Author Archives: Nancy May

Technoliteracy is the New Black.

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At this point, all public U.S. Corporate Boards have (or can explain why they don’t have) oneblackJPG.jpg or more qualified financial experts on board. This, of course, has been mandated for some time. The logic for having such talent has long predated the SEC and other requirements. Though by now, most boards see the logic for making sure that all their directors are financially literate, whether they sit on the Audit Committee or not. On occasion, we’ve seen this competency ignored. But how can anyone be engaged in and contribute to a board discussion on financial matters, if they are nearly clueless about what’s being discussed or presented? How can a meeting move forward if each financial matter, term, or implication has to be exhaustively explained to someone?  Or even worse, if the director sits quietly and lets the conversation work around him or her, contributing nothing, learning nothing.

Fortunately, basic financial literacy has now pretty much become more than just a standard for a board’s audit committee service. It is now expected of all corporate directors. This is evident in many candidate specs and defining corporate governance documents today. It is a sign of being up-to-date as a director in today’s business environment. And so, it ends there.

Or does it? After all, the times they are (always) achanging. It might be high time to look at another new type of literacy for board service ― technology literacy. For the sake of argument, let’s call it techno-literacy. What do I mean by “techno-literacy?” I like to refer to a popular definition that says to be technology literate one needs to be conversant (well-informed, versed, not expert) in the subject matter.

Now, not all of today’s directors are in the dark when it comes to understanding modern technologies and their real or potential impacts on corporations’ strategies. But in general, what would you estimate the average director’s knowledge to be in this area? I and many others doubt the “average” person of any age understands what is coming, where it will take us, and what it portends.

The point is that boards are NOT comprised of “average” people, and I’ve never met an “average-intelligence” corporate director. As a whole, public company directors represent and are drawn from the best and brightest of the corporate world. A number do, in fact, have a deep understanding or at least a considerable appreciation of how today’s technology can boost a company and industry, or more importantly, destroy it. Sadly, many more directors do not. Despite their “above average” intellects, they run the risk of becoming “out-of date.” So what’s the upshot? Well, it is only a short step away from being “out-of date,” to becoming irrelevant.

Some boards recognizing this, have quickly moved to “plug the dike” by adding one or two experts — some call them “digital directors”, “tech gurus,” what have you. This has come about because of all the buzz around the very real risks of cyber attacks on corporations’ finances, intellectual capital, and in many cases, infrastructure itself. The rise of social media, hyper-fast communications channels that can boost or trash a corporation’s sales, brands, and reputation, demands that boards ramp up quickly, or risk missing precious opportunities, or worse, face other dire consequences.

Having a top notch CIO and tech staff at the company and a tech expert on the board may work well in the short term. But, just like the financially illiterate director, what happens to the technologically-challenged director when more and more board discussions turn towards making key decisions such as adopting or investing in new technologies, and he or she can’t even follow the discussion? Even worse, how do they contribute to or deliberate on whether to make wholesale changes to operations, marketing, and other business strategies, because the entire industry may be going in another direction?

CEOs and board members of large and mid-cap companies shared how they agree about the need for all board members to ramp up their basic understanding of technology.

Brigadier General Dr. Dana Born, former Dean of the U.S. Air Force Academy, and an airforceJPG.jpgIndependent Director at Apollo Education Group told us: “Technology is a key component of conducting board business for the organization I serve. I believe that having a baseline of technology literacy is paramount for directors to support and guide all industries today. Whereas hard copy binders may have been the preferred format in the past, I believe the timeliness, comprehensiveness and portability of information offered by today’s automated tools (laptops, tablets, iPads, etc.) improves board governance and enables directors to better support the organization they serve. Specifically, having access to accurate, real-time information in a business environment of exponentially increasing complexity enables board members and boards to operate more efficiently and effectively.”

Steven Nerayoff, the CEO of Maple Ventures, a venture capital firm, and leader of a sophisticated technology consortium, is addressing the impacts of technology that go well beyond the average corporate directors’ knowledge of social media and cyber intrusions on business. He stated “fear of cyber crime, and the technological risks they can create, can paralyze the mindset of a board. History has shown that public and private corporate directors must learn how to leverage not just the risks, but the opportunities that are and will become available through advancing technology. Just look at the computer, Internet, and now the Bitcoin revolutions and the disruptive effects on the businesses of these companies and the opportunities that were there for the taking if someone on the board had understood them. The ability to think this way takes the board’s role to a new level where, at the very least, a base technology literacy will be an imperative for all directors in the near future. If not now, when?”

Knowing that you don’t know is always a good start, but accepting it as so is not. That said, how does the average director become “techno-literate?” Good question. Let’s start with, “How did you become financially literate?” You worked on it, you built your knowledge up through study and experience over time, until you got there.  It worked.

It won’t work the same way to get you to become “conversant” in modern technologies. Why? Because, even as you’ve been reading this, even newer technologies have come on the scene, and others have gone extinct. To get to where you can intelligently discuss or even just digital-darwin.jpgappreciate those technologies that will affect your company(ies), you need to catch up and stay up on what’s out there and what is realistically on the horizon.

I’m not just talking about cyber-security, cloud computing, customer relations software, and social media (to name only a few). You also need to know how the company is using various systems and technologies, and importantly, those technologies that have built the industries your company(ies) operates within. And whether you enjoy an innovative edge over your competitors, or lag behind then.

You also need to know – and should be asking this of management – how long these technologies will last or take to overcome you. You also need to embrace today’s tools enthusiastically. It’s fascinating to listen to many in the executive management ranks when they talk about their board’s lack of understanding of technology in general. Many, if not most, have given iPads or similar tools to their board members to receive board related information and materials. But getting their directors up to speed on their newly acquired “cool tools” has quite often been slow and somewhat painful. Many directors still report asking their grandchildren for help with their iPads or tablets.  My own father, a Good Photo.jpgwell-known CEO in the Optical Industry and one of the most fearless users of the technology of his time, will not touch a simple PC for fear he’ll break it. My position has always been: You break it? You can always get another! Even better, there are more “techno-geeks” than you can count who are willing – no – anxious to help you learn and overcome your fears. For many, just being able to demonstrate what they know is reward enough for them.

Having started my career in the technology field during the pre dot-com era, I’ve watched, with fascination how easily many executives are attracted to technology like a moth to a flame, and grasp how it can have an impact on their business strategy. On the other hand, I’ve also seen how many people, of various ages, can’t grasp how subtly complex the implications can be to a company’s existence.

If you’re familiar with women’s fashion, you should understand the importance of black. Black is reliable. Black is always up-to-date: It goes and works with everything. In the boardroom, financial literacy means being relevant and up-to-date. It is today’s director’s black. Being technologically literate is THE NEW BLACK.

Nancy May

Customers First, Investors Last: What were they thinking?

