Ram Charan has worked with executives and CEOs of public companies, private equity firms and family businesses for over 40 years, and has done so in nearly every country on earth where free market capitalism is practiced – and at least some where it is not.
This work, combined with decades of teaching experience at prestigious business schools including Harvard and GE's Crotonville, has earned him a strong following among top leaders and he has also published a number of must-read business books, including the classic “Boards That Lead,” widely considered the most important text for new directors of public companies.
Now in his mid-80s, Charan has been Director and sister publications chief executive officer—He maintains a demanding schedule that keeps him on a plane somewhere, always heading somewhere, as he pursues his life's work of helping companies and the people who manage and control them manage capital more effectively.
The selection committee awarded Charan this year's Greatest Boardroom Impact award for his decades of hard work helping to build better leaders, better boards and better strategies. DirectorWe spoke to Charan about what has changed, and more importantly, what has stayed the same, in terms of being a successful public company director. Below are excerpts from our conversation, edited for length and clarity.
You've been leading boards for over 40 years, what has changed since becoming a public company director and what has remained the same?
Forty years ago, the external environment was very different. In the 1980s, we had just witnessed the emergence of activist shareholders under a different name. Public companies didn't have much of a care in the world. CEOs were well-known, but boards did very little. Successors were appointed by the outgoing CEO. ISS emerged, and there was a ton of insider trading going on, but no real way to control it.
Today, the work is much more complicated. The reasons for the complexity are external: the emergence of aggressive shareholders. The Russian-Ukrainian war, disruptions to supply chains, energy flows, inflation, uncertainties about the Fed. Elections. All these uncertainties are increasing.
There is a difference here between what the board does and what the board should do. Today, the board has 10+ people and it is difficult to have a good dialogue. There are only four 8-hour meetings a year, plus committee meetings. That is not enough time.
But there are boards that work very well. They have a strong independent chair, a strong lead director, or a strong CEO who knows how to maximize the power of the board to build the future of the company. The focus of the board is long-term shareholder value and a few key issues like diversity and protection from cyber attacks. Boards are currently challenged with a number of issues. They need to recalibrate how they do things, how they operate, and how they focus to manage this well.
What are the most common challenges you come across? Why should people hire you and what would you tell them?
There are three challenges. The hardest challenge is choosing a good successor to the current CEO. A lot of boards fail. A lot of boards fail to see that the CEO is screwed and take action. Investors know it before the board. The press knows it before the board. They likely know it too, but they don't act. That's one thing.
Number two, the board is not truly working together. If board members are ineffective or toxic, the board doesn't address it. Number three, the CEO becomes an autocratic CEO, and the board doesn't act when it should or doesn't let the autocratic CEO do what needs to be done.
The rest is taken care of by management. The board of directors does not run the company. The board of directors should not run the company.
Talk a little bit about sharing an outside perspective and challenging the board's thinking and why that's important.
I have a very enlightened outside perspective on the world, so what they do, and the perspective that I have on the outside world, is to show them what's going on outside, and therefore to inspire them to think differently.
You can do it with the board, you can do it with a committee, you can do it alone with the CEO. It depends on where the issue is. I've done it with the whole board. I'm just trying to get them to think differently.
I've been asked on many occasions to challenge the strategy that the CEO has laid out. There are usually three reasons why challenging this strategy is useful: First, you get an outside perspective on the company's situation, which is often different from the CEO's perspective, and the CEO and the board benefit from it. Second, you get an outside perspective on technological changes that go against the company's assumptions, which is useful to them.
The third is to challenge resource allocations. Too often, resource allocations are too short-term and not enough to build a long-term perspective. These are constructive challenges. They require judgment, but they help you see different scenarios.
How do you judge a board?
There are many ways. Most people look at how many people attend meetings, how long the meetings are, how many meetings are held, how disciplined the meetings are, how many people show up prepared and how many show up unprepared. How does a CEO provide the right information, input-driven, across the board, internally and externally?
These are not the right criteria. The board's most important job is to have the right CEO in place at all times, and to take action when the CEO's performance declines and choose a highly effective new CEO.
The second job is to ensure that capital allocation strikes the right balance between short-term and long-term.
And the third item is to ensure that the company culture is not dishonest and will continue to be competitive.
Results are what matters. Everything I said is measurable. And that's what results are. Results determine how good a board is doing. Selecting a CEO, firing a CEO is over 100% of the value a board can add. We know how many boards have failed to select a CEO — Starbucks, former HP, Ford, the list goes on. This is the most important metric.
If the most important job of a board is to hire a CEO, will the characteristics that boards look for in a CEO be different in the coming years? What are your tips for future CEOs?
First, the basic requirements are all the same: have a broad perspective, be resilient, pick the right people, know how to strategize, etc. Everyone knows that. What has changed is a sharper attention and awareness of external changes and their drivers, recognizing that the external complexity and uncertainty has changed substantially. And technology is driving significant changes in the external landscape. This area is what separates the great CEOs from the not-so-great ones.
But we're in a time where boards are being asked to have experts on every topic all the time. They're being asked to have tech experts, cyber experts on the board, but at the same time, it seems like the job of the board is getting more and more complicated. Do you think boards need to simplify and really focus on the key points that you talked about, or are they moving away from that?
The key point is that most boards are made up of 10 members, including the CEO. You can bring in experts, but they must also have a broad perspective. They must be able to see the whole company. Otherwise, they remain narrow experts. My point is that selecting a CEO has nothing to do with being an expert. It's a job of judging people. There is no perfect way.
Looking ahead to the next decade, what do you think it takes to be a successful public company director?
The board is a group. It's not a team. There isn't enough time for them to really learn the business or get together and discuss the business. There are too many problems. There is a complete asymmetric information gap between the CEO and management of the company and the board. Private equity boards are very different. They are very proactive. They know the business. Everyone is in the game with their own stake.
A public board, if it's lucky, has just three directors who are sympathetic and see the company's point of view. They persuade the other directors and work effectively with the CEO. These three directors make the whole thing work. They have wisdom. They know how to summarize, integrate, and focus. Then the board and the CEO can work well together to tackle the toughest problems that arise, including business problems. Such boards are very effective.
