The role of the Board of Directors has never been more important. Boards make important decisions that affect companies, the people who work in those companies, the people who own those companies, and sometimes the economy itself. If ever there was a place where excellence is required and should be demanded, this is it. The effectiveness of a board should not be considered a nice addition to a well-managed company, but a prerequisite.
But what makes a board effective? Surprisingly simple elements that are too frequently ignored. Among them, creating a plan for the board, demanding far more than mere independence from board leadership and establishing a board culture of performance and accountability.
Boards Need a Plan
The starting place in running an effective board is no different than running a good business – it begins with a plan. And most boards don’t have one. They largely react to management’s priorities or whatever seems to be the “pressing issue of the day” – be that a regulatory matter, a shortfall in profitability, etc. Arrows are shot, targets are painted around them and victory is declared.
Why shouldn’t the Board of Directors create a plan for its work and key objectives in the same way that all other layers of an organization– from the CEO to the smallest division – are required to do?
The entire board should determine and agree upon what they want to accomplish over the next 12 months, three years, five years. This may involve items the board itself needs to address – such as the recruitment of a new director with expertise in a particular line of business that forms part of the company’s growth strategy. Or it could involve setting priorities for items the board wants management to bring forward over the next 12 months – such as a plan for executive succession or a recommendation on what to do with a money-losing business unit that has long been treated as a “sacred cow.”
This exercise requires board members to stop and do something that most champion sports teams regularly do– namely, stand back and talk about their game plan: What’s working well? What does the team need to change or do differently to play better going forward? Boards, by contrast, spend very little time on self-reflection. There are always a myriad of issues to deal with – jam-packed agendas, new items of business constantly coming forward, barely time to grab a coffee or lunch during the meetings, much less take time to talk about how we’re working together as a board.
Board evaluations – originally conceived as a vehicle for exactly this type of self-reflection and continuous improvement – have largely become box-ticking exercises for boards to satisfy themselves that there are “no issues” and move on. The results are barely discussed and quickly stuffed into a file folder so that everyone can feel satisfied that things are well in hand.
By contrast, creating a plan puts the board in a proactive position of setting its own agenda and defining its priorities. This is a very different exercise than analyzing scores from a board evaluation, circulating an email to board members and asking if they want any items to appear on an upcoming board agenda or checking off a template annual board calendar. It looks a full year out and involves all directors in setting priorities and developing their own ideas for continuous improvement.
Because the plan is board-driven and all board members become involved in developing it, it’s much tougher for management to dismiss or neglect items that appear on the plan – something that can be done with relative ease when only one or two board members are trying to get a thorny issue, such as CEO succession, onto the table. That said, it’s important to underscore that while the board should drive the plan, boards need to cooperate with rather than usurp management in setting priorities. So much governance regulation over the past decade has focused on strengthening the board’s role in corporate oversight. Yet, boards have a dual role – both to oversee and to collaborate with management in running the company.
Caveats on Non-Executive Chairs
That dual role raises a hot topic. Is a corporation better served by separating the roles of Chairman and CEO? Certainly the installation of a non-executive chair is the current response to the perception that separating the two roles automatically creates better ‘governance.’ But does it?
The answer is, of course, that it depends. What do you really want your Non-Executive Chair to do? Is the additional layer of governance provided by an independent Chair meaningful or simply “good optics”? Does it, in fact, disempower the rest of the board by creating an imbalance of information and knowledge of the business between the Chair and other directors? After all, if a Non-Executive Chair and CEO join forces on an issue, it can be tough for the rest of the board to challenge their position.
Chairman problems can run the gamut, from annoying micro-managers who can’t run a meeting to CEO lapdogs. When they arise, board members find themselves in a tough position: Who’s going to tackle this issue? How will it be done, so as not to give offense or create embarrassment? Appointing an independent Chairman is great –if you have the right mechanisms in place to get rid of him or her without a lot of drama if you need to. This starts with a mindset that nobody is Chairman for Life and that performance is expected in the role of Chairman just as it is from the CEO.
What do we mean by “performance”? Great Chairs run great board meetings – they watch the body language at all times, draw the quiet directors into the board discussion, understand the art of shutting down off-topic segues, bringing the board to consensus even on divisive issues. They form highly constructive working relationships with the CEO –raising tough issues rather than side-stepping them, and serving as a terrific sounding board. They enjoy the respect of the other board members – not because they hold the Chairman’s title or enjoyed an illustrious career, but rather because they’ve earned that respect, and continue to earn it at every board meeting.
Thinking through how the Chair of the Board is appointed, re-appointed (and for how long), evaluated (and by whom) and paid are all critical questions that many boards fail to grapple with. The time to address these issues is well before problems arise. Is there a job description for the Chairman and does it make sense? Does it include everything you really want the Chair to do? Are there criteria for someone to become Chair? Is the Chairman regularly evaluated in a way that is meaningful, confidential and constructive?
Boards Need Accountability
All the planning in the world and all the high-minded statements about the importance of good governance quickly loses any semblance of credibility when there is no real accountability backing them up. In many boards today, the lack of accountability is rampant.
