Building an Exceptional Board

There are no formulas to creating a great board, but there are some hallmarks of excellence

What does a great board look like? Is it a group of star business personalities, or one that lives up to the highest standards of good corporate governance? Is it the board of a company that consistently beats analysts' estimates, or one that has deftly handled adversity and CEO succession? The answer is that there are no answers.

Corporate governance experts and board advisers agree that there is no recipe for building a great board. A group of exceptional business stars might be highly dysfunctional behind the closed door of the boardroom, while a diverse group of largely unknown but highly experienced individuals could be running the best board in America. Because boards are made up of a group of people, it is in that human interaction and chemistry that great boards are made. The sum is greater than its parts.

"It is difficult to identify the best boards," says Patrick McGurn, executive vice president and special counsel at the ISS unit of RiskMetrics. "You can have a board that looks great on paper and then you see the work product and how they react when a problem emerges and it's another story," he says.

There are boards that have all of their governance best practices checked off: They have separated the chairman and CEO role; they have nearly all independent directors; and they score high marks from corporate-governance ratings firms, such as RiskMetrics and The Corporate Library, but there is no guarantee that they will perform at a high level. Ric Marshall, chief analyst and co-founder of The Corporate Library, a governance research and ratings firm, says that governance ratings are an important gauge of board-effectiveness, but they don't necessarily identify the best boards. "A great board is magic. It's human chemistry and the right kind of experience. There are no formulas or recipes. A great board is born in and of itself," says Marshall. In fact, a board that takes a check-the-box mentality and lives by the letter of the law is unlikely destined for greatness, he says. "In my experience, the most compliant boards are usually not bad boards, but they are also rarely the best boards."

Then there are boards that are full of superstars. Consider the board of Procter and Gamble: in addition to its highly regarded Chairman and CEO A.G. Lafley, the board boasts such luminaries as Ernesto Zedillo, the former president of Mexico; John F. Smith, the former chairman and CEO of General Motors; and Rajat Gupta, former managing director at McKinsey and one of our selections to the Directorship Boardroom All-Star team. It also includes the current or former CEOs of Archer Daniels Midland, Boeing, Verizon, and eBay. How would you like to have Apple's board? In addition to Chairman and CEO Steve Jobs, the smallish board includes Al Gore and Avon CEO Andrea Jung (both Directorship Boardroom All-Star selections), as well as Eric Schmidt, CEO of Google, and the CEOs of J. Crew, Genentech, and Intuit.

While these boards might be among the best—their companies certainly have the results to back it up—there is no guarantee that top talent will make for an outstanding board. Sometimes a dream team of stellar individuals doesn't click, like the 2004 U.S. men's Olympic basketball team that, by all accounts, had the best players in the world but finished with a bronze medal because they couldn't play as a team. "One thing that boards do wrong is to go for the biggest name or the best athlete available, to steal a sports cliché, instead of filling the specific need that they have," says McGurn.

Hard to See

Identifying great boards is not be as hard as identifying great board members, since the company has a track record that you can follow. But Drew Hambly, a corporate governance analyst at Moody's, says that there are lagging indicators for great boards, but few leading indicators. By that he means that you can't really tell a great board until it does something great.