A board’s secret sauce: industry expertise

While most boards list industry expertise on their skills matrixes, what passes for “expertise” varies widely. And when it’s lacking, investors and activists see a red flag
By Beverly Behan

Twenty years ago, more than one-third of TSX 100 boards lacked any independent directors with experience working as executives in the industry of the company they governed. That data may seem shocking in 2017. But even today, many companies lack the level of industry expertise most shareholders would want and should expect at the board table.

Directors who served as senior executives of another company in the same industry bring unique value to boardroom discussions: their in-depth knowledge enables them to challenge management in ways that other directors cannot. CEOs also routinely rate these board members among their most valuable because their personal understanding of the business amplifies the value of their contributions.

Guylaine Saucier, with whom I co-facilitate in the ICD director education program at McGill University, always shares this story with our classes: “When I was a director of BMO, we invited the retired chief risk officer of JPMorgan Chase to join our board. And that was something I’d almost describe as a sea change. He was able to raise points and shed light on issues that none of the rest of us could because he had spent his entire career in global banking.” She always makes it clear that BMO had a strong board prior thereto; but this addition served to take the BMO board “to another level.”

Independent directors with industry backgrounds typically need to be retired to avoid conflicts of interest. And finding them can sometimes require recruiting from another geography—Air Canada, for example, made its only director with significant global airline experience (Vagn Sorensen, a veteran of Austrian Airlines and SAS) chairman of the board this year. His elevation seems to underscore the value Air Canada directors—and probably management, as well—have found in his industry expertise.

But it’s also worth noting that industry expertise is most relevant when it comes from executive experience at a company of equivalent size and scope. Air Canada’s skills matrix, for example, lists two outside directors with airline industry experience—Sorensen and Joseph Leonard. However, Leonard was the chairman and CEO of AirTran Holdings, a regional airline with roughly 8,300 employees (compared to Air Canada’s 42,000). Some shareholders might consider small, regional airline experience almost irrelevant when it comes to overseeing the affairs of a major global carrier like Air Canada.

There is also a wide chasm between the perspective of someone who has executive experience at a company in the same business and a director who “knows the industry” through a different type of exposure. The classic example here is the 2012 CP Rail proxy fight: CP’s management circular revealed that Tony Ingram (who’d joined the CP board only three months earlier) was the only independent director with significant executive experience in the railroad business. But CP’s board skills matrix check-marked every board member as having “knowledge of the transport industry” and trumpeted the fact that Bill George, as CEO of Suncor “supplies fuel to the industry and is a shipper of petroleum products by rail.” As the voting showed, shareholders weren’t buying it—nor should they.

Telus’s 2017 proxy offers a current example of a similar issue. None of Telus’s independent directors appear to have any experience as senior executives in telecommunications or technology firms. Yet, Telus’s 2017 skills matrix has a category called “Technology and/or Industry Knowledge” with three directors check-marked along with Telus CEO, Darren Entwhistle. These three are the former CEO of the Hospital for Sick Children, the CEO of television station TVO and the president of B.C. Institute of Technology (an academic leader). All of these people may provide useful perspectives in Telus’s board- room. But is their industry expertise truly comparable to someone who’s worked as a senior executive at Verizon, Rogers or AT&T?

The Telus example also highlights a final point about the board skills matrix, which Canadian companies often disclose in their proxies: why is the CEO included in it? Yes, he or she is a member of the board. But isn’t the board skills matrix supposed to focus on the governance team of independent directors that oversee management?

Boards unquestionably benefit from diverse perspectives—having directors with different yet relevant backgrounds is critical to creating a high-performing board. But industry expertise is core—and at least two or three independent directors should have it. Boards without it should be a red flag to investors—and a target for activists.

Beverly Behan is a New York-based board consultant who has worked with more than 140 boards of directors in the U.S., Canada and internationally in the past 19 years. E-mail: beverly.behan@boardadvisor.net.

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