The new reality of the board room has dawned for boards. Directors are familiar with Sarbanes-Oxley’s major tenets and even some astute nonprofit boards are re-tooling to conform to similar standards of independence, accountability and transparency. Potential directors have sharply increased their due diligence before accepting a new board seat. Others have resigned from boards where confidence was shaky. Attendance at director conferences and seminars around the country has grown substantially in the last four years with directors learning more about regulatory requirements, compliance and risk management.
As a result of the increased attention to the areas listed above, you could assume that boards are dramatically more effective than they were at the dawn of the millennium, right? You would logically conclude that improvement has occurred; and in fact, board leadership has kept pace with the new laws and SEC and stock exchange listing requirements with the help of their attorneys and accountants.
We have observed boards move between three stages in the past five years. Most boards prior to the debacles at Enron, Tyco, Global Crossing and others were in stage one: Mighty Proud to Be There. Following the wake-up calls issued after the revelations of scandal, boards were thrust into a stage in which most have reached a Plateau, but have not progressed beyond there. Finally, we have observed a few boards that have launched themselves onto the path of the third stage, a High Performance Board.
Mighty Proud to Be There is the stage in which directors occupied the chairs ceremonially, enjoyed each others’ company and the organization’s largesse, and in return for their retainers and meeting fees, they pretty much deferred to management’s thinking and recommendations without provocative questions or concerns.
With the advent of Sarbanes-Oxley, boards were jolted into the next stage of board development, which we call the Plateau. They are more fully aware of the seriousness of what shareholders expect of them and of the legal consequences to directors who do not treat their duties with sufficient care, loyalty and obedience. When the board reaches the Plateau stage, they arduously attend to ensuring that they comply with the letter of the law. Meetings last longer as directors scrutinize the financials more closely and ask more questions of management, demanding more and more information before making decisions. Audit and Compensation Committees meet longer and more frequently than ever before. Some boards are reversing the trend in becoming smaller in size and are increasing their size just to handle the increased work load. Yet other boards are increasing retainers and fees to better compensate for the increased time demands and exposure.
With the additional time and attention directors are investing in their work, you would think that boards all over America would be making a noticeable difference in their contributions to organizational performance. Unfortunately, that is not what CEOs and plenty of progressive directors report. In fact, they often speak of feeling “stuck” or having reached a Plateau in which they have not gotten more effective, they are just working harder and longer without making any significant proactive, strategic difference. They feel more like an organizational traffic cop than a valued and trusted set of advisors collaborating with the CEO. This occurs at a time when so many organizations are feeling the press for earnings growth, and the board could and should be providing leadership that creates a competitive edge!
How do you move your board beyond the Plateau? What does a board and its leadership need to do differently to get unstuck and to evolve to the High Performance stage of board work? We will discuss eight essential steps the board and its leadership can take to move the board up the performance curve and to more fully capture and exude the spirit intended by the changes enacted through laws and regulations. Moreover, these steps will boost the return on investment of your board to the extent that you can realize the full potential your board has in order to become a competitive and strategic asset for the organization.
Step One: Define and Take Inventory of the Competencies on the Board.
It seems like everywhere we go Jim Collins’ book, “Going from Good to Great” is on the executive’s bookcase. Managers routinely tell us that they are implementing some of Collins’ observations in their own organizations. One of the early practices described by the stellar performers in the book was “First Who…Then What“. The leaders of those companies “first got the right people on the bus, the wrong people off the bus, and the right people in the right seats “.
Could this be an appropriate principle when applied to the board? How do you know who the “right people” are for the board seats, board leadership and committee roles? Traditionally, board leadership (usually the CEO) looked around for kindred spirits, friends, maybe someone who could reciprocate with a seat on their board and compensation committee in return. If no one came to mind, a recruiter could be called and counted on to produce a blue chip name with plenty of other board experience to his or her credit. They would have plenty of business experience, and they knew how to play the game by avoiding asking questions that created discomfort, especially for any of the other directors. Plenty of these folks still occupy boardrooms.
The “right people” are those who come to the table possessing the competencies that are needed to support the organization in achieving its mission, vision and strategy and in acting in congruence with the organization’s values. Competencies can mean either the skills, attitudes or behaviors that are needed in directors. The “right people” are long-term and visionary thinkers, they insist on short-term results at the same time, and they are comfortable with the nuances of the financial reports. They understand the business model, sell their ideas through influencing others, and above all, they manage themselves impeccably. Additionally, the board needs individuals who bring specific competencies that are instrumental at a given stage of the organization’s development…e.g., people with insight into international markets, experience with complex mergers and acquisitions, people who have led organizations to the level to which this organization aspires.
