There is no one-size-fits-all solution to designing corporate boards for long-term value creation. Companies around the world, under different ownership structures and in different stages of growth, use markedly different governance practices. Indeed, recognizing and understanding that choices are available is the first step toward making longer-term choices and establishing next-generation board governance.
Long-term companies recognize the breadth of board design options employed globally and leverage them to focus on next-generation governance challenges rather than remaining anchored to past practices.
The board is the connection between investors and corporations. In private companies, shareholders are typically in the boardroom. In publicly listed companies, shareholders vote for directors, and directors govern companies. Directors, executives, and investors depend on each other to be able to focus on the long term.
Boards need to find a balance between providing freedom to enable long-term value creation through entrepreneurship and overseeing resilience to ensure long-term sustainability. They can get it wrong in the short run by allowing too much discretion or insisting on too much process. The trick is to find the right balance to unlock experimentation, feedback, learning, and growth while safeguarding against unintended outcomes.
Indeed, many public company boards overcorrected away from entrepreneurship towards control in the latter part of the twentieth century to address concerns about “imperial CEOs” running companies as they saw fit. Generating resilient long-term value creation is a challenging mandate.
Long-term companies broaden their frame of reference and think creatively when they set up their boards to meet the needs of their executives and corporate strategy. Critical dimensions to target include:
These should be set jointly, not individually – the companies’ choices must be complementary to one another and well-matched among their board, executive team, and corporate strategy.
In the chart below, we characterize four board archetypes to illustrate common combinations. Boards of widely held public companies tend to be short-term oriented, more risk averse, and more governance focused than their closely held and private market peers. Boards of more closely held companies, commonly in the form of family or founder held firms, permit a long-term orientation alongside an increased focus on management as well as the ability to target the controlling shareholders’ risk appetite. Private equity boards are transaction oriented with an intermediate time horizon. Venture capital boards tend to be more involved in management and more growth focused than buyout boards as befits the needs of startups.
The notion that the public-company board model is the sole approach for corporations to achieve success is misleading
Looking bottom-up at the boards of real-world companies, rather than top-down based on legal or policy norms, reveals a wide range of options. One method for doing so groups companies based on common structure and practice. Another method considers successful public companies with provocative governance practices. Below, we share some preliminary observations from both approaches that begin to illustrate the range of governance choices available to companies and investors.
We loosely identify and characterize five types of boards in Table A. These simple examples encompass public and private boards, one- and two-tier boards, a range of board sizes, varying degrees of involvement and incentives, a range of emphases on governance and management, differing levels of investor involvement, and the use of one or more share classes to provide control.
Indeed, there are far more levers currently used to align boards with management and strategy than delineated above. These span board structure, committees, diversity, qualifications, criteria for elections, expectations, evaluations, criteria for dismissal, compensation, share ownership, agenda, resources, engagement with staff, engagement with shareholders, engagement with stakeholders and dynamics. Truly, the range of options for board governance is wider than commonly perceived.
| Table A | ||
|---|---|---|
| Theme | Type | Distinctive Characteristics |
| US Public | One-Tier Board | Medium (10), arms-length one-tier board with oversight and insight focus; dispersed ownership with common voting share class |
| German Public | Two-Tier Board | Large (20), supervisory board focused on control, includes labor; management board comprised of executives focused on management |
| Closely Held | Family Owned | Large investor with control and generational/legacy focus; information closely held; multiple share classes common for public companies |
| Private | Venture Capital | Small (4-6), resourced, involved, incentivized board with investor control; focus on public market IPO, next deal, and building the future orientations |
| Private | Buyout | Small (5-8), resourced, involved, incentivized board with investor control; focus on sale of company and operational effectiveness |
For practical examples, we share some key governance features of six high performing public companies in Table B below.
| Table B | ||
|---|---|---|
| Theme | Company | Distinctive Characteristics |
| Visionary | Novo Nordisk | Public benefit foundation with voting control via multiple share classes; board R&D committee |
| Tesla | Elevated CEO ownership share; AGM proposals requiring supermajority | |
| Tech Story | TSMC | Meaningful government ownership has transitioned to public markets; executive leadership and board heavily oriented to science and engineering |
| Tokyo Electron | Strong local ownership with enduring two-tier board; re-org to smaller board for agility, speed, and common CEO level view | |
| Strategic | Volvo AB | "Nordic" model with long-term, strategic, local investors; AGM-driven governance process empowering large shareholders |
| Stellantis | Blend of family, government, and corporate strategic investors; loyalty shares for strategic voting power by long-term investors |
While a detailed case study of how these boards function exceeds the scope of this article, considering a set of key characteristics from a cross-company perspective reveals:
Conclusion
A well-matched board cannot be absolutely entrepreneurial – exclusively focused on long time horizons, growth-oriented, and heavily involved in management – nor so focused on resilience as to squash risk over short horizons from a distant, governing posture. Long-term boards want to build companies that are entrepreneurial to create value and resilient to build confidence in the direction of travel even during the inevitable period of underperformance. This is how companies align boards with strategy.
There is no one-size-fits-all solution to this challenge. Specifically, the current public company board model is not the only option that corporations can use to generate strong performance. Successful companies around the world, under different ownership structures, and in different stages of growth use markedly different governance practices. The first step for companies and investors toward making longer-term choices and establishing next-generation board governance is to recognize and understand that choices truly are available. Future research may identify levers for making these choices and a select set of fundamental, underlying qualities of long-term corporate boards.
Ultimately, companies’ board practices are choices, whether made knowingly or unknowingly. Companies and investors have important, long-term choices to make so that boards focus on next-generation governance challenges rather than remaining anchored to past-generation practices.
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