CHAPTER 6
THE BOARD OF DIRECTORS AND MAJOR PROJECTS¹

6.1 INTRODUCTION

An important responsibility that managers at all levels of the organization have is to be involved in the decisions to initiate a project, and to maintain surveillance over ongoing projects during their life cycle. The board of directors (BOD), supported by senior managers, needs to be involved in the selection of major projects to support the “choice elements” of the enterprise. Once projects are selected and funded, the responsible managers—to include the BOD—must maintain an ongoing review of how well the project is being managed and the potential results that are promised by the project.

This chapter starts off with looking at how some boards of directors have neglected their responsibilities for the management of major projects, and through their neglect have allowed major problems in the management of the project to develop and endure. Conversely, exemplary BOD behavior, the empowerment of the BOD, and how major projects are to be reviewed are also subjects in this chapter. Finally the chapter looks at the project information needed by the BOD, how project performance audits can be used, how cultural considerations impact the role of the BOD, and what general criteria can be used in the selection of the members of the BOD.

In addition, an overview of the roles of senior and other managers and their project management responsibilities are described.

6.2 THE NEED FOR BOARDS OF DIRECTORS

Boards of directors have been used in the business community for over 150 years. State general corporation laws require that all business corporations have boards, typically stipulating that the corporation “shall be managed by a board of at least three directors.”

Once a project is funded and corporate resources are expanded to design, develop, and construct or manufacture the project, it becomes an important responsibility of the board to maintain surveillance over the efficiency and effectiveness with which corporate strategy is being implemented through the use of major projects. Corporate strategy is clearly a key responsibility of the corporate board of directors. Strategy, according to Chandler, is “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and allocation of resources necessary for carrying out these goals.”² The board of directors cannot work out a company’s strategy, but it is the duty of the board to make sure that a company has adequate strategies.³

6.3 SURVEILLANCE

By maintaining surveillance over the status of major product and process projects within the enterprise, senior managers—to include members of the board of directors—can gain valuable insight into the effectiveness with which the enterprise is preparing for its future. There are, of course, limits to the number of projects that such managers can monitor. There are, however, certain projects whose outcomes can have major impacts on the organization’s future direction. Senior managers should review the adequacy of the planning for these projects and keep abreast of which projects are being executed to further corporate purposes. The projects in which the directors should be particularly interested include:

• New-product, service, and process development projects that have the promise of giving the company a competitive advantage in the marketplace. Projects that contain the possibilities of technological breakthroughs, or significant incremental improvements in products, services, and processes, should be of particular interest to the directors.

• Projects whose execution requires the commitment of substantial resources, such as the building of new facilities, or the development of major supporting organizational resources, such as restructuring or downsizing initiatives.

• Projects that are the outgrowth of a strategic alliance being negotiated for the sharing of resources, results, and rewards with another organizational entity. Research consortia, partnering, and sharing of manufacturing facilities and marketing facilities are some common examples.

• Other projects for supporting the strategic purposes of the firm, such as major cost-reduction initiatives; new major, corporatewide information systems; and investment opportunities.

When the directors accept the concept that projects are building blocks in the design and execution of organizational strategies, the directors gain the use of an important strategic management tool—the inventory of product, service, and process projects under way in the enterprise. As the corporate directors sense competitive changes in the marketplace, or realize that new technological initiatives are coming forth from the research of competitors, or recognize any other major change in the enterprise’s future, they need to ask a key question: What projects are under way in this company to meet—and exceed—these competitive threats coming out of the firm’s environmental and competition system? If relevant product, service, or process projects are not under way, then the firm’s competitive position will be threatened, and projects to position the enterprise to meet these changes need to be undertaken in a forthright manner. If the directors become involved in regular and rigorous review of these important projects, an important message will be sent throughout the company: Projects are important to this company, because it is through projects that we are able to organize our resources to position ourselves for the uncertain future.⁴

Why have some boards overseeing capital projects not carried out their responsibilities? This chapter will attempt to answer this question by examining the role of the board of directors with respect to the strategic management of projects. To gain insight into why many boards seem to have been so ineffectual, the activities of several boards will be discussed. Then some constructive ideas will be offered about what the role, the information required, the actions, and what the background of the board members should be.

6.4 SOME BOARD INADEQUACIES

Directors watched seemingly idly as one seemingly invincible corporation after another—from Eastman Kodak and General Motors to IBM, Sears Roebuck, and Westinghouse Electric—faltered and declined. Inadequacy of a board of directors’ performance is not limited to for-profit enterprises. The following examples reflect on the board performance in a not-for-profit entity.

Fortune magazine published an article in their May 14, 2001 issue titled “The Dirty Half-Dozen: America’s Worst Boards.” The boards that qualify for the magazine’s “Hall of Fame” include Coca-Cola, Intel, Pfizer, Target, and Texas Instruments. The boards that are in the “Hall of Shame” include Advanced Micro Devices, Archer Daniels Midland, Maxxam, Occidental Petroleum, and Warnaco.

But things are changing. There is a quiet revolution going on in American boardrooms—the directors are waking up and taking the job as director more seriously. Unfortunately, there are still many firmly entrenched CEOs and old-line directors who resist modern governance. For most CEOs the reality of global competition has motivated the need for knowledgeable, talented directors to serve as sounding boards and advisers. Some of the enhanced assumption of responsibility on the part of directors has come about from the heightened scrutiny of boards by the press and public, combined with a growing respect—if not fear—of the threat of litigation against directors. With so much stock concentrated in a few large institutions, pension funds, and mutual funds, shareholders are more organized and active. They are making their presence felt and are demanding that the directors exercise genuine involvement and oversight.

