Directors spend the bulk of their time every quarter reviewing financial results and receive updates on enterprise risk. However, very little time is spent reviewing talent development and succession planning. Compensation committee agendas and metrics tend to be dominated by executive compensation discussions, and relatively little focus is given to measuring and tracking talent development and retention across the leadership suite.
From Left: Steve Newton, Barbara Duganier, Eileen Campbell, and Doug Foshee
Panelists at a recent event hosted by NACD Texas TriCities’ Chapter, all leaders in the field of executive management and human resources (HR), discussed board-level talent oversight. Barbara Duganier, director, Buckeye Partners, served as moderator of a panel including Eileen Campbell, former vice president of human resources for Marathon Oil; Doug Foshee, former chair and CEO of El Paso Corp.; and Steve Newton, partner, Russell Reynolds Associates. The conversation confronted the fact that while the vast majority of CEOs are promoted from within, boards spend very little time on executive leadership development—and even less time on talent development beyond the chief executive.
The development of executive HR talent in an organization seems often to be left to chance. Whether it’s because the CEO and board don’t place critical importance on the position, or the HR leader views their role less as a strategic asset and more as compensation or benefits cost center, development of HR talent—and others in the executive pipeline—deserves more board-level attention.
Below are several challenges that were discussed, as well as some solutions to developing talent and value from your company’s HR leadership.
Challenge 1:People think they’re good at recognizing talent, but biases and lack of process might lead to missing out on promising people. Ask any executive to identify high potential employees, and they can always name a few promising people. However, because the ability to recognize a talented person is considered a soft skill, it doesn’t get measured or tracked on a regular basis. Interestingly, most people will identify people in their own image—just younger. Therefore, if the leadership team is not diverse, promising people may go overlooked that do not meet preconceived notions of what leadership looks like.
A Solution: Measure and track. HR leadership and the board should insist on tracking talent development-specific metrics with the same level of importance as financial metrics. Measuring also allows boards and executives to notice unconscious biases in recruitment and talent development.
Challenge 2: People are protective of their highest performers. Lateral moves and broadening development positions are imperative in order to assess and build talent across the organization. But as Campbell pointed out, managers are often reluctant to recommend their highest performers to other divisions.
A Solution: Once people are identified as high-potential employees, they should be considered “group resources” rather than belonging to a department or division. By operating across departments, leaders outside of the individual’s direct supervisors can take part in nurturing the long-term development of employees’ talents.
Challenge 3: People are reluctant to put high performers in certain roles due to a fear of failure that could result in career derailment. As a result, sometimes leaders are not “tested” outside their comfort zone, and can remain unproven until they’ve ascended to the role of CEO.
A Solution: Develop a program similar to General Electric Co.’s “popcorn stand,” a concept shared by Doug Foshee. This concept provides a future leader with significant responsibility outside his or her comfort zone in a part of the business where commercial impact on the overall organization is less relevant. In smaller organizations, these could be roles that require managing through ambiguity or necessitating cross-functional skills. In larger organizations, these could be special projects or small profit and loss businesses whose bottom line is minimal or negligible.
Challenge 4: Boards are not comfortable addressing CEO succession if they have just named a new CEO. Steve Newton remarked that given the average tenure of a CEO is four to five years, it’s never too soon to begin assessing readiness of internal candidates if you believe they have gaps between current and desired capabilities.
A Solution: Identify a wide candidate slate within an organization early in a CEO’s tenure and begin developmental plans to grow a leadership team that has both breadth and depth of understanding.
Take a moment to place yourself in this board’s shoes. The company has…
An enviable revenue stream, with approximately $120 million in sales per day and an average sales order of $2,000;
A strong balance sheet with very little debt;
A need to react to seismic shifts in customer needs;
An overweight of assets in Europe while sizable growth for your industry has been predicted in Asia; and
A market cap of roughly $2.6 billion.
What would your board do?
Would your board be comfortable acquiring a division of a competitor for $2.4 billion in cash and 2.785 million shares of your company’s common stock, representing an approximate seven percent ownership position?