How do you change “who is on the bus” in the board? By involving the entire board in a “fair process” of creating a picture of what is needed in a director in the future. We have guided many boards through overcoming the inertia and fear of dealing with their own board’s composition and succession issues. As a result of creating a collective picture of the competencies needed in the future, a groundswell of energy usually emerges among the strongest directors to support creating a transition plan, taking retirements into account, to make a place to put the “right people” on the board. Sometimes those changes take place over a period of a couple of years, but there is a breath of energy in creating a clear game plan for the future. The sense of relief among stronger directors when this occurs is palpable.
We have also observed quite a few directors who see what the new higher expectations will be and decide to inform the board of their plans to retire or to move to director emeritus status in order to make room on the board for the competencies needed and to save face. Each board is different in how it evolves its composition, and each board can engage in its own succession planning with far more professionalism and less pain than anticipated.
Step Two: Define the Board’s Role in a More Strategic and Complete Way.
How does your board spend its time? If your board is like most boards, it spends plenty of time monitoring past performance or discussing reports that provide a look in the rear-view mirror. In fact, as we talk with various directors, they attest to spending most of their time in monitoring organizational performance, exploring and managing potential risks to the organization and in reviewing the strategic plans brought to them by management.
Boards will always need to fulfill these responsibilities, but they are not the complete set. If the board is to be accountable for ensuring the long-term success of the organization, the board needs to broaden its role. The board needs to spend more time focused on the future, not just the rearview mirror. The best directors want to do more than simply review management’s work AND the organization can benefit from a new and more complex, collaborative relationship between the board and management. Without micro-managing or intruding into the role of management, the board can play a vital role in contributing to the strategic thinking of the organization. The board occupies the unique space of being apart from the organization (given its largely independent status these days) and therefore being able to view ideas more objectively and more from the perspective of outside constituencies, namely the shareholders and the marketplace. When utilized to add to management’s thinking, not second-guessing, the board can evolve into a competitive and strategic asset for the organization; one which delivers a return on the investment made in the board.
Boards that become aware of the need to broaden their role beyond oversight sometimes struggle with the boundary with management and want better definition of what is a helpful strategic contribution. Given the perspective that directors bring to the table, they are well suited to contribute to discussions about how the organization is responding to trends in the marketplace, thinking creatively about how to change the industry or whether to be an industry leader and what the competition is doing. Directors who make a difference in this area do their homework. They are likely the visionary thinkers who have created strategic advantage in their own industries.
Ensuring an ongoing healthy succession pipeline is a critical strategic responsibility for the board. Too many boards only deal with succession when the CEO is either about to retire or is underperforming. Then, they are more likely than not having to recruit from the outside. While this may be preferable in some situations where a strong culture change is needed (such as when Lou Gerstner was brought into IBM) it is also statistically more risky. According to noted executive recruiting firm, Challenger, Gray and Christmas, 40% of outside hires into executive roles fail within 18 months.
Even when the succession process is working well, the board needs to attend to executive performance, beyond determining compensation. The board needs an effective process for communicating goals and expectations to the CEO and for measuring achievements relative to those goals at year end. During that appraisal process, CEOs need feedback about what they accomplished and about how they went about accomplishing it. Too many CEOs receive a raise, a few more shares and a pat on the back with general kudos. The best CEOs want a substantive dialogue about performance. Plenty of directors have observations about CEO performance that do not get communicated constructively. Too often, when the CEO first learns that the board is unhappy, discontent has been building for some time, and the CEO is surprised that the negative perception about his or her performance is so strong.
In addition to attending to the organization’s needs, the board is going to need to become accustomed to dealing with accountability for itself, beyond compliance. Governance belongs in the full board’s role as well as in committee. The board should not delegate decisions about how it will govern to its attorneys. That is abdication of one of its most important roles. The board must attend to its policies for governing the organization, decide how it will introduce new members effectively, evaluate its own performance and search for educational opportunities that are needed for directors on an ongoing basis. Finally, the board cannot afford to ignore dealing with its own succession issues. Planning for and cultivating future board leadership deserves thought equal to that invested in CEO succession.
Step Three: Measure How Well the Board Fulfills Its Role
The board expects the organization to measure how well it is performing. Likewise, the board needs to measure how well it is performing. Beyond fulfilling the letter of the law, the board needs a process for evaluating itself (ideally against best practices). Too many boards find a questionnaire in a book or online, distribute it, have an administrative assistant compile it and return it to the directors at the next meeting. It gets a few minutes on the agenda in which directors often conclude, “We’re doing pretty well. We sure aren’t the group at Tyco. We take care of everything in its time”.
