Category: Board Composition

How Does Your Board Compare?

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What keeps directors up at night?

  • How do our board practices compare to our competitors?
  • What are boards in our peer group doing to create sustainable, competitive advantage?
  • How are companies in our industry and sector handling Dodd-Frank?
  • Is our director compensation package too lavish?
  • Do we have an adequate succession plan in place to lead our organization through a sudden change in leadership?
  • Have we adopted the kind of internal codes that set the right tone at the top?
  • Is our board’s composition optimal, and do we have the right board leadership structure in place?

These are the kind of questions that can keep an honest and committed corporate director up at night. In this age of heightened public scrutiny, the answers to these questions can mean the difference between success and failure—and between acclaim and scorn.

Great news:  NACD recently introduced one of the world’s only customizable, fact-based and data-driven board benchmarking analysis. “Every board, including mine, should conduct an annual board benchmarking analysis to optimize their board practices,” said Rich Daly, CEO of Broadridge Financial Services, Inc.

NACD offers a comprehensive assessment that allows corporate boards to determine how they stack up against other boards and gives them actionable steps to improve any shortcomings. The NACD Custom Board Benchmarking Report provides data on nearly 70 board practices, including board priorities, board size, use of independent consultants, ethics codes, executive compensation metrics, CEO succession plans and more. The data is broken down for twenty-four industries. Depending on a board’s interests, the data can be analyzed by a number of criteria, including industry, company type (public and private), listing exchange and market cap.

It is a one-of-a-kind tool that helps boards figure out what they are doing right and where they can make improvements. A company can determine, for example, if its failure to hire an independent consultant for a given task places it outside of normal industry practices. That valuable bit of information can help directors avoid trouble down the road.

The NACD Custom Board Benchmarking Report enables directors to strengthen their organizations by identifying new areas of interest and cutting-edge practices among their peers at other companies and in other industries. This service also helps directors build robust boards that can withstand the vicissitudes of the marketplace—boards that can establish a clear vision and mission to move their businesses far into the future.

By eliminating the trial and error in the boardroom, this customized reporting service helps corporate directors to advance exemplary board leadership.

NACD Insight & Analysis: When Is the Board Too Big?

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With increased scrutiny of corporate boards, it is only logical that attention be paid to one of the basics of boardroom composition—board size. Many high profile companies have made news recently for altering the size of their boards to include more directors with operational experience. Most notably, Japanese automakers Toyota and Honda have announced plans to shrink their boards from 27 to 17 members and 20 to 12 members, respectively. Both Morgan Stanley and Goldman Sachs added three new members to their boards, while Goldman Sachs concurrently shrunk its board to 11 members. Taking into account that the average board is 8.3 members, according to the 2010 NACD Public Company Governance Survey, what is the optimal board size?

There are many advantages to having a larger board. More directors can bring a greater wealth of diverse experiences to the boardroom, as well as a greater network of connections and resources. A larger amount of available directors can also allow for the board to staff committees without overlaps. However, a board that is too large can become unwieldy and ineffective. According to a post from Professor Bainbridge, large boards tend to suffer from fragmentation—reducing their ability to properly oversee management and efficiently make decisions. Bainbridge also notes a 1913 psychological study by Kravitz and Martin, which found that in larger groups the ability to measure individual productivity decreases. Therefore, “social loafing” becomes more acceptable, creating wallflower directors who do not pull their weight.

The same principles listed above apply to smaller boards. While fewer directors can bring less diversity of experiences and resources to the table, it is easier for a smaller group to communicate. Smaller boards offer fewer opportunities for directors to sit on the sidelines, encouraging all members to actively participate in decisions. The increased cohesion and communication, though, often leads to a higher possibility of groupthink. Directors on smaller boards should be especially aware of their responsibility to be constructive skeptics in boardroom decisions.

However, directors should understand that one size does not fit all with respect to optimal board size. Depending on many factors, including a company’s size, industry, strategic needs and stage in the business cycle, the amount of directors needed fluctuates. Over the years, our annual governance survey has found that by revenue, smaller companies tend to have smaller boards. Nonprofit companies also tend to have more directors—in 2009, the average nonprofit board had 19.8 trustees[1].

[1] According to the 2009 NACD Nonprofit Company Governance Survey

Why I Welcome Evaluations

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Urmi Ashar, President and CEO of NACD Three Rivers Chapter, possesses insights derived from medicine, gifted education and business. She serves as 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