By Stuart R. Levine
Ethical Boardroom, Summer 2017
Directors spend approximately one full month a year on board-related matters. What can you do to assure that your board’s culture is optimal and that this valuable time is maximized effectively? Dysfunctional boards waste time, and, more importantly, dysfunction depletes the organization’s resources through unwise decisions and missed opportunities. Highly functioning boards have the courage to step back and take a hard look in the mirror to grasp what is working well and what needs to be improved.
One best practice that will help your board achieve and maintain peak performance is a board assessment. Annual evaluations of the full board, as well as of the committees, set an important baseline for engagement of all directors. A growing trend would indicate that individual directors be reviewed every two years. Furthermore, retaining a qualified independent third party to assist in this process, will encourage candor and deliver an agnostic perspective. This initiative engages the board to identify and maintain its strengths and identifies opportunities for the continuing strengthening of the culture. It additionally will serve as the basis for an intelligent re-nomination of director candidates.
Successful boards are rooted in mission-driven core values and focus on creating long-term sustainable value for shareholders and customers. They are fully engaged, and they assure their organizations have the requisite skills and tools to maintain a culture of competence, open communication, and constructive challenge both within the board and with C-suite executives. They address the continuing obligation for succession planning. They focus on strategy, with an in depth understanding of where the company is and where it is going. A critical addition to board conversations is having at least one director who has expertise in current technology and cybersecurity.
Well-functioning boards recognize the speed at which customers, employees, and everyday realities are dramatically changing, especially across generations from iGen and Millennials through retirees. As an example, if you have not read the fascinating book, Big Shifts Ahead by John Burns and Chris Porter, I highly recommend it. The book’s subtitle, Demographic Clarity for Businesses, describes the speed at which each decade’s customers, employees and realities are dramatically changing. These changes are critical to understand in order to protect shareholder needs and interests and to provide the necessary financial and human capital oversights. They appreciate that these changes must be understood to look after shareholder needs and interests, and to provide the necessary financial and human capital oversight.
Highly functioning boards operate in a zone of alignment and collaboration with senior management around ethics and values. With the rise of social media and deteriorating public trust, CEOs are being held to even higher levels of ethical accountability, creating a greater need for board alignment and transparency around succession-related matters.
It can be tough, however, for board members to take a hard look at themselves in the mirror. An independent and professional “mirror” makes it a little easier to absorb. The assessor gathers independent and confidential input from all board members on how the full board is performing. Some boards will go beyond board member interviews, and perform a complete 360 analysis for directors. This top down – bottom up approach can provide individual board members with valuable feedback on their areas of strength, and those areas that need strengthening.
Asking yourself these excellent questions can help you determine the level of assessment that is required.
If you answer “no” or are uncertain about any of these questions, an in-depth discussion and assessment will assist you to work through these challenging issues. Confidential in-depth interviews conducted with every board member and the CEO provide the insights that can be analyzed against generally accepted best practice standards. The aggregated data will be then shared with the entire board in a reflective process, with appropriate recommendations and personalized solutions. There is no one-size-fits-all.
The presentation of findings must stimulate discussion, be constructive, and not appear punitive. Recommendations are designed to create a common understanding of the investments in human capital needed to ensure board optimization and effectiveness. The board gains perspective on working in a collaborative manner with the leadership team, and can more effectively participate in setting strategic direction.
This transparent process could surface “underperforming assets” on the board. This should be a business learning opportunity to strengthen board functioning. Under independent lead director oversight, the process should provide systems and means that support board members in better serving the organization. For example, those members who should sharpen certain board skills, can be coached with a goal to increasing that individual’s productivity. Individual assessment, feedback and coaching should be designed so that each board member is pursuing their key responsibilities effectively. A lack of improvement, however, should result in the director not getting re-nominated.
According to National Association of Corporate Directors (NACD), re-nomination to a board should not be a given. All directors should be regularly evaluated and receive a review at the end of each term. Unfortunately, in 2015, NACD reported that only 40.7% of respondents to the NACD public-company governance survey said that their boards do evaluations at the individual director level. This is clearly a missed opportunity for those boards and companies.