When the board evaluates itself and its committees and the results are tabulated, the board needs a process, facilitated by an outside party, to focus the board’s attention on the most significant gaps. It is then useful for the board to receive guidance about the options that several other comparable organizations have used to address the same gaps. Boards do not feel as overwhelmed by their status when they have a resource to discuss alternatives for addressing their circumstances. The next step is helping the board to set goals to close those gaps during the coming year and establishing accountability for those goals during that session. We have seen many boards begin to make significant progress in their performance as a result of this type of process. Directors, especially the best ones, report feeling energized and greater commitment to the board when they can see progress made toward accomplishing their goals. After all, the best directors are high achievers who like to make a difference.
Step Four: Raise the Bar and Provide Support
In 1991, author Judith M. Bardwick published a powerful book entitled, Danger in the Comfort Zone. The focus of the book was about how to root complacency and the sense of entitlement out of organizations. She concludes that the roots of those problems lie in paternalism and too much security for too many people. When organizations discover the existence of the psychology of entitlement, it is frightening because it destroys motivation and performance. It will eradicate an earnings mindset and supplant a meritocracy.
That same psychology of entitlement has infected too many boards. Without external accountability, some directors believed that when they had attained the level of power and influence needed to be elected to certain boards that they had “graduated” from “performance appraisals”, and it meant they did not have to answer to anyone. As a result of the high-profile scandals of the last few years and many outraged shareholders, that mindset was exposed.
Without any traces of scandal, the entitlement mindset is still insidious, since it undermines the quality of the board’s membership. The best directors will leave a board that is complacent and only the mediocre will join the board. How does the leadership of the board rid the board of the last vestiges of that mindset from its membership? Follow the same advice that you would use inside the organization, raise the bar and provide support.
Boards do well when they define and communicate to directors what is expected from their performance, just as they would with managers. Directors need a clear understanding of what is expected, beginning before they agree to nomination for a board seat. It is a powerful recruiting incentive to well-intentioned “A-list” potential directors to learn that they would be in the company of high performers who expect the best of each other and the organization. Meritocracies attract “A players”, and meritocracies require continuing performance, not resting on laurels.
What about current directors who see the bar raised and who want to fulfill the expectations for their role, but feel overwhelmed with the changes? That is where the support comes in. Board leadership does not need to turn its back on directors who are willing to do what it takes to stay up to speed. It is the responsibility of the governance committee or other board leadership to locate and recommend the director educational opportunities most appropriate to its members, both individually and collectively. Boards also undertake reading and discussing some of the plethora of books that have appeared about effective boards since 2001. There are many ways to support directors who see the handwriting on the wall and are willing to do what it takes to make a difference in the work of the board.
Step Five: Recreate Your Meeting
Do you want to re-energize your board and heighten its value-add many times over? How do you spend your meeting time? Is it a microcosm of how the board divides its attention in filling its role with discussions ranging from the progress of successor candidates to a decision to enter an adjacent market to whether the organization’s culture is supporting the strategy adequately? How much time is spent in constructive dialogue shaping a shared picture of how to create a compelling future for the organization?
Or does your meeting consist of a series of management presentations covering reports you received in your pre-meeting packet? How many directors doze at the table? If nothing is required of directors other than passive listening to a myriad of reports that they should already have digested during their preparation for the meeting, then most conscientious and prepared directors are bored.
Try shaking up your meeting agenda. Remember raise the bar? Set and get agreement from directors to come to the table with the understanding that they have digested all pre-meeting information, and in each usual agenda item or management report, the only coverage will be exceptions or questions which directors raise for discussion. Then, devote the remainder of agenda time to strategic level deliberations, items requiring a board vote and fulfilling other board responsibilities, such as the succession pipeline and director education.
Gary Hamel, noted strategist and author of Competing for the Future, says that, “As a benchmark, to develop a prescient and distinctive point of view about the future, a senior management team must be willing to spend 20% to 50% of its time over a period of several months.” If the role of senior management is to focus to that degree on the future rather than the rear-view mirror, where should the board focus its time and attention?
Move the detailed exploration of issues to the committee level. Nitty-gritty fact-finding and deliberation need to occur at the committee level. Boards need to charter committees with powers that are broad enough, along with accountabilities that are strong enough, that the committee’s recommendations are usually the preferable path. There should be little need for the committee to have to rehash its entire work plan for the full board. If the board learns it cannot trust the committee, then it is time to change the committee charter or membership.
Revamp your meetings to ensure that time is available to spend on the board’s broader role, and watch the amount of engagement, energy and contribution soar during meetings.
Step Six: Revamp Your Information Format
What do the directors on your board have to wade through in order to be prepared for meetings? How is information packaged for them in their pre-meeting packets? Are directors sent internal reports that managers use to make operational decisions? Do you sometimes wonder why meeting discussions veer into the weeds with directors firing tactical questions second-guessing management?