In recent years there has been a strong movement for companies adding more outsiders to their boards, and also vastly upgrading their requirements for directors. Figureheads, celebrities, and yes-persons are not wanted. Companies want outside directors who can take an active role in helping guide the company to sustained superior performance. Companies also express a preference for only those active executives that sit on no more than three outside boards.⁵

The linkage with project management comes about through the board’s assessment of the ability of the CEO to provide the leadership of the enterprise through the use of effective strategic management initiatives. Put in the language of management theory, this means that the CEO should provide the environment, resources, and proactive actions to develop and implement the core elements of strategic management: mission, objectives, goals, and strategies. The goals—the milestones for the enterprise—are projects that provide for the design and development of new products, processes, and organizational processes. Thus, to prepare for the enterprise’s future means that current projects are the basic building blocks and the means for identifying and integrating resources to develop future initiatives for the enterprise. Major projects, which represent a significant commitment of resources for the enterprise, should be reviewed on a regular basis by the directors. By doing so the directors should have an excellent means for determining if enterprise resources are being committed in meaningful ways to prepare the enterprise for its future.

It is clear that every time you find a business in trouble, you find a board of directors, either unwilling or unable to fulfill its responsibilities.⁶ On the Trans-Alaska Pipeline System (TAPS), the individual oil companies that owned the project formed an owner’s committee to maintain oversight of the TAPS project. In addition, an owner’s construction committee was established to administer the contract with Alyeska, the agent for the owners and their designated project manager. This committee, which was to act much in the manner of a board of directors, did not focus adequately on the strategic decision making on the TAPS project. Its members also improperly intervened in day-to-day operating decisions. A review of the record of this committee indicated little resolution of substantive strategic issues on the project, such as:

• The development of a master strategic plan for the project

• Early integrated life-cycle project planning

• Design and implementation of a project management information system

• Development of an effective control system for the project

• Design of a suitable organization⁷

Too many corporate boards are overpopulated with members of management. Inside directors tend to be committed to the way things have always been done and to their own ideas. Outside directors often have insufficient information about the company, and in too many situations, they receive information concerning the matters scheduled for a board meeting, only shortly before the board is convened. In practice, when the CEO encourages board members to meet with senior company managers on a regular basis, outside the formal board meetings, this increases the likelihood that the outside directors will be able to have a fuller grasp of what is really going on in the company.

The nuclear industry was a striking example of the laxity of the directors. In the nuclear industry in the past, all too many utilities had boards that neglected to exercise “reasonable and prudent” strategic management in their oversight of nuclear power plant projects. As a result, administrative courts disallowed substantial costs from inclusion in the customer rate base for the utility. In many cases, a failure of the board to participate in key decisions set the stage for the major difficulties later in the project’s life cycle.

The clear responsibility and accountability of the board of directors can be demonstrated by reviewing a few key litigation conclusions drawn from the nuclear power industry. Although these projects are now history, there are important lessons to be remembered!

• Cincinnati Gas & Electric Company reached a $14 million settlement in a shareholder suit that charged directors and officers with improper disclosure concerning a nuclear power plant.

• The Washington Public Power Supply System (WPPSS) defaulted on interest payments due on $2.5 billion in outstanding bonds in part because of the failure of its directors. Communication at the senior levels of the organization, including that of the board of directors, tended to be “informal, disorganized, and infrequent.”

• On the Long Island Lighting Company Shoreham project, the public utility commission determined, “The company should be able to show that its directors . . . were attentive to the project’s progress, and aggressively pursued cost containment measures wherever there were reasonable opportunities to do so.”⁸ Noting the small proportion of board minutes devoted to addressing the Shoreham project, the commission remarked on the “lack of urgency in the board’s approach to the project’s large cost escalations.” The commission was also concerned with the board’s “lack of involvement” regarding the critical decision to replace the project’s construction management firm. In addition, it found that “prudence dictated that the board carefully examine management’s plan and its potential consequences.”⁹

• On another nuclear project in the state of Washington, the Washington Utilities and Transportation Commission determined that a number of ominous external occurrences should have caused the officers and directors of the Puget Sound Power and Light Company to call for an in-depth cost-effectiveness study, something they neglected to do.¹⁰ In a separate opinion, one of the commissioners elaborated:

• In a review of the role of the board of directors of the Diablo Canyon project, an expert witness testified that the board’s decisions and actions were either limited or nonexistent in regard to several key decisions and actions. These included the approval of a strategic project plan and the decision that the company acted as its own architect and its own engineering and construction manager. Furthermore, the board did not give proper attention to the choice of a basic organizational design for the project, nor to the implications of the discovery made during the construction of the plant that there was a major earthquake fault in close proximity to the plant. Nor did the directors make a full assessment of the flawed quality assurance and control procedures that led to major design deficiencies in the plant. The board also had too little to say about the selection of a project manager and a constructor in the final phases of the plant’s construction.¹² At key decision points in that project, the board of directors’ role was little more than that of a passive onlooker. The failure of this board to insist upon thorough information and its inaction in the face of serious problems confronting the project were incautious, far from what one would expect a “reasonable and prudent board” to carry out.

In this same case, it was found that from the very outset, the board’s role was deficient in overseeing the selection of the plant site. The selection was not even considered by the board but was relegated to the chief executive officer’s advisory committee, a top-level executive body whose authority was purely advisory. Although this committee evaluated the site for the nuclear plant, it was done during one of their regular meetings along with 19 other agenda items, allowing only 5 minutes per item on average. Later, during the construction of the plant, an earthquake fault was found offshore, and it caused the Nuclear Regulatory Commission to order a redesign of the plant to bring the plant up to a higher earthquake design configuration. The redesign of the plant and the subsequent reconstruction increased the total cost of the plant by approximately $1.4 billion.

