In this insight about board dynamics, I offer lessons from 25+ years as a CEO and my broad experience as a board member. An organization’s chief executive officer is the ultimate authority in making management decisions. Even so, the CEO answers to the board of directors. The board sets long-term goals and oversees the company. The board’s decision-making process sets the tone throughout the organization.
“Quality starts in the boardroom.” — Edward Deming
Two major issues are common for many boards: poor decision-making and groupthink.
A board rarely uses the collective intelligence in the room. Research shows that size matters. The optimal size for a decision-making group is seven people. Moreover, for each person added, the group’s decision-making effectiveness reduces by ten percent.
I have served on Boards with more than 25 members. So, the maximum theoretical effectiveness of a board of this size is about 15%. Also, boards often seek representation (geographic, gender, profession, etc.) and continue to exhibit group-thinking. High performing boards ensure a diversity of thought.
“The high performing board shows the ability and openness to “question itself, senior management team, and its decision/discussions.” — Pearl Zhu
Roles and responsibilities of directors have evolved over the years
The heightened focus on risk and compliance with regulations has dramatically changed. It is a vastly different landscape now, partly caused by the financial crisis, and a creeping bureaucracy, that needs much more focus compared to when I became CEO of a publicly traded company in 2001. This was at the time the Sarbanes-Oxley Act was coming into effect. The Act significantly changed the management's responsibility for financial reporting. I recall the apprehension I had the first time I had to certify the accuracy of our financial reports personally. The Sarbanes-Oxley Act also imposes harsher punishment for obstructing justice and securities fraud, mail fraud and wire fraud. Public companies now have to report in “plain language.”
In 2000, information technology was emerging as a strategic activity. Today, it is the lifeblood of companies. Its failure has caused many organizations to fail. In the age of personalization, I see information technology as the number one risk, thus the most probable cause of bringing down an organization.
A board needs to have the ability in information technology to see into the future, even if the organization is not in a technology business. Fifteen years ago, I began advancing the concept of “engineering governance,” where every board would consider technology expertise in the same manner as they deemed legal and financial knowledge in its make-up. Today’s advanced technologies need technological stewardship.
Information Technology Risks
“Many foresightful boards invite CIOs to the big table for bridging gaps and harnessing communications to accelerate digital transformation.” — Pearl Zhu
Many CEOs are taking part in the rhetoric on security and privacy. The conversation is more common than ever before. There are many conferences dedicated to discussing cybersecurity, privacy, and other problems. Often boards are out of the loop. However, this talk will not build technological stewardship. Evidence, evidence that comes together to form trustworthiness builds trust.
Boards answer to proper oversight in this area is a simple one. They need to ensure that individuals own their data and have a choice to monetize or otherwise use it. Problems become complex when organizations put profits using customer data before ethics.
With 5G just around the corner, every organization’s information technology is going to change significantly. So, boards must prepare themselves to deal with a topic that in the past was often considered a back-office activity.
Selecting Board Members
Building a strong board of directors takes ongoing work. High-profile board failures, the boom in activist investing, and the disruptive forces of technology are only a few of the reasons effective board governance is becoming more critical.
“Women do not win formula one races, because they simply are not strong enough to resist the G-forces. In the boardroom, it is different. I believe women are better able to marshal their thoughts than men and because they are less egotistical they make fewer assumptions.” — Henry Ford
Very few organizations spend enough time or effort in recruiting and appointing directors. The entity is best served with the diversity of thought and expertise, and directors with the right temperament to be a high performing board member. Being a director is a different skill set. Our performance analytics predict if an individual will be a top performer as a director with 85 percent reliability.
