Vanguard’s Jack Brennan on private company governance best practices, refreshing the board, and latest news and views.
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“Great boards give management the ability to tune out the noise.”
John J. “Jack” Brennan is chairman emeritus and senior advisor of Vanguard Group Inc. With assets totaling over $3.1 trillion, Vanguard, based in Malvern, Pa., is the largest mutual fund company in the world. Following his undergraduate education at Dartmouth College and an MBA from Harvard Business School, Brennan started out his career with a private company, household cleaning supplies manufacturer S.C. Johnson & Son. He joined Vanguard, another resolutely private company, in 1982 as assistant to Vanguard founder John Bogle. He was named president of the firm in 1989, served as CEO from 1996 to 2008 and chairman of the board from 1998 to 2009. He is a director of General Electric Co., Guardian Life Insurance Company of America, and LPL Financial Holdings Inc., among other board affiliations. The following is an edited excerpt of the Q&A session conducted by Directors & Boards editor James Kristie at the Private Company Governance Summit 2015.
Let’s start with the most basic of questions: A board for a private company — good idea or not?
It is a great idea. When I came out of grad school, I had the privilege of working for a great family-owned company, S.C. Johnson. I came to Vanguard partly because it was private. But in each case, I found that the personal experience of having outside/in perspectives on our business from a strong board of directors was just a powerful force to make the private enterprise more successful. Whenever I talk to friends who run private companies, or family-controlled or family-owned companies, the first thing I talk to them about is the value of having that outside/in perspective. You don’t want friends or cronies as directors but serious people bringing you serious value from the board perspective. So the answer to the question is an absolute “Yes” — I am a huge fan of the idea that private companies should have a board.
On the Vanguard board you find current or former senior executives from such companies as IBM, Xerox, Rohm & Haas, Johnson & Johnson, Corning, and Cummins, plus other leaders such as the president of the University of Pennsylvania. Describe a bit what they brought to you as the CEO of Vanguard?
For a company that has grown as quickly as Vanguard — during my time at Vanguard, we grew at over 20% compounded per year — with a mostly homegrown leadership team, we needed a set of perspectives to guide us. I had a fantastic lead director, Larry Wilson, then the chairman and CEO of Rohm & Haas. He was running this huge global company serving on the board of what basically was a mono-line domestic company. But the perspective he could bring to me was unbelievably invaluable, both on leadership and on making hard decisions — and on the way you take a good company and try to inspire people to make it great. Where do you get perspective like that if not from people who are vested in the success of the organization by having signed on to the board? I don’t think I as the CEO, or my successor as the CEO today, could do what is required to lead this complex and now very large firm without the very experienced, very supportive people with diverse backgrounds that serve on the Vanguard board.
How does a CEO develop a productive relationship with his or her board?
It starts with candor. One of the things that can be so valuable for the leader of the private company in having a board is you may be able to have a more candid relationship with your directors than you can with most people in the organization. People think the old “it’s lonely at the top” is boloney until they are at the top and realize it is lonely. Here is something I pass on at the Vanguard training programs (with tongue in cheek, but to make a point): There are two major professional events in your life — the first is when you become a supervisor, because you then become a leader of people; and the second is when you become the CEO, because now you don’t have a boss anymore. So, do you now want this board to be your boss? Do you want them to be your friend? Do you want them to challenge you? The CEO has to be very candid about what that relationship is going to be.
Secondly, the CEO has to decide if this board is for him or her or is it for the whole leadership team? There are CEOs who want the board to know everybody in the company that they can possibly know. I happen to think it makes for a stronger board when management and the board members to have a relationship, but some people may not. Is that part of the deal on the private company board? You ought to be very clear as to what the board’s relationship with management will be.
And then you get down to the tactics of information flow. How informed will the board be to the financial dynamics of the private company? Or, to the real inner workings of the family dynamics? All of this comes back under this umbrella of candor being how you end up with a very solid and productive board/management relationship.
You have been quoted as saying, “Great boards give management the ability to tune out the noise.” Can you say a bit more about that?
Frankly, that is the single most important thing that a board, public or private, does. As a CEO, the business is your livelihood. You’re running 24 hours a day. It is hard to clear the fog, to tune out the noise. Directors come in from the outside and ask questions that someone who is fully vested fulltime in the success of the organization may find harder to ask. When I reflect on some seminal moments at Vanguard, we made better decisions because the directors looked at things this way when we were looking at them that way.
This is particularly important in a successful company, as Vanguard has been. You can start breathing your own air real easily. The “Yes, Jack” can be more common than being told “What, are you crazy?” Directors have no trouble saying, “You’re crazy.” That is really valuable. One of the secrets of what a great board can do for you is to knock you down a peg now and then.