It is clear that the boards of the various nuclear projects mentioned in the preceding discussion could have helped reduce their projects’ problems or reduce the threats that faced their projects by careful, informed involvement in key project matters on a regular basis.

6.5 EXEMPLARY BOARD BEHAVIOR

The inadequacies of the boards mentioned up to this point reflect a pattern of inactivity and ignorance concerning the problems and threats that buffeted the projects. It is clear that the boards of the various projects, nuclear and otherwise, could have helped reduce their problems and the associated threats that faced their projects by careful, informed involvement in key matters on a regular basis. This has been done on some nuclear plant projects. For example, the Pennsylvania Power and Light Company’s board of directors played an active role on the Susquehanna nuclear plant project, as stated in a letter to one of the authors:

This plant earned high marks from the Nuclear Regulatory Commission in its latest Systematic Assessment of Licensee Performance (SALP). Susquehanna earned the highest rating possible in 9 of 11 categories and the second-highest rating in the remaining two areas. This gave Susquehanna the second-highest average rating of all nuclear reactors in this country.¹³

There are other examples of good board review. The $2.1 billion Milwaukee Water Pollution Abatement Program initiated a comprehensive review of the status of the projects in that program to be conducted on a monthly basis by the owner’s senior managers. The program manager was present to explain the program’s status and to answer any questions posed by these senior managers. The senior managers, in turn, kept the board of commissioners of the Milwaukee Metropolitan Sewerage District informed on a regular basis. This complex, high-visibility program, which has held the attention of many stakeholders during its life cycle, finished on schedule and close to the original project budget estimates. The continued review by the senior managers and the commissioners is a major reason this project was successful.

In Fig. 6.1, a conceptual model is offered which notes the key roles to be carried out by an ideal board of directors. As discussed in this chapter, all too often, some of these key roles are not effectively carried out by some incumbent board members.

FIGURE 6.1 Conceptual model of roles for the board of directors.

6.6 THE BOARD’S RESPONSIBILITIES

Directors are the representatives of the owners of the corporation. Boards often move glacially in reviewing and approving the strategic management initiatives for the enterprise. Companies can become noncompetitive and dwindle, often without any intervention initiatives encouraged by the directors. Today increasingly impatient owners, representing such groups as government officials, shareholders, and institutional investors, are taking the lead in evaluating and changing the attitudes of investors.

Directors exercise a special kind of management surveillance. Although generally not concerned with short-term operational matters, directors should be alert to any problems and opportunities that are significant to the long-term performance of the company, such as profitability trends, competitive threats, increased costs, loss of future business opportunities, loss of market share, regulatory changes, and quality problems. Observation of any of these problems should alert the directors to the need for an investigation or audit of the company’s strategies. Such an audit should determine whether the corporation’s strategies have been designed to cope with these difficulties and what the possible and probable long-term impact of the current operations would be.

The directors should expect the corporation’s senior managers to manage the organization’s resources in a reasonable and prudent manner. Why should any less be expected of the directors themselves? Although their involvement in the corporate affairs is necessarily much broader, the directors need to determine to what extent the senior managers are executing their own responsibilities in the planning, organizing, and control of corporate resources.

The directors are the “most senior” managers in the corporation; they should set an example for reasonable and prudent management on the part of the corporate senior managers who are concerned with the strategic management and operational effectiveness and efficiency of the corporation. To accomplish this, the directors must demand high performance from the senior managers by ensuring that strategic planning and surveillance are carried out in the corporation, and that efficient and effective operational performance is realized.

6.7 THE ROLE OF MANAGERS

Senior managers or any other managers who are sponsors for a project should recognize that when a project is initiated within an enterprise, series of changes are likely to impact the organization. First, the initiation of a project will eventually change the enterprise in terms of its mission, objectives, and goals. Such changes will normally impact the technical side of the organization such as in new products, services, and organizational processes, as well as IT work, hardware, software, engineering, manufacturing techniques, and supporting services. Second, the cultural changes in the enterprise will undergo some change such as in the knowledge, skills, and attitudes of the people of the organization. The organizational design and the management processes, information systems, policies and procedures, and the way of doing things in the enterprise that support the culture will be changed. All this suggests that general managers, project managers, and functional managers need both technical and people management skills. General managers, to include top-management people, who have the responsibility for both the technical results and the supporting culture of the enterprise, require both technical and interpersonal skills.

The principal roles that are played in the management of a project usually consist of the following:

Chief Executive Officer who has the responsibility and the right to delegate authority for the planning and execution of projects in the enterprise that supports the mission, objectives and goals of the enterprise.

The Project Sponsor who will likely be the manager that has initiated the project to support appropriate objectives and goals of the organization.

The Manager of Projects who is responsible for the integration of the operational aspects of the work being done on the projects by the project teams. The manager of projects acts as an interface point between the senior managers of the enterprise and the project managers who are held responsible that the projects meet their objectives on time and within the budgeted amount of supporting resources.

The Functional Manager who integrates the efforts of the project team members in providing technical support to the project.

Work Package Managers who integrate the work of individual functional contributors to each of their assigned technical work packages in the work breakdown structure of the projects.

The Project Customer who has authorized the project.

The Project Champion who promotes and keeps the project underway, who may or may not be the appropriate general manager.

The Project Owner who may not be the project customer.

The Project User of the project’s results who may or may not be the owner.

Other Key Stakeholder people who have a vested interest in the project and in its outcome.

