August 28, 2018
August 28, 2018
The demands on the board’s time and agenda continue to mount as a host of critical issues—from technology and business model disruption to investor scrutiny, and from regulatory and political uncertainty to geopolitical risk—collide and reshape the business landscape.
As the business and risk environment becomes more complex, how are lead directors helping their boards add value and raise their game? What are their key areas of focus?
Discussing these questions with a number of lead directors in the past several years, I’ve heard recurring themes: the importance of the lead director’s role in setting the board agenda, the lead director’s relationship with the CEO, CEO/leadership succession, and shareholder communications. But virtually all the lead directors emphasized the importance of two additional topics that need to be top-of-mind: board composition and diversity, and enhancing board operations and oversight processes.
Board composition and diversity
Institutional investors continue to focus on board composition and diversity, expressing concern about low director turnover and whether board directors can guide the company and its strategy in the future. As Vanguard Chair and CEO William McNabb wrote in a 2017 letter to public company directors, the board “is one of a company’s most critical strategic assets,” and it should be “a high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.”
Developing and maintaining a high-performing board requires close coordination between the lead director and the nominating and governance committee chair—whose responsibilities for board composition may be similar or perhaps overlap. Determining the company’s current and future needs is the starting point for board composition, but a broad range of related issues require leadership and coordination—including succession planning, director recruitment, age and term limits, diversity, board and individual director evaluations, removal of underperforming directors, and board refreshment, as well as disclosures on these issues. As one governance observer has noted, the quality of board governance begins with board composition.
Enhancing board operations and oversight processes
Operations and oversight processes are also top-of-mind for lead directors today. This includes coordination across committees to focus on the issues most critical to the company’s success and long-term value creation, such as strategy, innovation, disruption and strategic risks, capital allocation, performance, leadership, and talent.
To devote more time to these issues while also remaining focused on compliance, operations, and so-called “rear-view mirror items,” many boards have significantly increased their time commitment in recent years. But that alone is insufficient, and lead directors and nominating and governance committee chairs are now focused on how they can improve board operations and oversight processes—and the nature of their engagement with management teams and among directors—to devote more time to these critical issues.
The steps lead directors are taking include:
In short, the important, and difficult, question lead directors are asking today is whether management and the board have the right governance structure and processes in place to drive critical business activities—to manage risk and calibrate strategy in a coordinated way.