Inside the Boardroom
The Board’s Hidden Performance Catalyst
Governance Committees Come of Age
By David W. Anderson, PhD
The Anderson Governance Group
Directors have grown weary of
compliance.
Some would say they have grown
tired of governance, as governance
has become virtually synonymous
with compliance — itself a catch word
for every kind of mandated regulation.
We must resist equating compliance with governance.
Compliance, while necessary and at times helpful,
is largely about following rules and regulations. The
outcome can only be as good as the rules themselves.
Compliance-driven governance, being common
within a given jurisdiction, does not generally confer
competitive advantage. It is legally necessary but
does not relate directly to performance.
Governance, on the other hand, is the highest form
of leadership. It is about capability, direction and
results. Performance-driven governance creates
differentiated approaches to business and thus, when
harnessed, confers competitive advantage.
To keep this distinction clear, directors are right to
resist the pressures of regulation and show impatience
when complying with “forms” of governance
that impede the higher “functions” of
governance.
There are two related stories at work
here, which I will tease apart in this
article. The first explains how directors
arrived at this junction and the
second gives hope for what may
come next.
Taking Stock: Five Years Past Enron
For five years, directors have been finding a new path
for themselves in this era of governance. Many have
decided to become strategic partners to management
as the best way to add value to the enterprise and
safeguard investors’ assets.
We must resist equating compli-
Much has been demanded of ance with governance.
directors, and they have stepped
up to the plate readily embracing,
by and large, the heightened expectations. Directors
are growing rapidly into the vastly expanded mandate
thrust upon them within the last five years.
But now, with the benefit of experience, that acceptance
of new requirements has turned to frustration in some
cases, as the compliance burden has come to work at
cross purposes with their strategic focus.
In this sense, directors’ compliance fatigue is
understandable. It reflects a maturity on the part of
directors who are now assessing with greater clarity
the value of imposed regulation. In short, they see
emphasis on compliance with onerous regulation to
be at odds with their desire to build corporate value
through a performance-based strategic partnership
with management.
The Rise of Performance Governance
The most common refrain I hear from directors is that
they want to spend more of their time and energy on
performance governance, not compliance governance.
A legacy of the corporate scandals has been an
emphasis on finding problems not solutions. The
focus on problems means looking for a “blame trail”.
To find out what went wrong, the spotlight was first
shone on the audit committee to see why it did not
catch problems of financial mismanagement. Then
the spotlight moved to the compensation committee
when it was realized the faulty accounting outcomes
were the result of behaviour that had its motivation
firmly rooted in remunerative outcomes. Dangle large
rewards in front of people for hitting the numbers,
and accounting tools are employed to make up the
numbers actual performance could not.
Investors and regulators alike, in a bid to rid the world
of governance failure, chased the elusive answer to
Issue 130 | February 2007 | 13
 I n s i de the Boardroom

why both management and governance failed. That
scrutiny has brought with it directives to change
board process and structure — and generated a
considerable workload for directors and the executives
who support them. The answer does not lie down
this path. It cannot provide the solution because this
compliance governance thinking rests on three related
assumptions whose faults compound each other:
for the board itself to face the challenge of delivering
value to the enterprise. It is seldom recognized that
the tasks mandated for governance committees by
the New York Stock Exchange are very much about
performance governance. The tasks pertain to:
1 Performance Leadership
Engaging in director recruitment and selection.

1 Board infrastructure (process and structure)

determines board effectiveness; 2 Performance Objectives
Developing governance guidelines, mandates
and charters.

2 Mandated changes to board infrastructure

(compliance) leads to performance; and
3 Performance Feedback
Overseeing board and management evaluation.

3 Reviewing executive behaviour (oversight)

yields more value than encouraging cooperation
(strategic partnering).
In reality, people’s behaviour is responsible for
the board’s effectiveness; voluntary adaptation
of the board to the needs of the business leads to
enhanced performance; and an emphasis on strategic
partnering between the board and management
builds more value by focusing
I think directors’ frustration with on forward-looking capability,
compliance can best be resolved direction, and results.
by replacing the mentality of com-
pliance governance with that of I think directors’ frustration with
performance governance. compliance can best be resolved
by replacing the mentality of
compliance governance with
that of performance governance. The time is right
to consider the role of the governance committee in
bringing about the desired change1; the governance
committee is well positioned to be a catalyst for
performance improvement. Often in the shadow
of the audit and compensation committees, the
governance committee could be the performance
engine for the board, helping directors to contribute
value to the enterprise.
Taken together, these tasks create the potential for
the governance committee to take a leadership
role within the board to demonstrate the impact of
performance governance over compliance. An active
governance committee can begin to replace the
frustration of directors over endless compliance with
the satisfaction that the work of the board is focused
on building value.
The governance committee can be the performance
catalyst for the board — actively tending to the make-
up of the board, the board’s objectives and board
and management evaluation. There is no better way
to overcome compliance fatigue than by focusing on
what directors are really there to do — build better
performing companies.
David Anderson is the President of The Anderson
Governance Group (www.taggra.com). He can be reached
at (416) 815-1212 and david.anderson@taggra.com.

Boards often delegate to the governance committee

the tasks of finely tuning the make-up, structures and
operations of the board. These functions are essential

1 The National Association of Corporate Directors in the U.S. is about to publish a Blue Ribbon Commission Report on the role
of the Governance Committee. The author has served as Special Advisor to this Blue Ribbon Commission and to four previous
Commissions.

14 | Institute of Corporate Directors