The essential documents that should be developed and maintained for the roles of these principal managers include:

1. Policies

2. Procedures

3. Information systems

4. Planning and control standards

5. Description of adequate money, resources, people, and implementation strategies to support all the approved projects

Responsibilities retained by the general managers include:

1. Select the right projects to support enterprise strategy.

2. Provide planning for and use of resources to support the portfolio projects.

3. Assure that the projects are organized and managed on a Project Management Systems basis.

4. Monitor, evaluate, and control the performance of project management within the enterprise’s overall strategy.

5. Resolve project-related conflicts arising in the management of the projects in the enterprise.

6. Advise higher-level managers, to include the board of directors when appropriate, on the progress being made in the management of the life cycle of the projects.

The project sponsor’s role:

• The sponsor’s role can range from being distant from the project or be so involved that acts as a “super project manager.”

• Project sponsors must spend time with project managers, the team members, other stakeholders, and the customer.

• The sponsor should be more a leader than a manager, who sets the direction for the project’s future, communicates a vision for the project, is fixed on the project’s future, and is sufficiently involved in the planning of the project so that the plans are adequate to prepare the project for its future.

• A good sponsor also adds value to the project through mentoring, motivating, and becoming a catalyst and “boundary manager” for the project.

• Project sponsors must be involved from the planning of the project through to the closeout and transfer to the project customer.

An appreciation of some of the linkages of projects with the strategic action of the enterprise can be gained by reviewing the experiences of rival companies.

Project management is often used in the strategy to revitalize or upgrade the performance of an organization that is operating at less efficiency and effectiveness than is desired. The merger of the auto companies DaimlerChrysler over 7 years ago has not worked out as anticipated. Since merger of the two companies, DaimlerChrysler has experienced a reversal, rife with irony. It was anticipated that Mercedes would be the healthy partner and Chrysler the laggard. But now Mercedes is the laggard.

According to Business Week magazine:

When W. James McNerney, Jr., was recently appointed as the president and CEO of the Boeing Company on June 30, 2005, the company shares soared 7 percent. Key strategic issues facing the new company’s leader were three major challenges. First, a realignment of a strategy to deal with a declining Defense business and sustaining a growing commercial airplane business. Second, successful execution of two key bet-the-company projects—the 777 passenger jet and a huge contract to deliver the Future Imagery Architecture system, with an estimated $10 billion budget over the next 10 years. Third, an existing bureaucracy that stifles innovation, resists change, and tolerates rule-bending. Boeing has allowed behavior that led to sexual harassment suits, debarment, and criminal prosecution.¹⁵

At White Plains, NY, U.S.-based Starwood Hotels and Resorts, Inc., one of the world’s largest luxury hospitality corporations, project management is essential to support the organization’s strategic objectives. By way of policy, the company depends on project managers to deliver high-quality projects that set new standards. A project team enables the company to track problems, flag them, and escalate issues while maintaining a consistent approach. Having the proper policies and procedures in place allows for enhanced ability to deliver on time, within budget, and meeting the project and strategic objectives of the company.¹⁶

The giant computer and printer maker, Hewlett-Packard, recently announced a major restructuring of the company. Wall Street analysts are predicting large cost cuts at the company anywhere from 5,000 to 25,000 of the “50,000-person workforce. Also, under consideration is the shutting down of some nonessential research-and-development projects.¹⁷

The role of senior managers is critical in the success of project management in an enterprise. Because projects are building blocks in the design and execution of strategies for the enterprise, managers at all levels must have an interest and obligation to strategically manage the enterprise. The successful management of the relevant product, service, and organizational process projects means that an appropriate future is likely to come for the enterprise. Some of the common “failures” of those managers who are charged with the responsibility for strategically managing the project content of the enterprise include:

• An inappropriate linkage of projects to the strategic direction of the enterprise, resulting in projects lacking a “strategic fit” after too many organizational resources have been committed to those projects.

• Failure to integrate project development efforts with other development strategies that are under way in the enterprise, such as training initiatives, market development, recruitment and training of people, reengineering efforts, and so forth.

• Delaying the decision to establish a project or a family of projects causing “catch-up ball” in getting the project team assigned and the identification of the project resources under way.

• Failure to establish firm and timely project technical performance objectives that leads to future changes in the project’s scope, cost, and schedule.

• Failure to review the project results on a regular basis and to adjust resource input into the projects if needed as a result of the project review.

• Failure to build and maintain alliances with key stakeholders of the project to include visitations to the key stakeholders—like customers and suppliers—to keep them informed and help solidify their continuing support to the project.

• Failure to provide an ongoing training program for the enterprise to include project teams to update knowledge, skills, and attitudes of these people.

• Failure to recognize the motivational considerations of the project teams—and provide those teams with a leadership model for the managers and team members to carry out in the enterprise.

6.8 THE ROLE OF PROJECTS

In 1968, a landmark study of the practices of senior management in leading industrial corporations noted the responsibilities of directors for project management. The study was conducted by Paul Holden and several members of the faculty at the Graduate School of Business at Stanford University. Their findings established that project management was an important factor in overall enterprise management. The study further found that the high-level committee (such as the board of directors) was widely used as a valuable organizational design to:

• Establish board policies

• Coordinate line and technical management

• Render collective judgments on the evaluation of corporate undertakings

• Conduct periodic review and monitoring of ongoing programs and projects¹⁸

To state again—major projects are key building blocks in the design and execution of corporate strategy. This is a fundamental principle, all too often missed by key corporate managers and directors. Project management is not recognized for what it is: a process for the creation of something that does not currently exist but is needed to support future corporate purposes. When perceptive directors recognize the intertwining of projects and corporate strategies, project management takes on a new significance in the management of the corporation. Unfortunately, some directors have not recognized this fundamental principle. Before the project starts, the board should take action to require that a project plan be developed and presented for its review. Why should a board concern itself with the plan for projects? Several principal reasons are suggested:

• The board needs specific evidence that corporate managers have a planned process for managing projects.

