Being Smart Is Not Enough: Powerful Remedies for Boards
By: Denise Kuprionis and Patricia Lenkov
AGENDA published a summary version on 8/8/22. What follows is a more comprehensive version.
Activision, Exxon, Theranos, Boeing. We know these companies as leaders (or former leaders) in their industry. They are trailblazers and innovators — until they are not.
These companies may appear to have nothing in common, representing vastly different industries, geographies, sizes, and target markets. However, they share(d) a critical vulnerability: their board of directors. While undoubtedly impressive on the surface, the boards of each of these companies may not have been comprised of the ideal directors. Or the directors may not have had the right experiences at the right time, or the board may not have diligently carried out its responsibilities.
With today’s broadening scope of oversight and a heightened interest in how boards do their work, meeting agendas have expanded to include trending board governance topics such as employee culture, DE&I, ESG, and stakeholder relations. Board chairs ensure these topics are on the agenda, as well as conversation about board composition and how the board does its work. Directors reading this paragraph are likely nodding and saying, “yes, we do all that; my board is a good one.”
The “my board is a good one” sentiment is one we hear a lot. We don’t doubt these directors. We do wonder why, despite increased clarity on generally accepted board governance practices – and shareholders quite willing to voice their concerns – that we still read front-page stories about so many suboptimal and underperforming boards.
Further, year after year, we read the results of PwC’s Annual Corporate Directors Survey, which finds that almost half of directors (47%, in the 2021 survey) say that at least one fellow board member should be replaced. Incredibly, eighteen percent would like to see two or more board members replaced.
If we agree that boardrooms are comprised of smart people who do their board work following generally accepted board governance practices, why do we continually see significant governance missteps? And why do directors frequently report that one of their fellow board members “should go?”
Maybe it’s because being smart is not enough.
Let’s explore this statement by starting with the premise that the directors sitting around the table are smart – they have successfully led teams, navigated through crises, steered through growth, innovated to keep up with the times, and served on other boards. It sounds like they know what they are doing, so what’s wrong?
A director role provides many challenges despite a leader’s years of success, and past accomplishments as boards increasingly come under fire from multiple directions. The following are five chronic poor board practices and easy-to-implement, straightforward solutions to help boards avoid troublesome front-page headlines.
(1) Lack of Effective Board Performance Reviews and Candid “Results” Conversations
NYSE boards must annually review their performance. NASDAQ encourages it, and most boards comply. According to ESGAUGE and The Conference Board’s Corporate Board Practices Report in the Russell 3000, S&P 500, and S&P Midcap 400, 2021 Edition, “The vast majority of companies disclose some form of assessment for their directors; they are absent in (only) about 11 percent of Russell 3000 companies, only 0.4 percent of S&P 500 companies, and 4.5 percent of the S&P MidCap 400.” The statistics sound good – directors are assessing board performance. But are they simply performing a compliance exercise, or are they meaningfully capturing substantive performance input? In other words, does the performance review enable the board to enhance its effectiveness?
There are smart people in the room, so directors may not believe it essential to spend valuable time asking questions about board performance and peer participation. Another reason directors might not adopt fulsome reviews is that the process becomes routine. Same questions, same survey, year after year. Complacency sets in.
Solution: Move beyond the “check-the-box” exercise and don’t use the same survey year after year. Shake-it-up. Consider a three-year performance review plan using different formats each year.
Regardless of the format used, interviews, or surveys, there are seven standard board evaluation steps. The first is to map the structure and discuss the focus. For example, will you be looking at only board performance, board and committee performance, and peer-to-peer reviews? In addition to the directors, who else will be included in the data gathering, and who will facilitate? Second, prepare the tools, surveys, or discussion guides. Third, gather information. Fourth, analyze the data for themes. Fifth, share the themes with the board and facilitate a discussion. Sixth, conclude the board conversation by setting board goals. Seven, follow-up to check on the board’s goal-completing progress.
(2) A Re-Nomination Process that is “Cut and Paste.”
Whether directors are elected annually, or the board uses staggered terms, the internal re-nomination process is often not given enough attention. This is partly because board culture generally views the initial board election as a beginning, with no end discussed. Board seats are too often considered Supreme Court seats, where Justices serve as long as they choose and can only be removed from office by death or impeachment.
A company’s annual proxy statement showcases its director election process. Drafters usually begin their work using the previous year’s proxy statement as a template. The names of the directors up for election are often the same each year, and, too often, those names are listed without sufficient governance/nominating committee work, meaning no one asks individual directors about their “retirement” thoughts. That’s not good planning.
