This article is reprinted with permission from the February 2015 issue of PSX: The Exchange for People Strategy, an eMagazine that brings you cutting edge views and perspectives on all things related to people strategy.
As the institutional investors, institutional advisory firms, private equity firms and hedge funds investigate organizations, they will be searching for solid evidence of competitive advantage before investing. We believe that this will be clearly signaled based on differences in the QUALITY of the organization’s board. Investors will discover that situational-based board governance contributes greatly to the SUCCESS of organizations.
As an investor once said, one can hold steady either the principal or the interest, but not both. In predicting trends in the board governance areas it is our feeling that you can also predict either what or when, but not both. We have decided to predict what will occur, and will leave the “when” up to the environment, key stakeholders, business strategies, and the boards themselves to determine.
What does the future hold when it comes to board governance? Here are some trends to watch for: some are widely shared, while others may be a bit more controversial and, yes, some are even more hopeful extrapolations.
1. Governance strategy will become more situational, adaptive, and will better align with the needs of the business.
Although this is our primary message, it is more than just optimism on our part. As organizations grow larger and more complex business models are introduced, corporate management and boards will see the need for closely tying governance to the organization’s internal and external influences – where the organization is and where it is going, not so much where it has been. Governing in our new knowledge-based, global economy is far different from governing domestic “brick and mortar” businesses. Boards, CEOs, and senior management will eventually grasp the need for different boards at different times.
2. There will be more independent chairmen as the management of boards becomes more time-consuming and more focused on external issues. Boards will become more contributory in general.
In most organizations large and small, those growing and those transforming, need their CEO to be laser focused on executing the business strategies. Both boards and CEOs will realize that these demands require nearly a full-time commitment by the Chief Executive Officer.
In order to effectively compete, sustain and grow the business and protect stakeholder interests, a “divide and conquer” mentality will grow, resulting in more non-executive chairmen. Board members including the chairman, committee leads, and members will all need to make greater contributions, demanding more time and greater commitment. Over time this will be perceived as a good thing.
3. Boards will continue to search for the correct balance of board contribution.
There is a range of board contribution from informational, to advisory, to traditional, to operational. We don’t mean to suggest that these are the only four options, but that they represent four clear points on the continuum from “information providing” boards to full blown “operational and tactical” boards.
The combination of industry maturity, organization stage and the myriad of other influences will make pinpointing the right approach a challenge, especially since the target is moving, with industries and organizations evolving and influencers morphing in terms of relative importance. The most important thing for boards is to remember that the way they contributed 20 years ago and maybe even the way they contributed two years ago or even just two months ago may no longer be optimal for the organization. Continual evaluation of board contribution is critical for the protection of shareholder value.
4. The subject of board governance will continue to evolve slowly.
Empirical based evidence of a better way of doing things in the arena of governance strategies will at first be distained and discouraged. Honestly no one likes change, it’s hard to handle. For executives who became highly successful in one era, using one set of now likely dated approaches, a new (and better) way of doing things will be scoffed at. But over time, distain will lead to indifference, and indifference to consideration and consideration to acceptance. The organizations that will be the most successful will be on that new bus sooner, those less successful organizations will be under it.
5. Board governance diagnostics will become more thorough.
As the SEC continues to require more stringent disclosure, one of the topics for disclosure will be the rigor of the board evaluations. For the better boards this will mean more thoughtful diagnostics, more comprehensive performance reviews and evaluations, and more aggressive attention to any identified issue. These reviews will result in more adjustments to board structure, processes, staffing and culture and probably more turnover in board members as reviews make it harder to carry a non-contributor. This will occur over a very long time horizon.
6. Investors will wake up to the importance of good board governance. Savvy investors already have done so.
As the institutional investors, institutional advisory firms, private equity firms and hedge funds investigate organizations, they will be searching for solid evidence of competitive advantage before investing. We believe that this will be clearly signaled based on differences in the quality of the organization’s board. Investors will discover that situational-based board governance contributes greatly to the success of organizations.
7. The nomination and recruiting of future board members will move out of the board room toward more independent and objective processes. Board recruiting through affiliation, relationships, personal links and nepotism will decline.
Organizations will come to realize that the expertise demanded of today’s directors cannot be so easily found in your neighborhood, your rolodex, or your family tree. Some search firms will develop more substantial practices to identify and recruit board members for their client firms. Others will abandon board search for more lucrative recruitment.
8. Boards will start discussing the culture in relation to its contribution to the board’s effectiveness.
Board culture, which has historically not been a subject of discussion, will soon surface as a key strategic contributor to both board and organization success. But it won’t suffice, as some propose, to try and overlay some standard sports team “culture” on boards. Boards are unique, unlike a basketball or football teams they are not coached, board members are the coaches. Of course, boards have leadership positions (chairman of the board and the committee chairs) and in some cases boards operate under established hierarchies that give near royalty status to these roles. If these boards are effective (and situational) then that culture might be the best one for that board at that time. What we encourage is for boards to start discussing their culture and create a framework that helps current and new members to quickly acclimate and operate effectively.