• The project plan provides a performance standard against which project progress can be evaluated as the directors carry out their strategic monitoring, evaluating, and control responsibilities.

• If the project team, project manager, and responsible general managers know that the board will review the project plan, a clear message will reverberate through the organization: This project is important.

• Knowing the project plan can help give the board a reference point for other key corporate decisions which interface with the major project such as recapitalization issues, product introduction plans, and support facilities.

• The evaluation of the project plan and of management’s adherence to it allows continual evaluation of key managers.

In some cases a committee of the board, such as the executive committee, is given the authority to act for the full board. Such a delegation without adequate monitoring by the outside directors can have a deleterious effect, particularly if the executive committee’s deliberations are not reviewed or are accepted with only minimal questioning. Even with an active and competent executive committee, the board should reserve for itself a regular review of capital projects. Such reviews should include discussions on the cost and schedule of the project and future strategies for the resolution of any problems known or anticipated on the project.

The existence of projects in organizations is one clear indication that the organization is changing and is attempting to meet changing future environments. This is a key point not to be missed by senior managers and directors.

6.9 PROJECT REVIEWS

Directors and senior managers who clearly recognize their responsibilities should feel the need to regularly review projects along with other major organizational activities. Why should the board concern itself with review of the major projects? The board needs specific information that the projects are being designed and developed according to plan and in support of corporate strategies.

Then, too, knowing the status of the projects can give the board a reference point for the review of management actions and recommendations that are interdependent with the other projects and strategies in the organization’s strategy. Directors will gain an appreciation of the underpinnings of strategy such as policies, resource commitments, and executive and professional development to support the company’s strategies along with its capital projects. By having the directors insist that the company have a strategy and a management philosophy for major project review, another mechanism is in place for facilitating the continuous evaluation of senior managers.

Some projects reach the point where their continuation does not make sense for the organization. Because of the vested interest that the project manager and the project team have in the project, they are in the least logical position to recommend termination of the project. But total reliance on the senior managers to do this evaluation is not sufficient because the board is the corporate conscience to make an independent evaluation of where the project stands within corporate strategy. Therefore, both senior managers and directors are the most appropriate decision makers to recommend termination of the project.

How is the project review best done? Here is a prescription to guide directors’ surveillance of major projects:

• Accept a philosophy that projects are indeed basic building blocks in the design and execution of corporate strategies, requiring ongoing strategic management and surveillance.

• Conduct a formal review of the strategic plan for the project to determine if appropriate technology is planned and if suitable management systems are in place to keep all the principal managers abreast of the project.

• Require special briefings on the project during key periods of the project’s life cycle, such as finalization of design, commitment to construction or prototype manufacturing, design reviews, engineering completion, preliminary customer acceptance, or delivery of the first production unit.

• Go out and “kick the tires.” Use plant or construction site visits to observe firsthand what is really happening on the project.

• Insist that the project manager (and the responsible general manager) appear before the board on a regular basis to give a status report on the project.

• Question and question again any funding changes on the project to ascertain what caused the change and what the longer-term impact would be.

• Carefully deliberate on what information the board needs to do its job on capital projects, and relate this information to the major decisions or actions that require board scrutiny.

• If things on the project are not fitting together well, or if major questions and issues are emerging for which answers are not forthcoming, consider a performance audit of the project.

The foregoing list hints at overtones of interference with senior management responsibilities. Perhaps so. But as one reviews some of the major project failures of the recent past, a clear message comes through: Most of these failures can be attributed to the failure of senior management and the board of directors to follow some of the basic “commonsense” prescriptions just outlined. What is the cost of not following these commonsense principles? The answer to this question is imprudent financial performance, delay of effective strategies, waste of corporate resources, and support of a corporate culture that condones poor quality in the management of corporate resources.

During the review of major projects, with the project managers present to answer questions, the review should be structured to focus discussion and debate on the hard questions about the projects. Both the bad news and the good news of the project should get attention. The board should be concerned about the schedule, cost, and technical status of the project, as well as an ongoing assessment of the strategic fit of the project. Does the project continue to occupy a building block in the design and execution of corporate strategies? If not, why not? If there is adverse information about the project, what significance does the information have for the directors in coping with their responsibilities?

This discussion about the need for a regular review of the project implicitly assumes that performance standards exist which provide the basis for reaching a judgment of where the project stands. Experience has shown that such assumptions cannot always be made. If a comprehensive project plan and performance standard for the project do not exist, then monitoring, evaluation, and control of the project are difficult, if not impossible.

Something is added to the discipline of the project team simply because the project is reviewed by the board of directors. When the project team knows that a formal presentation on the project’s status will be required by the board, the team will be motivated to do a better job of thinking through the problems and of being prepared with solutions, explanations, or rationales.

What do the directors need to know to adequately review the project? The key to satisfaction of this need is the quality of the information provided to the board.

