We sometimes all wish we could go back in time to advise ourselves on how to approach a new challenge or community given the knowledge and experience we have today. For the 2015 NACD Directorship 100 (D100), each honoree was asked to do just that. D100 directors were asked to provide a short, written response to this question: “What is the best advice you would give to a first-time director?” The D100 editorial team received responses from most honorees and they ranged from pithy maxims to stories about the challenges of staying independent.
A portion of the responses from the Class of 2015 D100 directors follows. Profiles of D100 honorees can be found in the November/December issue of NACD Directorship magazine.
Gary E. Anderson
Chemical Financial Corp., Eastman Chemical Co.
“I found that the best way to [contribute] was to frame appropriate questions dealing with the topic at hand. It doesn’t matter what the issue is, whether on corporate strategy, short-term tactics, succession planning, compensation, or risk management. The use of appropriate questioning also can work at home with the family!”
Avnet, Southwest Airlines
“I fully embrace the Southwest Airlines and Avnet way of doing business: treat your people well and they will be equipped and motivated to treat your customers extraordinarily well, and that will produce distinguished rewards for your shareholders. Everyone is important, in every nook and cranny of the business, and every decision at the board level should involve the question, ‘How will this affect our people, our principles, and our culture?’”
“Know your shareholders. What are their expectations? Is the company meeting them?
“Know your colleagues. Diversity of views, backgrounds, and experience enriches the company bottom line. Learn where your colleague’s views differ from yours. Understand why. Have courage and join them in candid discussion.
“Know your management team. Do they live their values? Are they delivering results?
“Be involved in NACD, as governance is a learned skill and doing it right keeps our private enterprise system strong.”
Betsy D. Holden
Diageo PLC, Time Inc., Western Union Co.
“The best advice that I received as a new director was, first of all, choose wisely. Select an industry and company that you are really interested in, a management team that you believe in, and a board where your skills and experiences are relevant and will add value.
“Secondly, what really differentiates the best directors is how they interact with management and the other directors. Good directors are confident and courageous, and challenge management in a positive, constructive way…They understand that chemistry is the intangible that drives board effectiveness and they really listen to and treat other directors with respect.”
Nancy J. Karch
Genworth Financial, Kate Spade & Co., Kimberly- Clark Corp., MasterCard
“Some of the best advice I received as a new director was to accept that this role is different than anything I had ever done, and to have patience to learn the ropes. [A director] is an advisor, a member of a peer team, a leader on governance matters, a decision maker on some matters—[it’s] a mix unlike anything else. Plus, as in any job change, one is entering a new culture, and in the case of a board, both a company and a board culture. So be patient.”
Bemis Co., Delphi Automotive
“The best advice I received was pertinent to me both as a director and as a chair/CEO. That is: ‘Tim, be yourself, remember that is what got you here.’ [That advice] caused me to think about hard work, integrity, ethics, and striving to make the proper decisions.
“It also reminded me that as my career evolved from working summer jobs in automotive plants to the boardroom of BorgWarner, I listened to, learned from, and developed relationships with people from all levels of society. This has become a valuable tool in the boardroom. Each time ‘a sticky issue’ is discussed, I remember to think back to my previous experiences and express what I think is the proper approach.”
Sarah E. Raiss
Canadian Oil Sands, Commercial Metals Co., Loblaw Cos., Vermillion Energy
“The best advice I received came from a very seasoned director. He said that I should find a person or two on the board that I could best relate to and either ask them to be my ‘board buddy’ or just make them my ‘board buddy’ without even asking. This person would help me understand current board dynamics, help me understand the history as necessary, and provide feedback on the value I brought to the board. I have used this technique on every board to which I am appointed, [and it] has allowed me to be more productive and a valuable contributor more quickly. I am most appreciative of my ‘buddies.’”
Molina Healthcare, Park Ohio Holdings Corp.
“Three people gave me great advice when I decided to accept board positions at Molina Healthcare and Park Ohio. The first was Mary Molina, the company’s chair. It was simple but profound: ‘Remember the mission. It is the cornerstone of our corporate culture.’
“The second came from Ed Crawford, chair and CEO of Park Ohio. He said, ‘Act with integrity at all times and have the courage to do the right thing.’
“The third was from my husband, Bruce Kulp, former general counsel of Ford Europe. He counseled me to listen, get as much information as possible, trust in the power of common sense, and to always think strategically.
