The business environment is rapidly and fundamentally changing—and directors are expected to keep pace. In response to this state of extreme volatility, the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board explores how boards can position themselves to capably usher their companies into the future by focusing on continuous improvement. At the 2016 NACD Global Board Leaders’ Summit, Commission co-chairs Bonnie Hill, director of California Water Service Group and former Home Depot lead director, and Richard H. Koppes, director of NACD and the Investor Responsibility Research Center Institute and former deputy executive officer of CalPERS, discussed the Commission’s key findings with NACD Director of Strategic Content Development Robyn Bew.
Members of this year’s Blue Ribbon Commission came to a consensus early in their discussions that “board refreshment”—an increasingly popular term in the corporate governance community as various stakeholders turn their attention to board composition and director turnover—is a limiting, and even simplistic, concept. Instead, directors need to figure out how they can make themselves strategic assets to the companies they serve by instilling a continuous-improvement ethos into the culture of the boardroom. Over the course of the conversation, Hill and Koppes suggested that directors consider the composition and functionality of the boards in the following ways:
How do directors’ skills need to align with company strategy? Businesses evolve rapidly, and boards need to respond in kind. Here, directors need to consider how they are keeping abreast of the issues facing their organizations and whether the skills that initially garnered them a seat at the boardroom table still align with the current and future direction of the company. Sometimes this means deciding to leave the board.
Internally, new-director onboarding practices provide an opportunity to communicate about the board’s culture and governance principles, including reinforcing the idea that board service is not a lifetime appointment. Externally, boards can communicate to stakeholders that a director’s departure was in keeping with the board’s governance practices and does not reflect poor service on the director’s part.
What are the board’s processes for continuous improvement? Maintain a pipeline of boardroom talent and have a multi-year succession plan in place so that open board seats can be filled with highly capable candidates. These plans should include designating successors for committee chairs and the independent chair or lead director. For sitting directors, continuing education programs can help to refine or amplify skill sets. Evaluations, including at the individual-director level, are essential tools for continuous improvement when they are conducted regularly and periodically involve an independent third party. They help ensure that the board’s processes are functioning well, enable directors to be more nimble in their own self-improvement, and ultimately fine-tune the board’s strategic contribution to the organization.
How do stakeholder perspectives affect the board? Shareholders—especially institutional investors—are paying closer attention to issues surrounding board composition. Considering that institutional investors read thousands of proxies each year, the onus is on individual boards to effectively communicate how each director makes valuable contributions. More and more leading boards are going beyond the basic biographical information required by the SEC and listing exchanges and providing additional context. In addition, if there is any concern that a director slate could be a point of concern for investors, boards should reach out to those constituencies well in advance of proxy season to explain their position. Should investor dissatisfaction with the board lead to an activist engagement, panelists agreed that, while sometimes both parties ultimately agree to disagree, the board needs to hear out that point of view and seriously consider if their position might add value.
For detailed recommendations on how to enhance your board’s continuous-improvement processes in seven key areas, download the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board. In addition, read this article from the current issue of NACD Directorship magazine for more insights from Bonnie Hill and Richard Koppes on the creation of the report.
The final session of the Diversity Symposium at NACD’s 2015 Global Board Leaders’ Summit focused on the Report of the NACD Blue Ribbon Commission on the Diverse Board and how directors can implement recommendations from that report in their own boardrooms. Kapila Kapur Anand, a partner at KPMG LLP and the firm’s national partner-in-charge of Public Policy Business Initiatives, led the discussion with panelists that included Anthony K. Anderson, retired Ernst & Young LLP vice chair, executive board member, and Midwest and Pacific Southwest managing partner; The Hon. Cari M. Dominguez, a director at ManpowerGroup, Triple-S Management, Calvert SAGE Fund, and NACD; and Karen B. Greenbaum, president and CEO of the Association of Executive Search Consultants.
As the Blue Ribbon Commission that produced this groundbreaking 2012 report observed:
[A] company’s ability to remain competitive will rely on its understanding of global markets, changing demographics, and customer expectations. Diversity is a business imperative, not just a social issue. The new business landscape will require boards to cast a wider net to find the very best talent available. As a natural corollary, the board’s mix of gender, ethnicity, and experiences will likely increase.
Dominguez noted that structural, social, and habitual barriers may prevent boards from becoming more diverse, and she offered this key advice: Don’t rely solely on the company’s CEO to lead this conversation. It’s the responsibility of every director to move the discussion forward.
So why aren’t boards as diverse as they could be? Greenbaum addressed this question by referring to data she collected via a survey of both boards and search firms. Her findings surfaced five issues:
Candidate pool. Boards contended that it was difficult to find diverse candidates. Horn countered this claim by asserting that a failure to find qualified candidates is more a function of boards not searching correctly. Boards should demand that search firms provide a diverse list of candidates. Conversely, search firms take their cue from boards and expect them to be vocal about the importance of having a diverse candidate pool.
