As NACD general counsel and head of Board Advisory Services (BAS), I’ve gained tremendous insight interacting with all types of boards from startups to the top of the Fortune 500. Each board comes with its own unique dynamics, incorporating differing personalities, skill sets, advantages, and obstacles. But despite these differences—and regardless of the size and sophistication of the board—there are several common issues with which most boards are grappling.
While I’ve seen just about every scenario one could imagine, BAS is typically engaged for the following reasons:
The company has reached a turning point in its strategy, which has created tension and a need for alignment with the board and management.
The board is struggling with directors’ extended tenure on the board, which has created a stale environment and an obstacle to fresh thinking.
Often related to the second point, the board is wrestling with the thorny issue of succession planning and how to deal with underperforming directors.
The board is composed of strong, experienced directors, but management does not feel they are as engaged as they could be and are not bringing all their skills to the table.
In each situation I’ve found that our clients, despite facing significant pressure points, all have the desire to improve. Even the most sophisticated boards are willing to admit they don’t have all the answers. As such, they bring NACD—as an objective third party—into their boardroom to assist in identifying steps for improvement.
In my next posts, I will drill down further into these common issues. How are companies dealing with underperforming directors? What new succession planning techniques are working? Does extended tenure affect director independence, engagement levels, and the creation of fresh ideas? How can the board and management team be more effectively aligned?
At any NACD education program, the discussion of directorship as a part-time profession with full-time risks is bound to arise. Yet following any corporate crisis, the question is always asked: “Where was the board?” Outside of the C-suite and boardroom, many perceive that directors should be able to foresee and avoid a crisis before it strikes.
This perception is misguided for several reasons. As a result of legislative and regulatory activity, since the 1960s corporate boards have become increasingly independent of management. Although legislation such as Sarbanes-Oxley and Dodd-Frank mandated independence at specific committees, this has extended to the entire board. Today, most publicly held company boards comprise a majority of independent directors, and often the CEO is the only executive director.
The development of independent boards is not negative. In fact, it ensures that the board can effectively carry out its mission and responsibilities, and fairly hold management accountable to shareholders. However, there are a few consequences when directors are selected entirely for independence. Directorship, as noted above, is a part-time role. Inherently, directors rely on senior management for information necessary to carry out their oversight responsibilities. When outside directors are chosen for lack of ties to the corporation, they do not necessarily bring knowledge of the business or industry. Therefore, the benefit created by adding an independent director is largely tempered, as this outsider is reliant on the CEO for the information necessary to his or her oversight role.
To combat this risk of asymmetric information, NACD partnered with McGladrey to host four small gatherings of executives and directors in an effort to find ways of improving the communication and relationships between the board and C-suite. From these gatherings, the Bridging Effectiveness Gaps: A Candid Look at Board Practices white paper was created. As Bridging the Effectiveness Gaps notes, broadly, these gaps were found in the areas of strategy and risk, executive compensation, CEO succession planning, and board evaluations. By convening management and directors from different companies, the meetings fostered candid and open conversation regarding areas where communication tends to break down. However, where communication was generally the root of the problem, it was also the solution.
Urmi Ashar, President and CEO of NACD Three Rivers Chapter, possesses insights derived from medicine, gifted education and business. She servesas a director at Excela Health System and at the Community Design Center of Pittsburgh. Her unique experiences of bridging American and Indian cultures have been instrumental in helping organizations navigate complex challenges. Her primary interests lie in helping boards foster a creative dynamic culture within the boardroom to facilitate enterprise wide innovation.
Effective board governance doesn’t just happen – it takes a conscientious effort, both by directors and executive management to define roles, hone director skills and execute responsibilities.
To be effective, boards must have the right people, the right culture, the right issues, the right information, the right process, and the right follow-through. One clear objective must always be met: to create superior long-term shareholder value.
As a member of the director community, I have often wondered how we as a group—the board—can be sure we are adding value to the organizations we serve. How do we know? I think evaluations can help us answer this question with confidence, and so they should be taken seriously. Evaluations are the only tool available to the board to assess its own effectiveness.
Why Do We Undertake Board Evaluations?
Is it just that they are required? Shouldn’t we complete evaluations because we seek to function at our best? If organizations fail because of failures in leadership, I would make a passionate plea to all of us to embrace board evaluations instead of trying to shrug them off. An evaluation can help us define the value we want to create together, define our ideal for optimal performance and how we will get closer to our ideal.
Developing a board business plan is a value-creator for boards. An ideal business plan clearly defines specific performance goals for the board. Regularly evaluating performance against the plan, both at the committee level and at the individual director level, will make it more likely that board goals can be met.
If we learn we are failing, the evaluation should compel the board to take corrective actions. This may include replacing one or more directors, or challenging the board’s performance in other ways. An effective evaluation process offers a measurable and more objective means for determining what follow-through will be required to keep the board on a high-performance course. It keeps us accountable. And, if we are accountable, then we will be able to inspire accountability from management, and management from their teams and from our stakeholders. It starts with us.
To learn more about board evaluation services from NACD, click here