Critical Guidelines for A Strategic Approach to Board Composition (Part 2 of 2)

Just like a football team lays out its strategy for a game, you need to have a total picture of who needs to be around the board table. In my previous post, “Critical Guidelines for A Strategic Approach to Board Composition (Part 1 of 2),” I addressed the reasons behind this and some considerations to guide your strategic approach to board composition. In today’s post, I’d like to offer three key considerations for your strategy:

1. The power of having an active CEO/COO as an independent director.
2. The immense value of diversity of knowledge and experience for complimentary skills exhibited by all directors.
3. The incomparable value derived from actively pursuing gender and ethnic diversity in your board’s makeup.

1. Consider the power of having an active CEO/COO with current operational and leadership experience. It is extremely valuable to have a director at the table who is currently in the “heat of the fire” to bring a level of pragmatism and support to the CEO of your organization, particularly one with experience growing small- to medium-cap businesses. While CEOs of very large and/or Fortune 500 companies are of tremendous business value, many are far removed from the daily grind of navigating the growing pains associated with earlier stages of scaling a business. In any case, I find that a great balance is achieved within the board by having another CEO at the table. It may not be obvious for an operating CEO to consider juggling the demands of their own organization, their own board with the additional participation on an outside board, but don’t get discouraged—finding one will be a “win.”

According to 2014 Spencer Stuart Board Index Highlights: “For the first time, more than half of new directors are retired. 53% of new independent directors are retired senior executives and professionals, compared with 39% of new directors in 2009… Active CEOs being the most desired candidates… CEOs continue to feel pressure to turn down outside board seats. 46% of S&P 500 CEOs serve on outside boards, compared with 49% five years ago. CEOs today serve on an average of 0.6 outside boards, the same since 2010.”

2. Consider overall diversity of knowledge and experience. Given that, more than ever, the role of the board is to engage in strategy, and that directors need to spend more time on strategic planning, how is your board composition fully embracing diversity of knowledge and experience so that you have informed directors who can actually engage in strategy?

PwC says: “Boards are increasingly focused on recruiting directors with diversity of background and experience… Consistent with what directors have said over the last several years, financial, industry, and operational expertise are seen as the most important director attributes. Financial expertise tops the list (described as very important by 93% of directors). This is followed by industry and operational expertise (described as very important by 72% and 68% of directors, respectively)… Consistent with previous years, directors want to spend more time on strategic planning; 62% want at least some additional boardroom time and focus; of those, nearly one-in-three want much more time and focus.”

With these facts in mind, boards must strive to include voices formed by varied experiences and knowledge bases. Consider:

• International and global expertise– Companies with global aspirations require boards with global capability. Not nearly enough boards have directors who have international and global experience.

• Industry expertise- Many directors serving on U.S. boards today are people of great business judgment with long and valuable experience. Since they serve only part-time as directors, they may lack industry expertise, making it difficult to apply all their talents. How is your industry represented for a stronger competitive advantage?

• Financial expertise- Some boards are too heavily financially oriented, while some just don’t have enough of the capital markets, investment and corporate finance knowledge. How do you capitalize on that knowledge to strengthen your board?

• Retired CEO/COO- While an active CEO/COO is a great asset, do you have a board member who has been through the CEO/COO leadership journey during M&As, IPOs, supply chain and manufacturing challenges and turnaround and organic growth? How is that a consideration in your board composition strategy?

• Technology expertise- Our world has rapidly changed, and change is accelerating. Do you have emerging leaders, entrepreneurs or specialists who understand the technology driving forces that will fuel or restrain your growth? Nowadays, all companies are technology and data-driven. Can you afford to have a director who doesn’t understand technology? How many directors on your board should be tech savvy? How many should be internet and social media savvy? How many should understand the IT aspects of your business?

• Risk expertise- PwC says, “Nearly half of directors have not discussed their company’s crisis response plan in the event of a security breach, and more than two-thirds have not discussed their company’s cybersecurity insurance coverage.” Are you complacent or proactive as you refresh or assess your board composition?

• Marketing expertise- Do you need to have one or more directors who are experts in marketing, and are you aware of any negative downside to not have marketing skills represented within your board?

• Regulatory/government expertise- Given who you are, the types of products and services that you market, are you represented with the rigor needed?

3. Consider the value of an inclusive board. According to PwC: “24% of all new S&P 500 directors named in the last two years have been women, while female composition of boards is currently 18%… Male and female directors have differing views about the importance of having gender and racial diversity on their boards. Female directors are far more likely to consider board diversity important. For example, 61% of female directors describe gender diversity as very important, compared to only 32% of male directors. Similarly, 42% of female directors describe racial diversity as very important compared to only 24% of their male counterparts. These differences may be contributing factors to why diversity on public company boards has not increased substantially in the last five years.”

How do you then consider women and minorities to contribute to the breadth and depth of expertise around the table? Board leaders must be intentional and invest in recruiting diverse directors and be prepared to change the current board composition to create a position for a diverse candidate, as long as that candidate brings the right set of needed skills to the table. Directors need to make a genuine effort to get to know qualified diverse candidates. Boards and their directors must view adding diversity as important and beneficial.

Avoid as much as possible directors who have obvious conflict of interests, even if they might have the board’s best interests at heart. It is so complicated if issues occur, and given the complexity of effectively governing a board, there is no need to exacerbate the responsibility burden for the overall board.

Richard Branson said: “Complexity is your enemy. Any fool can make something complicated. It is hard to make something simple.”

I’d add that it shouldn’t have to be hard to make and keep things simple, but human beings often get in the way by adding complexity. My guideline for boards and otherwise: control the elements that you know you can so that you are better prepared for the uncontrollable.