6.10 INFORMATION FOR THE BOARD

The Corporate Director’s Guidebook makes the point that “the corporate director should be concerned with the establishment and maintenance of an effective reporting system.”¹⁹ A reporting system involving major projects takes the form of a project management information system (PMIS), which contains the intelligence essential to the effective monitoring, evaluation, and control of the project. Corporate directors require such information to determine the efficiency and effectiveness with which corporate resources are being used on the project. Also, the directors need other corporate information relative to the enterprise’s forward planning. This includes critical events and issues facing the enterprise that often might have a strong project context such as new products, facilities, and recapitalization strategies. The project’s cost, schedule, and technical performance considerations are certainly worthy of a director’s ongoing surveillance.

Juran and Louden, in a book published in 1966, addressed the information that the board requires to fulfill its obligation to exercise due diligence and to increase the knowledge that directors have about the company. Juran and Louden spoke of the “philosophy of completeness,” regarding information as an essential part of the climate in which the board and management operate. They stated, “Under this philosophy the rule with respect to information for the board is: Resolve all doubts in favor of completeness.”

According to the authors, the practical result of the philosophy of completeness is the advance information package in widespread use in many companies. According to them:

Juran and Louden also recommended that the typical information package for board approval include not only the project proposals on expenditures and actions which are on the list of reserved board powers but also those actions which chart a new course. The reports furnished to the board on the project’s status are important tools to help the directors do their job. At the minimum, such reports should contain summary information to help the directors meet their responsibilities: the surveillance of the project’s cost, schedule, technical performance objectives, and the probability of continued strategic fit in the enterprise. The project manager has the responsibility to see that the project’s status report provides sufficient intelligence for the directors to reach a conclusion about where the project stands.

The typical board meets on a monthly basis. Prior to a meeting, the directors usually are provided with an agenda and appropriate supporting materials for review so that they are able to do their “homework.”

Some important things to consider in the use of project-related information for the board include:

• Presenting important issues on the project to the directors before, and not after, corporate senior management has taken a firm position

• Making sure that the directors get any important information before the board meeting in order to make an informed judgment about the project

• Not burying the project information in a stack of corporate information

• Allowing the directors sufficient time to make a decision in which they have confidence

• Making sure there is time at the board meetings for a full discussion of the project with the project manager present to answer questions

• Using the board committees, such as the executive committee and the audit committee, to do detailed analyses and present their recommendations to the full board

6.11 THE PERFORMANCE AUDIT

If the information reported to the board and obtained during the project manager’s status report reveals project inadequacies or problems, a performance audit may be in order. Independent performance audits on large projects can provide valuable insight for the board and other corporate managers. An independent performance audit on a project may be defined as an in-depth, process-involving analysis of a project’s performance and outlook. The analysis should cover both the technical side of the project and its management. Project performance audits are best made at key points in the project’s life cycle or when the project is being buffeted by important problems or changes whose effects may not be fully fathomed. Heyel noted, “Regardless of intent, a failure to investigate independently may be deemed culpable ignorance and a breach of duty to stockholders.”²¹ Although the full board may order the audit, a subcommittee of the board can make sure the audit is appropriately executed and followed up with the most efficient and productive remedial action.

Although project history is relevant, because past events provide a base from which the project moves forward, the performance audit should not be done to find fault or to debate over past disappointments. Rather, it should use the past to develop a better understanding of how current and future performance on the project can be improved.

On a large water pollution abatement system project, an audit was conducted prior to initiation of detailed planning to turn the project results over to the user. This audit disclosed several contract modification changes that were unduly delayed and that could have an adverse influence on the operational availability of the system. By discovering this delay of changes through the audit, the project manager was able to initiate remedial strategies to get the project back on schedule and meet its operational date.

An independent performance audit appraises results so that the board and its subcommittees can objectively evaluate the need for and extent of remedial strategy and resources required. Failure to conduct an independent performance audit on an ailing or failing project may very well be considered culpable negligence and a breach of duty to the stockholders, leading to legal action.

In the nuclear plant construction industry, the Nuclear Regulatory Commission (NRC), found a direct correlation between the project’s success and the utility’s view of NRC requirements. More successful utilities tended to view NRC requirements as minimum levels of performance, not maximum, and the utilities strove to achieve increasingly higher, self-imposed goals. This attitude covered all aspects of the project, including quality and quality assurance.²²

During a performance audit of a large project, it was found that the attitudes, values, beliefs, and behavior demonstrated by senior management of the organization were detrimental to the successful outcome of the project. In an assessment of the corporate culture of this project, it was found that senior management had condoned a culture that contributed to various problems on the project with significant injurious results, such as:

• A lack of candor and openness in dealing with government agencies, particularly the Nuclear Regulatory Commission

• Management leadership which encouraged the destruction of documents that might have negatively affected the company during customer rate litigation

• A lack of commitment to adequate communications within the company concerning the status of the project

• Not taking a conservative approach to unknown factors in the design and construction of the project

• The general lack of leadership to solve problems on the project in a timely manner

• Reliance on past management philosophies and practices and a failure to recognize the impact of new technology on both the design of the project and the use of contemporaneous project management practices

6.12 SELECTION OF DIRECTORS

Every corporation should have formalized criteria for the election of directors, including the insider-outsider mix, occupational expertise, and length of tenure. Used as guidelines, such criteria can be varied to accommodate different requirements for the board. Considering the importance of project management to the corporation, the board should include individuals who have had experience in either the management of projects or the senior executive oversight of such projects. If the projects involve new technology, then at least some of the outside directors should have experience in that technology. Directors should be chosen who have experience in the industry or knowledge about the business the corporation pursues. In large integrated corporations, this is difficult, but by careful choice of the directors, a collective understanding of the corporation’s business can be known. If the board does not have outside directors with such experience, then the board should request external assistance in the form of project performance audits and consultations to evaluate and question the progress of the projects.

