May 20, 2020
May 20, 2020
Long viewed as a point of arrival rather than a point of entry, a board seat is not what it used to be. Gone should be the days when renomination is assumed as a given. A significant minority (46%) of directors believe that members of their boards—including board leaders, board chairs, lead directors, and committee chairs—should be replaced, according to a November 2019 NACD data snapshot. That statistic is a sign of an insufficient process that has failed to keep up with the increasing expectations of board performance by all stakeholders, both internal and external; indeed, 85 percent of directors agree that performance expectations for all board members are higher than three years ago. As one director noted during a recent meeting of the NACD Nominating and Governance Committee Chair Advisory Council, “We have a hard time with appropriate turnover because we as a society have always considered board work as the ultimate demonstration of accomplishment.” The director went on to add, however, that “you have to be ready to do the hard work of governance.”
The current pandemic has increased performance expectations of board members and boards need to think clearly and critically about the skillset of their members, including themselves, and if those skills align with what the company needs in the COVID-19 environment and beyond.
Investors and proxy advisors have historically created policies to help encourage regular refreshment of the board to ensure skills properly align with business needs. Boards, in turn, have created tenure-limiting or refreshment mechanisms, such as age limits and director term restrictions. These measures, however, belie the cultural and emotional difficulty of removing a fellow director. They also deflect the responsibility of the individual director to critically evaluate their own professional and personal goals, relying instead on process over substance. Some of the challenge is self-inflicted, too. While most boards have a robust onboarding process, few have similar discipline around directors leaving the board or off-boarding—voluntarily or for performance reasons.
To change the dynamic around the off-boarding process and support directors who choose to step down, boards can use these key points of guidance for success:
Directors should view appointment to the board as the start of a new career rather than a final destination.
“We have conversations that are a part of onboarding; we say it is not a lifelong appointment. Because the director dynamic has changed, we’re not all buddies, but it makes it have less stigma to leave a board. Create an onboarding plan right up front that includes why you were selected and how you fit in, here is what we expect of you and what you can expect of us,” one director advised. “Make it clear at the top of the page: Being a director is not a lifelong appointment.”
Building from the onboarding process, the nominating and governance committee chair or lead director should have regular conversations with board members about their performance and how they are feeling about their board service and that of the entire board—outside of the formal evaluation process.
“We bake in feedback twice a year. Typically, we have our lead director or sometimes the nominating and governance chair… give feedback and ask directors how they’re feeling. This creates the expectation that a review will happen twice a year and makes feedback a normal process,” said another director.
Outside of informal feedback, evaluations can be a tool that helps directors to recognize board members who may be falling behind on expectations—evaluations may even help a board member to self-identify as a director whose own ability to contribute to the board is waning.
According to one committee chair, “We have an internal evaluation system. The way we are trying to help [directors] save face is [by] trying to encourage rotation off the board and getting new perspectives. In time, we will refresh the whole board. Now, the truth is the people we are off-boarding are the least impactful and their backgrounds are the least relevant.”
The nominating and governance committee chair should work in conjunction with the lead director to conduct the difficult conversation about off-boarding specific directors.
“We had someone who was showing signs of dementia,” a director participant said. The nominating and governance committee chair “approached [the board member’s] spouse and got them to seek medical advice. It took three months, and at the end, we said we can’t in good conscience have you continue on the board. It was a very difficult decision and process, but at the end of the day, it was in the best interest of the company.”
Directors who have been with the company for a long period of time may have valuable insights to share with current and new directors through a director emeritus program.
“For directors who have a lot of experience with the company, you can bring them in to do a half day Q&A and dinner with the existing board,” a committee chair recommended. “A lot of what these directors want is to have an emotional relationship with the company.”
At the end of the day, a board is only as good as the directors serving on it. While all accomplished professionals serve on the board for a reason, business strategy and needs change, and so should the board. Beyond tools to address an underperforming director, boards should also think proactively about the culture of service to the company that they want to create among their directors. When handled correctly, opting to step off a board will not be seen as a failure or as something signaling the board’s concern, but will rather be seen as an act of leadership calling forth respect. As one director thoughtfully noted, “The concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.”
The above is a brief excerpt from NACD’s Considerations for Effective Off-Boarding.
Note: The Advisory Council meeting was held using the Chatham House Rule, under which participants’ quotes are not attributed to individuals or their organizations.
COVID-19. Uncertainty. Fear. Recession. Fiduciary Duties.
It’s essential that directors know what to focus on and when.
NACD: Tools and resources to help guide you in unpredictable times.