9. We will not see any major changes in the size of boards, but we will see additional standing specialized committees adopted.
We truly don’t see any significant increases or decreases in the average size of boards. Larger boards are not efficient and smaller boards are not capable of handling all of the issues. However, the issues and challenges faced by boards are on the increase. The optimal solution will be to increase the number of committees and the time spent by committee members working on multiple, smaller teams.
10. Professional advisors will slowly get the message and, come to the board room free of conflicts.
It must be vividly clear who the advisor works for (shareholders, directors, executives) and who is paying the bill. Where there is confusion over who has hired the professional advisor (be it a consultant, auditor, lawyer actuary, etc.), who will pay the bill and exactly what the advisor has been hired to do, conflicts of interest can, and likely will, arise.
Professional advisors will need to establish unyielding policies that govern client relationships and avoid conflict of interest situations. Boards need to evaluate advisors and avoid those who are or may be conflicted assessing both the advisor’s 1) degree of independence both financially and intellectually, and 2) their potential conflicts based on work performed for the board’s own organization or work performed for other clients in the same industry.
11. The frequency of meetings will increase as will the amount of time spent by each director on board issues.
There really is no alternative that we see. The outside environment is becoming more demanding of boards and the competitive environment is becoming more demanding of management teams. What we see is a natural division of labor that will require more rather than less time of boards. This may entail boards hiring additional outside advisors, which, although controversial, may be necessary.
12. More work will be done in committees and the power will shift from the board chairman to the committee chairs.
There will be more committees and more work done there. With increasing complexity of audits, clear justification of executive compensation programs, and thorough examination of new board members, committee chairmen will demand additional resources to carry out their duties. These resources will come in the form of outside advisors and increased budgets and staff.
13. Boards will look for international talent and more global board members.
One of the biggest challenges facing today’s organizations and their boards is globalization. Every part of the value chain will be forced to compete on a global scale. Lacking international board members, organizations will find themselves at a substantial disadvantage. Recruitment of directors with significant international experience is essential in the 21st century.
14. The glass ceiling will remain, (with more holes) for women and people of race, at least for the next generation.
It is discouraging but it is a fact that boards, when given a choice, will recruit in the image of their own demographics. Since most boards are comprised of middle aged, wealthy white men, it is that pale shade with which boards will continue to be painted, at least for the near future. In some cases, where governments can be influenced by non-corporate interests, imposed quotas and stringent explanations for lack of diversity will gain ground. This is not always the best solution.
15. Staggered board elections will decrease in number.
Staggered boards have been an effective takeover prevention device whose time has really come and gone. With more investor awareness and the willingness by key investors groups to propose shareholder votes that would eliminate staggered boards; most of the larger organizations will wake up and smell the roses. We expect the number of staggered boards to be reduced substantially over the next 10 years.
16. As board responsibilities expand dramatically, boards will seek to more clearly define their roles
We expect boards in general and committees specifically to develop, document, and disclose, in corporate charters more specificity, in of the extent of their responsibilities. Some of this may result from reaction to high-profile cases such as Enron, WorldCom, Fannie Mae, and AIG where “role confusion” puts the board in a position of increased liability from shareholder lawsuits.
17. Director roles become more clearly defined, especially as committee responsibilities expand.
Director roles will become better defined in the form of official position (or role) descriptions. These descriptions will outline the range of a director’s responsibilities and duties as well as the limits of accountability. This will be critically important in all of the board’s major leadership roles. Director role descriptions will also provide the basis for the core of the future performance reviews that will be conducted with greater frequency and consequence.’
18. Scrutiny will increase as to whether boards and directors have grown stale.
This will be a point of focus by the Council of Institutional Investors members in the near future. Where they go, others will follow.
19. The total cost of the board becomes a serious subject of discussion.
Discussions of total board cost will lead to decisions about the quantity and quality of directors. Evaluating quantity is easy, it’s how many, and the more directors the higher the board cost. Evaluating quality of board members is less straightforward. The qualities that an organization must seek in its board members are highly correlated to its situation. But regardless of the qualities sought, there is no doubt that quality board members will come at a higher cost.
Even so, it is not just about the number of directors, the quality of directors, or even about total cost. The important consideration here is how director rewards (which is essentially the cost of the board) relate to director contribution and organizational performance.
When the nature of the discussion about total board cost evolves to contributions and organization performance, that signals that the organization is or will soon be successful. In the majority of cases we have found that smaller, more engaged boards with better quality members whose rewards are linked to contribution and organization performance are most effective.
We promise to keep track of these prognostications and advise you when we are on – and even when were found to be off – the mark.
Nancy May | BoardBench, LLC Michael Dennis Graham | Grahall, LLC