What number is the tipping point for serving on multiple boards? Directors sitting on multiple public boards, chairs of nominating and governance committees, and corporate secretaries may wish to consider what this means for them.
A number of high-profile individuals sitting on multiple boards are fuelling a simmering debate across the corporate world, with shareholders and watchdogs forming the view that the old limits are too generous given increasing board responsibilities and workloads.
Recommended limits on directorships have been in place for years, the purpose of which is to reflect the direct correlation between time-commitment and performance. Of course, most directors themselves will recognise there are constraints on their time, and there is a general consensus among institutional investors that where a director has committed himself or herself to service on a large number of boards, that they are unlikely to be able to commit sufficient focus to the company and to discharge their responsibilities effectively. It makes sense that if a directors’ time is spread too thinly he or she will struggle to perform properly on each of their boards. Some directors max out at one. At the same time, there are some very talented people who are on four or five boards. But in considering where you lie on the spectrum, think about at the most basic level, how can directors possibly squeeze in those last minute or emergency board meetings and calls if their schedules are packed too tightly, or for that matter prepare properly for their regular meetings?
Over the past decade, the average time commitment for board service has exploded. While the number of hours a director commits to preparing for and attending meetings of course varies, we might reasonably expect a director to easily average somewhere around 300 to 350 hours of work per year for complex public companies, depending on committee service. We might certainly expect regulated companies to be at the higher end given the intensity of regulatory change and expectations, including much closer oversight of the business and enterprise risk management, not to mention increasing shareholder engagement activities. The change over the past years is marked, with the National Association of Corporate Directors (NACD) annual survey revealing the average director time commitment has grown by 46 percent, from 190 hours in 2005 to 278 hours in 2014.
For context and perhaps an insight in to where things may be heading look at an international comparison: the United Kingdom. The UK Corporate Governance Code provides as a Main Principle that, “all directors should be able to allocate sufficient time to the company to discharge their responsibilities” and in relation to executive directors there is an associated Code Provision suggesting this Main Principle can be complied with by ensuring that, “the board should not agree to a full time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company”
Directors’ responsibilities are certainly not abating and while the financial draw to serve multiple boards remains, the stakes for directors are now much greater especially in the financial sector. Serious consideration should be given to how effectively directors can serve companies rather than being satisfied that directors can juggle multiple commitments easily; watchdogs and shareholder alike are certainly expecting quality over quantity.
This post draws from content originally shared by Nasdaq. It has been edited and synthesized for length and relevance to TBR Africa members.
An effective board seeks to stimulate the flow of ideas, identify key issues, consider alternatives and make informed decisions. To do so requires often-vigorous debate, which can sometimes turn into conflict, but there are many more reasons for issues to arise. Such disputes must be dealt with as soon as possible, since if left unresolved, they can undermine the board’s effectiveness and the organisation’s performance.
Most organisations will have policies and procedures to deal with complaints or grievances by customers, staff and the public, there is often a reluctance to deal with conflicts in the boardroom.
Such conflicts include those:
- Between directors;
- By a director regarding a board policy, process or procedure; and
- By a director regarding a resolution of the board.
Tension is not necessarily harmful, defining it as “disagreement that is often uncomfortable, but which can be resolved by healthy debate.” Conflict, on the other hand, is “aggressive tension that escalates to an extreme and unresolvable level.” While tensions are a positive – and indeed necessary – force for all effective boards, conflict tends to be detrimental.
Be emotionally aware
Boardroom conflict manifests itself in a number of different ways: passive aggression, emotional responses, repetition, overtly interrogative questioning and physical behaviours such as leaving the room, slamming doors and even resigning. Tension shows itself as robust debate, open exchange of information, discussion of difficult issues, diverse perspectives, questioning and engagement.
Broadly speaking, there are two types of tension: cognitive and emotional. Cognitive tension can occur during discussions about how to improve results, for instance, and may lead to constructive conversations and solutions. Emotional tension tends to focus on personal differences or performance problems, resulting in conflict when the possibility of constructive dialogue vanishes.
An example of a conversation involving cognitive tension would be: “I don’t think that’s the best way to achieve our goal. Can you think of alternatives?” By contrast, one involving emotional tension would sound more like: “That’s a bad idea – you haven’t understood anything. Your proposals always lead us to failure.”
Two principles of emotional intelligence can help to address the latter type of conflict: the first is to recognise that emotions lie behind some disagreements; the second is to understand their impact on board members’ thoughts and actions. Once that awareness is there, further steps can be taken.
Use corporate governance to set ground rules
Good corporate governance practices are intended to increase the value of company, facilitate access to capital and contribute to its continuity.
Poor governance can be an issue in many emerging markets that worries investors. In many businesses a lot of the conversations take place outside the boardroom, over dinner or lunch. But we are seeing more and more companies, particularly larger ones, wanting to know more about corporate governance. Some now have very good practices in place.
