Articles and Commentary
February 26, 2013 - Corporate Board Member Magazine
Why Are Boards Coming Up Short In Performance?
No board member sets out to be mediocre. And yet as institutional shareholders and activists are “grading” board performance on a steeper curve than ever before, their view is that many boards are coming up short.
ISS, government regulators, the press, and others are exercising much greater scrutiny over whether boards are executing their fiduciary responsibilities and really acting in the best interests of shareholders. While activist shareholders traditionally were able to hold sway and demand board seats in smaller companies outside the Fortune 500, today we are seeing this happen with venerable names such as Procter & Gamble, Yahoo!, BMC Software, and JC Penney.
In this climate of stakeholders’ taking a much tougher stance on what they deem to be “underperforming directors,” it’s worth it to examine the causes of mediocre performance on boards today. Why are many boards missing the mark?
Looking at the structure and process of many boards today, the following emerge as the greatest areas of concern:
• Knowledge gaps. One of the major causes of board underperformance is uneven knowledge on a subject; because some directors are way ahead of others, discussion around the table becomes limited. While it is not expected that everyone will be at the same level of knowledge about all board topics, a certain baseline is important for meaningful discussion. We have found a number of companies addressing information asymmetries by adding mandatory board education sessions on specific subjects—whether it’s M&A issues or a new geography the company may be entering or new regulatory developments. This greater leveling of content knowledge allows more robust discussion on the core issues. But the key is that these sessions become mandatory because when one or two directors miss a session, it sets everything back to zero.
• Lack of self-assessment. Boards of directors are continually pushing their CEOs to assemble the best team around them and also ensure that the top executives are being rigorously assessed and developed. Yet the paradox of corporate governance is that when it comes to the board assessing its own performance, it is often done using a check-the-box exercise with some form of gentle peer review. These reviews are frequently conducted by law firms focused on compliance rather than specialists in assessments. To better ensure director effectiveness, the best boards today are implementing truly rigorous assessments with substantive data on their performance rather than the kind of rubber-stamping sign-off that is so common—but is viewed with increasing impatience by board observers.
• Self-delusion. Because the role of a director is multifaceted and not easily quantified or measured, a psychological effect can come into play which is called illusory superiority. While it’s impossible for most people to be above average for a specific quality, people deluded by this effect think that they are better than most people in many arenas including work performance. This problem is exacerbated by the lack of honest feedback—fellow directors may comment behind the back of an underperformer but won’t confront him to his face. What is even more interesting about this psychological effect is that the most incompetent people are also the most likely to overestimate their skills. The fix for this problem is employing hard performance metrics for directors. Getting specific about what makes an effective director and then training, educating, and assessing against these criteria gives directors feedback on their performance that is useful and actionable.
• Committee inexperience and recruitment shortcomings. One of the most important conditions you need for performance is “content for the role;” for boards, two of their most important duties are strategy and succession planning. Yet when you examine the real experience that directors have when it comes to succession planning, very few actually have deep experience. What is even more concerning is that you rarely see succession expertise as a criteria for being selected to a board. Additionally, the committee members in charge of succession planning are usually there by default—those directors who did not have the qualifications to be on the specialist committees (such as Audit). Finally, during succession events boards often choose to “go it alone” rather than utilizing outside advisors, something they do for every other activity the board engages in (Audit, Risk, Compensation, Legal, etc.). The combination of not having the proper expertise and the extreme stress that succession events can cause can lead to board underperformance and outright ineffectiveness at a time when shareholders need them at their best.
• Leadership issues. Out-of-touch board leadership can be one of the most problematic issues for a board, even when there are outstanding individual directors around the table. Whether a board has chosen to split the Chairman and CEO role or to utilize a Lead Director, it is very important that board leadership be taken seriously. These are typically directors who have been developed purposefully through various committee leadership roles, combined with deep and broad governance experiences. The very best Chairs and Lead Directors are able to focus the board, draw out people’s points of view, re-direct when things are off track, and deal with issues as the come up in order to maintain a productive and constructive board environment. They are active in their roles engaging individually and collectively with directors and management. They have the pulse of the board and management and are able to guide the board through stressful situations using these events to bring the board together and galvanize it versus it become a divisive and unproductive situation.
Finally, and it should go without saying, people who “need” a directorship for financial reasons should not be on the board because they are compromised before they even begin. You should always recruit directors that have no financial motivation for being on the board. A company needs directors who choose a board because they are passionate about the company and have real skills and experiences that align with the needs of the company and the CEO.
Stephen Miles is founder and CEO of The Miles Group, which advises chief executives and boards globally.