William Etherington: Boards’ last blind spots: themselves

In The Director’s Chair with David W. Anderson: Recruitment may be professionalized, and diversity is taking hold, but when it comes to accountability, William Etherington says boards still have a ways to go

Celestica chair William Etherington: "The full measure of accountability has yet to be understood and demonstrated by boards"

As a director and now chairman of the board at Celestica Inc., where he’s sat since 2001, William Etherington personifies continuity of leadership. Celestica itself started as a spinoff from IBM Canada, where Etherington was CEO for a number of years, part of a 37-year executive career with that company. Add to that his six years as chairman of the board of CIBC, ending in 2009, and other current directorships, and the weight and wisdom behind his definitive take on contemporary issues in corporate governance is immediately felt. Here, in conversation with governance and leadership adviser David W. Anderson, Etherington scrutinizes the role of the chair, shares a few personal lessons learned, and issues a challenge to his fellow directors to be accountable; to measure their performance with the same rigour they apply to those they oversee.

David W. Anderson A board chair’s leadership strongly influences the effectiveness of a board. You’re known as a board chair who is collaborative with fellow directors, respectful of management and measured in tone and pace. How did you hone your leadership style?

William Etherington I’ve observed leaders my entire professional career and experienced a wide range of leadership styles in the managers I counted as my bosses and colleagues. At IBM, I learned there is no one style that is always best; even leadership styles I found objectionable achieved a measure of success in their own way. The lesson I learned is that you take what you have and use it to advantage. Appreciate your core values, skills and natural style and evolve these with training and experience. Supplement your strengths. In my case, my leadership style favours collaboration over confrontation—whether as a CEO in management or a board chair in governance. I let people stand on their own and prefer to get the best out of them with a carrot when I can.

David W. Anderson I see some leaders take their dominant and directive style as CEO and apply it as board chair to less effect. What makes boards less amenable to this style?

William Etherington The board is not a hierarchy; the chair works for the board. It’s different than a CEO. A chair, I believe, has to be more collaborative than a CEO may choose to be, because as chair you can’t impose your will, as decisions are made by the board as a whole. Similarly, as chair you can’t replace fellow directors, as they are elected by the shareholders. A chair does have influence over decisions, including who remains on the board through the re-nomination process, but the exercise of this power requires tact and patience. Directors expect and deserve respect for the governance role they have been elected to play. This is why some CEOs are not good chairs.

David W. Anderson Having an effective chair should not be left to chance. How do you increase the odds of getting the right person in the role?

William Etherington I take a long-term view on leadership. When candidates are first being reviewed for nomination to the board, I ask the question, “Could this person be an able committee or board chair?” Committee chairs are a testing ground for the board chair role. Directors get to view a colleague’s leadership style and effectiveness over three to five years running a committee—engaging fellow directors, working with executives, administrating agendas and materials, conducting meetings, forging decisions and reporting to the full board. I think a development process ought to be in place to identify ways directors and committee chairs can refine their leadership styles and continue learning about the business. With such an investment in assessment and development from initial nomination to the board to election as chair, a director is well positioned to contribute substantially as the board leader. As in any succession, it’s best for the board to have viable choices. Also, in the final decision, the chemistry between the chair and CEO must be a major consideration, as this relationship is critical to the healthy functioning of the organization.

David W. Anderson The committee chair role is a good testing ground. One common knock against committee chairs is that directors not on the committee often don’t know what happens in the committee or the basis of its recommendations. Do committee chairs and directors need to pay closer attention to the work of committees?

William Etherington Yes, and I think that’s happening. Committee chairs are learning to share more of the context of their recommendations and directors are not as accepting of committee reports as the only way of hearing about what’s gone on in a committee. Higher accountability and perceived risk mean directors today are not as willing to be unaware of what’s happening in other committees. Good directors won’t stay around if committee work remains opaque. More transparency is required within boards, not just with shareholders and markets.

David W. Anderson Since you began your board career in the mid- 1990s, the modern governance era has taken shape. What’s really changed in these last 20 years?

William Etherington Simply put, governance became a permanent focus for investors and the media, precipitating huge, positive change in how directors think and act. We’ve witnessed tremendous progress in North America in the quality of corporate governance, rooted in clearer roles for directors and higher performance standards in executing them.

David W. Anderson How has this focus affected how directors do their work?

William Etherington The sense of responsibility directors have in their role has risen substantially. External auditors, annual director elections and threats of class action lawsuits have disciplined boards from the outside. Internally, directors see the potential of their work to make a difference through rigorous engagement with management on the direction of the company and metrics to gauge success. This understanding, that directors hold the ultimate responsibility for the fate of their organization, simply didn’t resonate with directors before. It just wasn’t taken seriously. It’s a measure of how far things have come that this seems incredible to us today.

David W. Anderson There’s been a big shift, too, in the seriousness with which boards think about diversity.

William Etherington That’s right, I think an understanding of the need for diversity in all dimensions has finally taken hold. We’re able to have mature dialogue about a host of ways in which people differ—and how those differences can be leveraged for the good of the company. One way this is clear is in how boards are far more thoughtful in detailing a broad range of competencies, skills and perspectives we as directors think may help us make more informed decisions. Most boards now determine with some care the diversity of thought and experience needed in their circumstances and then set out to hire directors to fill those gaps.

David W. Anderson Does this trend toward greater professionalization in the definition of diversity in candidate pools extend to how directors are actually then chosen?

