Tag Archives: Board Evaluations

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.

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.