Having a formal shareholder agreement that sets out rules covering how the business is run, including key issues such as succession-planning, can help to prevent boardroom infighting and protect business value.
Nip conflicts in the bud
While a good board is one with ‘managed’ tension, a dysfunctional board allows unresolved tension to fester and escalate into conflict situations. Various triggers exist, such as underperformance and the manner in which board members address one another. What is more, tension can transform into conflict quickly. The tipping point is almost always the result of a situation becoming emotionally charged.
Direct, interrogative and aggressive styles of questioning are often recognised as triggers for conflict. Similarly, concerns which are not listened to, or are not heard, often plant the seeds of future conflict. It is, therefore, important to deal with potential conflicts rapidly to avoid an irreparable breakdown of trust and loss of respect.
Disagreements should be openly discussed. Robust debate, open dialogue and tackling uncomfortable issues head-on explicitly benefit boards’ decision-making and actions. However, the research findings challenge the fundamental assumption that conflicts should always be aired, discussed and addressed in the boardroom.
In general, strategy and decision issues are more appropriately resolved inside the boardroom. Techniques for managing tension and minimising conflict include:
- Explicitly acknowledging concerns during board meetings
- Face-to-face conversations
- Depersonalising tension by reminding board members of their ‘higher purpose’.
Conflict, on the other hand, is most effectively resolved in informal dyadic meetings outside the boardroom. One way for the CEO resolve these tensions is to hold short one-to-one briefings with each board member before meetings to get a better idea of their main concerns. In this way, issues that have the potential to stir up strong emotions can be identified and managed before they escalate into boardroom conflict.
Ultimately the best decisions are reached when there is a transparent exchange of information, when concerns are fully aired and multiple, sometimes conflicting, perspectives are offered. Often boards need someone who can draw together all the disparate strengths of board members to facilitate effective teamwork.
Put plans in place
The open and honest exchange of views – even where there is disagreement – is the sign of a healthy board. Disruptive conflict is most likely to occur when disagreements are left unaddressed and unresolved. This can also be the case where directors’ disagreements become personal, making it harder for them to find any middle ground. The financial impact of such discord is often significant for the company and exhausting for all concerned. It can cause an irreversible breakdown of boardroom relationships and reduce the value of the business.
Those leaders who seek to build their business on strong governance foundations, improve diversity, take expert guidance and support open dialogue at all levels are more likely to prevent the most damaging bust-ups.
To serve as effective thought partners, boards must move beyond an arms-length relationship with digital issues. Board members need better knowledge about the technology environment, its potential impact on different parts of the company and its value chain, and thus about how digital can undermine existing strategies and stimulate the need for new ones. They also need faster, more effective ways to engage the organization and operate as a governing body and, critically, new means of attracting digital talent. Indeed, some CEOs and board members we know argue that the far-reaching nature of today’s digital disruptions—which can necessitate long-term business-model changes with large, short-term costs—means boards must view themselves as the ultimate catalysts for digital transformation efforts. Otherwise, CEOs may be tempted to pass on to their successors the tackling of digital challenges.
What are the right questions at a time when digital technologies are beginning to disrupt industries and mastering these technologies may be the key to long-term survival and success. Every corporate director—IT savvy or not—will benefit from reviewing the following questions as a starting point for shaping a fruitful conversation with management about what the company needs to do to become a technology winner.?
Close the insights gap
Few boards have enough combined digital expertise to have meaningful digital conversations with senior management. Only 116 directors on the boards of the Global 300 are “digital directors.” The solution isn’t simply to recruit one or two directors from an influential technology company. For one thing, there aren’t enough of them to go around. More to the point, digital is so far-reaching—think e-commerce, mobile, security, the Internet of Things (IoT), and big data—that the knowledge and experience needed goes beyond one or two tech-savvy people.
To address these challenges, the nominating committee of one board created a matrix of the customer, market, and digital skills it felt it required to guide its key businesses over the next five to ten years. Doing so prompted the committee to look beyond well-fished pools of talent like Internet pure plays and known digital leaders and instead to consider adjacent sectors and businesses that had undergone significant digital transformation. The identification of strong new board members was one result. What’s more, the process of reflecting quite specifically on the digital skills that were most relevant to individual business lines helped the board engage at a deeper level, raising its collective understanding of technology and generating more productive conversations with management.
Special subcommittees and advisory councils can also narrow the insights gap. Today, only about 5 percent of corporate boards in North America have technology committees.While that number is likely to grow considerably, tomorrow’s committees may well look different from today’s. For example, some boards have begun convening several subject-specific advisory councils on technology topics. At one consumer-products company, the board created what it called an advisory “ecosystem”—with councils focused on technology, finance, and customer categories—that has provided powerful, contextual learning for members. After brainstorming how IoT-connected systems could reshape the consumer experience, for example, the technology council landed on a radical notion: What would happen if the company organized the business around spaces such as the home, the car, and the office rather than product lines? While the board had no set plans to impose the structure on management, simply exploring the possibilities with board members opened up fresh avenues of discussion with the executive team on new business partners, as well as new apps and operating systems.
