Get the Right Mix of Directors in the Boardroom

Board effectiveness depends on the quality of the individuals involved. Balancing board composition, more an art than a science, generally includes consideration of the following factors:

Independence. As we have seen, there has been continuing movement toward boards consisting of a preponderance of independent directors, and the definition of independence has become increasingly narrow. It behooves the board, however, and investors and regulators as well to remember that being independent under various legal definitions is only part of the desirability of independence. What the corporation needs are directors who possess sufficient character, confidence, and integrity to allow them to make judgments that are unbiased by personal considerations, and communicate them persuasively.

Diversity. Directors with diverse backgrounds and experiences may strengthen board performance. While boards are under pressure to attract and seat candidates defined as diverse such as women and candidates of color, the board also needs to keep in mind that the goal is to build a rich mix of points of view to render its decision-making more robust. Checking the box may be a worthy start, but the board then needs to find ways to capitalize on the resulting diversity by being sure that all directors are comfortable speaking their minds. All too often, newcomers fit in by mimicking those already in the room. Often, candidates who are different in gender, age, experience, or ethnicity are misunderstood by sitting directors, and odd choices can result.

Age and Tenure. While age and tenure may be relevant factors in ensuring a balanced board, bright-line rules can force the arbitrary loss of valuable directors and are a poor proxy for what really matters. In some cases, lengthy service can enhance independent behavior. A director, for example, who has served since long before the current CEO or is a generation older than the CEO may likely have greater ability successfully to challenge management should the need arise than will more recent additions. In addition, long-serving motivated directors with a deep understanding of the corporation and personal knowledge of its evolution can be irreplaceable.

Competence and Integrity. Intelligent, dedicated and well-qualified individuals with appropriate skills, experience, expertise, education, background and perspectives are not enough to make a board effective. The board, with its necessary mix of qualities must learn to function as an effective team. The quality of team dynamics may have a significantly greater impact on performance than the sum of individual director contributions. This is an important issue to consider, and thinking of the board as a sports team with several different players and positions and tactics may be very useful. Board roles must be fluid.

While qualities such as mutual respect, sense of common purpose, energy, business sense, and openness may be difficult to quantify or describe with precision, they are very much at the heart of effective board functioning. In thinking about board composition, directors should take a long-term strategic view focused not merely on filling immediate vacancies on an ad hoc basis, but on constructing a well-rounded board that works well together in handling the multidimensional responsibilities inherent in its role. Trust and respect are earned and must be treasured.

Commitment to Director Responsibilities. Individual candidates need to understand and embrace the substantial work load and time commitment required for board service. To ensure that the increasingly complex and time-consuming matters that the board and committees need to oversee receive the appropriate attention of directors, the board may want to limit the number of other boards on which a director sits. While not easily reduced to a formula, it is undeniable that serving on multiple boards, especially with committee involvement, may place significant and conflicting demands on time. Some boards ask members to report in real time on any significant changes in their work or even charitable activity. Some watch this aspect less formally through conversation.

Beware Overuse of the Skills Matrix. Some boards employ a skills matrix to be sure they have the mix of skills and experience they need on the board. While keeping an inventory of skills represented and needed is valuable, the skills matrix can often take on too much importance. One issue to consider is whether the desirable skills highlighted should be sought in board members, or instead be contracted for as a service or possibly brought in to the mix of skills in the employee population. For example, with respect to cybersecurity, what can a board member, whose skills almost by definition will be out of date in this rapidly changing world, do with his or her direct expertise to address cyber risk? It may be riskier for the company to create the illusion of board level expertise than it is to recognize that it needs state of the art up to the minute knowledge and engage a firm who focuses on nothing but cybersecurity.

Value Tempered Judgment over Technical Expertise

What all boards can benefit from is not so much specific expertise, but enough familiarity with company businesses to be able to offer the benefits of seasoned judgment. The wisdom that comes from surmounting difficulty and working in multiple formats, capacities, and industries is valuable to the company’s ability to recognize problems early and to resolve them well. It takes x-ray vision to be able to see into the organization and identify emerging issues while not engaged with it every day. To get the real benefit of independence, seeking that kind of skill may trump the skills listed in the matrix as needed. In the wrong hands, the matrix can be used to divide and conquer.

Director Training. In addition to the periodic mandatory requirement for all directors to refresh themselves on the corporate governance code, code of conduct and business ethics, new directors need orientation. Onboarding not only addresses company and industry business and competitive matters, but also addresses the intangibles such as corporate and board culture and history. The goal is to provide insight into the corporation’s business, strategy and risk profile, and method of making decisions in such a way that the new director can take his or her seat with confidence and not slow down proceedings with the need to explain basics.

Make explicit commitments to ongoing director education so it does not end up taking place in the board meeting. It can be comprised of specialized tutorials and/or site visits. It can be helpful to promote lines of communication that will foster open and frank discussions with senior management. Some boards hold their board meetings at a rotating list of company locations that can be used to highlight production, sales, and other mission critical activities. This gives the directors direct exposure to company operations, and, as important, makes them visible and human to managers and employees, and vice versa. It builds important awareness and connective tissue.

Another approach that can be effective is to bring key executives from various operations and divisions to the board, and include them in board dinners to facilitate informal exchange of information and the building of relationships. The executives may be asked to provide a presentation on their area of responsibility before the formal board meeting starts. Yet another technique to foster interaction is to have directors arrive a day early, with the expressed purpose of meeting with whichever executives they need to see, for committee work or general information. Executives keep themselves available that day.

One company developed a standing two-day meeting agenda, in which one day was dedicated to the general business of the board and the other was reserved for a day long exploration of key issues in a business area.