A Modest Proposal for Refreshing Boards in the Time of Racial Justice and COVID-19

Racial Justice is shining a spotlight on how public companies are managed.   While blacks represent 12.4% of the U.S. population, only 3.2% of senior executive positions are held by black people, even fewer serve on corporate boards.

At the same time, COVID-19 is rewriting the book on business strategy and execution.  Growing complexity, disruption and uncertainty have made the job of leading an organization more challenging. Yet, board turnover remains where it’s been for years, below 10 %.

Racial justice brings new urgency to board refreshment. Boards are expected to reflect the company’s customers and communities. Will racial advocates be content to wait as changes in the boardroom continue at its present glacial pace?

Companies need more diverse perspective in boardrooms now given the board’s responsibility for  providing guidance while building talent around the company’s strategy and future needs.  Relevant technical skills in cybersecurity, entrepreneurship and human capital are also critical.

While annual election of directors would seem to imply a fresh slate of board directors, it’s not the practice within the boardroom today.  The average company director has been in his seat for more than a decade. And, the majority of directors continue to come from the same recruitment pool.

Today, most directors see their board assignment as a term for life, or at least a decade. Because the role of director brings with it the imprimatur of a successful corporate career, most directors are loathe to give it up. As one veteran director observed, even with the increased requirements for directors, no one wants to give up the prestige of a board position.

Board refreshment needs to be an annual event. In countless surveys, the majority of directors admit that at least one board member is no longer effective.  However, the collegiality of the boardroom prevents fellow directors from singling out their less effective colleague, however obsolete his or her expertise and contribution has become.

The way to accelerate board refreshment is to require all directors to annually submit their board resignation to the Nomination and Governance committee chair.  That simple practice would give the board the opportunity to create the most relevant and diverse board for the current business environment.

Given the sluggish turnover of directors, investors are paying more attention to board composition. Institutional investors have increased the number of no votes against chairs of the nomination and governance committee.

If investors were assured that the slate of directors presented annually went through a true re-nomination, the board would be strengthened and its legitimacy reaffirmed. The practice would enable the board to retain its most productive members and create vacancies to recruit for greater diversity and new and needed skills.

The stakes have never been higher to ensure the most diverse and relevant expertise in the boardroom.

 

Karen Kane, former board secretary of the Federal Reserve Bank of Chicago, is a NACD Board Certified Director and Governance Fellow, writes frequently on governance topics and works with CEOs and boards to improve board performance.

The Digital Natives Are Restless

A new digital industrial economy is emerging where every company is a technology company, I write in the Korn/Ferry Institute Briefings on Talent + Leadership magazine.

It requires directors to develop a core understanding of how technology can impact the business, whether it’s lowering costs, better connecting to customers or improving the company’s offerings.

A new group of directors, call them “digital natives” have joined the boardroom.

Boardroom strife attracts activist investors

Boardroom strife attracts activist investors

Agenda, a Financial Times Service, interviewed Karen Kane about the current proxy season.

Poor performance is a key reason for making boards vulnerable to activist investors and their subsequent demands for change.  In addition, conflict on the board can also attract negative attention. As a University of Alabama study suggested, conflict is more common on boards where the CEO wields a high degree of structural power and control over director selection.

Elaine Wynn’s public battle to keep her board seat brought unflattering attention to Wynn Resorts as the company saw its stock drop after it cut its dividend by 67 % due to problems with its Macau business. Mrs. Wynn’s fellow directors did not re-nominate her.

T.Rowe Price, the company’s largest shareholder, supported the company’s slate of directors after Wynn Resorts promised to make changes to its governance practices and boardroom diversity.

Ms. Kane noted that the board has a year to deliver on its promise. “Time will tell whether the board is able to improve its diversity and the competency of its members,” she said.

 

CEO s and Activists

AckmanThe CEO job has never been easy.  It’s hard finding growth in a hyper-competitive environment. Satisfying shareholders becomes a bigger challenge when activists are watching. 

 What’s a CEO to do?

 Recognize that no company is safe from a rising activist tide.  Activists have the money and the analysis to go after lagging companies. Poor financial returns are the prime reason activists get involved. 

 CEOs should enlist the board in developing a dispassionate evaluation of the company and the board’s vulnerabilities.

 Understand the issues. What is the current performance and what is the potential?  Look at the board, it’s structure, how it’s elected, how it compensates management incentives.  Do they reflect that the board is doing right by shareholders?

 How involved is the board in strategy?  Has the board sought additional analysis to more fully vet the underlying assumptions about the strategy?

 What are your shareholders telling you? 

 Activists have raised the bar. Smart CEOs are looking for board member who can help him and his management team succeed.