“Lastly, the people you deal with in management and the board are human. They have families. They have good days and bad days. Kindness is powerful, even in the boardroom.”
Olympia J. Snowe
Aetna, T. Rowe Price Group
“One of the key components of executing critical judgment is ensuring an ongoing evaluation of how the company’s short term goals enhance its strategy for creating long-term value. That requires early and extensive director engagement in the shaping of the strategy, greater understanding and knowledge of business operations, and constant assessment and management of the risk.
“In this era of deeper investor involvement, it is more essential than ever for boards to communicate to shareholders the extent to which the independent directors are vigorously exercising their due diligence towards maximizing the value of the enterprise.”
Ronald D. Sugar
Air Lease Corp., Amgen, Apple, Chevron Corp.
“Select your boards carefully…You should be mindful of geography, meeting schedules, and be prepared to put in whatever time is necessary. And when trouble comes, you must be committed to see things through—whatever it takes.
“In well-run companies, board meetings enter a predictable rhythm, and are fairly routine. It has been said that in routine times, the quality of a board doesn’t really matter—until suddenly those moments when it matters enormously. Such ‘moments’ might include a significant market shift, a technology disruption, a planned (or unplanned) management succession, a serious regulatory or litigation threat, an environmental or safety crisis, a significant acquisition, a hedge fund activist campaign, or a hostile takeover attempt. In those moments, the board’s collective wisdom, perspective, and mature judgement can make—or break—a company.”
David A. Wilson
Barnes & Noble Education, CoreSite Realty Corp.
“The best advice came from the counsel I engaged for [a] special committee. He noted the fiduciary duties of directors formed a foundation but not the entire structure. The greatest challenge I will ever confront as an independent director, he said, is ‘independence.’ He was speaking not of the independence necessary to meet SEC and NYSE thresholds. Rather, he spoke of the independence of mind, thought and action.
“What our attorney never told me was how challenging it may be to hold fast when you are in the minority, but how critical it is to our governance system that you do.
“Polonius may have been a pompous fool, but I still find value in these words: ‘This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.’—William Shakespeare, Hamlet, Act 1 Scene III.’”
Review the full list of D100 honorees at NACDonline.org/Magazine, and take a few moments to consider who you might nominate for inclusion in our tenth anniversary list. A call for nominees will be issued to all NACD members in early 2016.
Risk governance varies radically across industries and organizations because a one-size-fits-all approach simply does not exist. There are, however, five interrelated principles that underlie effective risk management within all organizations in both good times and bad: integrity in the discipline of risk management, constructive board engagement, effective risk positioning, strong risk culture, and appropriate incentives.
Integrity in the Discipline of Risk Management
Integrity in the discipline of risk management means having a firm grasp of business realities and disruptive market forces. It also means engaging in straight talk with the board and within executive management about the related risks in achieving the organization’s objectives and the capabilities needed to reduce those risks to an acceptable level.
Integrity in the discipline is tied to strong tone at the top. If tone at the top is lacking, the executive team is not likely paying attention to the warning signs.
Consider the following common examples of integrity failures:
Not clearly grasping business realities. The 2008 global financial crisis is a good example of what can happen when the inherent risks associated with aggressive, growth-oriented market strategies are discounted, ignored, or never considered. Breakdowns in time-tested underwriting standards, failures to consider concentration risks, and excessive reliance on third-party assessments of structured products were among the root causes of the crisis.
Not integrating risk with strategy-setting. When risk is an afterthought to strategy, risk management fails to reach its full potential. The critical assumptions underlying the corporate strategy must be understood at the highest levels of the institution, and the external environment must be monitored to ensure that these assumptions remain valid over time.
Not tying risk tolerance to performance. Risk is often treated as an appendage to performance management. But how does management or the board know if risk is being efficiently managed if risk appetites and tolerances have not been delineated? Performance and risk must be integrated, and to that end, defining thresholds is essential.
Limiting risk management to a compliance activity. Integrity in the discipline means knowing that undertaking initiatives to manage risk in the pursuit of business objectives is not strictly a regulatory compliance measure. Viewing risk management as a “regulatory” check-the-box matter restrains its value proposition.
