Heidrick & Struggles
Chief Executive Officer & Board of Directors
Nine out of 10 directors think their boards are doing a good job. Their CEOs think only one director in five is effective. Who is right?
CEOs confide that they have at most one or two effective directors who provide wise counsel, offer advice on key issues. But 95 percent of directors rate their boards as either effective or very effective overall.
A study conducted by Heidrick & Struggles with the Center for Effective Organizations at the University of Southern California’s Marshall School of Business surveyed 768 directors, nearly 75 percent of whom are outside directors, at 660 of the 2,000 largest publicly traded companies in the United States.
When CEOs see only about 10 to 20 percent of directors as effective and their top management teams often regard working with the board as a demotivating experience, what are the issues?
The good news is that the causes of this disconnect are clear and there are readily available remedies to repair it. Several policies, practices and philosophies have converged in recent years to create the current disparity between the views of boards and CEOs. Among the most prominent:
Defining success differently. CEOs want independent directors who can help them make better, faster and wiser decisions, but who do not meddle in the day-to-day running of the business. They want a strategic sounding board and advice on extraordinary circumstances such as hostile takeovers, shareholder activism and significant business challenges.
But many directors define success in terms of committee work, fiduciary responsibility and overseeing compliance with legal, regulatory and other oversight requirements. In our study, directors gave themselves 95 percent in many of these areas.
Yet in the strategic and advisory areas that CEOs value, directors gave their boards low marks. For example, only 59 percent of directors responded favorably when asked to rate their boards’ effectiveness in shaping long-term strategy. Only 61 percent said their boards were good at identifying possible threats or opportunities critical to the future of the company. Less than two-thirds of directors reported that their boards are effective at one of their most important responsibilities: succession planning.
A gaps in the matrix. In the face of globalization, emerging markets and changing public expectations, nominating and governance committees have in recent years sought diversity of all kinds in new appointments to the board. They have created a matrix in which they checked each of the diversity boxes. But what is often missing in the matrix is a box for sound business judgment and diversity of thought. Certainly, building boards that are diverse across many dimensions is important, but the advisory and strategic dimensions should also be given a prominent place in the mix.
Many new CEOs greatly underestimate the time they will spend “managing” the board, and if the board is providing little genuine partnership, the CEO’s time could be better spent concentrating on the real needs of the business. The inability to balance managing the board with managing the business is often at the root of CEO tenures getting cut short.
The ideal dynamic can be achieved by following these simple steps:
- Make “advisory temperament” one of the job specs for new board members. The nominating committee should try to find whether a candidate is independent of mind and simultaneously inclined to be a mentor, adviser, and sounding board. They need candidates who have the temperament to be of real help to the CEO.
- Collaborate closely with the CEO on setting the board meeting agenda. The board cannot support the CEO if the board meeting does not address the issues that the CEO regards as critical. Where the chair and CEO roles are split, the board should make sure those issues get a prominent place on the agenda and get sufficient “air time” during the meeting. If the chair can responsibly push the “recurring” board responsibilities into committee agendas, more time can be freed for other topics at the board meeting.
- Make the results of executive sessions useful to the CEO. Often the results of an executive session of the board are communicated to the CEO in a brief conversation unaccompanied by any practical steps for achieving the goals. CEOs receive what amounts to a to-do list on top of whatever to-do list emerges from full board meetings.
- Expand board assessment and feedback. Almost all boards – 99 percent in our study – have a formal process for evaluating the CEO’s performance and 98 percent have a process for evaluating the board. But they have few have mechanisms for explicitly evaluating how the board interacts with the CEO and the leadership team.
- Refine the role of the lead director or non-executive chair. The role of lead director (or non-executive chair) is difficult to get right and its breakdown is often the chief cause of board ineffectiveness from the CEO’s point of view. The lead director should show real independence. The goal should be to help the CEO succeed, not merely to act as sheriff or alternate CEO.
The chair’s determination to help the CEO succeed in the area that really counts – superior quarterly results for shareholders – freed the CEO from spending inordinate amounts of time managing the board.