The principals in our firm have completed over five hundred board projects, in our experience the answer to who should sit on your board is, in every case… it depends. Every search is unique.
Who Should Be On Your Board – Determine Your Needs
There are a myriad of factors that determine who should serve on your board. The composition and culture of your current board are important factors. Similarly, the nature of your company is a variable in determining who should serve on your board:
- Customer Base
- Financial Strength
- Corporate Evolution
- Geographic Footprint
Your current board of directors, in some of its composition, is reflective of what the company was, or aspired to be, in years past. Your company’s profile is just a snapshot of what the company is today. Therefore, importantly, where is the company headed? What are the most important objectives to be achieved? In other words, what is your corporate strategy? The answers to these questions need to be understood in determining who will be the most valuable director(s) for your board. The person or people who should serve on your board are born from your strategy.
When you overlay your corporate strategy with an assessment of the toolkits of each director on your board and consider your company’s profile, you can create a matrix. The matrix illustrates the competencies you need to acquire to enable your board to guide your company toward its strategic goals. Add to this sensitivity to the board’s culture and you will see who should be on your board.
Who Should Be On Your Board – Universal Elements
Every company’s board competency matrix will be different, but there are a few common components that are found on most well-built boards:
- Diversity: This is stating the obvious, but a variety of perspectives is an important component for all boards.
- Operators: Among the members of every board should be one or two current CEOs or COOs, who will provide the board with an operator’s perspective and often act as a sounding board to the company’s CEO.
- Financial Acumen: This is a broad skill set, ranging from accounting and audit skills to treasury, financing, and M&A experience. We have not worked with a client yet who has said, “We have too many board members with financial savvy.”
- Industry Knowledge: An independent director with deep experience in the company’s industry will augment management’s expertise, can serve to educate other directors on the industry, and can provide an informed board level evaluation of industry specific items.
- Customer Knowledge: Board members with significant knowledge of major customer categories provide valuable insight in board discussions.
- Regulatory / Compliance: Knowledge of regulatory issues facing a company may be critical. The same holds true for risk.
- Technology: Every business relies on technology. Having a director who can evaluate the impact of technology on the company, make strategic recommendations and communicate effectively with other members is always valuable.
- International: This may not apply to all companies, but to those it does, it is a major concern. Boards are clamoring for directors who not only have a global perspective, but boots-on-the-ground international experience running a business, particularly in the BRIC countries.
- Committee Composition: Members should have relevant domain knowledge. (e.g. People on the compensation or audit committee have to understand the material).
Who Should Be On Your Board – Personality Traits of Great Directors
The depth of experience, level of success, and amount of talent a director has is irrelevant if it cannot be effectively utilized. Individuals should be intellectually and emotionally strong enough to actively participate and offer positive critical review, yet modest and mature enough to recognize their appropriate role as a board member and the need for partnership with their fellow board members and company management. They should be analytical and able to constructively evaluate a strategy, acquisition, and business plan. The candidate should be forward thinking and strategic, yet pragmatic and operationally savvy, with a passion for building true shareholder value. The personality/chemistry must be a fit. Honesty, openness, and high ethical standards are mandatory. It is important that a potential board member be prepared to be an active and engaged director, and willing to make a long-term commitment to the company.
Who Should Be On Your Board – Get The Leadership Right
Roles on the board are not created equal. There are four leadership roles that every board must have: non-executive chair / lead director, audit committee chair, compensation committee chair, and nominating & governance committee chair. Get these roles right and it will translate directly into shareholder value.
1) Non-Executive Chairman / Lead Director
Shareholders have always entrusted the board to carry out its fiduciary responsibilities, but in our contemporary business environment, regardless of the title given to the role (non-executive chair, lead director, presiding director…), it is essential for effective corporate governance that the board of directors have a non-management director as the recognized leader of the board, not the CEO. Dividing the duties of the leader of the company (the CEO) and the leader of the board acknowledges the new and increased responsibilities of both positions. It also creates checks and balances between management and the board, and is meant to be a deliberate expression of independence to shareholders and the market.
The clearest distinction between the two roles is, simply, the non-executive chairman / lead director runs the board, not the company (that is the domain of the CEO). In running the board, the non-executive chairman / lead director has a wide range of responsibilities, which can vary from company to company, but in almost all cases he/she:
- presides at all meetings of the board and the shareholders, ensuring that all issues on the agenda are efficiently attended to and that each director contributes to their full potential.
- establishes, in consultation with the CEO, an agenda for each meeting of the board.
- leads a critical evaluation of the board as well as of management, its practices and its adherence to the board-approved strategic plan and its objectives.
- facilitates an open flow of information between management and the Board.
The non-executive chairman / lead director role is a delicate role requiring a respected executive with broad business acumen, who is a strong communicator with evident interpersonal skills, and someone who has refined leadership ability (capable of focusing the board and building consensus). This role is not for someone who has an ambition to run the company. Non-executive chairman / lead directors should be complementary and compatible with the CEO (not seen as a rival); if their chemistry is poor, the function of the board suffers and ultimately, so does the company. Optimal candidates are capable of facilitating positive dialog on diverse subjects, and act as a buffer on behalf of the CEO and senior management, so that the board is not intrusive. The non-executive chairman / lead directors must have ethical standards beyond reproach, a passion for the role, and must take personal pride in the level of quality in the boardroom.
2) Audit Committee Chairman
Given the heavy responsibility and continued intense spotlight on the audit committee, this is a key role to fill for the success of the board and the company. An outstanding audit committee chair instills a greater sense of confidence in the company at the board, management, and investor levels, and likely individually impacts shareholder value. This role requires an extremely well qualified financial expert, preferably with independent director experience and the time to commit to this role. Optimal candidates would typically be retired executives who have been CEOs (with strong financial skills), public company CFOs, or broadly experienced audit partners.
3) Compensation Committee Chairman
The intense examination of executive compensation has also thrust compensation committees into the spotlight and has made its chairmanship a very important responsibility. This role requires a background with executive compensation matters and current knowledge of compensation issues and trends. Preferably, this person would also have prior public company board experience. Optimal candidates for this role would typically be a long-tenured CEO, an experienced compensation committee member, or another executive with significant executive compensation experience (e.g.: chief human resources officer).
4) Nominating / Governance Committee Chairman
Charged with leading the committee responsible for shaping the company’s corporate governance, evaluating the performance of the board and its directors, and recommending new directors for the board, the nominating/governance committee chairman is a critical role in today’s climate. Directors in this role need to have a deep knowledge of corporate governance and be committed to keeping up with its trends and best practices.
Who Should Be On Your Board
There are common components of all well-built boards, beginning with getting the leadership roles filled correctly. But who should be on your board is truly unique to each company. Through an assessment of the competencies on your current board, along with your company’s profile, viewed in comparison to the vision of your company going forward, and an appreciation of your board’s culture, a clear picture should emerge.