Solution: Ensure the governance committee has a re-nomination process in place and the process is followed each year. As with most board governance protocols, there is no one “right” way; steps will vary based on the board’s succession planning discussions. A suitable protocol starts as directors begin thinking about the annual meeting and the new board year. The board chair, or governance committee chair, will talk with each director up for re-election to discuss her continued interest and commitment to the board and the company. Other steps include a review of the peer-to-peer assessments, an in-depth look at the skills matrix (following its alignment with company strategy), and consideration of board tenure. The “set-up” for the re-nomination process begins during new director orientation with a call-out to the board’s commitment to ensuring each year that every director is the “right fit” for the board.
(3) Diversity is More Complex than Meets the Eye
Diversity is a topic of conversation amongst almost everyone. In terms of corporate leaders, many are playing catch up and trying to improve their company’s diversity in record time. There are government initiatives, education actions, grassroots pushes, and more—all incredibly necessary.
The most common diversity measurement is whether someone is a female and/or person of color. This is, of course, critically important. However, diversity is far more nuanced than this. Ethnic and racial diversity is not as straightforward as some current discussions suggest. We bundle all ethnic/racial diversity together in the boardroom and board reporting. In other words, the board will check the ethnic/racial diversity box if a director is a person of color. Any person of color. What a vast oversimplification of diversity and underappreciation of the nuances and differences between all ethnic and racial groups. Other important diversity elements may include age, tenure, and geography.
Solution: Continue to focus on diversity, of course. But we cannot lose sight that this is not simply a check-the-box compliance exercise. In the end, it is about the types of conversations that take place and the kind of problem-solving muscle a group with diverse thinkers can bring. To do this, we need to calibrate diversity further. We also must adjust the goal beyond simple diversity for its own sake to an appreciation of what an individual’s unique life experience can add to their role of director.
(4) No Director Continuing Education
Smart today does not necessarily mean smart forever. In other words, many skills and expertise have a shelf life. Additionally, business and the environment we work in are constantly evolving with new trends and discoveries. Artificial Intelligence, the Metaverse, and blockchain are just a few examples of ubiquitous subjects relatively unheard of ten years ago. These matters are in the headlines daily and have vast ramifications for our businesses, employees, and competition. Directors must keep up. They must have the tools in their toolbox continuously upgraded and kept current.
Solution: Boards should not rest on their laurels. Despite even the most immense past success and achievement, boards must maintain a continuous improvement mindset. Continuing education is essential and should be built into the annual board calendar. This can take the form of guest speakers at board meetings or specially scheduled meetings. It can also involve directors taking outside courses, classes, or attending conferences. If knowledge is regularly enriched, the value that directors can provide will be enhanced.
(5) Board Chairs Who Aren’t Willing to Initiate the Difficult Conversation
PwC’s Annual Corporate Directors Survey (see above for the full notation) found that close to half of the directors surveyed thought at least one fellow board member should be replaced. There could be many reasons a director feels someone on the board should be replaced, although the causes typically fall into two categories – a director is not fully participating or misbehaves; or he is a good director, but new skills, experiences, or perspectives are needed around the table. In either case, the conversation with the director who needs to go is complicated, and no one wants to have a challenging conversation with a smart director. This translates into hard conversations being put off or, more often than not, not being had at all. Instead, board chairs wait until a tenure limit is met and host a thank you send-off dinner.
Solution: Carefully consider the board’s process and board chair selection criteria. Being smart isn’t enough. The director must have established herself as a strong leader, dedicated to the company’s success and continually improving the board’s effectiveness. She must be inclusive and communicative.
Once elected, board chairs must stop avoiding the hard conversations. The problem director typically doesn’t just happen; it’s not a “black swan” event. And sometimes, a change in company strategy requires new skills. In either case, there’s time to prepare. While it’s essential to be sensitive, being clear and direct will be appreciated. It’s also important to have an off-boarding plan. As the famous Nike ad says, “just do it.” (This could still include the “thank you send-off.”) Boards are a team, so everyone must play at 100%.
CONCLUSION
There is an old saying that “a fish rots from the head.” When it comes to corporations, the implication is clear. As the organization’s apex, boards must stay ahead of the curve. As challenges to organizations continuously evolve, so must boards.
Many believe an appointment to a board is the ultimate accession. While it may be a recognition of accomplishment, it is a mistake to become content. Board governance is ever evolving and always challenging if done right. Being smart is simply not enough. Being smart is the baseline. Assume all board directors are smart. Those that will drive success for their organizations and stakeholders go far beyond the essentials.