The business environment is rapidly and fundamentally changing—and directors are expected to keep pace. In response to this state of extreme volatility, the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board explores how boards can position themselves to capably usher their companies into the future by focusing on continuous improvement. At the 2016 NACD Global Board Leaders’ Summit, Commission co-chairs Bonnie Hill, director of California Water Service Group and former Home Depot lead director, and Richard H. Koppes, director of NACD and the Investor Responsibility Research Center Institute and former deputy executive officer of CalPERS, discussed the Commission’s key findings with NACD Director of Strategic Content Development Robyn Bew.
Members of this year’s Blue Ribbon Commission came to a consensus early in their discussions that “board refreshment”—an increasingly popular term in the corporate governance community as various stakeholders turn their attention to board composition and director turnover—is a limiting, and even simplistic, concept. Instead, directors need to figure out how they can make themselves strategic assets to the companies they serve by instilling a continuous-improvement ethos into the culture of the boardroom. Over the course of the conversation, Hill and Koppes suggested that directors consider the composition and functionality of the boards in the following ways:
How do directors’ skills need to align with company strategy? Businesses evolve rapidly, and boards need to respond in kind. Here, directors need to consider how they are keeping abreast of the issues facing their organizations and whether the skills that initially garnered them a seat at the boardroom table still align with the current and future direction of the company. Sometimes this means deciding to leave the board.
Internally, new-director onboarding practices provide an opportunity to communicate about the board’s culture and governance principles, including reinforcing the idea that board service is not a lifetime appointment. Externally, boards can communicate to stakeholders that a director’s departure was in keeping with the board’s governance practices and does not reflect poor service on the director’s part.
What are the board’s processes for continuous improvement? Maintain a pipeline of boardroom talent and have a multi-year succession plan in place so that open board seats can be filled with highly capable candidates. These plans should include designating successors for committee chairs and the independent chair or lead director. For sitting directors, continuing education programs can help to refine or amplify skill sets. Evaluations, including at the individual-director level, are essential tools for continuous improvement when they are conducted regularly and periodically involve an independent third party. They help ensure that the board’s processes are functioning well, enable directors to be more nimble in their own self-improvement, and ultimately fine-tune the board’s strategic contribution to the organization.
How do stakeholder perspectives affect the board? Shareholders—especially institutional investors—are paying closer attention to issues surrounding board composition. Considering that institutional investors read thousands of proxies each year, the onus is on individual boards to effectively communicate how each director makes valuable contributions. More and more leading boards are going beyond the basic biographical information required by the SEC and listing exchanges and providing additional context. In addition, if there is any concern that a director slate could be a point of concern for investors, boards should reach out to those constituencies well in advance of proxy season to explain their position. Should investor dissatisfaction with the board lead to an activist engagement, panelists agreed that, while sometimes both parties ultimately agree to disagree, the board needs to hear out that point of view and seriously consider if their position might add value.
For detailed recommendations on how to enhance your board’s continuous-improvement processes in seven key areas, download the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board. In addition, read this article from the current issue of NACD Directorship magazine for more insights from Bonnie Hill and Richard Koppes on the creation of the report.
Identifying what expertise is needed on the board and orchestrating different—if not conflicting—points of view into constructive conversation can be a challenge. During a session at the second annual NACD Diversity Symposium on the opening day of the Global Board Leaders’ Summit in Washington, DC, panelists James Lam, director and chair of the risk oversight committee at E-Trade Financial Corp. (E*TRADE); Myrna Soto, director of Spirit Airlines and CMS Energy Corp.; and Charlotte Whitmore, vice chair and chief, brand strategies, of Analytics Pros., discussed how boardroom talent and a robust mix of perspectives are critical to ensuring a company’s success.
Conversation centered around two themes:
1. Striking a Balance. When considering the future needs of the company, Lam recommended that directors think about their business and its risk profile and then consider the following questions: “What are the key megatrends that will impact the business?” and “What director skill sets will be needed to mitigate this potential impact?”
Considering the continuously growing list of threats and disruptors facing businesses—such as cybersecurity, globalism, and climate change—some boards debate the need to focus on recruiting subject-matter experts to help them oversee these risks. But panelists agreed that new perspectives should replace long-standing expertise.