1. How will IT change the basis of competition in our industry?
Technology is making boundaries between industries more porous and providing opportunities for attacker models. For example, in the banking industry, online consumer-payment products such as Square—a mobile app and device that enables merchants to accept payments—are challenging traditional payment solutions.
For incumbents in many sectors, technology is becoming an arms race. Companies are harnessing technologies such as social media and location-based services to reinvent the customer experience and capture market share.
Questions to ask:
- Who are our emerging competitors?
- How is technology helping us win against traditional and new competitors?
- How can we use technology to enter new markets?
2. What will it take to exceed our customers’ expectations in a digital world?
Customers are being educated by e-commerce leaders like Amazon and Apple to expect an ultraconvenient experience, personalized in real time. Attackers in many industries are differentiating themselves from incumbents through convenience and service. Digital finance company Wonga, for example, settles loans in 15 minutes.
As a result, customer expectations are rising quickly. Simply meeting these enhanced expectations can be a major effort for organizations that were not born digital. For instance, retailers may need to step up their development of digital channels. Banks, insurers, and telecommunications players may need to automate end-to-end sales and service processes so that customers can interact with the company in real time in an error-free digital environment. The bar is high for delighting customers in a digital world. Often, doing so requires investment in sophisticated big-data capabilities that use social, location, and other data, for example, to attract potential customers to product promotions at stores in their vicinity.
Questions to ask:
- How does our customer experience compare with that of leaders in other sectors?
- What will our customers expect in the future, and what will it take to delight them?
- Do we have clear plans for how to meet or exceed their expectations?
3. Do our business plans reflect the full potential of technology to improve our performance?
Technology expenses can be high, but they are relatively small compared with their potential to boost the operating performance of the business. Technology can improve business performance by driving revenues (for example, by using big data for cross-selling in digital channels), reducing overall costs (for instance, by automating end-to-end processes), and lowering risk costs (for example, in insurance, by using social-media data to aid risk calculations). Technology can also have a negative impact on performance (for instance, by reducing margins given increased transparency about pricing in the market).
By seizing the opportunities and mitigating the threats, companies can dramatically improve their performance. One retailer has doubled revenue growth by investing in the digital channel. A bank is targeting a 10 percent reduction of operating costs through automation of end-to-end processes. Ultimately, the strategy that emerges from an assessment of opportunities and threats should be an integrated plan that shows how the business will beat the competition using information over a multiyear horizon, not simply a revised annual IT budget. With the right agreement on the scale and scope of the opportunity and threat, the level of investment in IT becomes an outcome rather than a constraint.
Questions to ask:
- Has the P&L opportunity and threat from IT been quantified by business unit and by market?
- Will our current plans fully capture the opportunity and neutralize the threat?
- What is the time horizon of these plans, and have they been factored into future financial projections for both business and IT?
4. Is our portfolio of technology investments aligned with opportunities and threats?
The portfolio should clearly reflect the business opportunities and threats at stake. It also needs to be dynamic—executives must avoid the temptation to reuse the allocations from the previous year’s budget without a close review. Companies should balance short-term P&L opportunities (for example, upgrading digital channels), medium-term platform investments (such as customer databases), and carefully chosen longer-term bets (for instance, piloting new, digitally enabled business models).
Regular, often quarterly, portfolio rebalancing is needed, as assumptions can change quickly. Many companies, for instance, recently cut investment in the Internet channel, as customers have switched to mobile apps. The portfolio should also be managed to keep execution risk in an acceptable range. On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted. These risks can be managed by monitoring the portfolio carefully and deploying effective processes that assure value will be created.2
Questions to ask:
- How well is our IT-investment portfolio aligned with business value with regard to opportunities and threats?
- How well does the portfolio balance short-term and long-term needs?
- Do we have effective value-assurance processes in place to mitigate execution risk?
5. How will IT improve our operational and strategic agility?
IT has a significant effect on operational business agility (for example, time to market for new products), as well as on strategic business agility (for instance, the ability to extract synergies from an acquired business or the ability to connect systems to a distribution partner).
Business agility is underpinned by the agility of the IT function itself—its ability to design and implement changes to systems rapidly at low cost and risk. IT agility can be increased by changing the systems landscape (for example, by reducing the number of systems), improving data quality (for instance, by creating enterprise data standards), optimizing IT delivery processes (for example, by applying lean-management techniques), and building flexibility into sourcing arrangements (for instance, by buying processing capacity on demand in the cloud).