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For years now, my colleagues and I here at BoardBench, have been saying that Wall Street has it backwards.  In the boardroom, directors have been fed, with a very large spoon, the mantra that they are beholden to the shareholder, that their purpose is to “maximize shareholder value.”  If you asked a large group of directors if this is true, you’d see a lot of bobbleheads in the room.  Many believe this is a legal requirement and in line with good business sense and good corporate governance.  Unfortunately, the concept of “shareholder primacy” is a relatively recent phenomenon.  It is also simplistic (shareholders’ wants are not homogeneous), has no legal basis anywhere (go ahead, try to prove me wrong), and, as many are now pointing out, usually damaging to companies, and the economy as a whole.

What we believe is real, and will eventually be proven again as real to the Street, is that customers, and employees are the two key drivers of corporate success.  When I say “again” I’m referring to Peter Drucker’s famous quote from decades ago: “the purpose of a business is to create and keep customers.”  So many seem to have forgotten this, or have never even heard of it.

But the basic premise is this: if you take care of your customers, and have great employees who are well supported and appreciated for being curious and excited about what they do such that they will ensure that customers love the products and services that the company offers, the company and shareholders will reap the rewards, too.  Of course other things come into play, like managing R&D investments (with the customer in mind), operations, and supporting a corporate culture that has strong values and morals.  The basic premise may be slightly oversimplified, but it applies, and should resonate with the board.

It appears that I’m finally not standing alone on this either.  In a recent interview, Jack Ma, the world’s newest CEO darling, made two bold public statements.  He basically shunned the current thinking of the Street by stating, on national TV, that “our customers come first, our employees second, and our shareholders third.”   He continued: “We aim to be larger than Wal-Mart by 2016, or sooner.”  If – no, when – Jack succeeds, and executes flawlessly on his statement, that customers and employees take a front seat over shareholders/investors, then he’s got an excellent chance of passing Wal-Mart as the world’s largest retailer.  Note, Wal-Mart just slapped some of its employees, who have the most direct relationship with their customers, by cutting their insurance benefits. This was probably done to cut costs, but it will probably also have a long-term impact on their customer relationships, too. But, I digress.

It seems that too many directors, CEOs, and business leaders, have become obsessed with what Wall Street, its analysts, and shareholders think.  Many have learned to play these groups exceptionally well, too. Countless analysts and shareholders have been taken in by companies’ projections, quarterly earnings estimates, and highly creative financial management and reporting.  Don’t get me wrong, the importance of the exchanges and the markets cannot be downplayed, but a balance is needed.  Focusing on Main Street is just as important, if not more so.

If you follow Main Street, you know about big box discount stores. Costco Wholesale Club, founded by Jim Sinegal and Jeffrey Brotman, believe in serving the customer first, and that if employees are treated properly, they will work with, and treat the customer well too.  Jim, the public face, is a “hands on guy” who is known for visiting each individual Costco store.  Jim is also outspoken about his views on Wall Street.  He’s been known to say that he puts his customers and employee needs above “pleasing shareholders.”  This philosophy must be working: Costco’s five year return is +116.73%.  If you bought the stock earlier, your return would be closer to 354%.

American Express is another company known for taking good care of its customer/members.  Personally I’ve been a fan of the company’s customer service representatives over the years, and tell them that every time I’ve called for help.  Don’t get me wrong, working at this company must be tough: when I was younger, AmEx employees were nicknamed The Dragons.  Perhaps because they were seehat2.jpgn as willing to fight for the company and their customers nearly to the end.  By the way, if you invested in American Express five years ago, your return on investment would be up 149.46%.

If you’ve worked with the general retail public, as I did during my college years, then you know just how tough this can be.  Sadly, not everyone who enters a store, calls a helpline, or dines in a restaurant is a kind and thoughtful customer.  Amazon deals with all sorts of customers from nearly every continent in the world, and I’m sure they have some interesting stories to share.  However, the company is noted for being one of the best customer service organizations in the world.  Amazon has more than one customer base, as many do: retail members, and consumers.  Jeff Bezos clearly divided the customer’s connection to Amazon into two categories: the experience and the service.  At this level, he notes that customer service is part of the full customer experience.  If it’s unpleasant, it’s a negative customer experience.  He supports the idea that a positive customer experience creates greater loyalty with Amazon.  If you’ve ever dealt with an Amazon Customer Service rep, you know that they work quickly to resolve your issue, they get the job done for you, and you are nearly always satisfied and left feeling good about your relationship with Amazon.  And, if you invested in Amazon five year ago, your return on investment is now up 236.64%.

While it’s much more pleasant to focus on the “good guys,” there are dark clouds.  Some companies are noted for their poor customer service.  Some survive because there are few alternatives: think of phone companies and cable providers, and some you can name on your own (take a look at their five-year ROIs).  However, when it comes to poor customer experience these days, I think sadly of that American icon Sears.  Whenever I bring them up these days, all I hear is: “Oh my gosh, I could tell you about the time when…”  Sears is a sad story101.jpg about the decline of a once great and loved retail giant.  Many years ago, the Sears catalog used to be called a “wish book.”  Families would anxiously wait for it to arrive in the mail.  It was nearly 5 inches thick. Moms, dads, sisters, and brothers would argue over whose turn it was to browse through and select from among the items they wanted for birthdays, holidays, special occasions and more.  Some people even bought their homes out of the Sears catalog.  But, it has lost its way, and it’s touch with its customers and has already begun its drop down that magical slide once pictured in its own catalog.  The entire company and its hopes for the future look pretty dismal: sell off of units and real estate, store closings, etc.  Sadly, if you invested in Sear’s five years ago, your return on investment would be -58.50% and it’s still falling today.

To sum up and put things into even sharper perspective, I recently spoke with the General Counsel of one of the largest, most recognized corporations in the world.  He told me, succinctly, that the biggest problem with their board is that not one director had any understanding of who their customers were and are or what they want.  I can also assume that they don’t understand their employees either.  So I will watch how this company slides in the next few years (Note: their record has been negative for some time), and report back with an update, unless, that is, they somehow figure it out and turn it around.

Do you need to focus on board improvement: composition, strategy, direction, execution, oversight?  Boards are our specialty. Give us a call.

Nancy May

Corporate Advisory Boards: “Show Me the Money”

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Tell me, simply: What’s the purpose of being in business? We shopped this question around to board members and executives, and heard many different (sometimes long-winded) answers. “Maximize value for stakeholders ― Have a flexible business strategy/model to stay relevant ― Make and sell goods or services ― Get and keep customers ― Derive monetary and psychic satisfaction, and a host of other interesting opinions. However, if you put all their responses into a big pot, lit a fire under it (one I like to call scrutiny), skimmed off all the fat, political correctness, esoteric ideals, and highfalutin’ thinking, you could boil it down to one simple, honest truth: “To make money!”

So what type of board can most directly make you more money? Traditional (governing) boards can, although not always directly, since their activities focus on many other things including compliance, fiduciary duties, long-term protection of stakeholder interests, etc. What about advisory boards? Companies have formed these kinds of board for lots of reasons. Often they do so to deal with  temporary issues like legal/compliance, getting closer to customers, bolstering management, etc.: issues that probably could be more efficiently addressed through consultants. But, for the most part, companies build and keep advisory boards with the long view in advisors.jpgmind, and to make even more money.