Leadership Lessons from Dorothy Gale

8-BOSS-articleInline leadershipIn her message to the young women and supporters of the Metro Achievement Center for Girls, President and CEO of ComEd, Anne Pramaggiore offered her perspective on leadership with lessons from Dorothy Gale of the iconic film “The Wizard of Oz.”  Pramaggiore was honored with the MAC Leadership Award.

Pramaggiore contrasted the two Dorothys of the film:  Back in Kansas, Dorothy Gale was a fearful and tentative girl but once the bump on her head that landed her in Oz, Dorothy Gale regrouped and found her leadership skills.  She sought mentors and a support system and showed an appetite for risk by traveling to the Emerald City to find the Wizard.  Dorothy Gale also demonstrated resilience in her willingness to fail, pick herself up and try again–all important leadership lessons.

And what a fitting story for Midtown Education Foundation, dedicated to improving the future of Chicago education by offering high-quality enrichment opportunities for both girls and boys through after-school and summer programs of one-on-one tutoring, mentoring and parental involvement .  In its 49 year history, MEF’s Senior Class of 2014 became the 15th consecutive class to achieve 100 percent high school graduation and college enrollment.  Many of the MEF seniors were in attendance, selling raffle tickets and assisting with the program.

“We’re very proud of you and look forward to your greater achievements,” Pramaggiore told the graduating seniors.

 

Keith_GottfriedShareholder Activism on the Rise

A sure sign that shareholder activism has become more prevalent is when large cap and well-run companies like Apple and Microsoft attract the interest of activist investors, noted Keith Gottfried, a partner with the law firm of Alston & Bird LLP who leads the shareholder activism defense practice.

His advice to boards of directors:  be prepared.

“The activist playbook has become more sophisticated,” he told participants of a webinar.  “Today’s activists are knowledgeable, well-prepared and well advised.”

He suggested that boards of directors have a game plan to anticipate activist activity.  And, if the activists come knocking, he suggests a team approach to engaging with activists.

“First, know the activists’ issues,” he said.  “Some activists are focused on breaking up companies to unlock shareholder value.”

It takes coordination to respond effectively.

“Put together a team of internal and external resources,” he said.   Insiders would include the CEO, CFO and investor relations.  “You’ll want to include the proxy solicitor to understand the issues of the various shareholders as well as special counsel since the internal legal resources do not regularly deal with activists.”  It’s also important to include others such as communication experts who work with boards of directors to help them learn how to be effective in engaging with activists, he said.  “Think of any proxy battle as a campaign,” advised Gottfried.  “You not only need message points and speeches but an ability to get the messages out to the right audiences at the right time.”

He sees activism only increasing.  “The success of activist investors is attracting more investment.  Activist investors have convinced fellow shareholders that they can help to unlock shareholder value.”

 

Leadership Lessons from Bob Gates

blog_duty_robert_gatesFormer Defense Secretary Robert Gates spoke about his book, “Duty”, to a sold-out crowd at the Fairmont Hotel in Chicago this week.

Much of what he said he has said on television and other forums about how toxic Washington is today and the difficulty of working and accomplishing anything in the “partisan abyss”.

 Contrasting the sacrifice of our dedicated men and women in uniform with the selfishness of our elected officials, he was asked what advice did he have for the public-minded crowd assembled by the Chicago Council on Global Affairs?

His talk is available on YouTube in its entirety but his answer begins at 38:20 

 “Our politics have always been rough and tumble. As a historian and someone who has read a lot of history, I don’t think our Founding Fathers anticipated that people would make politics their life’s work.  I think they thought that farmers, lawyers, doctors would have their own life and as a matter of public service go to Washington to serve in Congress and then go home.

 “For members of Congress today being a member of Congress is all they are.  They’ve wrapped their psyche around being a member of Congress.  And being defeated is intolerable.”

 When they leave Congress, most of them stay in Washington.  “It’s as though they’ve forgotten where they came from. People come and stay for 30, 40, 50, 60 years.  That becomes their life.

 “The most empowering thing for me in Washington as Secretary of Defense was that everyone knew I wanted to go home.  I was begging to be fired. The more I wanted to go home; the more they wanted me to stay.”

 He said that if these people ever  “realized how empowering it could be to vote their conscience on issues and do what’s in the best interest of the country–first, it might be the best politics–but also, they might find it liberating.

 “I used to say, if I could be elected to one term in Congress and play a vital role in putting the country on a strong fiscal track and I got defeated at the next election, I would be proud to tell my grandchildren what I did during my one term in Congress.

 In summary, he said: “I think we have too many careerists in Congress and not enough people who go to give brief periods of public service.”

 He was reminded of a favorite quote of Teddy Roosevelt:  “I represent the public, not public opinion.”

 His answer was met with vigorous applause.

