Recently, I was discussing board recruitment with a client in Connecticut who had hired me in 1981 to execute my first executive search, when it was just me, prayer, a cup of tea and my determination to find ‘The Best Candidate.’ He is a former Chairman and CEO of publicly-listed companies and remains a board member of various organizations.
“Why do corporate boards pick certain people?” he asked me.
This started a conversation about the changes in board nomination, selection, and governance over the past 20 years — where we were, and where we are.
It is not as simple as it once was.
Institutional investors, corporate and consumer activists — and all stakeholders, including employees and shareholders — have a say in how boards are structured. And, by and large, corporate America and all shareholders have benefited greatly.
Having healthy, profitable and ‘good’ businesses is, arguably, good for Connecticut.
The traditional paradigm going back to the 1920s, according to Directors & Boards magazine, was management-appointed and dominated board members. This began to change in the 1970s and 1980s when shareholdings were re-aggregated into large institutional holdings and large asset management companies. State pension managers and funds, for instance CalSTRS with current assets under management of $168B, began to exert influence, ask questions and seek changes on corporate boards.
Added to this, governance organizations, such as Institutional Shareholder Services and the National Association of Corporate Directors, began actively developing best board practices for publicly-listed companies and educating existing and prospective board members. This has evolved further over the past decade as Harvard, Columbia, Wharton School, University of Chicago and Stanford now offer programs in board preparation.
“Why do corporate boards pick certain people?”
Today, the choice most often starts with diversification; whether skills, experience, gender, age, ethnicity – an effort to refresh and realign the board with a company’s strategic vision, a need for skills or professional expertise, or to include customer and market representation missing from the board.
How will their customers buy product or services in 20 years? Who will be their customers? What about cyber security and global market risks? What about existing technology versus quickly evolving artificial intelligence, machine learning or the Internet of Things?
Technology has disrupted every industry – the way they go to market, the supply chain — and the voices that effect board selection and governance have marched in step.
These changes have been sources of great good to American companies and have certainly affected “who” and “how” boards pick new members. As a board recruiter, 15 years ago my mandate would have been to find retiring or retired CEOs for their strategic and operational capabilities and expertise, or CFOs for their audit and finance capabilities to sit on boards. Over the past decade this has changed tremendously. Every board search I have undertaken since 2015 has followed this need for diversification and refreshment. Boards today want members who can advise and educate them on digital innovation, global market expertise, how to protect the company and how to think about product development, markets and changes in consumer buying patterns.
Many corporate boards had no women or people of color who by gender or ethnicity reflected significant portions of their consumer base.
Institutional investors and private equity activists have been most often the drivers of change. Their purpose often was to obtain seats on the board representing the investor — but in the process, corporate boards started to align their members with current market demands, recruit for skills or expertise missing from the board, global market understanding and consideration of changing social and cultural norms.
For the most part, this new focus has brought amazing innovation, intelligence and energy to boards — changes that have increased stock value, improved strategic leadership, impacted corporate culture to give ALL employees a voice and has enabled the US to lead in global corporate governance practices and matters.
To share one real life example, I started working with a $300M@ Nasdaq company in 2015 to recruit a woman to their board. The decision was prompted by a corporate activist — my client had never used a board recruiter — we were brought in by outside legal counsel to advise the Chairman and CEO on how to prepare and defend their board structure.
Though concerned, they accepted reality that their board was composed of white men, some serving 25+ years, all had been early investors or business friends from their headquarters’ community. Most were lawyers, accountants or CEOs. They were comfortable and the company had performed well so why stir things up? The company had grown from a healthtech startup, had prestigious institutional investors and the shareholders had been pleased with their ROI.
In this case, from my discussions with the corporate activist, he hoped to shake up what he perceived to be a sleepy board, get two new representatives of his own on the board and drive the company to a strategic, liquidity event and recoup multiples on his investment — not an evil strategy, but what about the company? What was in the company’s best interest short and long term?
With the agreement of board leadership, we aggressively went to work for the betterment of the company and decided to let the chips fall where they may. We considered the activist’s candidates, but more important, did a board assessment with the Chairman and aggressively recruited candidates who brought skills and expertise missing from the board.
The outcome we recommended was to appoint an outstanding white male strategist from the activist slate, and from our slate an outstanding Black female doctor/MBA who was also a rural community clinician, and a white female MBA who brought investor, asset management and turnaround skills.
The outcome achieved both the activist and the company’s objectives.