Overseeing a company’s corporate governance process and structure, the nominating and governance (nom/gov) committee is essential to a company’s long-term success. In this BoardVision interview—moderated by NACD Director of Partner Relations and Publisher Christopher Y. Clark—Bonnie Gwin, vice chair and co-managing partner of the global CEO and Board Practice at Heidrick & Struggles, and Thomas Bakewell, CEO and board counsel at Thomas Bakewell Consulting, discuss the qualities of an effective nom/gov committee chair:
Sets the right mix between board culture and composition
Facilitates cross-committee communications
Performs effective board evaluations
Spots diverse talents in director candidates
Bonnie Gwin, vice chair and co-managing partner of the global CEO and Board Practice at Heidrick & Struggles (left) and Thomas Bakewell, CEO and board counsel at Thomas Bakewell Consulting.
Here are some highlights from the discussion.
Christopher Y. Clark: Depending on what your definition of best is, why should the best director on the full board be the chair of the nom/gov committee?
Bonnie Gwin: In my opinion, it is an incredibly critical role. You’re talking about a director who is helping guide the board in not just developing a great composition for the board that is strategic and focused…, but also a director who understands the culture of the company and the board that they’re trying to build. You really need an outstanding director who understands that mix between composition and culture and can work closely with the board to get it right.
Thomas Bakewell: Bonnie is spot on in terms of composition and having the right team around the table. The other magic that you need in a terrific nom/gov chair is somebody who can draw people out, spot talent, make sure everybody gets heard, [and] really…build the team. Coming from a baseball town where we have a pretty good manager [who] wins a lot of World Series, we know the value of having a great person who can draw everybody out and get the team to work together. It’s really [about teamwork] … and using a lot of the tools that are available today. One of the trends in tools is…much more thorough and in-depth evaluations. [These are] … not just check-the-box or check-the-list [exercises] but in-depth individual board evaluations to know what’s really going on in the boardroom and among directors.
Clark: NACD [held] a combined meeting of the NACD Audit Committee Chair Advisory Council and NACD Risk Oversight Advisory Council. … It was invaluable for both sets of committee members. How do you feel about [meetings between committees] … whether it’s audit and risk [or] compensation and nom/gov? Do you think those interrelationships of committees should be enhanced or promoted?
Gwin: Generally speaking, transparent communication across all the committees of the board is essential. It’s essential for a high-functioning board. And in particular where you have, for example, [the] nominating [and] compensation [committees], there’s a lot of interplay between them and the issues they’re addressing. I think it’s important to ensure that there [are not only] good transparent lines of communication between those two committees, but frankly across the whole board.
Bakewell: The magic ingredient is how people work together, and part of that key element is how they communicate. The old approach to boards was everybody showed up the day before the board meeting [and] went to the committees. A lot of times people went to every committee [meeting]. What’s the point [now]? You don’t have the time. You don’t have the energy. You don’t have the resources today. So how do you have a board where everybody trusts each other and they communicate? If you’re not on the audit committee and important issues come up…, can you simply pick up the phone and reach out to the audit committee chair, or is there another process that’s very helpful for you to get the information you need?
Clark: Please give us one last piece of wisdom.
Gwin: The piece of wisdom I would share is the importance of long-term succession planning. We’ve talked about that several times, but I really think, looking at board composition [and] board dynamics… over the next four or five years…is very important.
Bakewell: I would say my secret sauce is [that when looking at director candidates] it’s not so much [looking at] … particular talents, [because] everybody can look at a resume and see what somebody has. They’re going to see if they’re a CEO, [or] they’re skilled in marketing. The real magic is [asking], “What is their true personality? Are they a ‘driver’ personality? Are they a curmudgeon?” Sometimes boards need curmudgeons. … Is somebody a strategic thinker, or is their skill set not [being] a strategic thinker but taking strategy and converting it into action? What have they done in their past experience that really makes them qualified for this role?
Clark: Well I think we’ve got all the synapses popping. I wanted to thank the both of you for joining me today.
In 2012, initial public offerings (IPOs) did not quite make the rebound analysts had predicted. In the year of the botched Facebook offering, just 128 IPOs were made. Although quadruple that of 2008, this marks a decrease from 154 IPOs in 2011. Last May, the Economist observed that this decline was part of a larger trend: the decline in popularity of the public company.
Since 1997, the number of U.S. public companies has fallen by 38 percent. Additionally, the average number of IPOs has declined from 311 per year between 1980 and 2000, to 99 per year between 2001 and 2011. In addition to companies actively not going public, in the last year several well-known businesses “went private,” such as Quest Software, CKE Restaurants, Burger King, and J. Crew.