6.13 TO SUMMARIZE

The major points expressed in this chapter include:

• Corporate strategy is clearly a responsibility of the enterprise’s directors.

• Because projects are building blocks in the design and execution of enterprise strategies, the board of directors should be vitally concerned about the status of major product, service, and organizational process projects in the organization.

• Specific policies and philosophies should be established in the enterprise that deal with how the directors carry out their fiduciary responsibilities for the surveillance of major projects.

• In the past, and even today, there are directors whose performance has been inadequate. In the chapter, examples were given of how poorly some directors have performed.

• Some boards of directors have performed their fiduciary duties in a stellar fashion. Examples were given in the chapter of such performance.

• There is evidence that boards of directors are reducing the number of members, leading to easier assessment and discussion of corporate performance and future strategies.

• Whenever you find a business or a major project in trouble, the cause can likely be traced to a board of directors that was unwilling or unable to fulfill its responsibilities.

• Directors are becoming more liable for lawsuits, which charge them with imprudence in their fiduciary role.

• Examples were given of how inadequate performance by directors on projects in the nuclear power industry adversely impacted the performance of construction projects in that industry.

• Boards of directors are becoming more empowered, particularly in increasing the authority of outside directors.

• Regular and rigorous review of the status of major projects is the best way for directors to be kept informed of how corporate strategy is evolving—and how well the enterprise is preparing for its future.

• A prescription for how directors could best review major projects was given. In order to conduct effective reviews, the directors need timely and relevant information on the key projects in the enterprise.

• Project performance audits can be a powerful tool to use in gaining an independent assessment of a project’s status.

• In the selection of directors, consideration should be given to the individual’s competency in project management.

6.14 ADDITIONAL SOURCES OF INFORMATION

The following additional sources of project management information may be used to complement this chapter’s topic material. This material complements and expands on various concepts, practices, and theory of project management as it relates to areas covered here.

• Randall L. Speck, “Legal Considerations for Project Managers,” Chap. 33, and “The Role of Senior Managers on Projects,” Chap. 19, in David I. Cleland, (ed.), Field Guide to Proiect Management, 2nd ed., (Hoboken, NJ: John Wiley & Sons, 2004). These chapters describe a couple of critical considerations in the management of projects.

• Philip J. Damiani and Robert J. Teachout, “Pittsburgh International Airport Midfield Terminal Energy Facility,” in David I. Cleland, Karen M. Bursic, Richard J. Puerzer, and Alberto Y. Vlasak, Project Management Casebook, Project Management Institute (PMI). (First published in Proceedings, PMI Seminar/Symposium, 1992, pp. 44–50.)

• Paul E. Holden, Top Management (New York: McGraw-Hill, 1968). Although this book was published over 30 years ago, its description of the theoretical role of senior managers in an enterprise holds true today. The book was one of the first to recognize the important role that senior managers and directors have in maintaining oversight of the planning for, organization of, and execution of projects in the enterprise.

• Kenneth R. Andrews, “Director’s Responsibility for Corporate Strategy,” Harvard Business Review, November–December 1980. This article points out the key fiduciary responsibilities that directors have for the well-being of the enterprise—to include the obligation to ensure that the senior managers prepare strategic plans for the directors’ review. Andrews makes it clear that a board of directors should review corporate strategy periodically to determine its validity, and use it as the reference point for other key board decisions. He further states that key approval decisions on the part of the board should evaluate the risks involved, and share with management the risks associated with its adoption.

• Jay W. Lorsh, “Empowering the Board,” Harvard Business Review, January–February 1995, pp. 107–117. In this article, the author provides a general assessment of the responsibilities of the board, and suggests strategies that can be used by boards working with senior managers for the empowerment of the board. In addition, the author makes a key point about the key roles to be carried out by board members. He suggests that outside directors should select a chairperson from among themselves and board committees should be made up of outside directors.

• David I. Cleland rebuttal testimony, Diablo Canyon Project, California Public Utilities Commission, Division of Ratepayer Advocate, Applications Nos. 84-06-014 and 85-08-025, San Francisco, June 20, 1988. This testimony provides expected performance standards for exemplary board behavior regarding the design and construction of a major nuclear power generation plant—and how the project owner neglected these standards. In his testimony, the author found major discrepancies with the manner in which senior managers and board members conducted themselves with regard to the management of this nuclear power plant. Other major problems were found in other areas of this project by expert witnesses. After reading this testimony, and the testimony of other expert witnesses on this project, one can easily have the perception that the project could not have been more badly managed, if the project team, senior managers, and directors had really tried to fail in the management of this project.

6.15 DISCUSSION QUESTIONS

1. What kind of evidence might indicate that a company’s board of directors has been inadequate in its monitoring of major project undertakings? Explain.

2. What actions and activities indicate that a company’s board of directors has taken an active interest in major projects? Explain.

3. Briefly describe some of the major responsibilities of a board of directors with respect to project management.

4. “Projects are key building blocks in the design and execution of corporate strategy.” Explain what is meant by this. What ramifications does this idea have with respect to the responsibilities of a corporate board of directors?

5. Cite and explain some of the reasons for the need for board senior managers to have an interest in a project plan.

6. How can a board of directors ensure that organizational projects being effectively managed?

7. What specific questions should be addressed by the board in project review meetings?

8. What kind of information about a project should be prepared for and presented to the board of directors? Explain.

9. What is the purpose of a performance audit? Under what circumstances might a board of directors consider such an audit? Why?