It goes without saying that any board which creates a plan, such as the one described earlier, needs to hold itself accountable for achieving that plan. In fact, we recommend that boards revisit the entire issue of governance disclosure and provide substantive information about the board’s work more in line with MD&A disclosure than the boilerplate routinely found in proxy circulars, governance guidelines and charters. Summarizing the board’s plan and priorities would be one way for boards that are really at the top of their game to distinguish themselves.
But board accountability goes much further than this. Double standards that boards routinely apply to themselves vs. management continue to reflect the antiquated vestiges of board clubbiness dating back to the 18th century. Moreover, it serves to erode any board’s credibility with the very people whose work they oversee: the management team.
It’s tough to respect a board that tells management how critical performance and accountability is – then re-nominates directors year after year who everyone knows are long past their “sell by” date. Yet boards continue to do it; using term limits and retirement ages as their vehicle of choice to “ease” an under-performing director off a board rather than confront the performance issues head-on. The expectation that board members will continue to be re-nominated unless they “do something wrong” persists, reinforcing the “tenure mentality” that many directors still bring to the board table.
When you look at the charters of most Nominating and Governance Committees, they describe the committee’s role as that of recruiting, nominating and re-nominating directors. Yet, these are the mechanics of how the committee does its work. The real job of the Nominating and Governance Committee is to put the best possible governance team on the field. Held up against that standard, many would fall short.
Replacing board members is not the only tool boards have to deal with director shortcomings. Excellent Board Chairs often take time to coach directors or implement meaningful board development initiatives that can also have significant impact. The larger issue is that none of these tools are used as often as they should be. In fact, rather than considering composition in the larger light of board performance, it’s far too often judged primarily for compliance with independence requirements; or, as we anticipate shortly, diversity requirements.
While both independence and diversity can be important considerations in board make-up, actual performance and the real contribution of a director is equally important, and is far less of a consideration. For example, while much has been written about the need for board independence and diversity, less has been written about the need for board members to have a solid understanding of the company’s business, which in our view is “table stakes” for someone to be at the board table. Knowledge of the business and independence actually go hand in hand – the more familiar board members are with the company’s business and industry, the more independent they are likely to be. They will be able to form their own views about how management is doing in running that business and can put forward relevant and challenging questions.
We don’t believe that every director needs to have a background in the company’s industry, but those who don’t need to make efforts to learn about the business and become highly conversant in the affairs of that industry. Moreover, there should be some directors on the board – preferably two or three – who have an industry background. Spencer Stuart’s 2012 Canadian Board Index included a somewhat shocking piece of data: In 1997, 67 percent of the 100 largest Canadian companies had little or no relevant industry depth at their board tables. This has been remedied over the past 15 years. In 2012, almost 80 percent had three or more board members with industry backgrounds; vs. 10 percent in 1997.
What’s particularly interesting about the Spencer Stuart data is that this sweeping change – which clearly improved the overall level of governance at these companies – was not in response to a regulatory initiative that demanded a set number of directors with industry backgrounds. It was an initiative by Canadian boards themselves that hass been largely unheralded. It underscores the fact that boards know what needs to be done to improve their overall effectiveness. Given some space for self-reflection and the inclination to get serious about board improvement, boards can take meaningful steps to genuinely improve their overall effectiveness in governing a company instead of wasting time creating forms to react to the “best practice of the week.”
Board Culture and Accountability
The way most boards describe their “culture” is shocking when you think about it. Three words are routinely used by boards around the world in response to questions about how the board works together: “We are collegial.” And it’s said with pride.
Can you imagine how board members – not to mention Bay Street analysts – would react if CEOs described the corporate culture they were trying to impress upon their companies as “collegial”? “Innovative,” “passionate,” “committed to excellence” and “high performing” sound more like it. So why is it ok for a board to not only describe itself as collegial – but actually bandy this about as a hallmark of “good governance”?
We’re not saying that boards should be antagonistic or quarrelsome. But a board is not a dinner party. Boards make critical decisions with significant repercussions for the companies they oversee, their shareholders and many other stakeholders. Shifting the board away from a culture that values simply “getting along” to a performance culture is essential; yet few boards have genuinely made this transition.
When a board shifts its focus away from preserving collegiality and begins to increasingly set priorities, demand accountability and insist on excellence, something amazing happens: Board members typically begin to work even better together and there is far more openness and vibrancy in the board culture. After all, most directors don’t serve on boards for the money. They do it because they want to make a meaningful contribution to the success of the company they govern. Creating a culture that fosters this may be more demanding, but it’s typically more rewarding, too.
The board, after all, sets the ultimate “tone at the top” of any organization. Board meetings, themselves, have a fishbowl quality seldom lost on key executives invited in to make board presentations. If they witness directors who are absorbed in their blackberries, staring out the window or asking questions that betray a lack of preparation or understanding of the company’s business, this registers pretty quickly and the board’s credibility suffers accordingly.
There is no SINGLE way to make boards more effective. BUT ONE THING SEEMS CLEAR: Business has changed and many boards have not. Boards must be reflective and work more closely with all stakeholders to define a new playbook. Setting priorities and building a plan is essential. Ensuring that board composition not only reflects independence and diversity but also new and relevant skills is essential. Continuous improvement should take over from established norms and narrow perspectives. If boards take a hard look at the way things are being done and are open to new and better ideas, performance will follow. Public Boards of Directors have contributed greatly to the success of capitalism. Let’s get back at it.