Board composition is one of the most critical issues for companies and their shareholders today. This top-10 list of recommended practices—backed by candid commentary—is based on 40 recent director and executive interviews and ongoing advice and assessment provided to activist investors and boards.
1. Infuse your board with a shareholder mindset and directors with value-creation track records. Boards are stocked with too many “service providers” … “with no industry experience” … “who have not run anything” and “who lack value-creation experience” and go silent when tough business decisions need to be made, directors say. They “cannot provide the hard core insights to the management team” other than “be careful.” The message: recruit the opposite.
2. Remove over-tenured directors and ensure committee chair rotation. Tough discussions are occurring in boardrooms. Based on my interviews, “tired” and “complacent” long-serving legacy directors and committee chairs are impeding renewal efforts when “they are the most conflicted.” Conflicted directors should leave the room during such discussions, other directors say. Investors are not persuaded by self-interest.
3. Conduct independent performance reviews. Directors and regulators are mandating independent reviews. Set expectations at the outset and link the results to renewal. Don’t rely on retirement age as a performance proxy. “Rigorous evaluation” is a theme in my interviews. If a board blocks independent critical review, or does not act on the results, investors will step into the gap.
4. Engage directly with investors on board performance and composition. If a board cannot lead a value-creation model that is endorsed by major investors, including capital and asset allocation and performance, and show what each director’s contribution is to that, the board is vulnerable. To avoid this outcome, camera-ready boards are having structured meetings with long-term shareholders to listen, learn and act.
5. Address director origination and its impact on independence. Assume that investors will ferret out any and all conflicts, including friendships. If a director has previous or current relationships, to other directors or to management, they lack independence and will not ask tough questions. These directors are “owned” is the common refrain. Boards need to rid themselves of these directors and discontinue recruiting based on prior relationships.
6. Diversify your board to add value. Make sure your board is diverse, and underpinned by the skill sets needed. This means having diversity policies that are prescriptive, have measurable objectives, and define diversity, with increasing numbers that a board holds itself responsible for meeting and on which progress is reported. There are measurable objectives for gender, age and ethnicity that align with the company, its business, its industry, and the markets in which it operates.
7. Focus on company performance over governance box-ticking. Governance has been a cottage industry dominated by self-serving professional advisers and associations, many directors and investors have told me. The pendulum has swung so far that consideration of investment performance is either entirely absent or an afterthought rather than the primary focus. Good boards do not let the governance tail wag the performance dog. Investors want performance, not governance accolades.
8. Conduct a thorough, transparent director competency review, and act on the results. The director competency matrix belongs to investors and directors, not management. An inclusive, dynamic, objective, peer-to-peer, validated matrix review will generate development opportunities, remove directors who are lacking and generate desired skills in the next directors. Boards are wise to ensure that matrix design and administration is expert, free from management control and reflects investor input.
9. Focus on softer director attributes. Skills I have recently developed for directors include: integrity, teamwork, communication and commitment. These attributes can and should be recruited for and validated. A director who is lacking and cannot improve should be promptly replaced.
10. Display leadership and integrity. Ultimately, board renewal is about leadership and integrity. Directors who dig in and entrench are placing their own interests ahead of those of the company. Instead, they should do the right thing when it is time to go. Activism has become mainstream and shareholders may have much greater power in the future than they do now to remove ineffective directors, if directors do not do it themselves.
Richard Leblanc is an associate professor, governance, law & ethics, at York University’s Faculty of Liberal Arts and Professional Studies and a member of the Ontario Bar. E-mail: firstname.lastname@example.org.