Time for Self-Reflection and Pragmatism in the Boardroom

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 19, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from George L. Davis, co-leader of the Global Board Practice at Egon Zehnder. Additional readings on board succession and board diversity are available here and here.

The recent study by the well-respected women business leadership group The Boston Club, in their Census of Women Directors and Executive Officers in Massachusetts Public Companies exposed “We are frustrated by the large numbers of companies that persist in ignoring the business imperative for a diverse board.”

The diversity quotient is indeed problematic as the Census found that across Massachusetts’ largest 100 public companies, only 12.7% of board directors are women – and this a 1.6 % increase over 2011. More than a third of the top 100 companies still have all male boards. And, interestingly, less than 2% of the 850 director seats in the Census are held by women of color.

So while diversity is championed by many with virtually no opposition, the progress is slow to materialize at the highest levels of corporate governance. Some ponder that the mindset of a “culture of the familiar” permeates people decision-making in the boardroom, where like meets like and relationships have historically been key to nominations and ultimately appointments of new board members. And, since only a select number of openings arise each year on boards, the slow turnover process only exaggerates an already lagging pace of change.

One exception where the change has been notable is at the highest ranks of public US companies, who chart the highest averages in percentages of women on their boards. However, if you look closely, the overall averages are pulled down by companies who will only consider experienced female directors – many of whom have already been “maxed out” by prior board commitments or a lack of available time to meet the demands of the board appointment. It’s time for boards to get practical and hire the talent and not the name.

And while the diversity figures alone are reason for pause, the lack of female representation is only one factor behind the impending need for board’s to examine their own make-up and objectively critique whether they have the right leadership composition today — and ultimately long-term — to successfully govern to the needs of their shareholders.

In our extensive work with boards and with CEOs, we have found that boards are grossly delinquent in taking the long view to assuring they have the right composition of talent on the bench ready to succeed sitting board leaders as they transition. But why?

Boards appear too nice, too passive aggressive, and fearful of straightforward conversation in their own ranks. Directors cite reasons such as desire to preserve the “culture” or the “relationships” of the board to protect someone’s feelings. Boards therefore often default to age limits as the mechanism to bring new talent on to the board. This does not make for a progressive, strategic succession process.

Succession planning for boards is not mysterious; it closely mirrors the CEO succession process with which boards have gained extensive experience in recent years. What is important is to realize the unique nature and culture of the board and tailor the plan accordingly. Success in board succession hinges on getting the board engaged in designing a solution and following through, on a regular basis, to ensure the board has the optimal mix of skills it needs over time.

Here are some suggestions for getting started:

  • 1. Create a vision – Work with the board to outline a strategic vision that marries to your long term needs. Where is the company heading and how do the competencies on the board align with that direction?
  • 2. Design a process – Determine who on the board will take the lead and how you collectively envision the succession plan to unfold. While some boards do the minimum required to meet regulatory requirements, others are finding that investing time and resources in an in-depth review generates critical insights, builds teamwork and the ability of the board to engage effectively with the CEO, and quantifies the competencies required for success.
  • 3. Determine ground rules – Develop processes for sharing out information gathered in reviews, define the process for replacing directors, and agree to a set of rules that will be deemed effective and fair.
  • 4. Rinse and repeat – Recognize that the real value from board succession planning, which translates into greater effectiveness, emerges from a commitment to ongoing reviews.

Board succession planning is straightforward and the outcomes reached through objective analysis, dialogue and debate, will ultimately yield a governance body that mirrors the needs of the business and the people it serves.

 

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