Term limits. A lack of term limits results in a situation in which boards cannot be routinely refreshed with new directors. If term limits are restricting opportunities to bring on new talent, consider expanding the board.
Experience: Boards resist adding members who are not current CEOs or CFOs. Boards need to be open to first-timers and should develop strong mentoring programs to bring newly minted directors into the fold.
Succession planning: Build a pipeline of diverse talent in your own company so that these leaders can serve not only in your boardroom but also in those of other organizations.
Status quo. Boards can become complacent about how they operate, especially when they feel no pressure from shareholders or other stakeholders to change.
“All of us must be conscious that this is a leadership issue,” Anderson said. “If the leadership of a company doesn’t believe in diversity initiatives, the ability to make much happen is grossly inhibited.” Companies with a diversity strategy that touches on leadership, employment, and procurement are reinforcing the importance of diversity as part of company culture, Anderson added..
Creating change takes time, effort, and formal processes. Putting diversity on the agenda may require a shift in thinking and habits, but, as all of the panelists agreed, diversity is a business imperative that will only grow in importance over the coming years.
Leading boards increasingly take an approach to board succession that goes beyond traditional placement and even planning. They don’t want to be caught flatfooted in the event of unexpected departures of directors, multiple retirements, strategic evolution that calls for new skills on the board, or the sudden appearance of an activist investor demanding seats at the table.
Bonnie W. Gwin
Theodore L. Dysart
At its most advanced, this approach includes establishing relationships with potential candidates even when foreseeable board vacancies lie far in the future. At a minimum, it involves identifying robust candidates across the various sets of competencies the board might need down the road, and then keeping tabs on them, looking for opportunities to get to know these individuals, and learning how they might one day fit into the company’s future. Boards that employ this approach:
Manage foreseeable vacancies and skill-sets as a portfolio. Through detailed assessment, boards can identify critical gaps in their committees or expertise, and zero in on the skills they will need. They can then develop a competency index that enables them to manage succession planning holistically, not as a series of one-offs.
Continually identify a broader range of potential candidates to address expected (and unexpected) vacancies. The board of a leading consumer company, for example, maintains what they call an “evergreen book” of 40–50 potential candidates they keep their eye on from year to year. Similarly, the board of a leading financial services company, facing four vacancies in the next five years, conducts periodic “lit searches” and at any one time is aware of a dozen or so potential candidates.
Engage potential candidates before they’re needed.Activist investors, for example, are well aware of annual meeting cycles, and they use this time pressure to push through their proposed director candidates. Boards must, therefore, either be able to conduct rapid searches for world-class alternative candidates or face the prospect of a proxy fight. Boards that have already engaged with candidates and gotten to know them will not only understand who would best fit the bill but also who has the stomach to enter the fray. Moreover, these candidates will better know the company. We find that this not only gives the company an edge in convincing widely sought executives to join the board, but also helps ensure a faster, more productive start when they do.
Anticipate cultural fit. Through proactive engagement, board members can get a sense of how potential candidates might improve upon (or poison) the atmosphere of candor and collegiality that effective boards require.
Boards differ in how they engage with potential candidates, but the process is usually jointly owned by the CEO and an independent director. In some cases, the CEO takes the initial meeting with potential candidates. In others, the lead director or a member of the nominating committee makes initial contact. In all cases, the encounters should be informal, get-acquainted sessions, not formal interviews. The subject of board membership should be brought up only as a casual point of conversation with no commitment to timing and with no certainty that things will move forward.
Why, then, should potential candidates agree to meet? Because the worst that can happen is that they have made contact with the CEO and board of a prominent company and established relationships that could lead in any number of directions.
By identifying and engaging with potential colleagues, boards can reap big dividends, enabling themselves to:
Respond faster, more flexibly, and more effectively to unforeseen events
Refuse to settle for less-than-ideal candidates
Evolve the board in step with the company’s long-term strategy
Strengthen the board’s culture, both through thoughtful appointments and the board’s better understanding of that culture
As we have found, once the process begins to pay off—in a faster search in an emergency, the successful recruitment of an accomplished leader, a rapid and smooth onboarding of a new director, or the fine-tuning of the board’s culture or mix of skills—board members get firmly behind it. Most importantly, they give themselves a perpetual head start on one of their most important responsibilities.
Bonnie W. Gwin is vice chair and managing partner of Heidrick & Struggle’s board practice in North America. Theodore L. Dysert is a vice chair in Heidrick & Struggles’ Chicago office, where he is a leader in the global board practice and an active member of the CEO practice.