In a “bet the market cap” move, Tech Data Corp. took these actions, acquiring Avnet’s Technology Solutions business in 2017. Technology Solutions partners with more than 40 of the world’s top information technology (IT) vendors to address the IT business needs of 20,000 customers in more than 80 countries, including the Asia Pacific region (a new market for Tech Data). This acquisition makes Tech Data the largest public company headquartered in Florida by revenue, and is expected to catapult the company to a position among the forthcoming 2017 Fortune 100.
David Walker, director of NACD’s Florida Chapter as well as Chico’s FAS, CoreLogic and CommVault Systems, moderated a conversation featuring Robert M. Dutkowsky, Tech Data CEO and incoming chair; Steven A. Raymund, retiring Tech Data chair; and Charles “Eddie” Adair, chair of the board’s Transaction Committee. The panelists discussed the acquisition at a recent NACD Florida Chapter event held at Tech Data headquarters in Clearwater, Florida.
The Importance of Strategic Planning
At the urging of the Tech Data board, Dutkowsky and the management team undertook a significant strategic planning process two years prior to the acquisition. Called “TDNext,” the project was an iterative one, with the board pushing back several times before a final plan was achieved. The board’s strategic planning process revealed a customer demand to accelerate growth in the “third platform.”
The third platform refers to the ability to leverage the cloud, mobility, big data, and other next-generation technologies for business, as businesses move beyond the first two platforms, mainframes, and client servers. The company recognized that Technology Solutions, which delivers technology services, software, hardware, and solutions across the data center, would be complementary to Tech Data’s diversified portfolio of offerings in moving customers to the third platform. Also, the plan’s revelation that Tech Data was overweighted in Europe was validated the day that Brexit was announced and the company’s stock dropped significantly.
M&A Experience and Unexpected Bumps
A perfect alignment occurred at Tech Data to move the acquisition forward. The management team was ready, and the balance sheet supported the deal. The highly experienced board had guided multiple acquisitions at the company and elsewhere; the culture of the board was one of trust with each other and with management; and a transaction committee comprised of three committee chairs, led by Adair, acted as a consultancy and cheerleader for management during the negotiations.
One unexpected bump did occur during the acquisition process. Rick Hamada, chief executive officer of Avnet, abruptly departed as the agreement was nearing completion. With Hamada as the primary point of contact for the deal until that time, Dutkowsky had to find common ground with a new CEO during final negotiations.
Integration, Integration, Integration
Despite the alignment of board and CEO at Tech Data, the road to a successful deal still lies ahead as Tech Data integrates Technology Solutions. According to Raymund, the board now wants to hear about execution, not strategy, for the next several months.
For his part, Dutkowsky praises the relationship he has with his board, saying he can always discuss challenges and hurdles without worrying about finger pointing. That said, when it comes to the work ahead, he adds, “Either I will hit the board’s objectives, or somebody else will…. And I’m fine with that.”
NACD Florida would like to thank the team at Tech Data for hosting the program and the panelists for sharing their experiences with attendees.
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.
The National Association of Corporate Directors (NACD) released the 2016–2017 NACD Public Company Governance Surveylate in 2016. The survey, which NACD has administered for two decades, helps directors affirm that their governance practices are effective, fit for purpose, and clearly communicated to shareholders. Our members find value in benchmarking their companies’ approach in areas such as board structure, composition, education, recruitment, and evaluation year over year, and they use the results to identify opportunities for improvement and validate board priorities for the coming year.
What did we learn about changes to public company governance in the previous year?
Although we did not see any seismic shifts in how public companies govern themselves, the data indicate that corporate boards are slowly adapting to heightened expectations about their contributions and performance.
Let me share 10 key takeaways from this report and illustrate some of the changes we have observed in our analysis.