Director's Behavioural Competencies
COMPETENCIES (Priority Order) | Definition |
---|---|
Leads Decisively | Demonstrating a forceful and robust leadership style and a readiness to influence others directly. |
Seeks Innovation | Thinking expansively and showing profound imaginative insight to find wise but innovative solutions. |
Demonstrates Character | Maturely honouring interpersonal commitments while keeping ethical convictions and playing by honourable rules. |
Inspires Others | Seeking the opportunity to influence others through a socially impactful image and expressing views persuasively. |
Demonstrates Community Consciousness | Committing to improving the quality of one’s community and the environment by volunteering for community duties. |
Empathic Inclusion | Promote quality group interrelationships. The ability to gain the perspective of another from both the perspective of the other and one’s own vantage point. Live through a common event from the perspective of others. Modeling of inclusion offers other the opportunity to learn from our embodiment of it. |
Identifies & Develops Talent | Demonstrating a leadership capacity that quickly identifies high potential talent and builds a strong team of loyal, competent direct reports. |
Demonstrates Energetic Enthusiasm | Committing to an enthusiastic, fast-paced life and being excited and passionate about one's work. |
Establishes Alliances | Prioritizing camaraderie among co-workers. Creating bonding social networks that reflect interpersonal intimacy. |
Focuses on Results | Making personal sacrifices and expending extraordinary dedication and work ethic for one’s career. |
Reasons Critically | Tackling intellectual ambiguity by using logic, quantitative support, and consequential thinking to find common sense solutions. |
Maintains Accountability | Assuming full accountability for what happens and being first to invite criticism and personal responsibility. |
Thrives in Chaos | Enthusiastically thriving under a chaotic demand and overlapping priorities. Displaying a preference for multi-tasking |
Sustains Profitability | Seeking profitability and personal wealth with a keen sense of risk to achieve financial success. |
Framework for the director’s job
“I continue to be amazed how people think they are instantly expert in everything upon being elected to a board.” —Bob Goodings
Directors need to listen to management and not tell management what to do. The board members’ job is not to run the organization. The board supplies strategic oversight, advice, and counsel to the CEO. Hiring, supporting, and firing the CEO along with ensuring there are CEO candidates in the pipeline are the most crucial decisions they make.
"If they see us eating nails for breakfast, then they’re going to think they should eat nails for breakfast." — Ken Freeman
The board should model the behavioural in the boardroom that it wants management to model in running the organization. If the organization is striving to create a particular culture and the board acts differently every time it interacts with senior management, it will confuse people. Directors and management can respectfully disagree. However, everyone needs to be on the same page regarding how they engage with each other and the direction of the organization. If a board starts meetings late and ending sessions late, it becomes an accepted norm within the organization.
Board’s Role in Succession Planning
It is the board’s responsibility to know the answers to these three questions.
- What is the health of our CEO-ready pipeline?
- Is anybody ready now?
- Will anybody be ready in two years? How many? How real are they?
In many areas of a business, an organization faces a fundamental choice—build or buy? Moreover, in a sense, that is the case when it comes to finding a new CEO. That is, does the board draw on internal talent, or does it look outside?
The CEO1000 Tracker shows that companies tend to look inside for CEOs, with more than three-quarters of today’s CEOs having been promoted from within the organization. The smallest companies (5,000 employees or less) and the largest companies (100,000-plus employees) are more likely to have internally sourced CEOs. There is also some variation by industry, with more media, retail and technology CEOs being recruited from outside the company.
It is essential when the time comes that somebody is ready to step up. You also must have a capable and diverse leadership pipeline. Board often charge CEOs with succession planning. That is a mistake — abdication of duty. We offer a comprehensive succession planning process and a ladder of leadership to help boards ensure the pipeline is developing internal candidates.
Update the Succession Plan When the Strategy Changes
Boards want somebody to either blow the strategy up or implement it. When a board approves strategies that look radically different from the ones, they have been adopting in years past. There are additional challenges. A board rarely understands the implications of the strategy that the company’s pursuing. Moreover, the company itself may not understand the strategy it is pursuing.
Our approach is to treat strategy-making as developing a set of answers to five interlinking questions. The questions cascade logically from the first to the last.
- What are our broad aspirations for our organization and the concrete goals against which we can measure our progress?
- Across the potential field available to us, where will we choose to play and not play?
- In our chosen place to play, how will we choose to win against the competitors there?
- What key capabilities are necessary to build and maintain to win in our chosen manner?
- What are the management systems necessary to build, use and maintain the key capabilities?
