What Directors Think
First Quarter 2014
Corporate Board Member
by Deborah Scally and Kimberly Crowe
What kind of board does your company need to maintain a competitive edge? Industry and leadership experience are obviously important factors and most boards have added a financial expert thanks to Sarbanes-Oxley, but does your board have IT expertise? Social media savvy? How about an international perspective?
Given the meteoric rise in IT risk, it is likely your board either already has a director who is well versed in information technology and data security or is looking for one to help it better understand the company’s IT risk profile. The same is true for the fast-growing realm of social media; its increased use as a competitive strategy in recent years has brought correspondingly greater risks. And if your company is contemplating expansion outside of the United States, bringing in a board member with international experience is a must. At the same time, more attention must be paid to the tricky arena of anticorruption and FCPA compliance, with its minefield of risk.
The results of the 2014 Corporate Board Member/Spencer Stuart What Directors Think survey, a long-running annual study based on the input of public company directors nationwide, reveal directors’ views on rejuvenating the board, risk oversight, say on pay, and more. In many areas, this year’s findings align with more than a decade of What Directors Think results and demonstrate that CEO succession and the desire for more time for strategic planning continue to be chief challenges for U.S. public company boards.
In addition to the core areas of study, this year we posed a number of questions around board structure, turnover, and guidelines to better understand the methods and processes boards are employing to maintain their vibrancy and effectiveness. Interestingly, quite a few directors wrote in to comment that these latter issues, while topical, should never become a distraction from their primary responsibility of improving the bottom line.
For example, one director noted that while surveys typically ask about say on pay and regulatory issues, the board’s focus should be squarely on enhancing shareholder value: “Shareholders want us to make money for them. … We work for those who invest in our companies to make a profit.” Another offered a similar comment, saying, “A board’s obligation is to further and enhance a company’s revenue growth, profit potential, and shareholder benefit” rather than to be overly concerned with political correctness. This years’ results support the fact that directors’ commitment to shareholder interests remains paramount, but Stephen G. Kasnet, a survey respondent and chairman of Rubicon Ltd., maintains boards can find common ground with some of the so-called softer issues and those that have a direct line to profitability: “A well-informed board can and does establish goals and structures that meet the shareholders’ and business’s needs.”
To provide context to the issues that surround corporate governance at the start of 2014, we have organized survey data into five categories: board composition and effectiveness, leadership challenges, executive compensation, risk management, and strategic planning. While compensation and succession are long-running themes, the results show there are new twists on risk oversight that undoubtedly reflect the current corporate environment, both technologically and globally.
ASSESSING BOARD COMPOSITION
For any given company, there must be both management and a governing body that are up to the task of meeting current challenges. And while many of the requisite skills are the same year after year, corporate challenges continue to evolve that require new blood and fresh approaches.
While the concept of “refreshment” is more readily applied to employees and management, there’s a growing trend among investors and academics to apply it to boards as well. Shareholders want to ensure that the boards of the companies in which they own stock are capable of handling the leadership and governance demands of the current marketplace and that the highest standards of independence are being met. This viewpoint reflects the belief that today’s corporate boards are one step further from the days when boards were often formed under the auspices of longstanding friendships or business favors—and stayed that way.
Today’s board members are well aware they need to stay sharp. As John Bagalay, one of our respondents and an executive in residence at EuroUS Ventures, notes, “Failure to establish an orderly method of changing board composition creates two problems: one diplomatic and the other leadership refreshment.” Two-thirds of directors we surveyed agree, finding the need to periodically refresh the board with new blood as either important (51%) or critically important (16%), with another 26% saying that refreshing the board is at least somewhat important (Figure 1). Bagalay adds, “All companies need board members who come on without a predisposition to accept the way things are.”
And the time has never been more appropriate for a jaundiced look at board composition. According to What Directors Think survey partner Spencer Stuart, among S&P 500 boards, retirement ages are being pushed back, and as a result, board members are becoming older and more entrenched. “While it sometimes makes sense for boards to ask experienced directors to remain on the board longer, they must also ensure they have the diversity of skill sets that are important in today’s business world to define a forward-looking strategy and vision and manage key risks,” says Julie Hembrock Daum, who leads the Spencer Stuart North American Board Practice.
Yet, one irony today is that adding younger board members to the ranks inadvertently means these new directors may one day end up with longer-than-average tenures. Along those lines, we asked directors whether it would create a problem for a board member to serve as much as 30 years on one board. Respondents were split on this point, with 53% saying yes; 47% no. As one director noted, “I generally favor age limits, but [Warren] Buffett is causing me to rethink the issue. Who wouldn’t want Buffett at 80-plus?” Another pointed out that proponents for age limits “seem to focus on the negative side of longevity but give little or no credence to the wisdom gained only through years of experience.”
Jim Hunt, a survey respondent and retired Walt Disney World executive who sits on several boards including Brown & Brown Insurance, says, “A robust, specific board evaluation … of each board member, coupled with individual discussions with each member by the chairman/lead director, should provide for a company’s board to be self-reflective and allow for change as needed.” And in his mind, this type of well-executed evaluation negates the need for external regulatory pressure to manage board performance. “The fact that a great many boards are up for reelection annually allows for shareholders to give due consideration to board performance,” he states, and thus evaluations can be handled without regulatory intervention.