Hoping that risks are managed sufficiently while knowing that business realities are not actively monitored, risk is not really understood, tolerance levels are not set, and risk management is addressed solely to meet regulatory guidelines is a clear indicator that integrity in the discipline is lacking.
Constructive Board Engagement
Effective risk oversight by the board begins with defining the role of the full board and its standing committees with regard to the oversight process and working with management to understand and agree on the types of risk information the board requires. Directors need to understand the company’s key drivers of success, assess the risks in the strategy, and encourage a dynamic dialogue with management regarding strategic assumptions and critical risks.
The scope of the board’s risk oversight should consider whether the company’s risk management system—the people and processes—is appropriate and has sufficient resources. The board should pay attention to the potential risks in the company’s culture and monitor critical alignments in the organization: strategy, risk, controls, compliance, incentives, and people. Finally, the board should consider emerging and interrelated risks.
Effective Risk Positioning
The expectations of the board and executive management for the chief risk officer (CRO) and the risk management function must be carefully considered and, given those expectations, the function positioned for success. To this end, six key success factors constitute a significant step toward a successful and effective risk management function.
The CRO (or equivalent executive) is viewed as a peer with business-line leaders in virtually all respects (e.g., compensation, authority, and direct access and reporting to the CEO) and likewise down through the business hierarchy and across the organization.
The CRO has a dotted reporting line to the board or a committee of the board and faces no constraints of any kind in reporting to the board.
The board, senior management, and operating personnel believe that managing risk is an organizational imperative and everyone’s job.
Management values risk management as a discipline equal to opportunity pursuit.
The organization clearly views the CRO as undertaking a broader risk focus than compliance.
The CRO’s position, and how it interfaces with senior line and functional management, is clearly defined.
Taking one or more of these elements away should send up a red flag indicating that the risk management function may be unable to fulfill its expected role and lacks real authority or influence. Depending on the expectations, the function may be set up to fail.
Strong Risk Culture
An actionable risk culture helps to balance the inevitable tension between creating enterprise value through the strategy and driving performance on the one hand, and protecting enterprise value through risk appetite and managing risk on the other hand. While risk culture has gained traction in terms of relevancy in financial services institutions in the post-global financial crisis era, the decision-making preceding the occurrence of reputation-damaging risk events and lack of response readiness when those events occur have made risk culture a topic of interest in other industries as well.
Culture is influenced by many factors. In addition to tone at the top and the quality of the board’s risk discussions, other factors include:
Accountability. Successful risk management requires employees at all levels to understand the core values of the institution and its approach to risk, be capable of performing their prescribed roles, and be aware that they are held accountable for their actions in relation to expected risk-taking behaviors.
Effective challenge. A sound risk culture encourages an environment in which decision-making processes allow expression of a range of views, manage the effect of bias and facilitate reality testing of the status quo.
Collaboration and open communications. A positive, freely open and collaborative environment engages the most knowledgeable people and leads to the best decisions.
Incentives that encourage risk awareness help shape risk culture, as discussed below.
Performance and talent management should encourage and reinforce maintenance of the organization’s desired risk behavior. The old saying “What gets rewarded, gets done” is as true with risk management as it is with any other business process. Disconnects in the organization’s compensation structure and an excessive near-term focus can lead to the wrong behaviors, neutralizing otherwise effective oversight by the board, CRO and other executives.
For example, if lending officers are compensated based on loan volumes and speed of lending without regard for asset quality, reasonable underwriting standards and process excellence, the financial institution may be encouraging the officers to game the system to drive up their compensation, exposing the company to unacceptable credit risk.
This principle requires more than focusing on C-suite executive compensation and upper management. Equally important is an understanding of the incentive plans driving behavior in the sales force and on the “factory floor” where production takes place, as this is where the individual “moments of truth” occur that add, subtract or neutralize the buildup of risk within the organization’s processes, each and every day.
Questions for Boards
The following are some suggested questions that boards of directors may consider, based on the risks inherent in the entity’s operations:
Has the board articulated its risk oversight objectives and evaluated the effectiveness of its processes in achieving those objectives? If there are any gaps that may impede risk oversight effectiveness, is the board taking steps to address them?
Are there any elements of ineffective positioning of the risk management function present in the organization? Is the CRO (or equivalent executive) viewed as a peer with business-line leaders? Does the board leverage the CRO in obtaining relevant and insightful risk reports? Does the CRO have a direct reporting line to the board?
