//BY PETER R. GLEASON AND ALEXANDRA R. LAJOUX

In today’s competitive environment, “status quo” won’t cut it, and directors and organizations must strive for continual improvement. This concept of improvement implies that there are levels of achievement, or some type of hierarchy. Does one exist? We think so. Furthermore, we believe that such a hierarchy is a natural outgrowth of human nature and needs.

THE HIERARCHY OF NEEDS
According to psychologist Abraham Maslow, people have several levels of needs. Individuals typically satisfy their most basic needs before moving on to the next ones. A person who is hungry and cold will seek food and shelter before worrying about safety, and will look for safety before seeking love and then respect. When a person has satisfied all these needs, then the individual seeks to satisfy the highest personal need- a transcendent purpose.

In the same way, organizations have a hierarchy of needs- from simply staying alive as a business to reaching their highest potential in the service of society. And boards serve in distinct ways to meet each level of need.

This is more than an analogy. Organizations are not merely similar to people; they are composed of and led by people. As such, like people, companies make decisions, build reputations and retain rights. Indeed, under the law, a corporation is treated as a “fictional person.”

Thinking about a corporation’s hierarchy of needs can help boards prioritize their self-improvement, meeting fundamental needs first. As boards handle each level of needs in the hierarchy, they reduce their company’s overall level of risk. With the help of a governance hierarchy model, directors and boards can see their current and potential future stages of development, design and implement continuous improvement programs and move toward higher levels of achievement.

LEVEL 1: SURVIVAL
A board’s first task is to meet the company’s need to survive. Early-stage boards are concerned with bringing a company into existence and ensuring cash flow adequate to prevent bankruptcy. They focus on fulfilling the requirements of the corporate charter that gives the organization the right to exist.

LEVEL 2: OVERSIGHT
After a board ensures the company’s need for survival, the next task is to meet its need for oversight. At this stage in its development, the board begins to break away from management and see itself as separate. This new oversight stage typically occurs when a company wishes to sell shares to outside investors, although it may also occur in private companies that voluntarily decide to provide board oversight. During this phase, directors focus on complying with the various state and federal laws that apply to the corporation. One law that has drawn directors’ attention over the past five years is Sarbanes-Oxley, especially its Section 404 on internal controls.

All of these practices are intended to protect the investment of capital- meeting the safety needs of corporations and their boards.

LEVEL 3: ENGAGEMENT
Although boards must continue to ensure the company’s survival and provide effective oversight, boards still have more self-improvement tasks ahead. Now they will become more engaged and abide by additional rules in that new engagement. If they have listed their stock on a particular stock exchange or other stock market, they must fulfill requirements of those listing organizations. If they borrow money from a bank, they must follow the lender’s requirements.

Boards of companies may feel another tug- the need to be accepted among a certain class of investments. Private companies, too, may operate at this level, opting to conform to public company governance standards in order to satisfy the need for esteem.

LEVEL 4: ADDING VALUE
Given human nature, however, directors don’t want to limit their work to ensuring that a company meets laws and listing requirements. Boards that have successfully met the first three levels of needs usually begin to look for a higher purpose.

It is at this point that a board typically feels the imperative to develop and adhere to leading practices. Such a board is motivated by the internal desire for the organization to reach the highest level to society.

At this highest level, boards become a strategic asset. They literally add value to the corporations they oversee. At this level, they consider ways that the organization can follow best practices in all its endeavors, and then help the organization become a leader that establishes best practices.

GOVERNANCE LEADING PRACTICES
At the same time, board members strive for the highest level of excellence in their own roles. They work to have the best guidelines, the most thorough governance standards and the most engaged boards.

Future frontiers for governance leading practices include the topics suggested by the most recent National Association of Corporate Directors (NACD) task forces and Blue Ribbon Commissions:

• Board leadership- particularly the role of the leader of the independent directors
• Board-shareholder communications- especially concerning the nomination of board members
• Board oversight of executive compensation- following principles of independence, fairness, value for shareholders, links to performance and transparency
• Board oversight of risk- including overseeing risk management, addressing specific risks such as information security, preparing for crisis, responding to crisis and learning from crisis
• Board evaluation- assessing whether the board has the right people, culture, issues, information process and follow-through
• The board’s role in corporate strategy- including help in developing the strategy and monitoring the execution, results and adjustments of the strategy
• The board’s role in succession- finding the right leader at the right time, based on the company’s strategy

MAINTAINING A FOCUS ON LEADING PRACTICES
While reaching for the highest level, the board must continue to meet all the organization’s needs for survival, oversight and engagement. The governance changes of recent years have caused boards to change their focus from leading practices to lower-level needs. Boards have had to devote considerable resources to meeting the most fundamental governance needs. The board may have had to step back and establish systems to ensure compliance with laws and capital market requirements.

But boards should not stop there. After they meet these needs and put systems in place, boards can return to developing and implementing new practices most suited to their organizations’ fullest potential.