Moreover, along with his skepticism and misgivings, Drucker would have reiterated his strong belief that large, complex institutions,
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whether private or public, need a “truly effective, truly independent outside” board:
The need is not primarily rooted in the “public interest” or in the wish to make boards “democratic.” The need is, above all, a need of the in-stitution itself. It cannot function well in all of its complexity unless it has an effective board.
Specifically, he defined the board’s role in terms of six essential duties, the first and most important of which was to ensure strong, competent management. He considered the removal of less than fully competent managers and ensuring orderly management succession essential to organizational effectiveness.
Second, he argued that complex organizations need an independent organ to ask the “hard” questions and make sure that management thought about them. What is our mission? What are valid “results” in our undertaking? Who are our stakeholders, and what can they legiti-mately expect from us? What are our plans for the future? What should we emphasize? What should we abandon? Are we innovating enough?
Acting as the organization’s “conscience”—the keeper of its human and moral values—was the third essential function on Drucker’s board responsibility list. To do this, he argued that direc-tors should regularly meet with people other than top management, both within and outside the organization—an idea that did not en-dear him to many senior executives.
The fourth board function he identified defines the advisory role of the board. With greater complexity, he argued, comes the need for more counsel. An effective board—one that understands the institu-tion, its opportunities, and its problems—could fill this gap.
Fifth, as another consequence of the growing complexity of the business environment, Drucker saw an effective board as the orga-nization’s “window to the outside world” or, as he once put it, its
“channel of outside perception.”
Finally, and also somewhat controversially, he viewed the board as having a responsibility to communicate what goes on “on the four-teenth floor” to the organization’s various constituencies and the community at large through regular, open dialogue.2
Interestingly, today’s conceptions of a board’s responsibility are not that different. The frequently cited definition by the Business Roundtable, issued in 2005, for example, apart from its greater em-phasis on shareholders, has many similar elements, as does the slightly broader perspective taken by governance scholars such as Milstein, Gregory, and Grapsas.3
The fact that such descriptions have changed little also points to a common weakness. Descriptions are useful for developing a basic understanding of a board’s responsibilities: (1) to make decisions, (2) to monitor corporate activity, and (3) to advise management. How-ever, they do not provide much guidance or insight into resolving a board’s principal dilemma: deciding which posture is appropriate at what time. Indeed, while the law, corporate bylaws, and lists of re-sponsibilities frame many of the key decisions that a board must make, such as appointing a CEO or approving the financials, they do not provide much guidance with respect to the board’s most impor-tant decision: when must board oversight become active interven-tion? When, for example, should a board step in and remove the current CEO? When should it veto a major capital appropriation or strategic move?
What’s more, the precise role of a board will vary depending on the nature of the company, its industry and competitive situation, and the presence or absence of special circumstances such as a hostile takeover bid or a corporate crisis, among other factors. The challenges faced by small private or closely held companies are not the same as those faced by larger public corporations. In addition to their traditional fi-duciary role, directors in small companies are often key advisors in strategic planning, raising and allocating capital, human resources
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planning, and sometimes even performance appraisal. In larger pub-lic corporations, strategic oversight rather than planning, capital allo-cation and control more than the raising of capital, and management development and succession instead of a more broadly defined human resources role better describe the board’s main domains of activity.
Similarly, global corporations face different challenges from domestic ones, the issues in regulated industries are different from those in tech-nology or service industries, and high-growth scenarios make different demands on boards from more mature situations.
Finally, in times of turbulence or rapid change in an industry, boards are often called upon to play a more active, strategic role than in calmer times. Special events or opportunities such as takeovers, mergers, and acquisitions fall into this category. Company crises can take many different forms: defective products, hostile takeovers, ex-ecutive misconduct, natural disasters that threaten operations, and many more. But, as boards know very well, they all have one thing in common: crises threaten the stock price and sometimes the con-tinued existence of the company. And, as many directors have learned, there are few situations in which a board’s fiduciary duty is more clearly on view as in times of crisis.