William Etherington Yes, the methods used to select directors for nomination have become professionalized. It’s common now to use a search firm to ensure independence in the process, to access pools of talent beyond the reach of current directors, to break out of the old boys’ network and to choose the right candidates to build a board team. I think this represents an important advance in how we go about nominating directors. Directors and director candidates themselves have stepped up their game, coming better prepared to contribute to governance-level discussions and decision-making. They’re taking advantage of the formal educational opportunities that exist and also are being far more proactive in learning on their own about their companies, industries, related technologies and stakeholders.

David W. Anderson You’ve identified trends that make for stronger boards, but governance still has shortcomings. Where do you see opportunity for directors to make the biggest difference?

William Etherington Accountability. The full measure of accountability has yet to be understood and demonstrated by boards.

David W. Anderson In practical terms, what does accountability look like?

William Etherington In simple terms, I think boards need to focus on three areas of accountability to dramatically increase their effectiveness. To start, boards need to systematically evaluate their own performance as well as that of their management teams. Then boards need to deal effectively with poor performance on the part of themselves and management, to maintain credibility with stakeholders. And finally, boards need to adopt practices to listen to their shareholders, asking for input and coming prepared to discuss and implement new processes that improve accountability in ways desired by owners. Say-on-pay is a good example of boards listening to owners’ concerns and adopting a process that gives shareholders a voice in compensation philosophy.

David W. Anderson In taking accountability for their board’s own performance, one challenge for directors would seem to be in the very make-up of the board itself, with directors often over-staying their most useful years.

William Etherington Many boards and directors don’t yet embrace the full accountability that I think we need to achieve. It’s true that some directors stay beyond the time of their greatest capability—and fellow directors are complicit in allowing this to happen. It’s a sensitive topic among directors, precisely because of the self-interest involved. The reality is that directors don’t always put the company’s interest ahead of their own. The case is plain: there is a limit to the effectiveness over time of any director, as we accept is true in any other role. Few boards would be satisfied with stagnation in their executive ranks; directors favour executive rotation to keep the talent pool fresh and varied. Too often this logic is not applied to boards themselves. The result in some cases is a greater commitment to staying, thinking oneself irreplaceable, rather than to doing the right thing for the company.

David W. Anderson What does accountability then look like for individual directors?

William Etherington The typical solution is to set tenure limits to limit the risk of any one director staying too long. The best solution is for boards to deal with director performance upfront and not wait for tenure to solve a non-performance issue. This requires a fair and rigorous assessment process. Directors can’t be fired in the normal sense; they don’t work for the chair. Unlike a CEO, a board chair or a governance committee chair can’t deal with performance issues as directly or swiftly. Nonetheless, a board can resolve to maintain clear metrics on director performance, discuss director performance regularly and act resolutely if a director is not working out. The most obvious means of managing the board’s composition in these situations is not to renominate such a director, ending their time on the board regardless of the anticipated tenure. We deal with management’s performance through assessment and succession planning, so it’s hypocritical for a board not to deal similarly with its own performance.

David W. Anderson Part of board accountability is CEO succession—yet boards are routinely criticized for putting it off until it’s too late. Why is succession so often mishandled?

William Etherington While most boards do manage the performance of their management team far better than their own performance, it’s true that CEO succession planning is generally not done well enough. Boards are accountable to shareholders and the broader stakeholder community for ensuring their succession decisions provide for both long-term continuity in leadership and the necessary infusion of new thinking to keep the culture innovative. The fundamental success of the business is at stake in succession. The difficulty for directors—and where they often fail in their accountability—is that they often switch their loyalty to the CEO away from the shareholders and company interests. We see this when boards fail to make the needed changes in management as the performance of a company deteriorates. It’s all the more difficult for boards to act when the CEO is also the founder or major shareholder or chair. This is where a more mature relationship between boards and owners can help boards be mindful of their accountability and act accordingly.

David W. Anderson How do you think boards can best protect the advances they’ve made in governance and address the accountability deficit you’ve identified?

William Etherington I believe strongly in the independent director concept and structure as the best way to govern companies and safeguard the larger interests of our capitalist system. The cross pollination of ideas that’s possible on an independent board can serve as a tremendous resource to management. It’s not just a nice-to-have value-add; in my experience, companies are more likely to get into trouble when they fail to leverage the perspectives of independent directors.

Proper independence includes a clear separation of chair and CEO responsibilities so that governance and management functions are well defined and respected. My responsibility as chair of a public issuer goes beyond serving my company; I and others in public company leadership roles have a responsibility to protect the system—because it’s a good system that has served us well. It affords business leaders access to independent thought and advice and provides stakeholders a means of oversight of corporate affairs.

Boards are finally getting into a rhythm with shareholders, allowing directors to understand and bring those ownership perspectives into the boardroom. I think some caution is warranted when considering changing the balance of power among shareholders, directors and executives, so we’re sure we’re making the system better. Any direction espoused by regulators or shareholders has to be tested against the alternatives. If the price of survival is adaptation, it’s clearly worth it.

David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com.

William Etherington — Biography

Primary role Chair, Celestica Inc.

Additional directorships Onex Corp., SS&C Technologies Inc., St. Michael’s Hospital

Former chair CIBC

Former director AT&T/Allstream; CIBC; Dofasco; IBM South Africa; MDS (now Nordion Inc.); Ontario Hydro; Relizon

Former executive Chair, President and CEO, IBM World Trade Corp.; SVP and Group Executive, Global Sales and Distribution, IBM Corp.; General Manager, IBM Europe/Middle East/Africa; President and CEO, IBM Canada; Assistant General Manager, IBM Latin America; CFO, IBM Canada

Education Engineering Science (Electrical), Western University

Honours Doctor of Laws, Western University

Current age 72

Years of board service 20

Photography: Jeff Kirk

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