Category: Board Composition

It’s Time to Get Uncomfortable in the Boardroom

Published by

Kimberly Simpson

Two NACD panels recently tackled issues surrounding sexual harassment in the corporate setting, and how directors should act and react to issues that could have profoundly negative impacts on company reputation and workforce satisfaction.

Key takeaways for directors ranged from careful CEO hiring to board composition. The following concepts could be readily applied to your own board’s conversation about overseeing this risk.

  • Aggregate Data to Spot Problems Before They Happen. Given that the board is ultimately responsible for overseeing company culture (including a culture that tolerates sexual harassment), the board should work to mitigate risks rather than taking up sexual harassment issues once a problem has surfaced, according to Michael Aiello, chair of the corporate department at Weil, Gostshal & Manges LLP. Lucy Fato, executive vice president and general counsel for American International Group (AIG), stated that boards should aggregate information to get the full picture, including:
    • Internal audit findings related to culture;
    • Employee relations/human resources reporting, including hiring trends, turnover statistics, and reports from exit interviews;
    • Hotline reporting, including whether there are too many or too few complaints; and
    • Company legal settlements and insurance payouts.
      Board members should also probe whether the company’s investigative processes are fair and thorough.
  • Go the Extra Mile in CEO Hiring. In light of the board’s primary role of hiring and firing the CEO, along with the fact that fallout from CEO misconduct can significantly impact shareholder value, a board should take steps to ensure that its candidate of choice does not have a history of sexual misconduct or even tolerance for a culture in which harassment is an open secret. According to Sabina Menschel, president and chief operating officer at Nardello & Co., to really know who you are hiring into the corner office, conduct an investigation that includes public records, social media, and supplemented standard reference checks. With regard to CEO hiring, Fato stressed, “Ethics, integrity, and how you carry yourself as a public figure should be a factor in whether you can lead the brand.”
  • Risk Starts at the Top. The CEO and senior management are not alone in the potential spotlight of the #MeToo movement. Board members also must be vetted fully, and once in place, board members should receive code of conduct training, just as employees do, said Fato. In addition, the board should pick one corporate policy per year on which to do a deep dive as part of its oversight duties. Tabletop crisis preparedness exercises also should be conducted.
  • Superstar? Irrelevant. A board may face a difficult choice if a superstar CEO is found to have violated the company’s code of conduct, fearing that a dismissal could impact short-term shareholder value. According to Brenda Gaines, director, Tenet Healthcare, Southern Co. Gas, and NACD, superstar status is always irrelevant when investigating misconduct. She suggests that the board should take action to remove an offending CEO and then have a separate conversation about revenue and valuation implications. She added that the company must be clear about its culture and key principles, and should have zero tolerance for misconduct, applied to everyone in the company equally. “Board members have to keep each other honest,” she said.
  • Expand the Company’s Enterprise Risk Management (ERM) Framework. Sexual harassment should be a part of each company’s ERM framework, given that fallout from a misstep can be quite severe, emphasized Fato. Also, when doing employee surveys, ask specifically about harassment issues. To do so demonstrates that the company cares about these issues, said Menschel. Also, in terms of monitoring potential issues with long-tenured employees or even board members, consider updating background checks at regular intervals, stressed Fato.
  • Diverse Boards Matter. The #MeToo movement will have an impact on the boardroom, as well as on investor relations, according to Renee Glover, director, Fannie Mae, Enterprise Community Partners, and NACD Atlanta. Indeed, large shareholders are asking about diversity on the board, and they may request sexual harassment policies and pay equity measures. Gaines emphasized the clear-cut nature of the need for more diverse boards. “Diversity is good business,” she said, “and we are nowhere near where we should be. We need more gender diversity and more people of color on boards. Don’t miss this in the search for skill sets.”
  • Find an Ally. Rochelle Campbell, manager for board recruitment services at NACD, says that she encourages boards to have at least two diverse members on the board, as such boards tend to be more successful. For women and people of color who are new to a board, they can play an important role in discussions about sexual harassment and equal pay for equal work. When asked for practical advice for new board members, Gaines shared best-practice approaches to oversight of misconduct:
    • Get the facts right.
    • Take the emotion away.
    • Look for an ally on the board.
    • Be persistent.

Glover summed up the issue: “We can do better. And when we do, we can get on with realizing the deeper value that a diverse board can deliver.”