Complicating a board’s ability to address director skill gaps, is the fact that board composition changes infrequently. Statistics show that on public boards, on average, a seat may open every three to four years. Additionally director ages continue to rise and director tenure is getting longer. A recent trend is a mandatory retirement age of 75 years, however, almost two-thirds have no term limits, according to a Spencer Stuart study, Board Refreshment: Investors Respond to Trends in Mandatory Retirement Age and Tenure with More Stringent Voting Policies. Moreover, 27% either don’t discuss mandatory retirement or don’t have a mandatory retirement age.
Director evaluations should determine whether directors are “leaning in” and learning. The issue of continuous learning often gets swept under the rug, but the quality of “listening to learn” should be part of a director’s review. Sometimes, directors need to be replaced when needed learning or improving skills are not occurring. Nobody wants to leave a board – it’s human nature. Getting past the short-term stigma of a director leaving a board, however, can allow a spot for someone who better fits the organizational need. Furthermore, the gracefully departing director can find another board more suitable for their existing skills. Companies are being bombarded with changing demographics, economics, technologies, and customer needs. This requires shifting strategies that demand directors stay current and that they continuously learn.
Another new and healthy trend is the inclusion of the executive team in the board assessment process. Information is gathered from the top leadership of the company on a track that parallels that of the board members. Areas of exploration can include insights on how management believes the board can serve the organization more effectively, and what the board/management team interface looks like. This information provides valuable input as board members seek a better sense of how to improve their board service.
Planned rotation of committee chairs is another benefit of the assessment process. The assessment conversation should engage board members in strategic conversations of board committee leaders, with a goal to strengthen the board in experience and knowledge. We have seen mistakes occur when strong-willed board chairs allow board members to default to the chairman on major decisions, instead of expressing an independent view. One director should never be in a position to inhibit the full functioning of the board. If a director, for example, wants to have a meeting with the potential CEO successor candidate, that director should not have to get permission from the chairs. Decision-making should be the shared responsibility of all board members. Additionally, there should be a defined process for rotating chairs of the committees so that there is no lapse in service or institutional knowledge. This best practice for the management team’s leadership development and succession planning, serves the board as well.
Succession planning for both directors and CEOs is a fundamental board responsibility. Independent board assessments are a great way to begin this important conversation that includes an understanding of the transformations the future will bring, and how the company will agilely and strategically respond. As an example, a board that was structured five years ago, when the company was in the financial services industry, may require dramatically different skills designed for a company that is now in the FinTech industry. The skillsets considered necessary for the corporate CEO of ten years ago are probably quite different now due to new and evolving technologies, customer needs, and the evolution of the customer base.
This pivot requires insights and different ways of thinking about succession planning for candidates for the CEO, board chair and board members. For example, when I was chair of the Nominating and Governance Committee on a public board, the chairman asked me which candidate I thought should be the company’s next CEO. My response was that we needed to define the vision for the company for the next five years. That vision would inform the skillsets, knowledge base and leadership capacity required to suit that position.
It’s the same question you should ask at the board level as directors reach “retirement age” and “board tenure age”, even if your board does not have mandatory ages for either. When recruiting the next generation of board members, the same questions must be asked. What skills will you need to provide intelligent oversight? The same honest, ongoing discussion that you would put in place for the succession planning for the CEO must occur at the board level in order to understand and evaluate the attributes of directors that are needed going forward.
In another new trend, institutional investors are following high-performing directors to new companies, and making larger initial investments in those firms. Investors seek trust in a director’s ability to protect and increase shareholder value. They see that all directors are not created equal; some providing greater value than others (Jay Dahya and Richard Herron, April 28, 2017, Do Investors Follow Directors to Other Companies?). Director bios and skill sets appear in the company proxy each year. Companies will be served by the ability to express the skill sets that enable their directors to provide continuing value to the organization.
Highly functioning, engaged boards do all that they can to up their game. Qualified independent third party assistance on a periodic basis, is a tool that will help.