. Boards don’t run the company. They should not run the company.
Talk a little bit about sharing an outside view and challenging the thinking of the board, and why that’s so important.
I have a very sensible outside view of the world. So, what they are doing, and my view of the outside world, is to show them what I think is happening on the outside, and therefore challenge them to think differently.
I can do it in the board meeting. I may do it in a committee meeting. I may do it with the CEO alone. It depends where the issue is. I’ve done that in the whole boardroom. I just try to get them to think differently.
Many times, I’ve been called to challenge the strategy presented by the CEO. Usually, there are three reasons why this strategy challenge is helpful. One is to get the outside view of the context of the company. Often, that is different from the CEO’s, so the CEO and the board benefit from it. The second is the outside view of technology changes against the assumption by the company. That’s useful to them.
And third is challenging their resource allocation. It’s often too short-term and not doing enough to build the long term. Those are the challenges that are constructive; they require judgment, but that is helpful to them to see a different scenario.
How do you judge a board?
There are many ways. Most people look at how many people attend meetings, how long are the meetings, how many meetings are held, how disciplined are they, how many people come prepared, not come prepared. How does the CEO provide right information inside, outside, all input-oriented?
These are not the right criteria. The most important job of a board is to have the right CEO all the time, and to take action when he’s deteriorating and select a new one that turns out to be very effective.
The second job is to ensure that capital allocation has the right balance between the short term and the long term.
And the third item is to ensure that the culture of the company is not fraudulent and is competitively better going forward.
It is the results that matter. Each of the things I’ve mentioned is measurable. And those are the outcomes. Outcomes determine how good a job a board is doing. Selecting the CEO, dismissing the CEO, this is more than 100 precent of the value a board can add. We know how many boards have failed in selecting the CEO. You’ve got plenty of names: Starbucks, old HP and Ford. The list goes on. That’s the most critical criteria.
If the most important job of the board is hiring the CEO, are there characteristics that boards should be looking for in CEOs for the next few years that may differ from what they looked for in the past? Give us a tip about the CEO of the future.
First, there are all the same basic requirements: has broad perspective, has the resilience, knows how to select the right people, create a strategy, all that. Everybody knows that. What is changed is a sharper attention and perception of external change and the drivers of it, knowing that complexity outside and uncertainty outside has shifted materially. And that technology is creating a huge change in the external landscape. It is this area that will differentiate a good CEO from a not-so-good CEO.
We are in an age, though, where boards are constantly being pushed to have experts on every topic. They’re supposed to have a tech expert or a cyber expert, and meanwhile, it seems the board’s job is getting more and more and more complex. Do you think they need to just simplify and really focus on the key things you talked about? And are they getting away from that?
The key point is that most boards have 10 members, including the CEO. Yes, you can have specialists—but they must also have minds that are broad. They must be able to take in the company as a whole—otherwise they remain narrow specialists. My point is the selection of the CEO has nothing to do with being a specialist. It is a job of judging people. There is no perfect way.
As we look forward to the next decade, what do you think it’s going to take to succeed as a public company director?
The board is a group. It’s not a team. There is just not enough time for them to really learn the business or get together to discuss the business. There are just too many issues. The information is totally asymmetric between the company CEO and management and the board. Private equity boards are very different. They’re very active. They know the business. They all have their skin in the game.
Public boards can be lucky and have just three directors who care, who take the company viewpoint. They persuade other board members. They work effectively with the CEO. These are the three directors who make the whole thing work. They have wisdom. They know how to summarize, how to integrate, how to focus. Then the board and CEO can work well and tackle the most difficult issues that come up, including business issues. Those boards are the ones that are very effective.