 

 

 

 

 

 

 

 

Directors Consider Peer Performance

Years ago, a highly regarded director and board chairman confided, “We have to be better about getting the poor and mediocre directors off the board.”  The issue was the collegiality of the boardroom and the reluctance to confront a non-performing director.

Today, according to the latest PwC 2013 Annual Corporate Directors Survey conducted during the summer of 2013, directors have signaled increased concern about their peers in the boardroom. With 934 public company directors responding, 35 percent now say someone on their board should be replaced compared to 31 percent in 2012.

And why do fellow directors worry about their peers’ performance?  Aging, lack of required expertise and lack of preparation for meetings are the three main reasons directors are not performing, according to the PwC survey.

Today, corporate governance continues to evolve at a rapid pace with directors taking on expanded roles and responsibilities. Expectations for board members have increased in response to regulation and greater shareholders demands.

It’s not the money (4 percent)  or prestige (3 percent) that motivates director to serve but rather intellectual stimulation (54 percent) and staying occupied and engaged (22 percent) that attracts directors to board service, according to the survey.

One of the unintended consequences of power moving from the CEO to the board is that directors themselves decide when they should step down.  It’s still rare that shareholders succeed in removing directors.  Retirement, reaching the age of 72 or 75, is the main reason for a director to leave a board.

One governance expert noted that some boards are reluctant to invite 40-year-olds to become directors because “they could be on the board for 30 years.” Why? If it turns out that the director is not effective, board leadership is uncomfortable addressing the issue, which also implicates the inadequacy of the  board’s own self-evaluation.

Is entitlement part of board service?  Do some retired-CEOs-turned-directors regard “intellectual stimulation” and “staying engaged” as their right to suitably interesting post-CEO careers regardless of the value they bring to the enterprise? The old saws of being a director as a “lifetime achievement award” or “a victory lap” may still be true.

Shareholders are noticing.

When JPMorgan was recently recognized for enlarging the powers of its lead director as a positive development for the firm’s corporate governance, one of the company’s large investors expressed concern for the age and long tenure of the individual in the post. Dieter Waizenegger, CtW Investment’s executive director, said he wants lead director Lee Raymond removed from that role because he has been a director for 26 years.  “We need someone who can lead a new and refreshed board that departs from the problems of the past,” he told the Wall Street Journal.

Boards need to develop and execute a robust evaluation of its members and the effectiveness of the board as a workgroup. Directors need to get the right help to carry out the task. They need-someone who knows business and governance and is independent, not selling ancillary services to the company as a result of his or her advice. And, they also need to follow-through on their evaluations.  If the director is too old, does not have the expertise required or is unprepared for meetings, the board should tell the director to step down.

Isn’t it better for directors to take the steps to ensure effectiveness themselves, rather than waiting for shareholders or regulators to assert greater authority in the boardroom?

Leadership, Peer Pressure and Sponsorship

Leadership, Peer Pressure and Sponsorship, The French-American Chamber of Commerce of Chicago’s Women for Women  Committee hosted a panel discussion, “Women on Corporate Boards: Exploring Different Approaches for Bringing More Women to the Boardroom”, an event co-sponsored by the Chicagoland Chamber of Commerce and Baker & McKenzie, where the meeting was held.

Laurel Bellows moderated the panel that included Sharon Thomas Parrott, President of DeVry Foundation and SVP of External Relations, DeVry Inc., Deb DeHaas, Vice Chairman and Chief Inclusion Officer, Deloitte LLP, Francoise Colpron, President, Valeo North America and Chris Curtis, President and CEO Schneider Electric North America.

The panel explored the international efforts underway for improving women’s representation in company leadership and corporate boards.

“Diversity is a business imperative,” said Parrott, who utilizes DeVry’s civic engagement funds to support the organization’s business leaders to get involved at a board level in non-profits in the community. She suggested a report card that scored companies on their inclusion of diverse leaders and board members. Colpron’s experience as a business leader in Europe and Latin America has convinced her of the importance of boards reflecting the community in which the company operates but sees quotas a short-term fix.

While DeHaas acknowledged the pace of change in the boardroom as documented by The Chicago Network’s annual survey of women on corporate boards in Chicago as “glacial,” she noted that it will take leadership and peer pressure to bring about the increased participation of women on boards. “I would add sponsorship,” said Curtis, which he differentiated from mentorship, noting that it takes a CEO or other leader’s investment in the success of the sponsored woman as a board member or corporate leader.

Women who are interested in attaining a corporate board seat should be actively engaged, the panel agreed. With the role for recruiting new directors moving from the CEO to the Nomination Committee and less than half of those committees using recruiters, networking has become more important. “It’s nothing short of a campaign,” said Curtis.

“There’s nothing casual about aspiring to a board director appointment. It’s part of your career planning,” said DeHaas. “Be realistic about your qualifications and what you can contribute. Be a student of good governance and let people know you have an interest.”