Questions to ask:
- How does our business and IT agility measure up with that of our competitors?
- How do our IT plans increase our business and IT agility?
- Are our sourcing relationships increasing or reducing our agility?
6. Do we have the capabilities required to deliver value from IT?
Technology alone delivers no value. It’s the combination of a clear strategy, the right technology, high-quality data, appropriate skills, and lean processes that adds up to create value. Any weak link in this chain will lead to poor value delivery from IT.
In many sectors, a shortage of IT-literate talent in the business is creating a bottleneck. Contrary to popular belief, the majority of executives can, with the appropriate training, learn how to manage value from IT. But capability building must start at the top. Some companies have put their top 200 managers through IT boot camp as a way to start the process.
Questions to ask:
- Do we have the capabilities needed to drive full value from our existing IT systems?
- What are the weakest links in our capabilities?
- Do we have enough IT-literate executives?
- What is our plan for upgrading capabilities?
7. Are we comfortable with our level of IT risk?
Cybersecurity is a significant and growing IT issue. Every large company’s security has been breached, and most executives have a poor understanding of the risks. But cyberattacks are just one category of IT risk. A failure of a small software component can cost a company a lot of money in customer compensation. IT systems can also cause business-conduct risk—for instance, if automated recommendations to cross-sell products conflict with regulatory requirements.
Companies need a comprehensive system for managing IT risk that assesses the full range of risks (for example, hacking attacks, vendor failure, and technical failure) and addresses the root causes, which include redundant technology, incorrect policies, poor processes, and insufficient oversight.
Questions to ask:
- Do we have a comprehensive understanding of the IT risks we face?
- How is our level of IT risk measured, and is it aligned with the company’s overall risk appetite?
- How are we reducing our IT risk on an ongoing basis?
- Who is responsible for overseeing the level of IT risk?
Board members need to increase their digital quotient if they hope to govern in a way that gets executives thinking beyond today’s boundaries. Following the approaches we have outlined will no doubt put some new burdens on already stretched directors. However, the speed of digital progress confronting companies shows no sign of slowing, and the best boards will learn to engage executives more frequently, knowledgeably, and persuasively on the issues that matter most.
Governance arguably suffers most when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. Today’s board agendas, indeed, are surprisingly similar to those of a century ago, when the second Industrial Revolution was at its peak. Directors still spend the bulk of their time on quarterly reports, audit reviews, budgets, and compliance—70 percent is not atypical—instead of on matters crucial to the future prosperity and direction of the business. This article discusses ways to achieve the right balance.
The case for change
As executive teams grapple with the immediate challenge of volatile and unpredictable markets, it’s more vital than ever for directors to remain abreast of what’s on (or coming over) the horizon.
The length of CEO tenures remains relatively low—just five to six years now. That inevitably encourages incumbents to focus unduly on the here and now in order to meet performance expectations. Many rational management groups will be tempted to adopt a short-term view; in a lot of cases, only the board can consistently take the longer-term perspective.
Roll back the future to access top board members
Too often, vacancies on a board are filled under pressure, without an explicit review of its overall composition. An incoming chair should try to imagine what his or her board might look like, ideally, three years from now. What kinds of skills and experience not currently in place will help fulfil the company’s long-term strategy? What, in other words, is the winning team? A willingness to look ahead expands the number of candidates with appropriate skills and heightens the likelihood that they will sign up if and when they become available.
Define the board’s role clearly
The familiar roles of a well-functioning board—such as setting strategy, monitoring risks, planning the succession, and weighing in on the talent pipeline—are easy to list. But in practice, things are never simple. CEOs and their top teams, for example, are often touchy about what they see as board interference. Equally, weighty boards with years of experience and members used to getting their own way are frequently frustrated because they can’t intervene more actively or their advice is ignored.
It’s critical to defuse these tensions at the outset by clearly defining the board’s role and establishing well-understood boundaries. Unless roles are clear, the relationship between the CEO and management, on the one hand, and the board, on the other, risks devolving into misunderstandings, loss of trust, and ineffectiveness. An annual discussion between the board and management, perhaps including a written letter of understanding setting out the roles of each party, is always a productive exercise.
Get your board to work harder
The 10 or 12 days a year many board members spend on the job isn’t enough, given the importance of their responsibilities. Several well-performing boards prescribe a commitment of up to 25 days of engagement for nonexecutive board members.
Some of that extra time should be spent in the field. Boards seeking to play a constructive, forward-looking role must have real knowledge of their companies’ operations, markets, and competitors. One big international industrial company requires all its board members to travel with salesmen on customer visits at some point each year. Other companies ask their directors to visit production and R&D facilities. The chairman of a manufacturing company adds that “You can’t fully understand the business, analyze the competition, review succession plans, visit a company’s facilities, travel with salespeople, and set strategic goals by working a handful of days.”
