In my February column, “Why Do Corporate Boards Pick Certain People,” I discussed various factors that can affect the choice of new board members, including the outside influence of large institutional asset managers, governance organizations, such as NACD or ISS, and the proliferation of board preparation academies, such as those at Stanford and Harvard.
These outside influences have encouraged diversification by gender, ethnicity and age, as well as encouraged new skills and thinking in cyber security, digital innovation, technology and cultural market representation. The resulting corporate goals, to name a few, have been to realign boards with an updated strategic vision, provide greater understanding of technology and brought attention to evolving cultural and social norms.
Board refreshment — often brought about by a new CEO — enables new ways of thinking and looking at the world, brings new energy to boards, invigorates senior management and enhances engagement with related communities and customers.
We looked at the board structure of a few Connecticut companies and confirmed that a few CEOs have been socially and culturally committed to diversification. However, the thinking behind modern day best board practices and decisions often started decades ago by earlier CEOs simply committed to best board practices.
Connecticut companies, especially those in urban cities, such as Stamford or Hartford have benefited from evolving and changing ethnic diversity. The community and companies there have employed emigrating populations over the years. Perhaps, this openness to employee diversity has moved companies toward a broader commitment to stakeholder versus shareholder capitalism.
The following board practices may be helpful to Connecticut companies considering board refreshment:
- Be intentional about being a continuous improvement board.
This can start with the Lead Board Director instituting an annual self-assessment by its members and is followed by the Lead Director conducting one-on-one meetings with each member. The goals established by the board and its specific committees should be communicated to shareholders and stakeholders. Consistently having an outside, 3rd party, interview board members and execute peer-to-peer assessments periodically can provide insight into how a board is performing against its’ goals.
- Consider sequential terms of 12-Year cycles for board service.
Most boards have between 8 and 12 active board members. One method of mindful board refreshment is to maintain a structure of one-third of the members with 4 years or less service; one-third of the members with 5 to 10 years’ service; and one-third of the members with more than 10 years’ service. Age 72 or 75 are often when companies require board retirement, but it can be flexible if the specific member has a skill greatly needed the year of retirement.
Thinking in 12-year terms can provide diversity yet continuity of thought, skills enhancement and can encourage an individual member to self-select out of service or adhere to term limits. It can also provide continual mentorship to new members such that their integration is seamless, and they are well-informed by human resources, finance or legal departments about specific company issues. Some companies institute the practice that each new board member will have a mentor their first year of board service. Board service terms can also encourage the Nomination-Governance Committee Chair, Lead Director and CEO to always be thinking of the board candidate pipeline. This can limit surprises, maintain strategic skills and functional or market expertise.
- Become a “desirable” board for diverse candidates.
If a company wants to attract diversity, having a diverse member join the board can indicate the company is serious about thinking more broadly and open to change.
- CEO engagement and communication.
A CEO should be diligent about getting to know his individual board members, perhaps calling them separately and frequently to directly engage their opinion on matters coming before the board. This is good practice if a CEO wants to be challenged, to have collaboration and engagement versus ‘group think’ and domination by a few. This can ensure all members speak and have a seat at the table.
- Board relations with investors.
Companies with large asset management investors, such as State Street, Blackrock and Vanguard, are likely to have a board communications program designed to reach out annually to their top 25 shareholders. Some companies may even have the Lead Director on these calls or in these meetings so investors can ask direct questions. Other than shareholder investor interest, companies may encounter social activism, such as, “What are your numbers related to diverse employees? What is your policy on climate change? Or, how is the Great Resignation affecting you and what are you doing about it? A company can benefit from talking to shareholders and taking their concerns to the board.
- Why do boards need refreshment?
It is one more way a company can ensure commitment to all stakeholders. It also enables a company to be evergreen — capitalize on new ideas, new energy and broader intelligence. Board refreshment can institute values of doing the right thing and having thoughtful goals rather than maintaining the status quo. Board refreshment is worthy of consideration by all companies. It can contribute to shareholder value, stakeholder engagement and the overall health and profitability of a company, employees and the communities they serve. Whereas, the status quo may limit a company’s effectiveness, harm its reputation or lessen stakeholder value.
Matthews can be reached by email or by phone: 917-881-9445