Does executive management openly support each line of defense (e.g., the primary risk owners [business-line leaders and process owners whose activities create risk], independent risk and compliance management functions, and internal audit) to ensure it functions effectively and that there is timely consideration of escalated matters by executive management and the board?
Do primary risk owners identify and understand their respective risks and risk appetites? Do they escalate issues to executive management in a timely manner? Is the board of directors engaged in a timely manner on significant risk issues?
Is risk management a factor in the organization’s incentives and rewards system? Is risk/reward an important factor in key decision-making processes? Do information systems provide sufficient transparency into the entity’s risks?
Jim DeLoach is a managing director with Protiviti (www. protiviti.com), a global consulting firm.
Few issues invite more spirited discussion than the question of leadership style. Case in point: a roundtable discussion our firm hosted last month at the 2015 Fortune Most Powerful Women Summit in Washington, D.C., where a distinguished panel examined the behavioral patterns that individuals draw on when serving in leadership positions. Leadership style, the panelists agreed, is one of the most important keys for unlocking the full potential of the organization.
For directors, assessing leadership style is critical in discharging their most important responsibility: choosing a CEO. Although, as our panelists pointed out, the most effective leaders learn to flex
Anne Lim O’Brien
their style according to the situation, most nevertheless have a go-to style that dominates, especially when they face new challenges. Understanding and identifying the dominant styles of CEO candidates, rigorously and systematically, should be a part of every board’s succession process, enabling the selection of a chief executive whose leadership style is best suited to the organization’s business situation, strategy, and culture.
Pilot: strategic, visionary, embraces complexity. Pilots relish challenges and thrive in situations requiring visionary leadership. But they can sometimes leave little opportunity for others to lead, and charge ahead without learning from the past or thinking through the future.
Collaborator:empathetic, talent spotter, coaching-oriented.Collaborators take a team-first approach, share credit, and attract talent. But their focus on others may come at the expense of strategic vision and clear direction-setting, and they can have trouble holding others accountable.
Provider:action-oriented, loyal to colleagues, eager to provide for others. Providers are driven by two different, yet equally strong forces—the desire to lead from the front and to take care of those around them. Their teams may experience them as deeply caring and thoughtful, but also as confident in their own ideas to the exclusion of all others.
Harmonizer:reliable, quality-driven, execution-focused, inspires loyalty. Harmonizers prefer environments where everyone is using the same playbook to ensure reliable, efficient execution, and they are adept at finding the right people to make that happen. But while they are consistent and supportive, they may be cautious when it comes to large-scale, transformational change or significant shifts in the way business is conducted.
Forecaster:learning-oriented, deeply knowledgeable, visionary. Forecasters relish the chance to continually gather data, expand their knowledge base, enhance their subject-matter expertise, and generate new insights about the future. However, they tend to rely on the strength of their ideas to carry the day, shortchanging the importance of influencing skills.
Producer:task-focused, results-oriented, linear thinker, loyal to tradition. Producers value results, consistency, efficiency, and proven approaches. But their emphasis on reliable execution can get in the way of incorporating new perspectives, appearing rigid rather realistic.
Composer:independent, creative, decisive, self-reliant. Composers are often gifted problem solvers, with an instinct for innovation and trust in their ideas. But because they are most comfortable when operating independently they may find collaboration and relying on colleagues difficult.
Energizer:charismatic, inspiring, connects emotionally, provides meaning. Energizes combine a magnetic personality with an ability to create a strategic vision, build enthusiasm in others, and inspire strong performance. Nonetheless, their determination may at times blur into relentlessness that is perceive as dismissive of those who don’t think as they do.
These brief sketches only begin to suggest the richness that emerged from our research. A far more detailed analysis of each style—its particular power, its potential blind spots, and the work environments in which it may thrive or struggle—can be found in our recent Harvard Business Reviewarticle. There you will find not only a useful guide to the leadership styles of potential CEOs but also an opportunity to identify your own style, a thorough understanding of which can bring even greater depth to the succession decision.
Bonnie W. Gwin is vice chair and managing partner of Heidrick & Struggle’s board practice in North America. Anne Lim O’Brien is a partner in Heidrick & Struggles’ New York office and a member of the global Consumer Markets and CEO & Board of Directors practices.