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

What to Look for in an Effective Audit Committee Chair

Published by

Paula Loop

The entire board relies on the hard work of the audit committee to meet its overall objectives. But audit committees today are faced with the heavy burden of regulatory mandates and growing investor expectations. Workloads are increasing, and they have to oversee more complex areas. Many audit committees are asking whether they have the right approach to meet the demands.

One way to ensure the effectiveness of the audit committee is to have a strong chair. Good leadership and effectiveness go hand in hand, and a strong chair can get the most out of the committee members. By choosing a strong leader for this essential role, your entire board will be able to have greater confidence that the audit committee is on top of the issues.

So what makes a strong audit committee chair? Audit committee chairs need to have experience, healthy skepticism, integrity, and strong communication skills. And to be a truly effective, he or she has to take the time to really work on the committee agenda and make sure meetings run well. They also need to be able to effectively coordinate with other board committees, such as the risk and compensation committees.

Here are six other attributes that I have observed in great audit committee chairs:

  • Highly experienced: Strong audit committee chairs need to have a good understanding of the business, its risks, and controls. They also know what topics to elevate to the full board, and when to do so.
  • Professionally skeptical: They’re willing to provide an independent point of view and are intellectually curious. They will look for additional information when they aren’t happy with the answers they get frommanagementand
  • Possesses integrity and confidence: They promote a strong “tone at the top” for the company and for the committee. They also need to ensure that all elements of the charter are being addressed.
  • Organized and proactive: They’re able to prioritize the most important items on the agenda. They’re good discussion facilitators and know when to cut off low-value discussions.
  • Strong communication and interpersonal skills: They provide clear updates of issues to the full board. They’re not afraid to ask difficult questions and have uncomfortable conversations with members of management, service providers, and even other committee members.
  • Willing to devote the time and energy: Chairing the audit committee requires a big time commitment—agendas are denser, filings are more voluminous, and compliance is more time-consuming. So the chair has to be ready, willing, and able to dedicate the time to the job. Strong chairs take the time to develop the agenda and effectively execute meetings. They also make themselves available to management and other board members. The time commitment of the audit committee chair goes well beyond just the meeting time dedicated to that committee, not to mention meetings of the full board.

Strong audit committee chairs understand that an effective audit committee means more than simply meeting stock exchange composition requirements. They recognize the importance of having a diverse committee made up of members with the right experience, expertise, and both hard and soft skills. They keep the committee refreshed and use the assessment process to ensure that all committee members are functioning effectively.

Having a strong audit committee chair at the helm can help ensure that the audit committee not only keeps up but excels.

For more on this topic, read the latest in our Audit Committee Excellence Series, Audit committee effectiveness: practical tips for the chair. You can also find more audit committee resources on our website.

Today’s Board Member: Activist, Strategist, Counselor

Published by

Sanjay Gupta

More than ever, organization leaders need committed counselors—individuals who will push them to greater heights and encourage them to pursue transformation. They need objective individuals who can advise, envision, and strategize for long-term success.

To find these advisors, companies are looking to their boards. Yet at the same time, the role of the board is changing dramatically.

In eras past, leaders looked to their boards to reflect and support their efforts. More recently, boards have been called upon to have more active oversight of the wave of risk and regulatory challenges. And, today’s board is being asked for still more. Navigating through a period of constant and fast-moving change, corporate leaders need a cast of engaged, insightful, curious supporters—people who are willing to press for innovation and contribute creative, strategic thinking. It is demanding new territory for board members. And it calls for a demanding new process to identify and engage the right individuals for the job.

To understand this process better, we conducted in-depth interviews with a dozen directors—all high profile current and former executives whose board experience covers more than 40 publicly traded companies across a wide range of industries. What we found was a great deal of change in board needs—and a tremendous difficulty in articulating that change. We found that companies want and need directors with a mix of activist and strategist skills. At the same time, they have been slow to realize that what they want is a new breed of director—and that finding these new individuals will require not just a change in attitude but also a change in tactics. Boards must change their thinking now if they want any hope of being ready for the future.

What Has Changed

What we learned was that the expectations of the new board member are not so much different as they are expanded. Boards need more from their members.

In the past, ideal competencies of a board member might have been insight, intellectual curiosity, and strategic advisory skills. Yet in our interviews, directors said they need new members with all these skills—plus. They need insights plus an abstracted way of thinking, curiosity plus the ability to adapt, the ability to advise plus engage.

This is not a job that can be filled by someone seeking to boost a resume. This calls for someone who sees board membership as an opportunity to learn and grow as a person. It calls for individuals with the time and desire to invest in the board and make the business successful.