“Seasoned directors can be a voice of reason,” Soto said. “New executives can be what you need to push the strategy. When you have that diversity of thought, you really challenge the strategy, but it comes down to the nominating committee and how it thinks about what the next director is going to bring to the table.”
Drawing on her own experience, Whitmore concurred. Whitmore is cofounder of the data analytics start-up, Analytics Pros, and knows what it’s like to both recruit directors whose business experiences are different from her own and to be recruited to a board because of her particular expertise. At her own company, Whitmore said she has learned from more seasoned directors that taking actions to grow the company too quickly might do more harm than good. “They bring a sensibility to corporate culture that’s not just about driving results,” she said. In her role as a director, she said her older colleagues often look to her data-analytics savvy to discover new ways to support the organization.
2. Facilitating Dialogue. Having diverse perspectives around the board table does the company no good unless they are heard. Effective director onboarding is vital to acquainting a new director with the company and establishing both the board’s expectations of the new recruit and what that director expects of fellow board members and management. A director’s ability to successfully contribute to the conversation is contingent on the conditions on which they were onboarded. Soto said that she turned down several directorships based on what she learned about the companies’ governance structures. Lam recalled having his own agenda during his onboarding at E*TRADE, ensuring, for example, that he was able to meet with the risk committee and senior management.
In addition, the lead director plays the very important role of ensuring that all directors are heard. When new directors are called upon to join the board of a company in crisis or during a transition—such as a CEO succession—the lead director can be instrumental in managing and balancing the perspectives and experiences represented around the table and getting the full board to a point where it feels comfortable not only in making major decisions, but also in communicating those decisions to stakeholders outside of the boardroom.
The first panel at the 2016 Global Board Leaders’ Summit’s Diversity Symposium provided directors with real-life examples and related metrics from four executives who have successfully linked diversity with competitive advantage.
Leslie Mays, partner at Mercer, moderated the panel that included Rohini Anand, senior vice president and chief diversity officer, Sodexo; Phillip Goff, president and cofounder, Center for Policing Equity; Herschel R. Herndon, founder and president, HRH Global Connections; and Sonya F. Sepahban, director, Genomenon and Cooper Standard.
The panel suggested four essential steps to build a more diverse workforce and create value through innovation.
Start With the Board
Anand noted that because the Sodexo board does not take its commitment to diversity lightly, performance metrics for the CEO are directly tied to diversity initiatives. Sodexo, a facilities management company, sets ambitious recruitment goals across every department, with the aim of achieving a C-suite consisting of at least 40 percent women by 2020. The CEO’s commitment to Sodexo’s diversity goals has in turn driven deeper engagement in diversity and inclusion at all levels of the company. The result? Anand said that the division of Sodexo that she leads has realized $1 billion in new business that can be directly tied to the company’s diversity and inclusion efforts.
Set the Metrics for Innovation
Herndon defines innovation as “anything new that creates value.” The value of a more inclusive workforce will be revealed if specific business practices are established:
Tie recruiting metrics to the statistical makeup of the market the company serves—or seeks to serve.
Monitor if and how diverse talent is being cultivated through the leadership pipeline.
Establish new-business lines targeted to previously underserved populations and then track their success.
When planning strategy, challenge your board to keep diversity top of mind.
Work to Remove Biases
Goff noticed that workers at a company he consulted to performed with greater efficiency when paired with a coworker of the same race. These workers had little training in how to work with someone who was not from their own background, and when paired with a colleague of a different race, faced tensions that slowed their work.
To realize the full economic value of diversity and empower teams to do their best work together, companies should provide training in how to overcome unconscious biases and in how to be mindful of tensions caused by misunderstandings when evaluating workers’ performance. “Bias can be baked in,” Goff said. “If we define all the things we care about and measure based on them, we will see greater success.”
Inclusion Must Be Pervasive
Sepahban, who currently works closely with start-up companies and venture funders, said that while only 12 percent of venture capital is awarded to companies with diverse leadership, companies with at least one woman founder performed 63 percent better than those without a woman leader based on exit valuations.
To change the tide towards inclusion at start-ups and larger companies alike, Sepahban urged her fellow directors to make inclusion pervasive. “This isn’t someone else’s job,” she said. “Even with all the great work done by diversity leadership, it’s still everyone’s job. Leadership should educate all to ask themselves what they are doing to help.”