Does your company have the right directors comprising the board? As a member of the senior management team, it’s certainly of concern to you—and of course the company’s shareholders—to determine whether the men and women providing corporate oversight do the job well. And board members themselves, as they look around the boardroom table, must be comfortable that fellow directors are people you can “go to war” with, your reputation (and possibly personal assets) in their hands.
This is a crucial question, on the minds of Congress, regulators, shareholders, and the public. A recent article in Newsweek flat-out said: “The failure of the financial system in 2008 wasn’t simply a massive failure of common sense, regulation, and leadership. It was also a failure of corporate governance … [Boards are] supposed to be there to act almost like a governor on an engine, if it’s running out of control at least to slow it down. Ideally they’re supposed to monitor, advise, provide contacts to the company, and help it grow. But at the very least, they’re supposed to keep it from blowing up.” The article’s focus turns to board composition, saying, “Unfortunately, boards are a narrow group who come from the same backgrounds as the CEOs. They tend to see the world the same way the CEOs do.”
This is much of the impetus for the new Securities and Exchange Commission rules taking effect this proxy season. Companies now will need to disclose each director’s specific experience, qualifications, attributes, or skills “that led the board to conclude that the person should serve as a director for the company at the time of the filing.” Also disclosed will be other directorships held by each board member (or director nominee) during the past five years at any public company or registered management investment company, and any executive officers, directors, and director nominees who have been involved in legal actions during the past 10 years.
Basically, all this gets down to why the current or nominated board members are deemed to be right for the job. But while the increased information will allow somewhat better transparency, nobody should expect from it an ability to make a clear determination of a board’s ability to perform well. Reality is that one must be inside the boardroom to make an informed judgment on how well directors are really doing.
Clearing the Decks
In connection with these expanded disclosures, we can expect boards themselves to go to some lengths to consider whether their current composition is what’s needed for today’s challenges. In considering who should occupy the seats at the table going forward, nominating and governance committees will need to determine whether any deadwood is on the board currently, and if so, how to remove it.
Many boards have term or age limits, forcing turnover over time. This approach is understandable, as it refreshes board composition and new thinking. But in my experience this approach fails for several reasons. First, we’ve seen some of the best directors cast aside simply because they’ve been doing the job for a long time or have reached an arbitrary age. And second, there’s a clear tendency for board leadership not to remove directors who aren’t cutting it, preferring to suffer with the inadequacy until term or age limits take hold.
Annual board assessments are much more effective. There are best practices for doing so, to determine when a director needs to be thanked for past performance and moved off the board. Not only is the process straightforward and easy to perform, it’s aimed primarily at turning weak directors into strong ones. And where a director is asked to move on, experience shows that he (or she) often recognizes the reality and is comfortable leaving.
In one example, a non-executive chair of a large public company asked for my advice on how to change the composition of the company’s board, which was overloaded with directors with similar background and narrow perspective. We developed supporting rationale for removing six directors. Following some preliminary discussions with them, we presented the idea at a special board meeting. All six, having understood the arguments and benefits to the company, agreed to the changes and tendered their resignations.
A Shift in Direction
The aforementioned Newsweek article continues: “A lot of disillusioned board members … [say they] are completely captured by the CEO in most companies. CEOs either have selected you, or approved your being on the board. They control your renominations, your perks, your pay, almost all the information that goes to you, your committee assignments, your agendas.” Well, that’s an interesting perspective, which often was the case years ago—but I’ve seen firsthand that today’s board dynamics generally are very different. With the vast majority of directors now being independent, along with separation of the chair and CEO roles or putting in place a strong lead director, the dynamics have changed. Certainly in many companies the CEO-chair wields significant power, but it no longer smacks of absolute power.
As you look around the board table, you want to be sure the directors occupying these seats are qualified and positioned to do their job well.
Here’s one telling anecdote of how power has shifted. The nominating committee chair of one company’s board has a strict policy: Any board candidate put forth by the will be eliminated from consideration. Yes, candidates identified by the nominating committee are vetted with the CEO, but they won’t be selected by him.
Reality is that in past years many large companies looked for “name” individuals, drawn from high political office, the military, academia, and the performing arts. But just as choosing an “imperial CEO” has largely given way to seasoned and highly skilled managers, board nominating committees are looking less for the flashy name and instead focusing on director candidates who can bring the technical talent, judgment, and facility to add needed value in the boardroom.
Building a Board
So how are the best boards built? A typical and useful process is to develop a matrix of desired expertise, skill sets, and personal attributes, typically listing them down one side, and the names of existing directors across the top. The boxes are filled in with a check mark, or sometimes a quantitative or qualitative measure. The goal is to determine strengths and shortcomings in relation to the established categories, and identify where enhancements are needed.
There are, however, other critical factors to include. Foremost, you want to structure a board that will cooperate in providing advice, counsel, and direction to the CEO and senior management team. By no means does that mean uniform thinking; diversity in background, perspective, and ideas is essential. But it does mean you want new board members who can enter seamlessly to provide needed strengths in a manner that promotes debate and discussion but also builds consensus for clear direction to management.
You must also focus on the skills and attributes needed not necessarily for where the company has been or is currently, but for where it is going based on the accepted strategic direction. I don’t have the space here to address all the other factors to consider in building a board that’s right for a particular company. Among them is the number of boards on which a candidate sits, other commitments, energy level, and so on. While rules of thumb for numbers of boards are commonly known, depending on whether the director is employed full time or otherwise retired, exceptions always crop up. Several days ago a friend who is a CEO actively running a company mentioned he was going to join his fourth public company board, adding to his two private company boards. Unfortunately, thus far I’ve failed to change his mind!
Nothing Is More Important
Getting board composition right has always been a critical element in a company’s success, and today it’s more important than ever. As you look around the board table—from the perspective of management or director—you want to be sure the directors occupying these seats are qualified and positioned to do their job well. You, your colleagues, and shareholders deserve nothing less.
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