10. Why should all projects have a sponsor?

11. What steps can be taken to protect a board of directors from litigation and subsequent court actions? Explain.

12. Discuss the importance of proper board member selection for organizational effectiveness.

6.16 USER CHECKLIST

1. What evidence indicates the possibility of inadequate attention by senior managers and the board of directors to the projects within your organization? Does any evidence suggest that your organization’s board of directors has been adequately involved in the corporation’s major undertakings?

2. What responsibilities do you believe senior management or the board of directors should be taking but has not? Explain.

3. How do the major projects within your organization contribute to strategic plans and achievement of objectives and goals? What does this suggest about the need for board involvement?

4. Does your corporation’s board of directors receive information about major project plans? What contributions do they make to these plans?

5. What attention has the board of directors of your organization given to strategic planning in the company? What attention is needed?

6. Are senior managers and the board involved in project review meetings? Why or why not?

7. What questions are addressed by the board of directors with respect to the project’s progress? What questions should they be asking?

8. What kind of project status information is presented to senior management and the board of directors? Is information presented on a regular basis and in advance of meetings?

9. Under what circumstances might a project audit be needed on a major project, in which, your organization is involved?

10. What board actions have had an impact on the role of project management of your organization? Explain.

11. Have any of your organization’s projects undergone scrutiny in litigation? How could the company have been better prepared for such litigation?

12. Is your corporate board of directors staffed with knowledgeable, competent members? Why or why not?

6.17 PRINCIPLES OF PROJECT MANAGEMENT

1. The board of directors, along with senior management in an enterprise, has the responsibility to maintain surveillance over the planning for and execution of a project.

2. It is the responsibility of the senior managers of an enterprise to select major projects that should be reviewed by the board of directors.

3. The directors of an enterprise must review, on a periodic basis, the linkage between the strategic management and projects in the enterprise.

4. The board of directors and the senior managers of the enterprise have residual responsibility for the success or failure of a project.

5. In order to maintain effective surveillance over the conduct of a project in an enterprise, the senior management and the board should approve the project’s plan.

6.18 PROJECT MANAGEMENT SITUATION—BOARDS OF DIRECTORS’ INADEQUACIES

In the material that follows, some of the key testimony presented by an expert witness on the prudence and reasonableness of the role of Pacific Gas & Electric Company (PG&E) in the design and construction of the Diablo Canyon nuclear power plant is presented. This testimony, along with other expert witness testimony, was presented during the period when the State of California was involved in evaluating the utility’s request for rate charges to offset the cost of the plant’s design and construction of approximately $5 billion.

The Diablo Canyon nuclear power plant is located in San Luis Obispo, California. Nearly 20 years elapsed before the plant became operational. It was the first nuclear power plant constructed by PG&E—who did the design engineering for the plant. Other plants that were built by the company were traditional “fossil-fueled” power plants. Excerpts from the expert witness testimony follow:

• “The evidence is clear, however, that neither the Board nor the Executive Committee played any significant role in directing and controlling Diablo until late in the project.”

• “. . . at least until 1979, the Board functioned without meaningful formal input of significant Diablo Project data.”

• “Because they lacked adequate information, PG&E Directors were unable to take appropriate action in the strategic management of the Diablo Project until late in its history.”

• “My further review of all the meeting minutes of the Board of Directors and Executive Committee cited by PG&E’s witnesses indicates that major periods passed during which these senior executive bodies took no action on the Diablo Project.”

• “. . . the Board’s effectiveness was limited severely due to its failure to insist upon timely, easily understood information on the project.”

• “The Major Construction Report (in both its weekly version given to the Executive Committee and the monthly version provided to the Board) was deficient in at least the following significant respects:

• It did not distinguish between Diablo and other, much less significant jobs.

• The report provides no basis for comparing planned and actual costs of the job.

• The report provides no basis for comparing the planned and actual schedule.

• The report did not identify key problems, events or issues that could affect cost or schedule.

• The report totally neglected consideration of technical performance, including quality assurance and quality control.

• The report did not facilitate identification of project trends.”

• “. . . PG&E failed to develop an effective project information system for the Diablo Project until 1982.”

• “At PG&E, however, such informational material and agenda items were typically not presented to the Board until the outset of the meeting.”

• “My review of a number of key strategic decisions and actions on the Diablo Project indicates little, if any, involvement by the Board of Directors and the Executive Committee.”

• “These decisions and actions included:

• Approval of a strategic plan for Diablo;

• PG&E’s decision to act as its own architect, engineer and construction manager (AE/CM);

• Choice of a basic organizational structure for the project;

• Assessment of the suitability of the Diablo Canyon site;

• Assessment of the implications of the Hosgri fault;

• Full assessment of the implications of the Mirror Image Error; and

• Selection of Bechtel Power Corporation as Project Completion Manager.”

• “Conclusion: The most crucial questions in evaluating the reasonableness of the Board of Directors’ performance are: (a) what did the Board know, and (b) what action did it take. It is apparent from PG&E’s witnesses’ testimony and their voluminous exhibits that the Board knew very little about the most significant project the Company has ever undertaken. It is also apparent that the Board was little more than a passive onlooker at key decision-points in the Diablo Project. The PG&E Board’s failure to insist upon thorough information and its inaction in the face of various problems were unreasonable.”²³

6.19 STUDENT/READER ASSIGNMENT

1. What overall action should the board of directors of the PG&E Company have taken with regard to this major project when it was initiated?

2. What project management principles were not followed in the management of this project?

3. What do you believe to be the most serious omission in the management of this project by the senior managers and directors of this company?

4. What “philosophy of project management” should the senior managers and board members have followed with respect to the project?

5. The PG&E Company had an excellent “track record” in the design and construction of fossil-fueled power plants. Why did they have major problems on the Diablo Canyon project?