It’s common to see start-ups and high-growth firms use advisory boards to get them over the hurdles, so that they can start or continue to generate more revenues than expenses. But, what’s more intriguing is the number of large, global, and/or well-established corporations that are quietly trying to think like entrepreneurs so that they can “get their groove back.” In response to this challenge, they are building and using advisory boards to reinvigorate their processes, products, sources of capital, and new business opportunities, among other things. Ultimately, of course, to make even more money. But are advisory boards really worth it? After all, for young and well-established companies, it takes thoughtful planning, time, and considerable resources to build, maintain, exploit, and execute on what they can give you. Apparently, some are convinced.

Recently, International Flavors and Fragrances, a global corporation, built a Scientific Advisory Board. The reason: to enhance their research team’s abilities and expand their innovation pipeline. The Advisory Board’s internal leader, Senior Vice President of Research and Development, Ahmet Baydar, had the support and backing of the company’s CEO and the entire board. Focus, time, and the right resources, have delivered results. Ahmet shared: “This effort has significantly increased our innovation development thresholds. Our Advisory Board members have given us sound guidance, introduced issues, partners, and opportunities that have all brought relevant value to our business.

Mid-cap private companies use such boards to give them extra muscle, or in some cases, to tap the brakes a bit, when needed. Jim Taylor, CEO of Abarta Oil & Gas and Chairman of Abarta, Inc., a diversified family-owned holding company, told of his experience. Having built a board of independent advisors, Jim shared that these folks have “challenged us, made us accountable for our decisions and actions, and pushed us to articulate our objectives and vision more clearly. In addition, the board has helped us identify new lines of business, which equate to new revenues.” He added that “without our board I would move more quickly, but probably recklessly, with less measured perspective.” The board helped them divest itself of a business it had owned for 63 years (originally bought by Jim’s grandfather). “They helped us realize a better value on the business than we could have expected.”

Then there’s Deutsche Bank Americas: different scale, different industry. A few years back, they correctly decided that their senior team could benefit from having, on tap, a broad and diverse group of globally-renowned advisers. They took the time to focus, find the talent, and commit to building an impressive group. They also made sure that the respect and support went both ways — as it should with a good advisory board. Bill Woodley, Deputy CEO, who oversees the Advisory Board shared: “We’ve assembled a world-class group of independent advisers who offer a diverse and rich perspective to our senior management. The Advisory Board has helped us look at our current and prospective clients differently, resulting in more sustainable and balanced business prospects.”

Although many companies keep information about their advisory boards’ ROI private, our discussions with both large and smaller companies point to real and considerable financial returns. Larger corporations, with mature advisory groups, tell us that returns in the early stages range from $100 million to over $500 million.  For some smaller companies, advisory boards have accounted for higher valuations for spinoffs, avoiding poor decisions (unlike one company we know, without a board of advisers, that paid 60% more than it should have for an acquisition), and yes, many new clients, too.  Either way, when you add it all up, well-constituted and managed advisory boards can create significant returns.

Now, let’s say you wanted to acquire such a board.  How would you approach it? The process may seem simple, yet it’s anything but. As with any good business, clearly defined objectives are the keys to a successful advisory board and solid ROI. This includes identifying gaps in expertise, among many other things. Also, be bold: understand that those who you think are beyond your reach may be the best suited to test your capabilities and push you beyond your corporate comfort zone. You’ve also got to realize that greed is NOT good and that thinking only about your own bottom-line with your advisory board may make you very lonely and deeper in debt.fin.jpg

Recognizing what’s in it for your adviser prospects will be one of the golden keys to soliciting their help. Done properly, your newfound advisers can open a five-lane freeway of relationships, insights, resources, and client opportunities. However, remember that you get what you pay for. You have to carefully sort out how your advisers will perceive your valuation of their time and efforts. Some companies have been lucky enough to find highly experienced and skilled advisors who are no longer financially motivated. For the most part, I believe this species has been over-hunted to the brink of extinction. Other “free” advisers may be secretly hoping to gain some other advantage from you down the line. I believe that appealing to someone’s self-interest is a safer bet than relying on their generous nature. Either way, to align their interests more securely with your company’s, your advisers should be compensated for their efforts through annual retainers, meeting fees, marketable equity, bonuses, commissions, in-kind services, or other creative incentives. Your recruitment process should include compensation negotiations, to increase your odds of success. Otherwise, your interests will most likely take a backseat to those of others who, they believe, value them more.

Once built, understand that constructive tension can be your best friend. You stand to gain a lot of good advice from each director one-on-one. However, getting them together periodically, accelerates the brainstorming and one-upping process among them, boosting your take-away potential. Being open to a push or a hard kick in the seat (no, I’m not into pain) from your advisers should enable you, and your management team, to drive business beyond where it’s been. That’s held true for small, mid-cap, and large global companies. The tough part is learning how to let go. Listen and debate the issues with an open mind, but once consensus is achieved, act on what your advisors recommend. If you don’t, you’ll lose their trust and interest, and your investment will likely go south. This is just the tip of the iceberg when it comes to building, running, and extracting value from a well oiled advisory board.

So what are you going to ask of your hard-won and newly-acquired set of (what you hope will be), precious expert advisers, the moni.jpgfirst time you sit down with them? That will depend on how you’ve assessed their personalities and egos, and on your own comfort and ability to balance subtlety with candor in what you say and do. But, even if you don’t straight-out say it to them, then you should be thinking it – all the time: “show me the money!” A little jump up and down for emphasis (behind closed doors) won’t hurt, either.

Now, once more, from the top: What’s the purpose of a business and an advisory board?

Nancy May

Diversity in the Boardroom: Resistance is Futile

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If you’re reading this, chances are you sit on at least one board.  If that board happens to be one that understands the value of diversity (and here I’m speaking of gender diversity) or has moved aggressively to get the board there, I applaud you. Your board will benefit, the company will benefit, and other boards will benefit (I’ll explain more later). If you align with board members who are still unconvinced – please consider that diversification sooner rather than later is in your best interest, the best interest of your fellow directors, and all boards. Let me present to you both the carrot and the stick:

The Carrot: Studies indicate diverse boards tend to be better
boards and lead to more stable companies.c2.jpg

There are studies with hard data from Pepperdine University, Catalyst, McKinsey and others that overwhelmingly suggest that companies with more women at the top are better off. More studies like these continue to come out and point to virtually the same things.

Recently, Credit Suisse Research Institute looked at the performance of selected companies with at least one female director over the last six years. While it noted little or no correlation with company performance between 2005 – 2007 when the economy was robust, between 2008 and 2012, the stock prices of companies with at least one woman on board yielded a 26% higher return than those with none. The assessment was that a more diverse board means less “volatility and more balance” during tough economic cycles.

A recent Thompson Reuters study, Mining the Metrics of Board Diversity, revealed how the increase in female participation on boards affects organizational performance. The study drew upon information on 4,300 global companies and over 750 data points that covered every aspect of sustainability reporting. According to the study, on average, companies with mixed boards show marginally better or similar performance measured against a benchmark index. Companies with no female board members underperformed relative to organizations with women on their boards, and had slightly higher tracking errors, indicating potentially more volatility. The study went on to suggest that the performance of companies with mixed boards matched or outperformed companies with male-only boards, stronger evidence that gender equality in the workplace makes good investment and business sense.

