Board Composition - The Unfinished Symphony: The art of building an engaged, diverse and harmonious corporate board

Wednesday, March 30, 2016 - 11:41

Board composition is a hot topic. At a time when serving as a corporate director is more demanding than ever, it’s also more important than ever for boards to recruit and retain diverse directors – in the broadest sense of the word – to challenge the management team with fresh ideas and new perspectives. Here, Steven R. Walker, General Counsel and Managing Director of NACD, and Rochelle Campbell, NACD’s head of board recruitment services, discuss composition, recruitment and related issues. Their remarks have been edited for length and style.

 

MCC: Board composition has been receiving a lot of scrutiny, and not all of it from activists. Traditional institutional investors have been vocal about the composition of boards and the impact on their ability to exercise their oversight function. What effect is the heightened scrutiny having, and do you see a link between board composition and board performance? 

Walker: There’s the regulatory influence, and there’s the practical influence. The regulatory influence goes back to 2009, when the SEC delivered its proxy disclosure enhancements. These required boards to go beyond giving biographical backgrounds of the directors, the organizations they belong to, and their education to detailing each director’s specific qualifications to be on the board. If we fast-forward to today, the SEC is considering rule-making that would require even more detailed public disclosure on how a board defines diversity; how it selects, elects and recruits diverse candidates; directors’ specific skills; and why it’s uniquely qualified for a company. 

As for practical influence, at NACD we have seen a dramatic shift, especially among our more than 17,000 members. Boards are recognizing that it’s critical that they continue to keep up on leading practices and governance strategies. Boards are
moving from the traditional approach of nominating people they know
when looking for board candidates  – literally, in some cases, searching their Rolodexes. Instead, boards are now employing a systematic process to identify, through skills-set analysis – what we call a “skills-set per client matrix methodology” – to determine the board’s current skills, benchmark against company strategy and map out any skills-set gaps.

Boards that take composition seriously and believe directors serve as strategic assets to the organization are performing better than legacy boards that have been together so long that some folks might question their independence or their ability to be as engaged and effective as they could be.

 

MCC: Spencer Stuart’s annual board index shows that turnover among independent directors for Fortune 500 companies was, on average, less than one seat per year. That was the highest level in eight years. It also shows that senior executives, such as CEOs, are not joining boards as frequently as they once did. Is this meaningful?

Walker: Those executives are under tremendous pressure to stay relevant and to make sure their companies are looking around the corner for disruptive innovation that may come and render them obsolete overnight. Given the high demands on boards today and the hours required to serve on just one public company board, fully employed, active C-suite executives simply may not be able to sacrifice the time that’s required to serve on a board. It can be a challenge for sitting CEOs to serve on more than one public company board if they want to dedicate the time that’s required for board service in the current environment.

As for turnover, while it’s slow on the whole, the average board member’s age is 63, which means many directors are in their 70s. So by pure actuarial measures, we are going to have enormous turnover in the next
5 to 10 years. At NACD we are preparing ourselves and our members for a tsunami of board vacancies. 

Campbell: The paradigm we find is that the majority of companies that we work with through our board recruitment practice tend to look for functional experience, such as that possessed by CEOs, CFOs and COOs – currently sitting or recently retired. They want that trending knowledge to make sure that their board is fresh.

Walker: I have observed, through the work we do in advisory services, boardrooms with an active, sitting CEO who is sometimes less engaged and missing meetings, contrasted with a recently retired CEO who is fresh, astute and actively engaged in board service. 

 

MCC: Board composition seems to be an art. When you’re bringing in new directors, what really matters? Is it operational expertise? Sector expertise? Do you need CFO-level financial ability? CTO-level tech understanding? I’m sure it varies company by company, but what are boards looking for? 

Campbell: I’m going to answer that with one word: strategy. Whatever the company’s current strategy, it needs to be considered when recruiting a director. From that perspective, each of our board searches is vastly different from the next. Companies that have done a skills-set matrix vis-à-vis their corporate strategy know where their gaps are. If they’re looking to grow in a specific market sector, they should look for candidates with respective industry expertise. If they need to develop their human capital, they should look for an HR executive. Above all else, strategy should drive candidate requirements.

 

MCC: Given the expected tsunami of turnover mentioned earlier, how hard is it to find the right people,
especially when you’re looking for highly specific types?

Campbell: NACD primarily uses our membership as our source for director candidates. We have more than 17,000 members, so we have no shortage of highly qualified candidates. We partner closely with our board clients to ensure that they have thoroughly thought through their needs. We also make sure the candidates will be a good cultural fit. Board dynamics are important. 

 

MCC: A recent survey shows the number of boards with a strategy encouraging refreshment has gone up 50 percent. Obviously, board renewal is a hot governance topic. Are investors driving this heightened focus on board refreshment or the companies themselves? Is there a perception that board turnover is just too slow? 

Walker: All of the above. The marketplace demands directors who bring unique skills and leadership experience. It is just as important to have diversity of thought, with some board members coming from completely different industries that perhaps are more innovative. This brings a critical new perspective to a board that may be becoming too myopic. Boards can become too comfortable and complacent because they pick members from the same industry. At NACD we believe that you’re not getting the benefits of constructive tension if you don’t have a diverse board in experience and points of view.

