With all the new mandates and expectations, particularly for public company boards, it’s easy to get swept up in the scramble to comply, disclose and explain. This made it all the more exciting to hear a CEO say, after the addition of some new directors, his board is now so good “it feels like cheating.”
In that single declaration, two key elements of superior corporate governance were revealed. First, this CEO views his board as a clear source of competitive advantage for his management team. Secondly, this company used the board refreshment process to do far more than check boxes: It composed a board where every director makes the company stronger.
Digging a bit deeper, I learned this CEO had a number of issues that were “keeping him up at night” related to capital allocation decisions, investor relations and the company’s vulnerability to government regulation, both in the U.S. and in key foreign markets. He came to the realization that no one on the current board could be helpful in these areas and brought it up with the independent directors. During the course of several board meetings, it was determined that new talent was needed around the table and the opportunity to add other kinds of diversity could be realized at the same time. The painful part came when a couple of long-tenured directors with outdated skills and experience were asked to retire. But retire they did, and the board is now “firing on all cylinders.”
Rather than viewing the recruitment and selection of new directors as a drain on time, money and energy, what if companies of all sizes and ownership structures focused on finding new ways to win in the marketplace with each new addition? This invariably involves some tough decisions but the payback can be tremendous.
One of the first decisions that needs to be made is to invest time, and potentially money, on the search for new independent board members. This is not easy for small and micro-cap public companies with limited resources nor for PE portfolio companies where every dollar spent is under the microscope.
But even one well-chosen director (never mind two or three) can change the fortunes of a company. No matter how good the leadership team is, they simply cannot have all the answers, understand all the risks, and see around all the corners. Having the right pairs of eyes on matters of strategic importance cannot help but enrich decision-making and, by extension, the company. So, whether you dedicate talented internal resources to the director search or bring in a board recruitment specialist, aim for a return on investment that is not only swift but also lasting.
Another set of decisions center on legacy board members, particularly if you don’t want to increase the board size and budget as you refresh its composition. This requires a candid assessment of every director’s ability to contribute to the enterprise going forward. Current directors may have been terrific in the past, but it requires an honest assessment of whether or not their expertise is aligned with the company’s future strategic direction.
CEOs who are forthright about what keeps them up at night and where they could really use help from the board will lead you straight to the answers about who should stay and who should go. Ego can make this a difficult process, but much of what it takes to succeed in business is difficult, so why should board composition decisions be any different?
Once the commitment is made to bring in a diverse director, care must be taken to write the position specification in a way that will lead to candidate diversity. Avoid the temptation to insist that a current board member knows the candidates, which automatically reduces the talent pool. It will also limit the choices if prior board service at a public company is a hard and fast prerequisite. These two criteria, more than anything, have held back progress toward boardroom diversity.
When a well-constructed net for candidates is cast, a pleasant surprise awaits most companies as they uncover the wealth of qualified and talented individuals from under-represented communities. The challenges that then emerge are ensuring a thoughtful selection and constructive on-boarding, making the chosen directors feel welcome and giving them the tools they need to get off to a fast start. The last remaining task is to track both the tangible and intangible return on investment in diversity for the board and the company.
My CEO who is “cheating” with his newly composed board does not yet have empirical data to support the changes that have been made but is confident they will show up at the end of the first full year together. He is tracking organic sales growth, return on capital employed, and several qualitative metrics related to risk management. He says the effort and expense related to board refreshment has already paid for itself in increased focus on key revenue drivers and in fewer sleepless nights—another important measure of success. He also reports highly constructive board meetings, where matters of keen strategic importance are robustly debated with a range of valuable viewpoints he never dreamed possible. The improvements he has observed show that a thoughtfully chosen combination of directors can have an immediate positive impact—both on the board itself and the entire organization.