The value of board diversity, from directors themselves:

Michael Critelli, board member of Eaton Inc. and former Chairman and CEO of Pitney Bowes, built a strong reputation for advocating using diversity to make his company and board even better. On having one of the most diverse boards during his tenure as Chairman/CEO he said: “Boards are most likely to do their job effectively when they have diversity of life experience and insight.  Groupthink on a board is very dangerous. The advantages of diversity are only realized when a board is inclusive in its membership and when it invites and values diverse thinking relative to board responsibilities.”

Linda Rabbitt, Chairman and CEO of Rand Construction Corporation, Lead Director of Towers Watson, and Chairman of the Federal Reserve Bank of Richmond notes: “As a woman I have had to overcome many obstacles as an entrepreneur and in the corporate environment. As a result of these experiences I see the world and business through a different lens. Having large obstacles to navigate around teaches you how to solve problems, identify opportunities and associated risks, and bring up new talent in a way different than the men who built the road before you. These skills bring a new value to the boardroom that has not been there before.”

Maggie Wilderotter, Chairman and CEO of Frontier Communications said: “Company leaders and directors, male and female, must do more to advance women in their ranks, and it is incumbent upon women to be responsible for their advancement as well. After all, doors successfully open and close when we push.” Mrs. Wilderotter added: “A recent Catalyst report shows a continuing shortage of women in America’s C-suites, Boards of Directors and as top earners. Studies show that companies with three or more women on their boards perform better financially than those with fewer members. Diversity in the board room and in the C-suite is a competitive advantage.”

The Stick: The rise of the ““Sheconomy.”

Even for those with a minimal grasp of the obvious, some things are plain. We have moved into a new economy, one overwhelmingly influenced by women. Consider these points raised in research by MassMutual, Fleishman-Hillard, the Spectrem Group, and other noteworthies:

  • Senior women over 50 control net worth of $19 trillion and own more than three-fourths of the nation’s financial wealth.
  • High net-worth women account for 39% of the country’s top wealth earners; 2.5 million of them have combined assets of $4.2 trillion.
  • Over the next decade, women will control two thirds of consumer wealth in the United States and be the beneficiaries of the largest transference of wealth in our country’s history. Estimates range from $12 to $40 trillion.
  • Wealthy women investors in the U.S. are growing at a faster rate than that of men: over a two-year period, the ranks of wealthy women in the U.S. grew 68%. The number for men was 36%.
  • Women account for 85% of all consumer purchases, including everything from autos to health care.

It’s hard to believe that many women could not apply for a credit card in their own name until 1974, when the Equal Credit Act was passed.

The point here: traditional boards cannot ignore the influence, control, and power that women hold as decision-makers, consumers, and, as investors, to go away. Or that they can have a dramatic impact on sales and have gained, through their dominant use of new media, a growing ability to advocate for or against a company’s products and services. Companies that understand and reflect this in their boardrooms will have the advantage over those who do not.

Here are some questions to ponder. With women’s dominant role in customer and financial decisions, coupled with growing transparency of company operations and board composition, plus the rise of electronic reporting and social media allowing everyone to easily see where a board is aligned or not with its customer base and markets (and this new economy), where do you want your company to be? What is the likelihood that if your board has a negative attitude toward more women in the boardroom, your company will be targeted for activist or populist actions and retaliations at a speed, and scale, never previously imagined?

Quotas are coming! Quotas are coming?

Board diversity, especially the number of women serving on boards, has become regular headline news, reflecting a growing pressure on boards to change or explain why their composition is appropriate. Legislative bodies worldwide find themselves under enormous pressure, and have started instituting changes. Outside the U.S., 16 countries have mandated some type of quota, threatening fines and, in some cases, dissolution if corporations don’t meet deadlines for achieving legislated. Formal quotas were introduced nine years ago in Norway where resident companies were required to have 40% of their board seats occupied by women by January 2008. Quota requirements are going global. This past November, Germany legislated a requirement that 30% of all non-executive board seats be occupied by women by January 1, 2016. At the close of last year, women held 14.1% of all non-executive board seats there. In our own backyard—Canada—the Province of Quebec requires that women occupy half of all board seats on state-owned institutions.

In this country, it’s important to gauge the increasing momentum behind gender diversity quotas. Currently, women hold 16.9% of the board posts in U.S. Fortune 500 Companies, have barely improved in their 16.6% performance since 2012. The numbers are even smaller among Fortune 1000 and mid-cap companies. Boards’ failure to respond to these changes will invite legislative and regulatory mandated quotas, if only to relieve the pressure regulators feel. If history is any example, the slower the pace of voluntary change, the faster the pace of imposed change. The more boards resist, the more likely change will come in ways they might not anticipate or want.

Sooner is better than later.

I’m no fan of imposed regulations in the board room. Regulations and mandates, while well-intentioned, often produce unintended effects and consequences. Quotas, with aggressive time limits can easily translate into board seats Nancy-May2.jpgoccupied by people who don’t belong. I applaud boards that see diversity positively now, and are going on to adopt, adapt, and improve. Boards that carefully consider and bring on excellent, relevant female board members improve their perspective and ability to deliberate. Diversity contributes to better board governance, because, as the number of qualified and valued women increases and becomes known, the perceived need for external actions (i.e. quotas) will start to fade. Thus, as your board grows more diverse, the pressure on other boards to do likewise will increase, even if only in a very small way.

So, “fellas,” here’s where this leaves us: this boardroom diversity “thing” isn’t going away. Diversity and equality in the boardroom is coming. How soon you face it and embrace it is up to you. Resistance is futile.

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Sustaining High Performing Boards

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Let’s face it, it’s a tough job for any board to oversee and direct a company. To do so while staying highly functional, with continued relevance in a volatile global economy, can be daunting. Even one misplaced or dysfunctional director increases the risk of failure for the entire board. One such person can quickly take a toll on the company, CEO, senior management team (who can lose faith in and respect for the board), and the other directors’ abilities to execute. An under performing board winds up impacting the company’s credibility in the market: consider the examples set by HP, Hess, JC Penny, and BlackBerry.  In conversations with numerous CEOs, Chairmen, Lead Directors, and others, it’s still remarkable to see how often exceptional directors are willing to live with and cover for less effective directors.

Eventually, the pain of working with such a “professional” on the board leads even the most detached directors to consider the need for director succession, or removal of one of their peers. This is usually a painful and difficult process, which is why many prefer to brush this under the table versus dealing with it in the open. When it does happen, the process is compounded by a new “emergency” quest to find a replacement. This is not something most directors expect to sign up for.

In addition, some large, well-known companies that have been in the spotlight of  government investigation and litigation have been backed into a corner on director succession ― by mandate. The last thing any director wants is to stare across the table at government officials (or aggressive activist investors for that matter), who want to step into their boardroom and tell them who should be there, and how they could better manage the company.