Our approach makes strategy easier and more meaningful. The result is that you get a better strategy that the board and management are on the same page and have a strategy that can be carried out, with much less pain and wasted time.
What’s the big idea?
The one question I find that CEOs and boards have the most difficulty answering is, “What’s the big idea?” They cannot answer it. What is a succinct statement of strategy that is clear, understandable, and accurate? They do not know. So, the real strategy is very often kind of “muddle through.”
It is incumbent upon the CEO to be able to say,
“I want to tell you with as much clarity as I possibly can the big idea that we’re pursuing around here, and the bets we’re going to make. Then we will talk about the steps that we are going to take to implement this strategy, and how we are going to know over a certain period whether it is happening, and what the challenges are that we’re facing.” — Kevin Sharer
Instead, there is a tendency not to clarify in companies. There is a tendency to obfuscate. In my experience, few CEOs and boards can describe their strategy succinctly, and virtually nobody does it in practice.
The Board/CEO Relationship
Even a capable CEO is not a solo act. CEOs get direction from the board and give feedback, so having a good relationship with the board is essential. The board chair, if they are not the CEO, should be ready to supply guidance if the CEO is unclear about the board's wishes. A good chair may roll up their sleeves and help the CEO if there is a crisis.
If the CEO does not connect with the board or have a good rapport with the chair, it can cause problems. Board members are busy people; however, when recruiting a new CEO, they should meet them in person rather than just reviewing their resume. That gives the board a sense of whether they can build a partnership with the candidate. The ability of both sides to communicate honestly and openly is essential.
Lessons for The CEO On Dealing with Their Board
As the board as a collective is the decision maker, I thought it was essential to deal with the board as a collective whole. However, should I become a CEO with another organization tomorrow, I would more quickly develop a close relationship with each director on a one-on-one basis beyond the boardroom. I would seek to determine the right level of information to share with a board as a collective and also satisfying the information needs for each director. It is a tall order. Relationships are everything.
There was always a huge learning curve there that I did not expect as I moved to different organizations. I have been the CEO of six organizations. In my case, I was confident as I made each move — “I’m ready to be a CEO. I’m prepared.” However, when you take office, it is always different. With the board, it was learning the tempo, figuring out what they need and what they do not need, and developing those personal connections outside the boardroom.
The board and the CEO need to be one team to achieve the mission. Over the years, I have asked many directors on how they see their role. I continue to be dumbfounded when directors say,
- “Just like the government, I see the CEO as the governing party, and as a director, I am part of the official opposition.”
- “My role is to catch the CEO doing something wrong.”
- “To support the CEO’s decision…that’s why he appointed me.”
Ask your board colleagues how they see their role on the board — it will be informative.
Difference between public, private, and not-for-profit boards
There is evidence that family businesses outperform their publicly traded rivals. It has a lot to do with their long-term focus, as the family-business may be passed down from one generation to the next. They groom their next leader. The family-controlled firm remains at the heart of even the most modern industrialized economies. They account for about 90 percent of the world's companies. All boards can learn lessons from family businesses: long-term thinking and succession planning.
Private Boards
There is a level of urgency that is much more intense. People tend to think of private equity as having a “buy it and flip it” short-term orientation. However, like the family business, they have a longer-term perspective than many corporate boards that are worrying about next quarter’s earnings. They are much speedier concerning decision making, and much less concerned about what is for dinner and what is for lunch, during the board meetings. It is a very pure investor model — aligned in wanting to create value. However, rarely do they have an adequate diversity of thought.
Public Boards
All public corporations must have a board of directors. It oversees corporate activities and protects the interests of the company's shareholders. These boards are much more diffuse. There are many benefits of much greater diversity on a public board. However, at the same time, there is a logistical challenge in bringing everybody together. It might take three weeks to arrange a call. Most directors are not as invested in the organization as many on private boards. The chair and CEO wield power.
The issue of whether holding both roles reduces the effectiveness of the board is a hot topic and often rears its head at shareholder meetings. There are good reasons to separate the two positions to strengthen the overall integrity of the company. The relationship between a company's management and board of directors continues to be an essential topic for both shareholders and regulators. Any future corporate failures linked to this lack of segregation of duties will heighten the conversation and may lead to even stricter legislation in the future.
