Requirements for Effective Boards … Beyond Fine Tuning

As CEO, you’re accountable for results whether your board helps or hinders you in working toward them. Ensuring that key requirements are met, requirements that affect how well equipped board members are to work together, will provide a sound foundation from which the strategic leadership and fulfillment of role and responsibilities will more likely occur. These requirements go beyond fine tuning … they are essential.

This article is the fourth in a series intended to help the CEO think through the issues involved in developing a board to contribute meaningfully to the purpose, vision, strategy and development of the organization. The first article, Your Board: Dynamic, Difficult or Detrimental, dealt with how boards affect the optimization of performance through strategic leadership. The second article in the series, Your Board: Proactive Partnering or Reactive Interference? addressed the role or fit of the board with the organization as a whole. The third article, Your Board’s Approach to Its Responsibilities: Resting on Laurels or Raising the Bar,discussed the responsibilities appropriate to the board’s role.

If you want to see a CEO’s passion go from 0 to 60 in 6 seconds flat, you might talk about the organization’s vision, or you might talk about the experience he or she has had working with a board lacking the basic requirements for effectiveness… such as working without the competencies needed, low commitment among directors, or about a board whose processes for working together undermine any hope for productive outcomes.

CEOs with these experiences could become missionaries about how to preventproblems before they develop. They can tell you about the board that grew to 33 members as a result of acquisitions. You need to speak from a pulpit to get the message heard at the end of a table that long! In this informal and extroverted group, there isn’t enough air space available for input from everyone within a reasonable board meeting time frame…not a good return on the investment in director compensation. What’s even worse, too many of these directors are perceived to hold the organization back while there is no term limit policy; or there is a policy and it isn’t used. There is a norm that once elected to the board, you just about have to do something criminal to lose the seat.

Other CEOs can describe the effects of having directors who lacked the competencies and commitment to fill their roles. One CEO we know created the board with 45% of its membership coming from the same industry as the organization. It is no surprise when their strategic perspective endorses a “me too” path for the organization. Another CEO selects directors who can help sell the organization, using seats on the board in return for revenue generation, but too often those directors have not brought the general management perspective, visionary capacity and financial literacy needed. Finally, there is the CEO whose “blue chip” directors are stretched by maintaining four or more directorships when they are still fully engaged in their own businesses. Their full calendars and sporadic contributions to pre-work in committees create untenable delays for the board.

Attention to five key requirements for effective and efficient boards can make all the difference: the information furnished to directors, the independence with which directors can operate, the commitment of directors to the organization’s needs, processes used in conducting the board’s work, and the competencies of the board and each of the directors.

Information Makes the Difference

One CEO and board with whom we worked faced the difficult decision of whether to relocate their corporate headquarters to a different location. Several board members with ties to the community in which the organization was founded vigorously opposed the move. Continuing to remain in the same location was adversely affecting attracting and retaining key talent and was limiting access to growth markets, both of which were threatening the organization’s ability to thrive and survive. When the CEO put together a compelling package of information for the board, prior to a retreat to discuss a possible move, he was able to show substantiation from numbers of outside experts that proceeding with plans to move the headquarters was the best decision for the organization. That package, including the letters of testimony from people he had consulted, made the difference in a very emotionally charged situation. Even with the comprehensive information, the board needed a carefully designed process for working together in order to use the information objectively.

Savvy directors, with busy schedules, require high quality, concise, pertinent andtimely information in order to be prepared to make the most of all-too-limited board meeting time. When we administer surveys of board effectiveness, few organizations are credited with disseminating the information in a concise and timely manner. The burden of gathering and presenting the information in a “director-friendly” fashion resides with the organization.

The information that is needed includes the status of the competition, key strategic trends, possible mergers and acquisitions, and the status of the implementation of plans. Sources should be varied, including investors, market analysts, customers, employees, and outside experts.

Independence Simplifies Maintaining Clear Boundaries

Given the difference between the roles of the board and that of management, it is academically easy to advocate for considering a nonexecutive chairman who is not a present or former employee of the organization. The reality, however, is that according to the Korn Ferry 1999 Board of Directors Study, only nine percent of the companies participating have a nonexecutive chairman who is not a present or former employee. And since this proportion is unlikely to change significantly within the next few years, the challenge is creating working processes that optimize the contributions of both management and directors.