So, what have boards done to mitigate such risks? Many boards now have a CEO succession plan or are putting one in place (hopefully), yet very few have built a sound succession process for themselves ― the board of directors. The fact is that many corporate directors find the succession process somewhat uncomfortable to deal with. After all, how many of us actually look forward to replacing ourselves?

Roger Kenny, a well known and respected governance advisor, says “I’ve seen this issue time and time again and it’s critical for boards today, more than ever, to have a succession plan for themselves and to review and renew that plan every year.  Frankly, many boards must start retiring their directors, as their lack of relevance becomes a liability to the company and shareholders. A good board assessment, applied together with a strategically built and managed bench of directors, can address and further help manage the assets and liabilities of the board. They must consider having the right skilled directors sitting in those seats. It’s important for directors to have more than one skill ― they must have breadth. Directors should not be recruited to solve a short-term problem.”

In these times, boards need to be more dynamic than they are today, if they want to continue to succeed. Life term directors and board “continuity” are no longer the prime means of keeping a board strong. Boards need to “refresh” and “rebalance” in response to changing business environments. In addition, we’ve seen boards presented with directors on a golden platter and “sold” on a few desirable-at-the-moment points promoted by external parties. When boards are looking for the looks good rather than what they really need, they can begin the (often unnoticed) slide downhill.

To combat these risks, boards need to have a strong, relevant, and dynamic resource from which to draw, and a significantly more robust process than a “guess who’s coming to dinner” evaluation of potential directors. Considering this, some boards have put in a revolving guest door for one or two individuals who might be perceived as potential prospects for board service. Others keep a running list of “who’s available” in the lineup of who they know, however, this is insufficient. In fact, that’s how many boards got into trouble in the first place. Some other boards are now starting to consider building a “bench” of potential directors to hedge against unexpected departures and to find new strength to address changes in markets and global economies.

Virginia Gambale, who has served on a number of high profile boards, agrees that a bench is an important and intelligent tool that public, and even private companies, need to keep up and remain strong. “In today’s dynamic and volatile environment, change occurs every day. Having a bench to draw from is critical.”

In speaking and working with Ron Geffner, a former SEC attorney and highly respected counsel who specializes in working with CEOs and boards on investor challenges, regulatory investigations, and actions, the discussions about the quality and value a good board brings to any given situation comes front and center. He states that “given the turbulent environment we live and work in today, having the ability to draw upon a trusted resource (bench) for experienced, diverse, prospects who can become exceptionally engaged directors, is not only critical to corporate leaders, it’s reassuring to shareholders. A board that’s strong, relevant, and committed also increases the opportunity for success and explains why some businesses not only survive during troubled times but rather excel.”

What could be considered a trusted resource of experienced, diverse, well-vetted prospects? Perhaps boards need to look at what teams, and more specifically sports teams, have done for decades: building and managing strong lineups of talent. After all, who goes into a season with only one quarterback or pitcher? Such talent takes time to find and cultivate to a point where they can come off the sideline and step up exactly when needed. Every team refers to such on-hand depth of talent as its bench.

Ideally, boards need such a dynamic and reliable tool. Whether you call it a bench or pipeline, it means having on-hand exceptional executives who have the right skills and are both capable and readily available to serve on your board and who can be trusted to add to the long-term health and value of your company. More importantly, having a bench of two or three prospects is not enough. There should be a full lineup that’s kept fresh and able to realistically address the complexity of the business should issues arise.

A number of Fortune 100 companies are already using some form of a bench today. A good number of them have been backed into doing so through government, legal, and regulatory intervention. There has even been some side discussion with insurers on innovative ways to use a bench to reduce the liability and risk on the part of the board and the D&O insurer.

Building and managing these types of “board benches” takes time and exceptional focus, generally much more than most boards can afford to do well on their own, especially as they face added compliance, regulations, economic shifts, and strategic and financial oversight concerns. Properly filling and maintaining such a bench usually requires a greater reach than the board’s connections alone to avoid settling for less than what’s needed. One director of a global company shared that they had tried to build their own type of bench, and found it nearly impossible due to time, inexperience, and thin networks.  He went on to say that: “We’ve been challenged with this issue in the past and have gotten stuck with two poor performing directors. One we learned, had conflicts of interest with our company, and he didn’t even understand why we confronted him with this. The other, we still have on the board, yet unfortunately, they adds little real value.”

Some other steps in the process include a deep, honest, and detailed review of the current board’s foundation, value provided, risks, and much more. Once set, a board’s bench also needs to be managed: continually tracked, evaluated, and monitored against the relevant direction and challenges of the company. That’s because a board’s Nominating/Governance Committee needs to stay current with their bench prospects, so that they can fill gaps without skipping a beat, feeling confident that the right people are there to fill those empty seats.

What’s the upside? When a new director is needed, final selection, election, and  “on-boarding” occurs with great speed and fluid integration, enabling a board to function without skipping a beat.

This leads to the question: how do we get this started and going? A simple question, that requires a more complex answer. The first step is to make the decision not to follow the “same old, same old” process, or do the same thing over and over expecting different results. This is a whole board commitment. The next is to solicit (or assign) board member responsibility to plan and pursue this effort. After that, a realistic budget, timeline, and goals are needed to execute and manage the “bench.” An honest appraisal is important to determine whether the board can tackle this complex process on its own, or if it needs experienced outside assistance. If there’s one message to remember, it is this: Your board should never rely just on a “who do we know” approach.

Connecting: Let’s Make it Real

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While dining with colleagues recently, our discussion turned to how easy it is to connect with the entire world and yet still be isolated and alone.  As much as we’ve all become “interconnected,” many of us still lack the ability to “connect” with one another.  Sad, because so many miss out on the power of face-to-face connection.  In addition, by being electronically versus personally connected, we lose out on the subtle (and sometimes obvious) knowledge to be gained from those who have very different backgrounds, viewpoints, delivery styles, and experiences.  The challenge of truly connecting with people at all levels has grown across all generations now that we’re starting to talk more at one another than with each other.

Let me share a story:  A few weeks back, while at a local store, I overheard a young clerk who was SO excited about a story he was sharing with a colleague.  These two young men, apparently newly minted college graduates, seemed frustrated with trying to find permanent jobs (I see similar frustrations with professionals searching for their first or second board seat).  One seemed so animated and excited about a friend who, as he put it, “was set for life.”  With great exuberance he continued:  “It’s all about talking with people… you know that getting ahead is REALLY all about TALKING WITH AND GETTING TO KNOW PEOPLE!”  These words caught my interest.

He continued by saying his friend had gotten to know another friend’s mom who had started a business.  In speaking with her over time, he learned about her vision and plans.  Shortly thereafter, he was asked if he’d be interested in joining the young company.  Within two years, he was being sent out to help launch their West Coast operations. “See? That’s what I mean.  You have to speak with everyone, get to know them, learn how you can help them and then continue to talk with others, expand the connections, and build upon those relationships.”  Honestly, I was amazed at how his energy level and body posture changed while sharing this story.

