Replacing Board Members: The Elephant in the Room

Replacing Board Members

Finally, an SVDX/Rock Center event that just about packed the house! I’ve complained frequently that people, especially students from nearby universities, are missing out on these excellent programs. Attendees still looked mostly like directors to me.

If students ever show up in large numbers, we’ll have to move to an arena or stadium. I’m not sure if it was the topic or if word is getting out. Critical mass has been reached with Replacing Board Members: The Elephant in the Room.

There’s no more important corporate governance task than board succession. Get that right and the rest should follow.

Like my reports from all SVDX events, these notes follow the Chatham House Rule. The Corporate Governance blog is basically my personal diary, with notes about some of the more important developments.  I’m more of a retail investor activist and theorist, less of a journalist, so my notes are crude.

Next to appointing the CEO, replacing board members is the most significant job of directors. With the rise of activist investors, the advent of proxy access, and continuous changes on the competitive landscape; focus and attention on board composition and succession planning has never been greater. Boards are under increasing pressure to assemble the right mix of leadership experience and skills not only to help their companies succeed today, but also to face inevitable curves ahead.

Replacing Board Members: The Panel

Dan Cooperman

Dan Cooperman is an attorney at DLA Piper, a fellow at the Rock Center for Corporate Governance, and a director at Molina Healthcare, Inc. Dan focuses his practice on corporate governance, board of directors issues, and the organization and management of a global legal department and global law firm. Dan has a nearly 40-year career in law and business, most notably serving as senior vice president and general counsel at Oracle under Larry Ellison and at Apple under Steve Jobs. He serves as a strategic advisor to Institutional Venture Partners, a premier late-stage venture capital firm, and its portfolio companies.

Curt Crawford

Curt Crawford, PhD is president and CEO of XCEO. He is the author of two books: Corporate Rise: The X Principles of Extreme Personal Leadership and Compliance & Conviction: The Evolution of Enlightened Corporate Governance. Curt currently serves on the board of directors of Xylem Corp and ON Semiconductor. He previously served on the E. I. du Pont de Nemours board and has been nominated to the board of Chemours, a new company created from DuPont’s Performance Chemicals businesses. He has also been a board member of ITT Corp, Agilysys, Lyondell Petrochemical, Sisters of Mercy Health Corporation, and DePaul University.

Jesse Wiley

Jesse Wiley is director at John Wiley & Sons and has served as a member of the nominating and governance committee since 2012. With the chairman, he will be forming a new technology committee this fall. As part of the seventh generation of the Wiley family working in the company, he joined in 2003 playing various roles in marketing, editorial, digital product development, new market development in Asia, and currently in strategic business development and mergers and acquisitions. Jesse also helps manage Wiley family business governance affairs.

Replacing Board Members: Moderator

David Chun

As CEO and founder of Equilar, David Chun has led it since its inception to become one of the most respected and trusted names in the executive compensation industry. David has been recognized as one of the “100 Most Influential Players in Corporate Governance” by the National Association of Corporate Directors (NACD). David often speaks publicly on corporate governance and executive compensation matters, including events hosted by The Conference Board, Corporate Board Member, The HR Policy Association, NACD Directorship, NASDAQ OMX, NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and Stanford’s Directors’ College.

Equilar has a new tool, BoardEdge, which they tout as the “Premier Board Assessment Solution.”  Equilar certainly has a great database. Board assessment and CEO succession are the board’s most important tasks. Chun gave me a 30 second overview after the program. I look forward to exploring this dynamic tool further. I would love to get feedback from readers who have been using BoardEdge. Follow @equilarinc.

Replacing Board Members

Most directors believe they already have the skills they need. After all, that’s why they got invited to serve. From what I heard at this mornings session, and it comports with what I’ve heard previously, the state of board succession is worse than CEO succession planning. Telling someone they won’t be renominated isn’t usually a pleasant task. 

Doing an assessment inventory of the whole board can be a good place to start. Another weak link in the chain is that about 60% of board nominations are based on board recommendations. Limiting nominees to people we know is problematic. Diversity, in the broadest sense of that term, tends to narrow under these circumstances.

Boards need to understand their current skill set. We were reminded; there is a difference between skills and experience. Understand your base. Then you know whom to recruit to fill in with the skills and experience you need for future growth. Skills, experience, attributes. A few companies are beginning to include a skills matrix in their proxy and there is increasing attention around diversity reports.

Skills matrix – Ask each individual to comment on their own skills and talents. You may find such assessments diverge from the perception other directors and even the director’s own resume. What skills does the board have?

Replacing directors – important to have data. Change chemistry of the boardroom. What do you have; what do you need? Term limits; age limits. Yes, but those are really a crutch… a copout and their is a natural tendency to change those limits. It is hard to loose an active contributor but boards need to focus on the future.