How can companies achieve the right degree of commitment? Higher pay will not be the answer, even if there were no governance watchdogs who would doubtless conclude that directors are already well paid or at least rarely need the extra money. What does actually help is a board environment that it encourages participation and allows board members to derive meaning, inspiration, and satisfaction from their work. The reward for individuals will be an opportunity to enhance their reputation for good boardroom oversight, to strengthen their personal networks, and to influence decisions.
Putting the board’s best foot forward
The best boards act as effective coaches and sparring partners for the top team. The challenge is to build processes that help companies tap the accumulated expertise of the board as they chart the way ahead. Here are four ways to encourage a forward-looking mind-set.
1.Require the board to study the external landscape.
To be able to challenge management with critical questions, a company’s directors should regularly compare internal performance data with those of their competitors across a range of key indicators.
2. Make strategy part of the board’s DNA.
The central role of the board is to cocreate and ultimately agree on the company’s strategy. In many corporations, however, CEOs present their strategic vision once a year, the directors discuss and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal, and there’s not enough time for debate or enough in-depth information to underpin proper consideration of the alternatives.
What’s required is a much more fluid strategy-development process: management should prepare a menu of options that commit varying levels of resources and risks. In this way, board and management jointly define a broad strategic framework, and management defines options for board review. Finally, during a special strategy day, the board and management ought to debate, refine, and agree on a final plan. “At the beginning of the annual planning process, the board’s role is to help management broaden the number of strategy options,” says the chairman of a large transportation company. “At midyear, it is to discuss strategic alternatives and help select the preferred route, and at end of year, it is to make the final decision to implement.”
3. Unleash the full power of your people.
Forward-looking boards are powerfully positioned to focus on long-term talent-development efforts because they understand the strategy and can override some of the personal ties that cloud decision making over appointments. Divisional managers, say, might be tempted to hang on to high performers even if the company’s interest would be to reallocate their skills and experience to a business with more potential.
Many forward-looking boards hold annual reviews of the top 30 to 50 talents, always with an eye on those who might eventually be suitable for key executive roles. Here’s how the process works in one manufacturing company. Each executive director selects, for presentation to the board, three to five promising managers. The board gets a photograph, information on their educational background, and performance reviews over the last three years. The presenter organizes the information on an evaluation grid showing categories such as performance, leadership, teamwork, and personal development. The directors then spend 10 to 30 minutes on each person, discussing key questions. How can the company coach and develop talented people? What personal and professional development opportunities, such as an international posting, might help broaden an individual’s experience? What are the potential next career steps? In addition, during corporate projects, client gatherings, and trade shows, directors should take any opportunity to meet—and assess—upcoming executives and fast trackers informally.
The key is that the board must agree with management on a sensible approach to reviewing executive talent. Appointing a board member with a successful people-leadership track record to lead the effort is one way of boosting its impact.
4. Anticipate the existential risks
Every company has to take significant risks. But while it has long been understood that overall responsibility for risk management lies with boards, they often overlook existential risks (e.g. cybercrime, insider trading, or corruption). These are harder to grasp—all the more so for executives focused on the here and now—yet harm companies to a far greater extent than more readily identifiable business risks.
The best way may be to tap into the concerns and observations of middle management, the group most likely to be aware of bad practices or rogue behavior in any company. Boards have a duty to ensure that management teams pursue bottom-up investigations (through confidential questionnaires, for instance), identify key risk areas, and act on the results.
Forward-looking boards must remain vigilant and energetic, always wary of bad habits. An objective 360-degree review, built on personal interviews, is generally a much better option than the box-ticking self-evaluation alternative. Winning boards will be those that work in the spirit of continuous improvement at every meeting, while always keeping long-term strategies top of mind. Only by creating more forward-looking boards can companies avoid the sort of failures witnessed during the last financial meltdown the next time one strikes.
This post draws from content originally shared by McKInsey and Company. It has been edited and synthesized for length and relevance to TBR Africa members.
No matter how experienced they are as leaders or how much previous boardroom exposure they have had, most first-time directors will admit to having some trepidation before their first board meeting: What will the first board meeting be like? Should I say anything at all in my first meeting? Am I prepared?
In working with first-time board directors around the world and the chairmen and lead independent directors of the boards they join; we have found that their questions and concerns about board experience typically fall into the five following areas:
- How do I know what’s the right board to join? Should I say yes to the first board invitation?
- What do I need to do to prepare for my first board?
- How much should I speak up during the early board meetings?
- How can I have an impact for the board and company?
- What if I have concerns? How do I disagree or raise questions when I’m new?
The director’s role and level of involvement in an organization’s oversight and governance have also changed considerably in the last generation-and so has the compensation. Directors are expected to work hard and know their stuff. And companies are willing to pay well for it. Gone are the days when the boardroom was all but indistinguishable from the clubroom. It is a workroom.