Relationships and Communication – Top Level

Now you may wonder what this story has to do with CEOs, boards, or directors.  For most people, connecting with people they don’t know, and building or expanding upon relationships with others is not a natural skill.  Creativity and ease in doing so is a talent that’s quite often uncomfortable for many large companies’ leaders and directors to cultivate. In fact, I’ve noticed that those who parade the names of people they know can be the among the least broadminded or influentially connected people you could meet. Here’s an example: in conversation with a board member and former Fortune CEO, he explained his recent discovery about how important it was to get to know someone slowly before trying to ‘get them to do something that you needed’.  The comment I found to be fascinating, more so because it wasn’t the first time I’d heard such comments from a CEO or board member. What he didn’t know was that I knew the person he was trying to connect with and that my relationship could have catalyzed his building such a relationship, increasing the return for him and the other person, too.   

This experience is not unique. I’ve observed the communication and network path of numerous CEOs, directors, and senior executives who have made similar statements and who liberally drop the names of ‘who they know’ – over and over again – forgetting the complexity and depth of how long-standing, trusted network relationships work both ways, either to strengthen or degrade situations.  Beyond direct conversation, there’s much to be said for observing physical behavior and listening to the tone of voice.  If you’re a keen observer (a learned and practiced skill needing continual honing) you can see the body position change, the tone of voice adjust, and in time, determine how confident they are, and just how strong the network relationships really are.

Observations:  Benefits

The higher up the ladder you go, the more critical your communication and observation talents are needed to support  your relationships and networks.  The elegance with which you use these skills can help you gain easier access to key resources or influencers that will strengthen your position.  Just as important, you start to more easily grasp where you can provide value, too.   In reciprocating value or support, “actions do speak louder than words.”  Lack of reciprocity says much about your (and your networks’) real character.  To his dismay, a CEO ran headlong into this when he recently shared that, when he needed support, he saw which relationships were really strong and who his real friends were.  There’s no better way to learn the truth about someone than to call his or her character into question.

Another example for me of both positive and negative character, came up when I attended a network gathering last year.  During the cocktail reception, a corporate chairman and I had launched into an enjoyable and lively discussion.  Shortly thereafter, three other members joined our conversation.  One person later joined the group and seemed, almost desperately, to want to monopolize the conversation.  Slowly, but unmistakably, he began to literally elbow me out of the circle.  I was fascinated to be the focus of his behavior and watched for signs of how the other participants would react.  The chairman, with whom I’d originally been speaking, also noticed. He gently took my arm and brought me physically back into the conversation.  As I said, one’s good character, and the flawed character of the other were quietly revealed.  Needless to say, it’s an experience that will remain with me, and expanded my respect and relationship with another.

The Cloistered:  You’re probably one of them. 

I’m still floored at how often CEOs, board members, and senior executives don’t take the time, or place enough value and focus on strategically building, maintaining, and “vetting” their relationships and communications with their networks.  Time and again I’m asked to help executives, who are looking to serve on boards, to either network, learn how to network, or even help them find another CEO or board post.  But I’m rarely asked by these same people, “How can I help you?” It happens so seldom that, when it does  happen, the individual automatically rises in my estimation.

So let’s circle back to the conversation between the two store clerks.  How we manage our communications face-to-face and otherwise, support and diversify our relationships, and network  all strengthen our ability to serve the boards and companies we work with.  Continually working on nurturing and learning from our relationships also increases our own knowledge, competence, and ability to serve at a higher plain of professionalism.

The next time you tap someone in your network, be it face-to-face or some other way, I hope you’ll remember what I shared here and use it to your advantage. And to help those who’ve helped you, too.

CEO Shifts: Opportunities for Renewal as the Economy Strengthens.

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It’s well known that the primary governance roles of a Board of Directors include recruiting, retaining, supporting, evaluating, and ensuring the smooth succession of their chosen CEOs.  This is a key part of each board’s mandate to ensure the long-term success and sustainability of their companies.  Many boards handle all aspects of that function quite well.  Unfortunately, even more don’t.  Why?  There are as many answers to that question as there are boards.  However, one reason that comes to the surface frequently is that, dealing with strong personalities – and what CEO (or board member) doesn’t have one – can be messy, sometimes painful, rarely a smooth straight line, and exhausting work.  Board members, and people in general, would rather work on a straight path and don’t like pain.

Unfortunately, during times of uncertainty, when risks multiply, the tendency of boards (and sadly, for that matter, most of us) is to put our heads down and work towards the status quo, avoiding any decision to bring in new leadership who might know how best to lead the company through tough times.  Judging from the last few years, and unless a CEO was front page news, the CEO slot could be considered one of the few places where you could consider your job fairly “safe.”

Now that economists are in agreement that we’re slowly coming out of a long global recession, one may start to see more boards willing to step out of their “toe the line” mode of operation and shift out their underperforming CEOs in hopes of revitalizing innovation and forward-looking performance with new leaders.  In 2012, 15% of the world’s largest companies changed out their CEOs.  Hope for the economy is still fragile though, and in the first half of 2013, CEO change has been running neck-and-neck with 2012.  If things start to heat up, predictions are that C-Suite shifts will accelerate as external pressures mount.   The same is also true of board turnover.  When economies become more stable and the business environment more predictable, boards and investors are more apt to support and even aggressively push for changes in leadership.

Risks always involve some level of uncertainty.  Turning over the reins of a company to a new CEO and/or new board member(s) creates a whole new set of dynamics and risks.  However,, “No pain; no gain,” because with those risks comes a whole new set of opportunities for rewards.  And rewards that arise from overcoming challenging situations are usually much sweeter.  Unless of course, you’ve staked your credibility, and the company’s welfare, on the wrong choice for CEO or board member.

Unfortunately, this preasure to change addes to the reasons why many boards do not do well in either their selection of a new CEO or establishing a successful succession process.  Often, both inside and external candidates are chosen on the basis of past performance, but past performance is no guarantee of future success.  Instead, shouldn’t boards focus on what is going wrong or could be better, and on finding those candidates with the best understanding, vision, answers, ability to adjust and execute on the strategy?

Ultimately, when things are not going as they should, it is the board’s responsibility to determine why.

Is the CEO not doing what is expected? Is the board not clear or realistic in what it expects?  Is it the management team?  Is it the relationship between management and the board? Is the board not functioning or understanding the company’s place in the industry and market?  Without these answers, it will be nearly impossible (unless lucky) to make those changes in the company that create positive changes in performance.

Directorship: Handling the Risks in Serving

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I continue to smile at the unbridled enthusiasm of professionals who jump to  say “Yes, I want to do that” when engaged in a conversation about board service.  It’s actually quite encouraging, considering the  personal, professional, financial, and reputational liabilities these people may have to put on the line.  Although the topic has been bantered around by current and prospective directors, there is a certain lack of depth in discussions about the exposures from joining a board that I find simply fascinating. Some directors have told me that, with the combination of the law of averages, consistently favorable Delaware Chancery rulings, and existing company indemnification policies and Directors’ & Officer’s Liability Insurance, a director has virtually all the protection anyone needs these days.  Generally, these do work in one’s favor,  except when they don’t.  In fact, understanding your potential risks/liabilities, whether it be  litigation, bankruptcy, permanent damage to your reputation, even criminal prosecution, and the  full extent of your coverage should be more important to you than the nuances of your board compensation.  Fortunately, with more issues arising to impact the health and well being of companies (i.e. cyber infiltration, social media, new sustainability issues, to name a few), more directors now appear to be focusing on the gap. But not enough.