Because of the expanded demands, the search for the right board member must expand as well. Instead of reviewing the usual candidates—CEOs (former or current) with prior board experience, often from the same industry—today the search must span a wider range of experience, with more diversity in geography, job function, and company status. And while a new board member must still be compatible with the existing roster, the “fit” must be considered in the context of change making. New members will be judged on what they can bring to the board—not just to help with current problems, but to help the company think about what’s next.

“A decade ago, there was more a focus on board collegiality — everybody getting along, feeling this was such a great board,” says Phil Martens, who has served on boards such as Graphic Packaging Holding, Trinseo SA, and Plexus Corp. “Today, what’s required is very different. The whole dynamic has changed. What’s required now is all about what you bring — your confidence to speak up and provide input, your point of view.”

The New Board Member

As boards wrestle with these new demands, and a profile for the new, ideal board member is emerging:

  • Recently retired CEO: Our research found there is a “sweet spot” in the experience level of the ideal board member. The individual should not be active in his or her own company. That intense responsibility leaves them too little time to devote to this new, more demanding board role. On the other hand, an individual too far removed from active leadership may be out of touch with the fast-changing business world. Therefore: look for recently retired or about-to-retire candidates. Zero to five years out from their leadership position is ideal for many directors.
  • Originate board candidates from both in and outside the industry circle. Boards should have a mix of backgrounds with some directors from the company’s traditional orbit and some from other industries and geographies.
  • Active counselor mentality: Rather than solely focused on containing risk, board members should be focused on helping to get the most out of the business.

Edward D. Breen, courtesy DowDupont

Some experienced directors already take this new process to heart. Edward D. Breen is CEO of DowDuPont and has over two decades of board experience including prior roles as the chair of Tyco International and E.I. DuPont de Nemours & Co. and currently as the lead independent director of Comcast Corp. His watchword is “options.”

“The question I bring up in meetings is: What could you do to create long-term shareholder value and how to create options around this?” he says. This is a key role of the director, says Breen—to ensure the CEO and executive team are thinking about a range of possible futures and paths forward. If that’s not coming from the CEO, then the board has to push the subject.

There are many reasons why boards have not pressed CEOs in this manner in the past, he says. Some boards were just too nice to the CEOs. In other cases, the CEO may have been insecure or arrogant and discouraged that sort of input. But a CEO today needs directors who think like activists. “The board needs to be thinking ahead,” says Breen.

One director, who served on the board of a century-old manufacturer, has seen this forward-thinking board help executives make necessary changes. When he first came to the board, the director recalls management was stuck in outdated patterns, clinging to old product lines and markets. But the board was able to take a more forward-thinking perspective. He and other board members pushed management to be more aggressive in M&A activity and to prune lower margin product lines. Today, the company sports a wide array of new products and a renewed focus on innovation.

Directors can also provide support for companies wrestling with regulatory demands. One director joined the board of a financial services firm soon after the financial crisis of 2008. While oversight and regulatory responsibilities were still present, the director says, the board helped the company to see and pursue a broader strategy. That played out, for example, in the company’s acquisition of a regional competitor. The board was able to provide advice, support, and counsel during a time of change. This is the way the new and improved board member should approach the job, the director says.

First Steps

This new, active, counselor-director is not a pipe dream; it is possible to find these individuals. But it will require a new set of board search tactics:

  • A more thorough assessment, interview, and onboarding process led by the board or search partner. This differs from traditional processes, which may have been less detailed and demanding.
  • An increased willingness and openness of the board and the CEO to look at potential board members outside of the traditional board member profile, reaching out to candidates in different industries and different geographies.
  • A commitment to develop the existing board to adapt to this new profile of board director.
  • There is no one-size-fits-all process for boards today, but the overall goal is universal: Like the fast-moving business world around it, the search for new directors must also grow and change to meet new demands.

Boards are recognizing their need for a more nuanced profile of directors. They are acknowledging that the traditional insightful, curious, advisor who has been a CEO is no longer enough. What they really need requires a deeper level of insight into the individual candidate, a greater level of assessment of potential directors, and more time invested into the selection.

Done correctly, the results will make a significant impact on the performance of the company. The board will be working as an internal activist force to think about the future of the business and push shareholder value. It is a level of engaged support and advice no organization can afford to be without.

 

Sanjay Gupta is global industrial practice group leader at Egon Zehnder, an executive recruitment firm.