If the key role of the board is to challenge the assumptions of senior management’s strategic thinking, for the purpose of ensuring the organization’s long-term viability, then the board needs a structure that allows that to happen, even if the chairman and CEO are the same. One option is to limit the number of inside directors (the average number of inside directors on corporate boards today is two), elect a lead director among the outside directors and provide for outside directors to meet in executive session without the CEO present. Only about 30% of current corporate boards follow these last two practices; however, they are considered to be among the Best Practices of boards of high performing organizations. Additional practices to ensure independence can prevent allegations of conflict of interest and other problems.

Commitment Results From Having a Stake

Most CEOs that we have worked with feel very strongly that directors should share an ownership stake, with many “best boards” requiring a $100K investment as a benchmark. Certainly not all boards can set the bar there, but it is worth scaling appropriately. Investing physical, intellectual and emotional energy flows more naturally from a fiscal investment.

The energy investment is considerable, beyond the attendance at a minimum of 75% of meetings, and participation in committee work and strategic retreats. Those directors, who are thinking about the organization strategically and globally, invest their own time following and investigating trends both inside and outside the industry. They want resources beyond the information fed to them by the organization as a way of providing independent input and challenging assumptions.

Most of all, commitment to the best interests of the organization is required. The director’s identity is with the shareholders…all shareholders. We’ve seen too many boards with factions, each representing a subset of constituents, with directors positioned around the table by “camps”. The effective director is a strongindividual, representing all shareholders (without personal interest frontiers prevailing), committed to change as needed, to being challenged by other strong individuals and to facing the ambiguity of the future, all for the greater good.

Sound Processes Strengthen Board Dynamics

It is clearly the responsibility of the chairman to establish process integrity within the board, and that goes much beyond Robert’s Rules. For example, how can directors fulfill their role of asking “what if” and challenging the thinking when there is no time for discussion, no norm for director participation beyond a “rubber stamp” vote of committee pre-work and there are 27 directors around the table? Boards who limit membership to 10 to 15 directors and who examine recommendations from committees then make decisions as a whole are in a better position to assume their responsibilities and liabilities as directors.

A healthy board process creates dynamics in which everyone is engaged and listening, adding value, supportive of open and authentic exploration of ideas and participating in balanced ways. Strongly divergent views can be aired and melded into a single, well-supported position and off-purpose behavior is handled constructively. All meeting procedures are designed to create this climate and to stay on track.

Additionally, the board must attend to the processes it uses to monitor its overall effectiveness and development. These processes will be the subjects of the fifth and final article in the series.

Competencies are First and Last!

Without exception, every CEO we have worked with has a clear picture of the criteria he or she would use to select new directors (and so many would like to wipe the slate clean and start over).  Clearly, the competency set of the board as a whole, and of each director, is paramount to the organization. The stakes are even higher when selecting directors today when the talent pool of qualified directors who are willing to accept new directorships is shrinking and organizations are becoming much more selective.

The Best Boards look at their mechanisms, at a macro level, for ensuring ongoing competencies. Among the mechanisms adhered to by Best Boards are deliberately-defining the competencies needed (instead of just picking a person), setting term limits as a way of deliberately bringing in new perspectives, specifying retirement ages, using inducements to help attract and retain top talent, orienting new directors to the organization’s expectations about the director’s role and responsibilities, and using individual director development processes. Additionally, many boards specify that a CEO from a company of similar size and stature sit on the board, as well as at least one outside director steeped in the organization’s core business.

The board as a whole needs at least eight competencies represented by several directors: business judgment, general management experience or perspective, finance, industry knowledge and trends, leadership, international markets (if applicable to the industry), strategic thinking ability, and crisis management expertise. The organization’s threats and opportunities may require more depth in some of these areas than others.

Each individual director needs to demonstrate the commitment to the owners and the purpose of the organization mentioned earlier, informed judgment in decision making, financial literacy, long-term conceptual and systemic thinking ability, the ability to influence others and a high degree of self management. This list is a starting point; however, looking at the composition of the board as a whole will usually reveal specific needs for other competencies in order to provide balanced perspective in the board’s work.

Tuning for Productive Outcomes

The requirements for directors to work together in productive and satisfying ways make a big difference in the experience the CEO has in working with the board and in how the board’s decisions impact the organization’s success. The return on investing time and effort meeting these requirements will be more than worth it.

What do you do when these requirements are not met? How do you “tune up” the board when directors do not understand or fulfill their role, responsibilities or requirements? In the fifth and final article of this series, we will discuss the tools available to assess the board and individual directors’ effectiveness and how to provide developmental opportunities that fill the gap.