CHAPTER 1 High Aspirations and Strong Results

The Bookends of Great Governance

What is great governance? This is a question that boards seldom ask. Perhaps directors assume the answer is obvious and everyone is on the same page. I don't think that's the case.

In this chapter, I offer my answer to that question. I make the case that the bookends, or starting and ending points, of great governance are high aspirations for and great results by the company or organization the board is overseeing.

Directors are sometimes like the stone mason who, when asked what he is doing, replies that he is constructing a wall. Less often, they are like the mason who explains that he is building a cathedral.

It's easy to get absorbed in the work of governance—attending committee meetings; discussing strategy, plans, and results; evaluating the CEO—and lose sight of the larger purpose of board work. There is plenty of wall construction in governance, but directors should always have an eye toward cathedral building over the long term. Asking and answering the question, "What is great governance?" can help.

Let me say a word about the importance of this question. When I was a dean at the University of Michigan, I chaired the business school's executive committee. It comprised senior faculty elected by their colleagues to advise the dean on the most consequential policy and personnel matters, especially faculty promotion and tenure decisions.

I learned many lessons in working with distinguished faculty over a decade. The most indelible of them came from Karl Weick, an eminent scholar and one of the world's great social psychologists.

"The best research begins with the best questions," Karl would remind us. Research methods are important, but what matters most is the question we are trying to answer.

"What is great governance?" is a best question for three reasons:

 

• It's consequential. A board bears final responsibility and accountability for the performance of the organization in its charge. It's popular to say that the buck stops with a senior executive—the CEO or president or managing director. But in fact, the buck ultimately stops with the board, so directors should have a clear and agreed understanding on what constitutes doing their job well.

• It's difficult. Is the proper measure of great governance nothing more than company or organizational performance? What are the proper performance measures? Can great governance be achieved simply by recruiting outstanding people to the board? Does the way they work together matter too? Is great governance assured if a board checks every box on good governance scorecards? If not, then what is required?

• It's practical. Shouldn't every board aspire to provide great governance? How can directors achieve this high aspiration without having a shared understanding of what it comprises? And don't those legislating, regulating, and evaluating governance practices need to understand the requirements of great governance?

 

The quality of governance is determined primarily by results achieved over a sustained period by the company or organization the board oversees. In the private sector in the United States, the standard measure of board performance is economic value creation for owners over the long term. In the nonprofit sector, the standard measure of board performance is mission achievement with efficient use of resources.

This view of governance is valid but incomplete. It is necessary but not sufficient. It fails to recognize the foundation on which value creation and mission achievement depend and the aspirations and vision they can help fulfill. It also ignores an aspiration shared by every board on which I have served: to maintain control of the organization's destiny.

My board experience has led me to a different way of thinking about the results of great governance. Value creation and mission achievement are central, but they are imbedded in the results that create them and the higher purposes they enable. A picture describes it best. I call it the Pyramid of Purpose.

For companies, the most critical measure of board performance is long-term economic value creation, measured by market capitalization and total shareholder return for public companies and appraised or realized value for private companies. Return on invested capital over time is a good measure of economic value for both public and private companies. For nonprofit organizations, the most critical measure of board performance is outstanding mission achievement in sector-relevant ways in education, health care, human services, the arts, and so on. Efficiency is also important because nonprofit organizations are entrusted with resources to fulfill their missions and, usually, privileged with exemption from income taxes.

The foundation of value creation and mission achievement is broad excellence. This includes the company or nonprofit being admired and recognized as a leader in areas that matter such as quality, innovation, employee engagement and productivity, and leadership and people development. While no human enterprise is perfect, the customers or clients, employees, suppliers, communities, and others associated with organizations that demonstrate broad excellence value them highly. Some even love them.

That love is often based on the organization's aspirations and vision. For example, in his 2013 end-of-year statement to Apple employees, CEO Tim Cook reportedly wrote, "I am extremely proud to stand alongside you as we put innovation to work serving humankind's deepest values and highest aspirations." The best organizations provide a paycheck, of course, but they give people something more as well: purpose and ability to make a difference in the world.

Broad excellence, value creation or mission accomplishment, and achieving aspirations and vision provide the results, resources, and strength to enable the board to maintain control of the company's or nonprofit's destiny and its precious right of self-determination.

To be effective, directors must be crystal clear about the multiple purposes of the companies and organizations they oversee. Here's how we think about it at Gordon Food Service (GFS).

Start with broad excellence. For decades, John Gordon Sr. has reminded us, "Remember, our last name isn't Gordon; it's Service!" Sure enough, all around the company are visible reminders of the company's service performance: on-time deliveries, error-free orders, accident-free miles, and so on. Service excellence is part of GFS's broad excellence, which includes aggressive adoption of technology, strong employee engagement, high productivity, and development of leaders at every level. Broad excellence attracts customers and enables efficient operations, which together drive earnings—the foundation of economic value creation. Value creation enables the company to achieve its vision of providing customers the highest quality foodservice products and services so they can be successful, contributing to the financial security of employees through profit-sharing and enabling the Gordon family to act on their deep Christian faith by funding missions through charitable contributions. The company's operational excellence and financial strength and its high aspirations and inspiring vision enable and motivate the board to maintain control of the company's destiny, allowing us to chart its course and maintain independence presumptively forever.

Here's an interesting illustration of the Pyramid of Purpose from the nonprofit world. Organization theorists have long been fascinated by the story of the March of Dimes. The reason is that if the sole purpose of a nonprofit organization were to achieve its mission, the March of Dimes organization would have closed up shop in the mid-1950s when its founding purpose in 1939—to combat polio as the National Foundation for Infantile Paralysis—was largely achieved with the invention of the Salk vaccine. But it didn't. Instead, leadership created a new and broader mission, one that wouldn't be so achievable! In 1958, the organization shortened its name to the National Foundation and set its sight on birth defects, arthritis, and viral disease, later narrowing its focus to prevention of birth defects, infant mortality, and premature birth.

Why did this happen? Because nonprofit organizations and for-profit companies are about more than achieving missions or creating economic value. They are bundles of competence and capability (at its best, broad excellence) that can be deployed to do useful things. Members and supporters become attached to these organizations because they provide structure, meaning, and relationships in their lives. The organization takes on a life of its own that can survive even beyond achievement of its mission. The leaders of these organizations, including the board, understand this, and like most of us, they are proud and independent. So directors strive to maintain control of the destiny of the organization for which they are responsible. Self-determination is success. Capitulation is failure.

In saying this, I do not mean to imply that every decision to sell, merge, or cease operations of a company or nonprofit is failure. For example, in 2007, Sam Zell (chairman) and the board of Equity Office Properties (EOP, a sister company to Equity Residential and at the time the largest owner of office buildings in the United States) decided to sell the company to Blackstone Group for $23 billion and Blackstone's assumption of $16 billion of debt. EOP ceased to operate as a company. This turned out to be a great governance decision by the board because 2007 was, in retrospect, the very peak of the commercial real estate market, and EOP's economic value was at an historic high. The board decided to seize that value and distribute it to shareholders. The sale of EOP was decidedly not capitulation. To the contrary, the board initiated the decision and maintained control of the company's destiny to the very end.

The four levels of the Pyramid of Purpose are interconnected and interdependent. That's why wise boards and smart senior executives strive to create a self-reinforcing, virtuous upward spiral of results across the four categories. The most challenging situation a board can face is a self-reinforcing, downward negative spiral that directors must arrest and turn around.

How does a board create a virtuous upward spiral? By setting high aspirations.