Consider these cases:

A director of a foreign company board retired from his post.  Within two years of leaving, the company became embroiled in a heated legal battle in which the all the board members were also named.  The departed director signed in relief stating “I’m glad this is not my issue anymore.”  A few short weeks pass before he received notice he was also named in the suit.  What’s worse, he also learned he was liable for his own costs of representation. Concerned, he called the GC to ask why this was an issue for him and why he was being invoiced for legal services.  As it turned out, the annual D&O no longer covered him, leaving him fully exposed upon his retirement  Four years into the battle he was still trying to get coverage on the company’s policy – after paying out several hundred thousand dollars of his own money.

Another intelligent director we know served on a large public company board that has been the front and center of several cases.  When the first exposure hit the press, she counted back the date from her retirement.  She exhaled in relief to learn any personal responsibility she may have had (and yes, she checked her coverage years after departing to confirm that her protection was still in force), was well past the statute requirements.  Still another director we know shared that she has been named in litigation cases at least 17 times.

One director we know of has also suffered permanent reputational risk.  He has worked hard to recoup from the stigma of being on a board when the company collapsed due to fraud, He has served since on not-for-profit boards and donated large amounts of time and funds to good causes, as well as other types of “give backs”.  Still, the community and industry holds him, and all other board and senior management fully responsible, to this day.  When his name comes up in the course of conversation, board members bluntly shy away.

Another director on a public company board,  served for successfully for years with his fellow board members until faced with an unexpected legal challenge.  Addressing the issue, the directors went to work and brought in their own counsel.  Shortly after starting on the case they reviewed the D&O coverage and learned that existing policies did not cover the entire extent of their legal costs.  They eventually found out (and still bitterly complain) that they were personally out of pocket nearly $800,000.

The risks associated with board service will always be present (in addition to the rewards), and, in general you should look at these “risks” as typically having two components: likelihood (of occurrence), and impact (usually monetary).   In dealing with both aspects you (first) want to understand the risks you might be/are facing; (second) work to reduce their likelihood of occurrence through certain actions (control those risks); and (third) get help from others to soften the impact (insure yourself against the impact should they occur).

Understand your risks:

You need to assume that, as a board member of a public company (and many private ones) that the company’s risks are now YOUR risks too.  Any failure, and those affected will turn their eyes right to you and maybe your bank account.  Before, during, and after joining a board, understand the environment in which you’re working.  Do you have a pretty sound grasp of the company’s business, industry, and general operational/industry exposure? Does the company have large investors, or many small investors who could be easily hurt by a misstep? How volatile is the industry and the company’s business? How well do you know your board members (before, during, and after service)?    Is the top management team up to snuff?  Where does management need to be shored up or supported?  Are you able to clearly follow all discussions among your peers, and presentations given by management and outside consultants?  If so, great.  If not, you’d better be a quick learner.

Control risks (than you can) through your own actions:

To reduce the likelihood of getting into a lawsuit, always try to do the right thing as a director.

Your role as a director should be oversight, not management. If you find that you are giving specific directives in how to conduct the company’s affairs, something is wrong. 

Get the best information you can (inside and outside of management, as a reality check) so you can grasp the risks and upsides in the business. Use consultants as you need, to understand complex business issues, proposals, innovations, and opportunities, among other things.  You should be comfortable discussing all points during board meetings.

Understand those around you so that you can have a positive and productive influence:

Don’t worry as to whether management likes you.  Ask them the tough questions, have a healthy level of  skepticism (without being abusive or negative — but don’t wimp out either). Your trust, and theirs is to be earned and built upon.

Does management have the right programs in place to deal with risks? Are there strong internal systems and controls? Has management identified compliance issues and risks such as, money laundering, bribery, data protection, security, crisis management, record retention, etc.

Does the board have the right programs in place? Does the board have a good system in place for addressing complaints – example:  if there are material weaknesses in the company’s financial structure, is there a system in place for  employees, vendors, or others report them directly to the Audit Committee?   How trusted is our whistle-blower program? Are whistle blowers protecting with anonymity from retaliation?

How well do you know those around you? What’s the CEO’s risk appetite? Do you have detailed understanding of each of the senior management team’s capabilities? How are they executing board directives? Are each of your fellow directors well-qualified?  Do they display integrity, good judgment, and are they engaged at all meetings? Do they welcome and openly engage in periodic self-assessment and evaluation?

Insure the risks you can’t anticipate.

Reducing the likelihood of things going wrong, doesn’t mean something won’t happen.  Board work and responsibilities are growing ever more intricate, in line with the increased complexity of running any business these days. What’s key is how to protect yourself against those who want to punish you for not doing your job the way they think it should have been done. Right or wrong can often become a matter of great, lengthy, and expensive legal debate.

You need to fully understand  your coverage and review it annually – at least. It’s important to understand what layers of protection have been put in place for you as a director of the company, so that you can focus your attention on doing what’s right for the company and stakeholders.  You should understand the company’s indemnification policy for directors, when it was last reviewed and updated, and by whom.  You need to understand the D&O policies in place, (in particular, Side A coverage).  For example: what are the individual and aggregate limits, how exclusions work, layering, whether advance payments are available for legal costs (lawyers like to get paid timely if you want to continue to be defended), and the effects of settlements on additional coverage,  just to name a few.

You also need to know how long you are covered for after service.  New regulations can extend your liabilities five years out.  Many companies don’t cover directors once they leave.  If necessary, supplemental individual policies should be discussed and considered.  In any case, getting legal and financial advice should always be sought, unless you’re already an expert in this area. Another tactic to consider with your advisors is the wisdom and prudence of sheltering your personal assets.  As the saying goes: “hey, you never know.”

Many directors face legal liabilities during and after their board service.  If it’s any comfort, the law of averages and your odds are still pretty good: most directors don’t get sued, and for those who do, most times their defenses prevail.   In closing, my best wishes and, as the saying goes: ” may the odds be ever in your favor.”

The “Digital Director” Dilemma

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According to Darwin’s Origin of Species, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.’ (Megginson, ‘Lessons from Europe for American Business’)

The “Digital Director” Dilemma

It is an obvious statement that much has changed in the boardrooms of corporations in the past few years.  What’s not so obvious is that such changes sometimes lag far behind what is happening in business – be they large, small, public, private, or not-for-profit companies – as a result of rapidly evolving technology.  Along with the ubiquitous dependence virtually all organizations now have on technology, be it hardware, software, cloudware, netware, etc., has come an enormous uptick in unforeseen risks and vulnerabilities.