 

MCC: NACD issued a Blue Ribbon Commission report a few years ago focused on board diversity as a
business imperative. Give us your take on the business case for diversity on corporate boards. 

Walker: First, you have to define diversity. Diversity is a big word. The authors of our Blue Ribbon Commission report were diverse in ethnicity, gender and professional background, and their consensus was that we should think of diversity broadly, including skills, race, industry experience, educational background and expertise. We’re seeing more requests for diverse candidates in our searches, but it’s not just based on ethnicity.

Campbell: Diversity is often a consideration for our clients. Interestingly, regardless of whether the board has asked that the candidate slate include diversity candidates, we are more and more often presenting incredibly talented diverse candidates. In fact, 80 percent of our placements in 2015 were diversity candidates.

 

MCC: A Stanford Law School professor examined various studies of board composition and concluded that they didn’t establish a conclusive relationship between diversity and financial performance. NACD’s Blue Ribbon Commission called diversity a business imperative and not just a social issue. What is the business case for diversity on corporate boards?

Walker: Let’s take the consumer products industry. Look at the demographics of the U.S. and think about the average consumer. Ask yourself whether you would like a qualified representation of the consumers of your product on the board to provide unique insight into their buying preferences. Can you scientifically say that a diverse board is a better-performing board? I’m not sure, and I don’t think NACD endeavors to do that. However, we do say that it’s a business imperative because it’s practical. 

 

MCC: It takes much more today than it did yesterday to be a fully engaged director. It’s not just about reading the board book and showing up. That strikes me as very challenging when it comes to recruitment. Has finding directors become more difficult?

Campbell: Recruiting directors can be a challenge. As Steve mentioned, oftentimes the board members look to their own Rolodexes for prospects and don’t look outside their personal circles to identify candidates who are better aligned with the company’s strategic goals. That said, we see companies in the next five years turning more often to search firms to help broaden the net. This is where we step in – we challenge the CEO and the board to think about the skills-set that they don’t currently have around the boardroom table. And then we, in turn, challenge our candidates to ensure they are fully prepared to take on the commitment that a board seat requires. 

 

MCC: Do directors stay on boards because they find the experience fulfilling? Is there a danger of complacency? How do you make sure board members stay fresh and engaged?

Walker: Board evaluations are an absolute must, and it’s important that boards evaluate their own performance after each meeting. It falls to the leadership of the board to hold the board accountable, and the chair of the nominating and governance committee to make sure there is continuous education and evaluation of board members. They have to hold themselves accountable. 

We believe boards should constantly be doing self-assessments so that regardless of age or term, if someone’s not actively engaged, providing value or still the right asset for the board based upon the organization’s strategy, then that director needs to be encouraged to move on.

Campbell: We’ve had companies engage us to recruit one director and, halfway through the process, decide to elect two of our candidates so they can work toward transitioning a sitting director off the board for lack of preparation and engagement. We also have clients elect two candidates up front to prepare for planned director retirements that will be happening in the next few years.  

 

MCC: This touches on the next topic: succession planning. In some places it’s been driven by retirement age considerations rather than the needs of the business. You mentioned that NACD does not favor strict limits. Are there best practices companies should consider when it comes to succession? 

Walker: I’ll come back to the skills-set matrix. The best practice is for the nominating and governance committee to create a living, breathing skills-set matrix that is examined at every board meeting and at committee meetings to determine what skills the board has, what gaps we’ve identified based on our current strategy and what pool of candidates we have on deck. It takes quite a while to find a good board member. Even if you’ve identified the need and the skills, it doesn’t happen overnight if you’re truly vetting the candidates and taking the time needed to recruit a highly qualified director. 

Campbell: The average length of our search engagements is eight months. However, we have some searches that extend for two years because the board wants to start the process early and have plenty of time to vet candidates, elect them and allow for transition time as sitting directors roll off the board. Our searches can also be as quick as six weeks. With our pool of more than 17,000 directors, we are able to move fast if the board has an immediate need for candidates.

 

MCC: It sounds like companies are in the position of being in almost continuous recruitment mode.

Walker: They should be. They should always be keeping an eye out for prospective directors who might fit their skills-set needs.

 

MCC: What specific issues should our readership, mostly general counsel and chief legal officers, be thinking about?

Walker: It’s imperative for legal counsel to play a pivotal role in giving the nominating and governance committee all the assets it needs to perform its functions. They should make sure the committee chair is taking advantage of NACD’s guidance on leading committee practices and our resources to help with succession planning.

Campbell: It’s important that legal executives be aware of the member resources NACD offers so that they are prepared should anything unexpected happen with the board. Emergencies happen. As I mentioned, we’ve had to move very quickly for some of our board clients. Being prepared puts you way ahead of the curve.

 

Steven R. WalkerGeneral Counsel and Managing Director of the Board Advisory Services, National Association of Corporate Directors. s_walker@NACDonline.org

Rochelle CampbellLeads the National Association of Corporate Directors’ Board Recruitment Services practice. r_campbell@NACDonline.org