Knowledge Center: Article
Is your board a catalyst—or a constraint?3/16/2017 Heidrick & Struggles
With proxy season in full swing as companies around the world get ready for their annual meetings, shareholders should ask themselves a different question this year. Don’t just ask whether an individual is qualified to be on a board. That question is obviously important, but it isn’t enough. Think, as well, about the board as a whole, and ask whether the mix of people is right for your company.
To understand the importance of mix, you need look no further than Theranos, the high-profile start-up that raised capital at a valuation as high as $9 billion but that has blown up over the past year and a half. The company claimed it would revolutionize blood testing by requiring only a few drops, rather than vials, of blood from patients and stood by its technology even as evidence mounted against it, but was eventually exposed. If you looked at its board members as individuals, you couldn’t find a bad one in the bunch; they were a “who’s who” of distinguished leaders, including former US secretaries of state, senators, generals, admirals, and a defense secretary. But the board became the subject of the sort of nightmare story in Forbes magazine that no director ever wants to see. The headline on April 27, 2016, decreed a “crisis,” followed by the question: “Where was the board?”
The Theranos board simply didn’t have the right mix of general experience and specific knowledge with either biotechnology or start-ups, so it couldn’t challenge the company’s charismatic founder, Elizabeth Holmes, when she maintained that the technology was developing as expected.
Although shareholders don’t get to view the dynamics of how boards interact, our extensive research into board performance provides some signposts that indicate whether a board is “accelerating”—helping to drive company performance forward and reduce the time to value—and when it may be a drag on results. Through an analysis of the FT 500, our research identified 23 companies as “superaccelerators,” and the characteristics of their boards are instructive. Boards at superaccelerating companies are smaller, on average, than nonaccelerating boards: 10.69 members versus 12.97 members. Superaccelerating boards appear to have more relevant expertise, with an average of just 46.6% coming from outside the industry versus 59.5% being industry outsiders at nonaccelerating companies. Members on superaccelerating boards have longer tenure (a median of 9.10 years versus 6.76 years) and are younger (37.2%, on average, versus 30.9% under 60 years of age) than those on nonaccelerating boards.
Our research suggests that, as a group, directors need to be more active than they have been in the past. The days are long gone when a director was chosen essentially as a reward for past successes and when the work consisted of a quarterly trip to a meeting to rubber-stamp what management was doing. Increased regulation of boards, including through the Sarbanes–Oxley Act in the United States, and shareholder activism ensure that demands on directors will stay intense and perhaps become even more severe. So, the composition of a board needs to be carefully watched and managed.
Our research shows that, no matter the qualifications of individual directors, boards need to demonstrate these five characteristics:
- There must be one or two “utility player” directors. Every accelerating board needs a few wise, battle-worn business leaders who have lived through multiple business transformations and cycles from the front seat and come with the commensurate respect and sophistication to ask the exact right question at the right moment to tease out of management the real issues at heart. In a crisis, you need such leaders on your side.
- There must be a strong CEO. The board—no matter who is on it, how often it meets, or what it may collectively know—is not running the company. The board’s most important daily requirement is to oversee the performance of the CEO, and it must insist on strength for this role.
- There must be a strong relationship between the CEO and the chair/lead independent director. If we were to measure only one aspect of performance of a board to determine the projected level of success, we would look at the relationship between these two individuals. Do they know each other? Do they respect each other? Are their perspectives and experiences complementary? Can they honestly debate, disagree, and then move on?
- The board must be overindexed on industry experience. Businesses need to make decisions rapidly. Boards need to be the headlights that can shine further ahead, allowing for a longer and wider view than management is capable of. They can’t be in the car learning to drive or, worse, in the passenger seat enjoying the ride. There is no time to learn on the job. Financial acumen is the number one request and requirement. Industry-specific financial acumen is the difference between a good board member and a great board member. In Fortune 500 companies, five out of six industries drew most often from within their own industry when making director appointments in 2015.
- Members must be willing to fire themselves. Boards that don’t constantly monitor their own performance will fail. The days of “professional directors” are over. This is not a retirement role; being a director is an active career choice. If you are not “all in” and relevant to where the business is going, you should be fired or should fire yourself—or you will be known for being on a board of a company that missed the obvious and failed, which is even worse.
Many managers and board members complain about the short-term focus that markets force on them—we call it “quarteritis”—but the capital markets are a superb disciplinarian. They will weed out the slow from the fast. So boards must help organizations pursue an acceleration agenda. Boards that embrace this role appear to be evolving much faster than their peers. We believe that disruptive boards and board members will redefine the relationship between the board and the management team and will play a pivotal role in accelerating strategy, creating role models that will redefine corporate governance for the benefit of all.
Even though shareholders aren’t privy to the inner workings of boards, they need to be thinking about the mix of members and the overall agenda, not just the individuals’ qualifications, as they cast their votes this proxy season.
About the author
Colin Price is an alumnus of Heidrick & Struggles' London office.
A version of this article originally appeared on LinkedIn.