Not-for-Profit Boards
Control of a not-for-profit lies with a governing board of directors or trustees. The board is responsible for seeing that the organization fulfills its purpose or mandate. Often board members act as individuals, however, they must serve as a group.
Often the organizations have members who make up the board. This reality creates an inherent conflict where directors are the customers, the workforce, and the governors of the organization. When speaking about the governing bodies of the self-regulating professions, on several occasion government officials have commented that the SELF is much bigger than the regulation.
Most not-for-profit boards would benefit from having additional independent directors.
I recommend non-profit chief executives should be ex officio, nonvoting members of the board.
Today about 50 percent of chief executives are not currently members of their boards, with 38 percent of serving as ex officio, nonvoting members of the board, and 12 percent as voting members of the board.
Common Mistakes that Rookie Directors Make
Talking too much or too little is at the top. Another is not taking the time to learn the organization. Some first-time board members do not know what their responsibilities are. Many people still think that being on a board is a symbol of prestige and there is not much work involved. There is a lot of work involved if we do the job right.
I recall an event at the first council (board) retreat I attended about six months after I joined Professional Engineers Ontario as its CEO and Registrar. I thought the right place to start was on familiar ground — discussing the Principle Object of the Professional Engineers Act. One of the councillors who had served more than three years on the board said: “I fundamentally disagree with the Principle Object, and we should be doing …”
It is irresponsible to join an organization as a director if you do not understand and support the mandate, especially when it is set out in legislation. Your job is to supply oversight. The three key questions are:
- Is this company performing for shareholders?
- Do we have a healthy environment – including social factors, compliance factors, legal factors, risk factors, customer excellence factors?
- Does our CEO have the judgment, deportment, and personal characteristics to lead this organization?
Seasoned Directors
Here are some of the common mistakes that I have seen seasoned directors make. They do not:
- do their homework, so they come in with opinions, and they think they somehow have been promoted to wisdom
- understand the social dynamic and culture of the board, and they try to advance a position before assuming what the group dynamic is
- realize where the power on the board lies
- invest the time with the CEO to gain their trust and know what they are trying to do
- understanding that there are only three questions (above) that the board is there to monitor
For the full list and additional insights, you may find Recognizing, Managing and Preventing Board Director Bad Behaviour, to be of interest.
What Separates High Performing Directors from Rest
You learn about people in a crisis. You cannot hide — stand up and be counted. Always think about the stakeholders and be prepared to make exceedingly complex decisions. Often it relates to CEO hiring and firing or misbehaviour. In those situations, it takes one or more board members to stand up and say, “We can’t ignore this. We must take action.”
Usually, one or two people appear as being the sagest of the sage. They speak less than other directors. However, if they talk, everybody listens to every single word they say. Moreover, they can simplify complex problems. The board members that have stood out to me can clarify, express their views, and through their demeanour, experiences, and their insights, they can command the respect of the board.
How the CEO Annoys Directors
Circumstances very much drive it. However, one problem I have seen is when the CEO stops listening. The CEO needs to remember that he or she has a boss — the board of directors. When the CEO becomes so happy about their successes that arrogance takes over, that is when it is time to start asking the questions. Moreover, if the CEO is not treating his or her board members with dignity, fairness and respect, the odds are surprisingly good that the CEO is not treating the employees of the organization with dignity, fairness, and respect. This is a lightning rod.
What Boards Need to Look for When Hiring a CEO
When I interview people for the CEO job or senior leadership jobs, I ask myself:
- Would I want to show up for work every day and engage with this person?
- Will he or she treat me with dignity, fairness, respect?
- Will arrogance get in the way?
I am always on the lookout for ego, and I am on the lookout for integrity so that when the going gets tough, they will do the right thing. I find the performance insights from our analytics to be invaluable. It allows me to probe more deeply in specific areas. They are specific for each role. The traits for a CEO for a $10 million company are significantly different for those for a billion-dollar organization.