In addition to the obvious distinctions of private companies—a lack of shareholders and adherence to regulation—NACD’s recently released 2012—2013 Private Company Governance Surveyfound many lesser-known differences. This survey features responses from over 550 individuals who serve private company boards. Some of the contrasts include:
Private company boards are smaller. On average, private company boards have 7.3 members—a decrease from 8.9 members in 2011. For the past several years, public company boards have consistently maintained an average of 8.8 members.
Public company directors are more likely to receive continuing boardroom education. In 2012, 82 percent of public company directors received continuing education in the last 12 months, compared to 57 percent of private company directors. This may be connected to company policy, however: 83.1 percent of public directors were reimbursed for education expenses, while only 54.5 percent of private company peers were.
Trend in the private company boardroom: D&O Insurance. Additional directors and officers liability insurance was obtained by just 15 percent of private company directors in 2008. In 2012, this figure jumped to 50.4 percent. In comparison, 42.8 percent of public company directors purchased additional D&O insurance in 2012.
Nominating and governance committees are much less prevalent at private companies. Similar to public company counterparts, audit and compensation committees are nearly ubiquitous at private companies. However, just 49.2 percent of private company survey respondents indicated that their board had a committee dedicated to nominating and governance.
Private companies employ different mechanisms to ensure director turnover. The most commonly used method of director turnover at private companies is director evaluation. Age limits and term limits are both used by nearly one-fifth of respondents. At public companies, the most prevalent mechanism to renew and replace directors is age limits, closely followed by evaluations. Term limits are used by just 6.5 percent.
Generally, private company boards maintain less diverse composition. Compared to 27.4 percent of public companies, 38.5 percent of private companies do not have any female directors. With respect to minority directors—based on race and ethnicity—70.3 percent of private companies have no such representation, compared to 51.8 percent of public boards.
Over the past two decades, I’ve worked with an array of boards in multiple capacities—serving as general counsel, secretary, board advisor and board member.
In my current role as general counsel and head of NACD’s Board Advisory Services, I’ve had the opportunity to counsel and facilitate board evaluations for companies ranging from large family-run businesses to the top of the Fortune 500. Over the years, I’ve concluded: no board evaluation is truly holistic without some form of feedback from senior management.
The management team’s participation in the evaluation process creates a critical 360° view that often brings to light factors that are limiting the board’s ability to operate at peak performance. This approach can naturally raise some very sensitive issues between executives and directors. Yet my belief that anonymous, candid input from the management team is essential to a complete and credible evaluation remains constant.
The insights and information that the c-suite and beyond provide are invaluable. Not only does the input enhance the quality and validity of the evaluation, it typically uncovers information that will directly lead to concrete action steps to improve alignment between the board and senior management.
There are a couple of important dynamics that the evaluation process commonly uncovers:
Talent vs. Engagement
In more cases than not, management teams believe they have strong assets on the board. Yet they often find that some very qualified directors are not as engaged as they could be. The company is not fully benefiting from the wisdom and unique experience these talented advisors bring to the table.
Often, management sees—and reports to my team—that one or two strong personalities on the board dominate meetings, limiting the opportunity for others to contribute.
Tactics vs. Strategy
Many directors tend to drill down into tactical issues, moving away from the real responsibility of the board to provide strategic direction. The board may not realize how serious the issue is until the management team reveals the extent to which that misplaced focus hinders their ability to get things done.
Conversely, boards often find that it’s the management team that spends too much of the meeting focused on operational minutiae, trapping them in “PowerPoint hell.” With limited time for the full board to meet, the agenda should be devoted to the most critical strategic opportunities and risks facing the company. Operational and tactical issues should be reserved for the committees.
Interestingly, we’ve often found that the reason for this is that management tends to drive meeting agendas, which naturally results in a focus on operational issues. In most cases, management would welcome collaboration with the board on defining the agenda to ensure the board’s time is devoted to strategic discussion and risk oversight.
We recognize that giving management a voice in a board evaluation process can be extremely sensitive for both the board and management. To facilitate the most valuable and practicable outcomes from board evaluations, NACD’s approach ensures that feedback is completely anonymous with no risk of attribution. Our approach of weaving the results into strategic education lowers defensive barriers, enabling the “ah-ha moments” that focus the entire process on solutions rather than criticism.
Unless c-suite-boardroom disconnects are brought to light, they can fester and potentially jeopardize the organizational mission. Done right, the management team’s involvement in board evaluation clarifies expectations and fosters a healthier collaborative environment.
My experience has led me to conclude that senior management has a sincere desire to capitalize on the wisdom, leadership and unique business experience of each and every board member. By involving the management team in the evaluation process, boards capitalize on management’s expertise in the same way. Result: the organization’s full intellectual capital is leveraged for the collective benefit.