Dynamic process. Age and term limits can be helpful to avoid difficult conversations. A study by Society of Corporate Secretaries and Governance Officials found a majority of boards now utilize a skill matrix. Typically, this involves a table of all directors – with columns describing skills necessary going forward. Measure each board member against those criteria. Development of the matrix forges agreements of the competencies needed. Once filled out, you’ll see where the skills gaps are.

The matrix helps when identifying board candidates. Disclose it to the public? That is not required. The SEC requires each company to specify the minimum criteria for nominations and why recommended but there is no requirement to disclose a skills matrix. Here’s a link to one Prudential included in their recent proxy statement. However, there are lots of reasons not to include it. For example, it exposes your weaknesses. You may have activists lurking in wings and publishing your skills matrix gives them fodder by highlighting weak directors. On the other hand, maybe they will suggest much better replacements.

I think there is too much of a tendency to automatically get defensive with regard to suggestions by investors. If an activist identifies a better nominee, maybe the board should listen.

The matrix needs meaningful discussion because checking the box could represent broad differences. It also isn’t likely to measure director effectiveness – only your colleagues know who is effective in the boardroom but that is critical to assess. Boards need a continuous constructive feedback and assessment peer to peer every 18 months, preferably by external consultant (like Kristina Veaco who was there in attendance).

With all the talk about skills matrices, here was an interesting reminder: Who is most knowledgeable? Who is more beholden to the CEO? The CEO often has veto power over nominees but not directors who appointed them to their jobs. Who is more financially aligned? Existing directors generally hold a lot more stock than new nominees. A skills matrix doesn’t independence. Effectiveness isn’t shown on a table. The usefulness of a skill matrix is tempered. Behavioral skills are often overlooked on such matrices. Existing directors will almost always look better on paper but we need to keep an eye on the future.

Setting and communicating expectations. Rigorous frequent assessment is required. Boards need mechanisms to test expectations against performance. They are in the talent management field. Unfortunately, many boards are behind in the use of tools that have become common in HR.

Accomplished executives are not used to being questioned. Collaboration skills are equally important. That should come to measurable light through board evaluations. Chair or lead director needs to address underperforming directors… rehabilitate. May need encouragement, education. Generally, directors are not asked to leave due to a lack of skills but rather due to their attitude. One of the panelists spoke of a director laid back in their chair, sleeping at meeting. He nodded to the chair, who took a quick break. The sleeping director was suddenly cured and they never had the problem again. I once had a similar experience that did not resolve so easily.

In response to a question from the audience: Yes, if you leave your job, a current board, or other major change in status, many companies require a mandatory offer of resignation. It provides a good opportunity for the board to assess how that change in status may impact the company.

Self-nominations by outsiders? Proxy does set out qualifications and invites nominations. All such nominations should be vetted with nominating committee. Acknowledge receipt of letter; then provide response after vetting.

Corporate governance and nominating committee? Look in the proxy at how many meetings they hold.  It is usually fewer than the audit or compensation committee. Members generally meetings paid less and they frequently have no long-term external partner – but it is arguably the most important function. Look to number of meetings they hold as a leading indicator of how much work they are doing. Boards need to go beyond compliance. Independence is most crucial to that committee. Partners can be search firm or someone in the governance space. 

Boards should also rely on general counsel for a somewhat independent view of directors and dynamics, since they frequently have a broad view and are usually the only member of staff that always attends board meetings. Board has responsibility to ensure the general counsel takes on that role. Obviously want help of GC when you are getting rid of someone. Rely on outside counsel for assessing related-party transactions. You also need to look at how senior management is interfacing with the board… they could be ineffective as well. Maybe the management team doesn’t really understand board’s role.

Board discussion of withhold vote, say on pay? Boards are very attentive to how many votes directors get. Also look at other boards where that director has served. Contact other board members. That’s all part of reference checking.

If recruiting, how do you determine interpersonal behavior? Do you ever use tools like Myers-Briggs? Response was haven’t started using but are using the concepts behind the tools. Team dynamics is important and is considered. Assessment is used more if you are trying to decide between candidates but not if you are recruiting. For experienced boards the discussion is more around fit. Isn’t team dynamics a measure of fit? It boils down to the fact that if you are recruiting, the candidate feels less obligated to submit to assessment… but doesn’t that mean they get started on exactly the wrong foot?

Directors are uncomfortable giving negative feedback even if constructive. They are uncomfortable receiving negative feedback. Yet, 65% think at least one director needs replaced. All directors need to take on the role of assessment, both for themselves and for others members of the board.

No one should be caught by surprise, since they should have already received feedback. Leaving board members sometimes want major role in picking successor. Pluses and minuses for that.

It was another great program with lots of networking opportunities. I made a couple of new connections myself and renewed acquaintances after the long summer break. Don’t miss the next program on October 15th, An Effective Board: Pipe Dream or Reality?