The reality is that we all revert to our natural performance under pressure. So, what you see in the interview is not necessarily what you are buying. I value authenticity.
Three Questions for Turnarounds
"It has to be simple, but simple is hard."
As a board member ask the following three questions and use these simple ways to talk to everyone in the organization. It must be simple.
Problems
Is there any imbalance if significance in this organization or this industry?
Are there any apparent problems regarding, say, compliance or customer service or controls?
Alignment
Is senior leadership aligned?
Engage the team, ask them to imagine a matrix of performance traits and results, with x and y-axis going from strong to weak, and then ask them, which box are we in? If you get a lot of different votes from the leadership team, particularly when you have the data that shows the financials are all broken, you know there is something wrong.
Accountability
What is the level of accountability of employees for organizational performance?
Key Insights
A crucial issue is a dynamic between the board and the CEO. Does the CEO view the board as a formal point of governance but not a real source of power, counsel or even relevance? That was the historical view. Moreover, many board members felt gratitude for the prestige of being on the board, for the opportunity to be on the inside. Also, for some board members, the compensation was essential to them.
Directors, by their attitudes, perpetuated this idea of the board as a sort of governance, check-the-box group. They are not involved in any meaningful way regarding the organization’s performance or the CEO’s job performance. That attitude persisted for many companies through the '90s. After a series of corporate failures, including, Enron, things started to change. Shareholder demanded that Boards realize they had a role in the leadership of the organization.
Some boards think that they are there to be a shadow management force and that they should lead. That is unhealthy because boards do not have context. They show up in a room six times a year, and they hear very thoughtfully presented information from staff who are on their best behaviour. Good directors get information from other places. However, they are not able to lead.
Adopt the attitude that the board’s in charge. The board is like the Supreme Court. Moreover, every day you are trying to make only a few judgments:
- Is this company performing for shareholders?
- Is our environment, including social factors, compliance factors, legal factors, risk factors, customer excellence factors healthy?
- Does our CEO have the judgment, deportment, and personal characteristics to lead this company?
Do not come to the meeting with a prosecutorial view that the answer is no to those questions and your job to prove that you are right. Be alert to the responsibility you have that those are the key questions.
Three or Four are In Charge
The other thing I learned with boards, even though there may be 12 or 30 directors, three or four people are always “in charge.” Nothing of consequence is going to happen unless these four people agree. Effectively, they have collective veto power. It provides a check on other directors who are confused about what they should be advocating for. The big four typically are the chair and the chairs of the comp committee, audit committee, and governance and nominating committee. Directors and management are under the supremacy of these four folks. They will be the first to volunteer to be on the CEO selection committee.
Concluding Thoughts
Boards must keep a close watch on the shifting nature of their role in today’s corporations and find the right balance between governance and management. Greater responsibilities require increasing commitments of time and energy, not only during board meetings but also between meetings to stay current and to learn more about the industry, the organization, its competitors, and its customers. These responsibilities also raise the premium on carefully protecting the independence that makes boards valuable allies to senior executives, shareholders, and a diverse array of other stakeholders.
Contemplate the following steps to alter the engagement board members:
- Connect between meetings — Touch base in between formal board meetings to stay current
- Help form strategy — Don't just review a strategy that executives have already fully baked
- Cultivate talent — Consider recruiting executives and mentoring high performers
- Engage the field — Target specific projects and act on a collaborative basis
- Ask tough questions — Understand how the company and its divisions create and destroy value
Excellent Directors — Increase Value for Shareholders
An excellent director has the understanding, ability, moral courage and the willingness to:
- Be stewards of the organization
- Execute their fiduciary responsibility
- Sees the big picture
- Deals with the vision and the long-term
- Link with the legal and moral ownership
- Honour board policies and decisions
- Think in terms of systems and context
- Values innovation that furthers the organization
- Governs through the broader formulation of corporate values
- Participate assertively in deliberation, while respecting the opinions of others
- Withhold judgments in the absence of previously stated criteria
- Commit the time and energy required to serve the board and its committees
Whether your recruiting or conducting an annual review, our analytics are 85% reliable in predicting top performance.
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