1. Select the right opportunity
Most directors would describe their first non-executive board role as a major professional milestone, a terrific growth opportunity and something they are very glad they did, even though it represented a significant commitment. Given the demands of board service — 20-30 days a year up to nine or more years — it pays to carefully weigh the pros and cons of a given opportunity. The key question, say directors, is whether it is mutually beneficial — one that the prospective director finds engaging and useful as a growth opportunity and that adds a valuable perspective to the board. As one director put it, “You need something that will bind you to the job, because it is a lot of time.” Ask yourself, “Is this a business that I will still be interested in, say, in six to nine years’ time?”
Other considerations may be who else is on the board — especially the opportunity to work with a good chair and gain exposure to experienced executives from other industries — the strength and diversity of the management team, and how well the board and management team work together, which in part reflects how much the CEO values the board’s contribution. “I asked the CEO, ‘Do you like having a board?’ And he very honestly said, ‘Mostly.’ If he’d said to me, ‘I think they’re marvellous all the time,’ I’d know he was lying because that’s just not how executives think,” recalls one director.
When considering whether you can balance board service with other commitments, particularly if you have a full-time executive role, understand that you will likely underestimate how much time it will take, especially early on. “It took much more time than I thought would be required initially to get up to speed — to understand the business, strategies, key issues and opportunities,” one director told us. If you have to travel to meetings, plan on that adding a day or two to the board meeting commitment. You also should allow time for work related to committee assignments and, depending on your expertise, you may be tapped to mentor someone on the executive team, work on issues outside of board meetings or respond to unexpected demands related to a crisis or deal. “It can be hard to budget for that, and it can happen at the worst time. But you can’t shake off your responsibilities at the time when you’re needed most, when there’s an activist or stakeholder issue, a significant transition or a succession planning issue that you have to work through.”
Conversely, don’t immediately take yourself out of the running for a very valuable opportunity. “If I thought too much about the time commitment, there is a chance I would have turned it down, which would have been a terrible thing,” one director told us. Equally do your research; it’s amazing the sorts of businesses that initially might seem not right for you but on further research are really interesting and worth pursuing.
2. Do your homework.
As part of your due diligence, you will already have read published information about the company, and it goes without saying that new directors will have received a wealth of material as part of the onboarding process and in advance of the first meeting. What many don’t appreciate before they’ve done it is just how much pre-reading material there can be, and the amount of time it can take to thoroughly digest it.
Many first-time directors have presented to their own company’s board of directors, but these encounters provide just a narrow glimpse of the board’s responsibilities. For this reason, some first-time directors find it helpful to attend a formal director education program providing a deep dive into corporate governance, including the board’s fiduciary responsibilities and areas such as NED liability, reporting to shareholders and reporting on sustainability. “They expect you to have an understanding of governance when you come in. They’re happy to answer questions, but they’re not going to know what you don’t know. If you don’t even know what you don’t know, then you don’t know to ask,” said one director.
Most formal onboarding programs encourage new directors to meet with key members of management, and many will schedule site visits to key operations. “It was really helpful to spend quality time with each of the CEO’s main direct reports so that I could get a sense of their top priorities and how they think about running their businesses. Without that little additional context from some of these executives in the organization, you’re really operating in a bubble.”
One-on-one meetings with as many of other directors as possible before the first board meeting can provide a sense of the priorities of the board, and the dynamics among directors and between management and the board. When these meetings are not an explicit part of the onboarding process, it can feel awkward to reach out to other board members, but directors say arranging a breakfast or dinner meeting or even a coffee with other directors, starting with committee chairs, is well worth it. “Everybody is busy, but the time you take to meet people upfront definitely pays dividends in the long run because you get context you wouldn’t have gotten any other way. You can’t replace seeing someone’s facial expression or their gestures while they’re talking about a certain topic. You’ll see how much something worries them. How emphatic they’re being. You’ll see their brow wrinkle when you dig deeper into certain issues.”
What else do new directors typically find most helpful in preparing for their first board meetings?
- The key performance indicators (KPIs) and lead indicators for the company. “What do I have to keep my eye on? Every other question ends up stemming from those KPIs.”
- A glossary of company and industry-specific jargon and acronyms. “Many companies overlook this, but it’s a real impediment to being productive in your first couple of meetings.”
- Meeting with as many members of the executive committee or senior management team as possible.
- Understand how the board views sector and company risk. How does management assess, present and articulate risk? Are assumptions discussed and challenged clearly and freely?
- A detailed overview of the operations, operational challenges and underlying infrastructure. “You can think you know how an airline runs, but when you walk through the operation centre and see hundreds of people managing thousands of flights in the air at the same time around the world, you begin to understand the complexity of the business.”