When directors are expected to wade through hundreds of pages of detailed internal reports created for management in preparation for the meeting, they are more likely to find tactical issues and questions because that is where the reports are leadingthem. The directors are also resenting devoting four hours of their Sunday afternoon to information that could have been summarized into a format requiring one hour or less.
As a courtesy to your directors, they are due executive summaries about mostagenda items. (This recommendation does not cover what the audit committee needs to do its work at the committee level.) When directors are expected to vote about an item, they need a document that summarizes the issue, the pros and cons of the top two or three key alternatives considered (in a bulleted fashion in many instances), management’s or the committee’s preference and the thinking behind it. This type of document works for key capital expenditures, major acquisitions, major strategic shifts and almost anything else the board considers. It does not prevent directors from asking additional questions, but it shows appreciation for their time and experience, and encourages them to focus their attention at the right level.
Thoughtful and concise presentations of information equip directors with just the right amount of information and in a format that is user-friendly for their decision-making. You will have better informed directors simply by supplying information in a way that is more customized to their needs.
Step Seven: Change Your Norms
What are your board’s norms? Are meetings strictly feed-forward with management presenting and members listening and voting for the most part? When a new director joins the board, how long does it customarily take before that director participates fully and adds value? If a director has a question, is it okay to ask it during the meeting or is it the norm to call management outside of the meeting to inquire? Do directors challenge management but not each other during meetings? Do directors tend to gather and talk about the meeting in the parking lot, saying many of the things there that should have been stated in the meeting?
The norms of the board develop as the usual way it gets things done. They are the accumulated habits about how directors behave and interact with each other. Norms are usually tacit and may or may not support the outcomes the board needs and wants to achieve. A discussion in which directors make their preferred ways of interacting explicit can help the board improve its performance. These norms can then be introduced to new directors during the orientation process. The chairman needs to invoke the norms as part of that role, or the responsibility can be placed with the vice chairman during meetings.
Examples of constructive norms that directors may set and agree to for working together may include some of the following:
- Everyone contributes and adds value
- Stay focused on the agenda topic
- Listen without interrupting or talking over each other
- Ask questions and explore concerns without getting mired in tactical details
- If it needs to be said, say it during the meeting instead of in the parking lot
- Remain at a strategic or policy level instead of detailed, tactical level
- Assume positive intent
- Avoid defensiveness if challenged
- Issues are not re-hashed after voting; support is expected after voting
- Speak to a purpose; avoid grandstanding
- Each of us can and will support change
- Take a stand on issues and learn when it is time to let go
These types of norms can launch a board in a far more constructive operating mode when agreed to by all members and enforced by board leadership.
Step Eight: Deal with the Lump under the Carpet
One of the final but best ways to take your board’s performance to another level is to deal with what we call the lump under the carpet. It is the huge lump that has been there for quite some time, everyone knows it is there, they walk around it and it is not spoken about except in whispers.
What is your lump under the carpet? Is it a chairman who is stifling the board’s input or consuming half of the CEO’s time because he is trying to run the organization? Is it a group of octogenarians, grandfathered from the retirement age, who doze through meetings and occupy seats that are needed for different competency sets? Do you have several directors who do not carry their weight and therefore others are overworked? Are there members at the table who cause you concern given the increased scrutiny of boards today? Is it a director who will not turn loose of an issue after it is voted on and s/he keeps bringing it up? Do you have directors who become defensive any time someone questions them? Are some of your directors embarrassingly biased? Do you have directors who never seem prepared for the meeting?
You will free up untold amounts of energy that can be channeled toward organizational performance if the board’s leadership will go ahead and deal with the lump under the carpet. Everyone on the board will breathe a collective sigh of relief. Plenty of advisors exist to support the leadership through the process. And when it is done, call on those same advisors to help you put a process into place that will enable the board to deal with any ensuing director performance problems in an objective way and a way that will apply to any and all directors in the future. It is much easier to address director performance issues when there is a clear process to follow.
When you remove the lump under the carpet, it can dramatically change the dynamics or processes in the board. A void will exist and the board will have to create a new way of working together instead of the way that was devised to work around the lump. Advisors can guide the board through this transition in order to restore the board to more constructive patterns of relating and working together.
One Step, Two Steps, Three Steps or More
This collection of recommendations is not intended to be a recipe. You can implement any number of the steps and get an incremental performance boost. You can approach them in almost any order and see a difference. However, we can attest from working with numerous boards over time that this set of steps, if executed well, will combine to make a substantial difference in your board. You will break through the Plateau and begin your ascent to High Performance.