For years now, as it has been filtering upwards through organizations (from those at operations levels most immersed in the technology fields) to the C-Suite, most levels of management either gained or are gaining some grasp on what their businesses face or are about to confront.  But that understanding, more often, dies when it hits the boardroom.  While some astute portions of the director populace get it, and many are beginning to understand that what they don’t know can hurt them, there are directors who can’t  respond to a simple email.  Some still have their right-hand admins print out their emails so they can read them and decide how to respond through those same admins.  How easy, do you think, it is for them to grasp the concept of “social media” and its implications. And, if you read the quote at the top of this blog, how long can these directors be expected to last, let alone succeed?

So now, as an answer to this problem, many are bandying about a special kind of director: “Digital Director.” So what, exactly,  is a Digital Director ( DD)? Ideally, this is a candidate with all the traits that make for a good director plus having strong knowledge of the current state of technology (i.e. cloud computing, social media impacts, etc) and risks (i.e., cyberattacks, cybercrime, intellectual property theft, etc.).  This is the new “Uber-Director” the one who will save the board from ignorance and irrelevancy.  Of course, this raises some questions: Is the DD readily available? What other impacts can the DD have on the Board? and Is (s)he really needed? What’s their impact on strategy? etc.  These are just a few questions to start the ball rolling further along.

Next: Is the DD readily available?

How easy is it to find the DD? The answer is: not so easy. Think about the populace from which we prefer to draw our directors — the 50+ year old business veterans: those, whose long and varied experiences have grown and honed a “big picture” view of things.  What needs to be considered is that these professionals did not grow up comfortably immersed in the technologies of today (like almost any 20+ business newbie). The digital age sort of seeped up around them.  Some few embraced it early on, some are trying to catch up or not look stupid, others are lost and clinging to the rocks of what they knew early on in their careers.

Fact is, there just aren’t many directors with strong “current” knowledge of the digital world, let alone those the additional needed skills and experience to have impact strategies  guide businesses.  Which means, that, if everybody wants them, there will soon be a whole crop of “over-boarded” directors (good, bad, or indifferent).  Which, in turn, will soon mean that your particular board cannot expect much from them. So what is the alternative? Settle for less? Recruit new board members steeped in technology but light on strategic operational business and governance experience?  While this may be the expedient solution, the tactic in and of itself leads to other board issues.

What impacts can the “new” DD have on the Board?

First off, the board gains asymmetries that will reduce the entire board’s effectiveness in discussions and decision-making.  A new knowledge expert, with no close seconds, will often go unchallenged by peers in discussions and decisions on technologies for the firm. At the same time, this new DD has to catch up on all the other skills to be able to contribute in any other discussions. That lost multiperspectivity can lead to group-think and other board dysfunctions.

In addition, having a knowledge expert allows those so inclined to “skate” and not advance their game. One can hope that the DD will educate and advise all the other board members, but this is a very rare expectation sought in new recruits.

So, coming from the first two the last question (at least for now) is…

Do boards really need a Digital Director?

The answer is: it depends.  It depends on what knowledge the board members collectively have and each individual’s base understanding of technology as a tool and how it does/will impact the firm.  It depends on the potential for damage to the firm from the board’s not understanding its technology risks.  It depends on how quickly a new Digital Director can be educated and integrated as a full contributor into the board.  And lastly, it depends on how quickly and firmly all other directors bring up their technology “literacy” so that vigorous, useful discussions and effective decisions can continue to be made to protect the firm and its stakeholders.

Board Evaluations

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Board Evaluations

According to a 2011 PWC 2011 study, 94% of public companies regularly conduct an evaluation of their board. Since the NYSE requires all its listed companies to conduct some form of board evaluation (NASDAQ does not, but recommends it as good governance) this number is not a surprise. Unfortunately, both listing agencies are silent as to what an evaluation should be, what form it should take, or how one should be conducted. Small wonder therefore, that an “evaluation” can take almost any form, from an informal discussion about how the group is doing, through to a full, detailed, peer-to-peer or 360 assessment. For some directors, such “under-the-kimono” looks can be quite uncomfortable.

I meet with many directors, and have had numerous one-on-one conversations. Always implicit is the expectation of confidentiality about their experiences and expectations. The topic of their peers’ performance in the boardroom is often brought up in discussion.  It’s interesting to note what an individual director thinks about how productive self-evaluations are, or how much the needle has actually moved (and what’s involved in developing and conducting a productive evaluation).

I’ve seen and heard all sorts of approaches.  Many board members put on a brave face, go through the motions or adopt a “let’s get it over with ” check-off-the-box approach. Those who do it regularly conduct it the same way over and over again. Occasionally one finds some conducting reviews with moderate substance or thought. Some few bring solid thought to the questions posed, follow up on findings, and use the results to ignite positive advances.

My impression is that most boards consider evaluations uncomfortable and a waste of time.  It still amazes me when others, to minimize their “pain,” prefer to use the same approach – and questions – year after year. Unfortunately, as the saying goes: if you always do what you’ve always done, you’ll always get what you’ve always gotten. That, of course, may get you a pass while the winds are blowing in your favor.

Why does this go on?  I suppose it comes down to how much pain is perceived or expected from the effort, and how much personal risks stack up against anticipated rewards. Few directors can argue against being better engaged and more productive in their roles and a greater asset to the CEO, management, and stakeholders.  Frankly, wanting to do almost nothing with regards to evaluations, while creating the perception of actually doing something (some call it “pure theater”), is the preferred option.  These days, with a myriad of complex issues around strategy, technology, financial oversight, risk, compensation, compliance and the potential liability associated with a misstep, how many board members are going to publicly admit what they don’t do or know?

Granted, there are many board members who do understand the value of the effort and are more than willing to go through with it for the right reasons.  Many will use the process solely to solve a particular problem, such as removing a difficult board member.  And, then there are those who see and glibly vocalize about the value of a substantive evaluation, but will only reluctantly get involved with the process, all the while trying to avoid focusing on outcomes, root causes, and improvements.  My impression is that this last group is the largest.

So, how can we work to overcome that mindset, and make the world of board governance at least a little better? Perhaps more detailed listing requirements?  Hasn’t worked well so far, as there is no push for further clarification of what a “board evaluation” really is.  Directors’ and governance organizations and associations?  Again, no. Boards see those groups being more motivated by wanted to sell more services or to push for conformity (one-size still does not fit all).  Education on evaluations and their benefits is better than nothing, but does it really drive improving individual and board group performance?

Based on many recent governance “evolutions,” the best hope is pressure from shareholders for reporting transparency.  Reluctant boards and directors will take notice when shareholders start demanding basic information on board performance from the directors they elect, and pressing for accountability. But again, at what price?  When the risks associated with doing the bare minimum grows greater than the pain of the effort to actually improve, evaluations will take on a more universal importance.   Shareholders (led of course, by institutional and other large investors) need to ask more pointed questions, such as:

  • What evaluation method did you use this year?
  • What methods changed from last year?
  • Did you use outside assistance?
  • How were results measured?

And, most importantly:

  • What governance and performance improvements did you put in place since the last evaluation?

Happily, as I alluded to earlier, some forward-thinking boards are already doing this.  However, until shareholders and investors see these answers, in proxies and corporate websites’ governance sections, the question of the board performance evaluation will remain far down on the agendas of too many corporate boards.