1. Overseeing Uncertainty Economic uncertainty and business-model disruption are among the top concerns for corporate boards in 2017. Respondents also report that major industry changes, growing regulatory demands, and cyberattacks will significantly affect their companies over the next 12 months. Global economic uncertainty was selected by 60 percent of respondents as one of the five trends that will have the greatest impact on their companies over the next 12 months, most likely in light of ongoing economic turbulence that includes the fallout from Brexit, emerging markets volatility, and the protectionist trade stance of the new US administration.
2. Deeper Board Engagement with Strategy Setting Growing external uncertainty seems to accelerate the momentum for increased board leadership in strategy. For more than half of boards, active involvement in the development of strategy is a goal for major improvement over the next 12 months. Recognizing that successful strategy setting and execution in this volatile environment are challenges, boards are eager to move from the traditional review-and-approve process to more active strategy engagement earlier and on an ongoing basis, allowing directors to examine underlying assumptions, competitive dynamics, and alternatives.
3. The Tyranny of Short-Termism Maybe the most important structural barrier to board engagement in strategy setting is the intense short-term performance pressure placed on both boards and management. Seventy-five percent of respondents report that management’s focus on long-term value creation has been compromised by pressure to deliver short-term results, while 29 percent report that pressure on boards to focus on short-term performance inhibits their ability to effectively oversee long-term strategy development.
4. Risk Oversight Moves to a Higher Standard Board risk oversight is becoming a robust practice, with a large number of boards looking beyond a review of the top risks to consider the linkage between risk and strategy, the impact of incentives, and the strength of their company’s risk culture. Many boards now receive frequent reports on key components of risk management, including summaries of top risks, emerging risks, and their mitigation. According to our survey, 63 percent of them perform in-depth reviews of specific top risks. Perhaps in response to the recent corporate debacles in the auto industry and banking sector, more than 57 percent of boards now assess whether incentives used in the company’s compensation structure could inadvertently create or exacerbate risks.
5. Struggling to Meet the Cybersecurity Challenge Directors continue to wrestle with effective oversight of cyber risk. Many of them lack confidence that their companies are properly secured and acknowledge that their boards do not possess sufficient knowledge of this growing risk. Fifty-nine percent report that they find it challenging to oversee cyber risk, and only 19 percent of respondents report that their boards possess a high level of knowledge about cybersecurity. While 37 percent of respondents feel confident and 5percent feel very confident that their company is properly secured against a cyberattack, many of their boards may lack sufficient expertise or adequate information to confidently assure that cybersecurity defenses are indeed effective.
6. Managing a Growing Board Agenda The average director time commitment has stayed relatively flat at 245 hours per year, with more time spent on preparations and less time on travel compared to last year. The average number of meetings has also remained flat. Facing ever-expanding agendas, boards struggle to effectively prioritize their scarce meeting time. When asked about time allocation over the last 12 months, more than a third of respondents indicate that their boards spent too little time on director education, executive leadership development, cyber-risk oversight, board succession planning, sustainability, CEO succession, and information technology oversight.
7. Information Rich, Insight Poor Boards receive much information from management but express concerns about the quality of that information. While directors noted an average increase of 12 hours for document review in preparation for meetings, roughly 50 percent of respondents noted a glaring need for improvement in the quality of information provided by management.
8. Increased Shareholder Engagement Boards are increasing their shareholder engagement, but their level of preparedness to address activist challenges is uneven. This year, 48 percent of respondents indicate that a representative of their board held a meeting with institutional investors over the past 12 months, compared to 41 percent in 2015. Only 25 percent of respondents have developed a written activist response plan, which may be a critical tool to effectively address a forceful challenge from an activist.
9. The Increasing Reliance On Search Firms for Director Recruitment Boards no longer primarily rely on personal networks to recruit new directors, signaling increased professionalism and a desire to tap into a wider network of candidates. For the first time since NACD began to survey its members on this issue, search firms were the leading source boards used to identify their most recently recruited director.
10. Only a Minority of Boards Conduct Individual Director Evaluations Only 31 percent of respondents report that improving the board evaluation process is an important or very important priority for their boards in the next 12 months. In fact, just 41 percent of boards now use individual board evaluations, and an even smaller number use the results of these evaluations to make decisions about replacing directors.