“One of the clearest examples of a governance trend is the focus on board composition and performance. Effective oversight of public companies requires boards to collectively possess the skills to exercise their fiduciary responsibilities. And board composition is under pressure to evolve to meet new business challenges and stakeholder expectations. Today’s directors are more focused than ever on ensuring their boards have the right expertise and experience to be effective.”
– PwC’s 2014 Annual Corporate Directors Annual Survey
Board composition is something I take very seriously and that I thoroughly enjoy addressing. Board Chairs, CEOs, investors, entrepreneurs, Executive Directors and Presidents of non-profits reach out to me for counsel regarding the composition of their boards, often as a result of dissatisfaction with their fellow directors or as a result of augmenting or refreshing their boards. They engage me to help bridge gaps in communication, help identify how the board in its current composition can best serve the needs and challenges of the organization, interview board candidates and assess how to optimize the talent in the boardroom and the leadership of the organization.
According to “Making Boards Work” (McKinsey Insight, December 2014), boards aren’t working: “It’s been more than a decade since the first wave of post-Enron regulatory reforms and, despite a host of guidelines from independent watchdogs such as the International Corporate Governance Network, most boards aren’t delivering on their core mission: providing strong oversight and strategic support for management’s efforts to create long-term value… In short, companies keep appointing directors who aren’t independent thinkers and whose experience is too general.”
There is no “one size fits all” approach to how we train, recruit and educate board members to adequately represent a small cap business, as opposed to a large public company, and fully serve a non-profit or a start-up organization. According to Adam Epstein, author of “The Perfect Corporate Board“: “Small Cap directors frequently operate in environments in which alternatives and flexibility are replaced by a cognizance that even seemingly innocuous decision making can have business-ending consequences… an issue requiring no board oversight at one company could well require extensive board action at another.”
Given the resource constraints of boards in general, we must be diligent in carefully hand-picking board members as we build, maintain and refresh our boards.
I am astounded by the number of boards I’ve been exposed to that don’t have a strategic approach to their board composition—especially in terms of having the right people around the table—people best qualified to serve the organization’s unique needs. This doesn’t mean that the board members aren’t bright and successful people. It means that I have seen too many boards bogged down by not having the people with the attributes that best match what is needed for the organization’s trajectory at different inflection points. As cited by Epstein, “one of the least appreciated reasons why promising small-cap companies fail to graduate to mid-size cap and beyond is the systematic failure of directors to adequately appreciate and understand the nuances of corporate finance and capital markets.”
One of the major stumbling blocks for board composition is nepotism—populating the board with friends or those who can offer each other personal advantages—versus prioritizing what the organization is strategically trying to achieve and who would best complement as well as appropriately challenge the leadership team.
Another problematic trend I’ve witnessed is “diversity for diversity’s sake.” While diversity within boards is important, the primary focus must be to strategically address how to optimize the board’s composition. Once cognizant of the qualities ideal candidates should possess, diversity should be considered—but not before.
Building, maintaining, augmenting and refreshing boards is not easy, and it is imperative to define a strategy vis-à-vis board composition on a continued basis. I frequently hear that it is work, that it takes time, that it might not be possible to find the right person, that so and so was highly recommended… To these types of comments, I say that the risks inherent in not taking the time to define a strategy for board composition and patiently seek exactly the right board directors are too great. I have seen first-hand that it is naïve to think a board can function optimally without this investment, and it is to the detriment of the shareholders and the organization.
Take the time to approach board composition strategically, ensuring to have the strongest links in your chain. “Names” are not what you should be seeking, but relevance, knowledge, practical guidance and understanding of the organization’s growth dynamics, as well as the ability to supplement access to relevant strategic partners for a given strategic phase of the organization.
So, what’s your strategy for your ensuring your board composition is optimal?
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