What Directors Think: Part 2
Most boards have formal policies regarding ongoing board service and tenure. Just over half (53%) of directors reported that their boards employ a mandatory retirement age. In addition, 39% said their boards require a mandatory resignation submission in the event of a personal reputational event, such as a bankruptcy or arrest, and 28% require a mandatory resignation if a director fails to garner a majority vote. However, fully half of those surveyed said the latter is not required nor needed, which may indicate a preference by directors to evaluate each case individually rather than under blanket guidelines.
In addition to examining the methods boards are using to refresh their ranks, another important function is for boards to undertake a healthy self-evaluation to ensure all sitting members are contributing something unique and relevant to the whole. This is often an important step when there is a vacancy on the board. Dovetailing with this idea, the survey asked directors which attributes would be most important in selecting their board’s next new member. Not surprisingly, financial and industry expertise were the top two choices, followed by CEO experience, knowledge of information technology, and global expertise. Close behind was the relatively new demand for directors with marketing and digital/social media experience.
Industry experience is often viewed as a compelling factor for selecting a board member, especially in terms of how a candidate could contribute to the competitive growth and strategy of the company. Tim Gentz, a survey respondent and chairman of Speed Commerce Inc., says to make his board stronger, “We need to enhance our industry knowledge both via education and by recruiting candidate(s) with industry experience, as we have recently changed our strategic direction.”
With regard to leadership experience, the survey found a difference of opinion about the upside of having active CEOs serving on boards. One director said there is a need for more CEOs or COOs who are willing to sit on boards, explaining, “We now have too many professional board members who are getting education boxes checked through the NACD, etc., who don’t have the experience of actually running an organization. They tend to be good on process and weak on leadership.” But another director complained that “board members who are also CEOs and sit on multiple boards are cheating everyone—[they don’t have] enough time to do any of it right.”
“Active CEOs bring a wealth of relevant current business experience to the board,” says Daum, “which is why they are frequently sought by boards looking to recruit a new director. They also tend to relate well to the company CEO and are well-equipped to build a strong working relationship with him/her,” she adds. “But boards will want to be cognizant of the tradeoffs in adding a sitting CEO to their boardroom, among those, potentially less time to devote to company business in between meetings or when extra time is required–in a crisis, for example. Boards also will want to have a candid discussion about whether they are looking for a marquee name or someone who will actively contribute to the dialogue and deliver value,” she explains.
Daum says the 2013 Spencer Stuart Board Index revealed that 23% of new directors were retired CEOs, COOs, chairmen, presidents, and vice chairmen, compared with just 16% in 2012. And, for the first time, fewer active CEOs than retired CEOs joined S&P 500 boards, 77 versus 79, “suggesting that more boards are comfortable that retired CEOs can make a similar contribution as sitting CEOs―who are more reticent these days to sit on incremental outside boards,” she notes.
One area that Corporate Board Member has been actively tracking for the past several years involves initiatives to promote board diversity. Thought by many to have benefits above and beyond a perception of political correctness, board diversity has gained momentum in countries that have put their regulatory muscle behind such initiatives. Such regulations, however, have not gained a foothold in the United States, nor do most directors expect them to. Nearly 60% believe there will be no formal actions in the U.S. in the next three years related to board diversity, though 38% believe we will see increased pressure on this front by investor activists.
As one director noted, progress toward more diverse boardrooms is likely to occur, but it will come about by more organic means. “Diversity cannot be achieved by mandatory selection of less experienced members; it has to come about naturally through societal changes. As more and more diversity enters the job markets, the pool of directors will allow for diversity.”
These views are telling in that directors themselves are a key component in how their future boards are shaped. Nearly two-thirds (63%) of those surveyed, for example, said individual board member recommendations are the most successful source of new board members, followed by the use of search firms (22%).
For a closer look at the functions of the board and its members, the survey set out to ascertain how effective the board and its committees are in several key oversight areas. Directors are most confident in the audit committee’s ability to accurately monitor financial reporting, followed by their ability to challenge management when appropriate, and the compensation committee’s ability to properly align CEO compensation and performance. Rounding out the top six are the audit committee’s ability to investigate internal fraud, the board’s ability to develop and deliver the CEO’s performance review, and the compensation committee’s ability to properly set industry benchmarks for CEO compensation.
“For the 10-plus years we’ve been doing this survey, directors have been unwavering about their ability to monitor financial reporting. I truly believe that audit committees take great personal pride in their ability to perform this important task,” says TK Kerstetter, chairman of Corporate Board Member. “What is equally interesting over those 11 years is how little has changed regarding the order of the duties they feel they oversee effectively.”