- A holistic view of the board calendar and activities — not just what the next board meeting is about, but the key processes of the board over the course of 12 months of board meetings. “When you’re new, you might wonder why the board isn’t talking about the compensation implication of a decision, as an example, but everyone else knows that’s because the next meeting is the one when the board does the comp review.”
- A detailed explanation of how the finances are organized, including a complete listing of accounts in an accounting system. “Everybody’s chart of accounts is different. Depending on how it’s drawn, you can get a very different look at P&L.”
- Mentoring — First-time directors, especially, tell us they appreciate having a mentor during the first six to 12 months on the board. An informal mentor program pairs a new director with a more experienced director who can provide perspective on boardroom activities and dynamics or help with meeting preparation, explain aspects of board papers, and debrief and act as a sounding board between meetings.
3. Know—and remember—why the company recruited you.
You’re there for a reason. You’re there because they thought you could add value. So, consider, what is your expertise? Is it your particular industry or your professional or governmental knowledge? Is it your executive experience? Is it your understanding of product development or marketing? Find out how your expertise relates to that of other board members and what the company expects you to contribute. By the time you have your first in-depth meeting with the Chair or CEO, you should have a clear understanding of why you are there and how you can contribute. Listen more than talk during your first meeting, but be willing to participate in the discussion, especially in your area of expertise.
4. Raise questions
Fresh eyes are good, but one of the worst things you can do is walk into the board and home in on topics that aren’t going to be productive, that the board has already hashed to death.” That is why it is important to have read the board minutes, if not papers, for the previous year or so, so you can understand some of the key issues and debates.
By definition, a new director lacks perspective on the board’s history — the sacred cows, the topics that have been debated ad nauseam already and other important context. This makes knowing when to raise questions or to push for more information all the more difficult. “Fresh eyes are good, but one of the worst things you can do is walk into the board and home in on topics that aren’t going to be productive, that the board has already hashed to death.” That is why it is important to have read the board minutes, if not papers, for the previous year or so, so you can understand some of the key issues and debates.
Getting a read from other directors about the board’s priorities can provide important context, as can using meeting breaks to follow up on your questions. “You’re not going to know everything going in. Expect that you’ve got a lot of holes. When I have big questions, I’ll grab a board member who I know will have the context and say, ‘Hey, I noticed this,’ or ‘I had a question on this,’ or ‘I’m sure there’s context here that I don’t know about,’ and just let them talk.”
When a director does have questions or concerns that go deeper, the delivery is important. “Asking questions, even when you know what the answer is, rather than making declarative statements is a good general approach. Other directors will be receptive to your questions if you communicate that you’re trying to get to the heart of important issues and facilitate discussion that needs to happen to gain consensus on direction.” How you frame questions also is important: Ask, “How are you thinking about …?” rather than trying to be too prescriptive and asking, “Have you considered …?”
Most new directors truly value their first board assignment, despite the time demands and steep learning curve. First-time directors are most likely to enjoy the experience when they conduct careful research and due diligence before accepting a board invitation, prepare thoroughly for board meetings and have the confidence to be themselves in the boardroom.
Given the board and management are striving to achieve the same vision and objectives,a team approach based on trust and respect is more appropriate than manager-subordinate relationship. Central to this relationship is a clear mutual understanding of roles, delegations and boundaries which allows each party to respect the other’s responsibilities, contributions and expectations. The relationship depends on the open flow of relevant and timely information in both directions.
The responsibilities and expectations of each of the board and management is often set out in the organisation’s board or governance charter, but the translation of these principles in practice as part of the culture of the organisation and the relationship between board and management vital. The chair has a primary responsibility to foster and maintain a constructive and effective culture in the best interests of the organisation.
The board expects management to accept that the board’s role is to monitor and question, probe issues, seek clarification, offer insight and share its knowledge and experience. With management much more deeply involved in the detail and operations of the organisation, board members rely on management to share in a timely manner all material information needed for decision making to allow them to effectively fulfil their obligations as directors. The board also expects management to ask advice and make use of the directors’ wealth of experience as and when appropriate.
Similarly, management has expectations of the board. Primarily, they expect that the board will trust them to implement strategy and deliver outcomes without undue interference. The CEO expects clearly stated performance objectives and defined boundaries of authority from the board. Without this direction, the CEO can only speculate on what the board wants him/her to achieve. The CEO should also expect regular and honest performance feedback. Recognition for achievement, honesty and openness, wisdom and advice, and the ability to use directors as a sounding board are also desirable.
For optimal performance, boards and management must work together cohesively as a team with respect and candour. Responsibilities and expectations of the board include:
- making quality informed decisions based on relevant and material information being available to the board, especially from management;
- overseeing, managing and holding management accountable;
- satisfying itself of the competence, capability and capacity of management;
- being accountable to shareholders/members and regulators of the organisation’s performance.
