Critical Guidelines for A Strategic Approach to Board Composition (Part 1 of 2)

According to Deloitte and Touche’s Board Refreshment: Addressing Shareholder Concerns: “In the 2015 proxy season, directors will very likely hear institutional investors and activist shareholders voice concerns about—or call for—board refreshment. To arm yourself to respond, it is useful to assess your board’s composition, understand how that composition relates to the organization’s strategies, and have robust board performance assessment and board succession processes in place.”

In my recent blog “Board Composition: Only as Strong as the Weakest Link,” I stressed the importance of having optimal board composition, not just a group of talented directors.

A strategic approach to robust board composition is necessary to ensure that the board is equipped with talent that can address what’s at stake at any given time for the critical inflection phases of growth for an organization. It is about having “the” quality board team and knowing how to fully leverage the composition of the board.

Too often, I observe board directors being nominated with no composition strategy taken into consideration, particularly for non-profit boards, and often for start-ups, small to mid-cap companies and advisory boards.

To achieve optimal board composition, you need to step back and take a strategic approach. Don’t identify and interview the candidates before knowing and being clear about what you need. Here are some critical guidelines to take into account: 

1. Who are you as an organization?
   • Where are you on your trajectory, and where are you heading? Are you about to launch in new geographies, targeting vertical markets, expanding your product and/or services portfolio? Are you seeking your first investor, your next round of financing, getting ready to go public, or tightening your belt? Are you growing through acquisitions?
   • How strong or how vulnerable is your leadership team (the CEO and the Executive Team), and what are the crippling skill gaps and deficits that can’t be overlooked? How capable or stretched are the CFO and the legal counsel?
2. What kind of board are you working with, building, augmenting or refreshing, and how is the board complementing the strengths and deficits of the leadership team?
   • Is the board fully aware of its governance challenges and how it makes up for the experience it doesn’t have, such as making highly specialized capital markets and corporate finance decisions, as prevalent for small cap companies?
   • Is the board too heavy in one industry or operational sector? How do you need to balance the knowledge within the board?

Is there a strategic process to identify the skill gaps, “the moral character attributes,” expertise, knowledge and experience within the board based on the current pulse of the organization, the board and the leadership team?

Now that you have a situation analysis of your board and the leadership team, you can more clearly identify and address your board composition’s needs and confirm if and why the board should increase in size or be refreshed. Revisit the size of your board and the average age and tenure of your board directors.

Whether you are building, augmenting or refreshing your board, you will benefit from having a list of screening criteria before identifying and recruiting the needed board directors.

• Be clear about your moral compass and the moral compass of your future directors. Trust, respect, judgment, integrity and transparent communication should be the basis of your identification process for directors who, in turn, need to keep their fiduciary duty firmly in mind, regardless of their gender, ethnicity, background, and/or experience.
• The independence and the judgment of the future independent directors must be informed by facts, knowledge, experience, and expertise.
• The directors must give a high priority to ethical standards and corporate culture.
• The directors must attune to needs of your customers, suppliers, partners, consumers and communities to be impacted and influenced.

When refreshing your board, you can’t be afraid to communicate your declassified structure. According to 2014 Spencer Stuart Board Index Highlights, “It has become standard practice for boards to adopt policies requiring directors who fail to secure a majority vote to offer their resignation. “

Do not overlook that the board director candidate needs to have the bandwidth to fully honor their commitment to your board. You must be fully aware of the number of other boards the considered director is on. Spencer Stuart Board Index Highlights also says: “Restrictions on board service have continued to become more prevalent. 75% of boards now place restrictions on how many other boards their directors can serve on compared with 67% five years ago.”

Whether you are a CEO, the Chair of the nominating committee or a board chair looking to make a change within the board, take the time to have a strategic approach for your board composition.

I’ll continue this exploration of strategically approaching board composition in part 2.