The stakes are higher than ever before. Public expectations are greater than ever before. It is an immensely challenging business environment in which boards must now play a decisively stronger role to ensure the highest standards of corporate governance.
To that end, boards need to embark on a continuous process of self-assessment. We cannot do better tomorrow until we ask ourselves an important question:How are we doing today? Only where self-reflection is part of the board’s DNA can it provide the strategic guidance that defines its mission.
While many large and small questions drive self-reflection, three essential questions begin the process.
Are we independent?
There are often fundamental warning signs that a board is no longer thinking independently and that self-interest may be clouding its judgment. One is tenure. How long has each member served? Is it possible that, as a result of many years of service, some members have become too narrow in their perspective or that their own personal investment in the company might create a conflict when big decisions need to be made?
“It is generally agreed that director perspectives on a particular company can become stale and even compromised after many years of continued service,” according to the Bridging Board Gaps report by the Columbia Business School and the University of Delaware. “It may be difficult to remain objective about a company one has served for a long time.”
In other instances, circumstance simply makes independent judgment impossible. If a family business goes public, for example, family members cannot function as independent-thinking board members.
The self-reflection that a board needs to assess its own independence has to be a tough-minded, conscientious process. Hard questions need to be asked. But the board that has the courage to ask itself the hard questions is all the more likely to have the courage to act decisively to address critical problems in the future.
Do we have chemistry?
There has to be some real chemistry in the boardroom if discussions are to be open and free-wheeling. Board members have to trust each other. They have to feel free to float new ideas and challenge others. They don’t have to be best friends, but board members need a sense of camaraderie to assure a creative group dynamic.
An attentive, enthusiastic and engaged board means more efficient decision-making. Are your board members attentive, engaged and active? Are there certain directors who are not? Is there some adjustment, some way to change the chemistry to ignite a higher level of enthusiasm?
Do we have the right team?
Having the right team means building a well-constructed board, with members from a variety of backgrounds who are ready to meet the challenges ahead. Having the right team means a broad range of skills, talents and perspectives that can feed the company’s strategy in multiple contexts. It is a competitive necessity, reflecting varied work experiences, personal backgrounds and educational training.
Really think about your board composition. Do the directors around the table offer a diverse mix of industry experience? Do you have expertise across various disciplines such as operations, marketing and finance? Watch out for too much expertise in any one industry. Whatever the company’s business, independent input is essential if the board is to advise on the multiple opportunities and problems that confront management.
In fact, board members are often all the more valuable when they can see the company as other stakeholders see it.
Self-reflection is a never-ending process. Questions about your independence, chemistry and diversity must be constantly revisited and broadened to ensure optimal service.
Self-reflection is also a challenging initiative. Performing an objective, holistic evaluation of your board may require the engagement of independent professionals who stand ready to provide the benefits of their significant experience and intellectual capital.
Sometimes others need to see you before you can really see yourself.
“There is nothing new under the sun,” complained the author of Ecclesiastes. This old lament comes to mind when I hear about “new” solutions in governance. I can usually find a precedent near at hand—whether it is something we have done here at NACD within the director community, or else a solution we’ve seen coming from other governance groups such as managers, shareholders, and professionals.
But I have to say that Bridging Board Gaps:Report of the Study Group on Corporate Boards, released in late April, contains some new perspectives and some new thinking.
A New Gathering
The Study Group on Corporate Boards is new in the breadth of its representation across U.S. public company governance and, frankly, the celebrity status of its members. At NACD we take pride in our Blue Ribbon Commission reports, which bring together a diverse group of participants in governance. The Study Group assembled an equally strong group with a wide range of backgrounds and affiliations.
Study Group Co-Chair Charles Elson
Co-Chairs Charles Elson, University of Delaware; Glenn Hubbard, Columbia Business School; and Vice-Chair Frank Zarb, Hellman and Friedman, currently serve on a total of seven major corporate boards. The Study Group also includes other prominent corporate directors, plus an array of retired chief executives, senior managers, shareholders and professional advisors of note, and also two retired jurists—Chief Justice E. Norman Veasey, retired from the Delaware Supreme Court, and Chancellor William T. Allen, retired from the Delaware Court of Chancery.
Also serving in the Study Group is Arthur Levitt, former chairman of the Securities and Exchange Commission; former Treasury Department Secretary Paul O’Neill; former general counsel of the Securities and Exchange Commission, David Becker; and a representative of organized labor, Damon Silvers, policy director and special counsel of the AFL-CIO. The group even includes Jon Hanson, chairman emeritus of the National Football Foundation and a director of the
Study Group Co-Chair Glenn Hubbard
company that owns the New York Yankees.
So exactly what did the Study Group say that was new? The main message of their report is twofold:
1. There are natural limits to what boards (as part-time nonmanagers), by definition, can do, and we all need to face those limits and adapt to them. Previous reports leave this difficult truth unaddressed.
2. Even given these limits, some boards are falling short of their potential.
The Study Group identified seven gaps: gaps in purpose, culture, leadership, information, advice, debate, and self-renewal. Every member made a significant contribution to the discussion. My own area of focus was the issue of information asymmetry, which I have addressed in a number of NACD publications. Management will always know more than the board about the company; that gap is inevitable, but it can be narrowed.
In my view, however, the truly new message in the report lies in the last three areas: advice, debate, and self-renewal. Boards are not investing enough in advisors; their fear of treading on management’s toes leads to serious gaps in knowledge. Also, boards are too deferential in their discussions. Rigorous debate is required and there is also a place for outright dissent (votes need not always be, as they usually are, unanimous). And finally, the third message that to me seems quite new is the suggestion that although obviously evaluation is the best way to refresh board membership, boards should consider term limits—a backstop that fewer than one in ten corporate boards have implemented, according to NACD research.
A New Start
Although as a lifelong auditor, I am constitutionally incapable of being star struck, I must say it was an honor to serve with this distinguished group. Indeed, I can’t imagine any American man or woman of business being uninterested in what this unique and high-caliber team has to say. I commend this report to the attention of every corporate director, and to all who care about free enterprise in America and in our global economy.
Get the Report and Discuss Its Recommendations with Jon Hanson, Charles Elson, and Ken Daly
Ken Daly and Charles Elson will be joined by fellow Study Group member Jon Hanson to discuss the recommendations in their report at the Master Class NACD will conduct in Wilmington, DE, June 7- 8, 2011. The Master Class is open to experienced directors only, and is best suited to lead directors and committee chairs. Check out the full agenda here. To register for the Master Class, where you will receive a complimentary copy of the Study Group report, click here.