Board directors have high expectations (based on legislation) and demands of management to ensure timely and relevant information flow and reporting to it so that there are “no surprises.” As such, boards should signal the high standards of discipline and rigour expected of management by challenging and asking the hard questions concerning management reports in order to:
- test validity of assumptions made;
- stress test opportunity/risk analysis;
- test depth and breadth of management’s knowledge, understanding and analysis;
- help foster trust and confidence in management;
- stimulate innovative and creative thought.
Board directors must courteously and respectfully listen to management with an open but constructively challenging mind to allow management to make its contribution with confidence and clarity of viewpoint, and without undue interference, constraint or trepidation. In this sense, leadership by the chair is critical in managing the relationship to meet the reasonable needs and expectations of both board and management.
Conversely, through its displayed actions and performance, management must assure the board of management’s competence, capability, capacity, integrity, effectiveness and efficiency. In this sense, management has a critical role in effective board decision making by:
- reporting relevant material information to board;
- stimulating board discussion on emerging issues;
- assisting board in analysing and considering issues;
- responding to issues raised by board.
When reporting or presenting to boards management must:
- be clear as to the purpose to the report or presentation and what the board is being asked to do arising from it (i.e. for noting information purposes only, for discussion and to gain the board’s wisdom and input, or for decision making and resolution);
- know their audience;
- be responsive to audience’s needs;
- understand board politics and personalities;
- maintain focus on key issues;
- be patient, polite and respectful.
Management expects the board not to unduly meddle in operational matters although being respectful of the need for the board to delve deeply from time to time, especially if problematic trends are emerging and are not being resolved by management.
Relationship between the chair and CEO
A good working relationship between the chair and CEO is vital. The chair is the key link between the board and management via the CEO. The chair and the CEO need to agree about how they will work together.
The chair cannot give instructions to the CEO. Chief executive officers report to boards, not to chairs. But the chair can, and should, guide the CEO on matters of board concern and should warn the CEO if trouble is likely to arise. The chair may even be required to reinforce the CEO’s position with the board in certain circumstances, especially where the chair has more knowledge than the board about the CEO’s actions. Key responsibilities of the chair are included below:
Effectively advises the CEO: The chairman serves as a critical mentor and advisor to the CEO. Beyond an ability to advise on the content of strategic decisions, the chairman provides thoughtful, actionable guidance on how to effectively translate strategy into action. The chairman maintains an open-door policy for the CEO to seek guidance.
Asks tough questions: The chair asks probing, penetrating questions on the logic of strategic decisions and the dynamics of organizational performance.
Acts when necessary: The chair doesn’t hesitate to act when the standards of governance and fiduciary responsibility require intervention, and is willing to get his/her “hands dirty” when circumstances require a hands-on approach (e.g. crisis management).
Maintains right attitude on strategy and succession: The chairowns and embraces an active leadership role in CEO succession. The chairman makes clear that he/she will play a critical role in leading the board discussion on approving strategy but that he/she won’t attempt to usurp the CEO’s responsibility for developing strategy.
Demonstrates full commitment and engagement: The chair maintains and demonstrates a deep commitment to the performance of the organization, and this commitment clearly is reflected in his/her level of engagement on issues of critical importance to the performance of the firm. The chairman brings a spirit of energetic teamwork to all interactions with the CEO.
Collaborates with the CEO to establish expectations, agendas, processes and decision rules: The chairman is clear on the board’s expectations of the CEO. The chairman collaborates with the CEO and seeks his/her input in establishing board agendas, processes and decision rules. The chairman sets precise expectations on the inputs upon which the board needs to make decisions.
Proactively seeks to build professional relationships with management team: The chair seeks to build professional relationships with key members of the management team. The chair has keen insight into the profiles (backgrounds, personalities, capabilities) of these critical executives.
Effectively communicates and facilitates: The chair always is available and communicates openly, proactively and transparently with the CEO and directors. The chair is uniquely able to facilitate useful discussions with the CEO and the board. The chairman encourages forceful discussions yet manages the dialog toward positive outcomes.
Relationship between individual board members and executive management
Enquiries by board members of management and bymanagement of individual board members should primarily be channelled via the chair and CEO.
Where there is any direct material contract between individual board members and executive management, the chair and CEO should be kept informed by way of courtesy. Where there is strength of mutual respect and confidence that the chair’s and CEO’s authority will not be undermined, communications between executive management and board members may be freer. There may also be expectations of freer communication between the chairs of the audit and risk committees and the relevant executives responsible for those functions, on matters within the scope of those functions.
This post draws from content originally shared by the Australian Institute of Company Directors, IMG, and Effective Governance. It has been aggregated, edited, and synthesized for length and relevance to TBR Africa members.