CEO succession planning is such a crucial role played by a public company board. How about on the private company board?
If it’s preordained that the succession will move family member to family member, and if everybody — the board and the owners — agree, that’s fine. I for one wouldn’t serve on the board if the expectation was that I would have no input into the CEO succession. If it is a family situation, I believe the board should offer its view as to whether the person next in line is capable of leading the company. This is again where candor comes into the relationship that I, as the director, and you as the leader have. It’s one of the vital issues where you say, “What does it take to succeed in leading this company? Do we believe that it’s genetic? Or do we believe that there is a genetic component to it but we as a board can help make the designated leader’s chances of success that much better?”
I would have a hard time staying on a board where I was uncomfortable with the CEO. For me, the test of whether you want to be on the board is: who is the leader of the organization? I believe that our job as directors is to challenge and support, but if you don’t believe you have a shared set of values around standards and success, that board probably is not a great place to be.
You are on the board of General Electric and several other public companies. What are the big distinctions between being a director of a public company and being a director of a private company?
I will make a broad generalization. A private company’s board service is largely given to substance. As a public company director there are exogenous pressures and requirements that come with regulations for public companies. That is probably the biggest difference. Then you come to the matter of who you are serving. For a director of a private company or a family-owned business, it is very clear who you are serving. In a board meeting you may be looking at the person who owns the company. But as a public company director you are the steward for, in some cases, millions of small investors. Each representative role is challenging and interesting. But the amount of regulatory requirements on the public side are part of why, at least as I talk to people, the idea of serving on first-class private company boards is so appealing.
Any advice on recruiting directors to a private company board?
Serving on a private company board is a very attractive thing. There is a big candidate pool that would like to serve interesting and well-managed companies. The team doing the recruiting — be it the CEO or perhaps family members — has to know what they are seeking in a director and they must find out why a potential candidate wants to be on the board and what do they expect from that board. It is a two-way street. To say we want to put together a board doesn’t make sense without a strategy for what the outcomes of having a board will be.
Good directors are going to want to know what your expectations are of them. So start with a strategy of why you want a board and then, secondarily, what kind of skills do you need on that board. Do a skills matrix: do you want technology expertise? Global expertise? Manufacturing? Marketing? Finance? Very diverse backgrounds? Go at it in a very strategic way. Don’t rush out and set up a board. That’s not a sensible thing. Great boards have a succession planning process just as great companies have effective succession planning. It really is no different than what a public company does in recruiting directors but you can be more discerning in some ways because there are fewer constituencies to satisfy.
This is how we, over many years, have recruited board members into Vanguard — when we weren’t very big either, by the way. There was a time when not everybody knew Vanguard, so we would sell very hard on what someone could learn from us and, importantly, what they could bring to us. Board recruiting needs to be an open market purchase, if you will, between the company and the director, where supply meets demand for the right reasons.
Refreshing the Board
Top businesses typically have high-performance human capital backed up with solid management processes that provide continual feedback to employees and reward talent for creating measurable profitability. Those who cannot perform to benchmarks are “managed out.” High-performance boards take a similar approach to managing themselves, via continual feedback and appropriate rewards for driving shareholder value.
Refreshing the board constitutes one of the most important – and one of the most difficult – tasks facing any group of directors. The need to refresh the board may be precipitated by any number of factors: retirement of a director, a mismatch of talents and expertise vis-à-vis current and anticipated needs and challenges, the unexpected retirement or removal of a director, and challenges to specific directors from activist shareholders and investors.
Enlightened boards dissect strategy and decide what skills are needed in existing and new directors to drive the company forward. They match up the criteria for new board candidates against evolving strategy and market concerns.
What are the drivers for board refreshment? Can age or term limits be effective? Do directors understand the need for rigorous and periodic assessment for their skills and “fit,” even beyond self-evaluation? Does rotation of committee and board leadership yield fresh insights and new perspectives valuable to the business while maintaining an existing slate of directors.
At the Private Company Governance Summit 2015, Heidrick & Struggles vice chairman John Wood hosted a panel of veteran board members – Gerald M. Czarnecki, chairman and chief executive officer, Deltennium Group Inc., Anthony W. Schweiger, managing principal and chief executive officer, The Tomorrow Group, and director, Marketcore, and NACD Board Advisory Services managing director and general counsel Steven Walker – in a wide-ranging discussion of refreshing the board and the hard choices this process sometimes requires. Wood kicked off the dialog by noting that private company and family-owned boards often navigate rougher waters on the issue of board refreshment because the process of “out with the old and in with the new” is fraught with complications arising from family ties, existing friendship, and long-term tenures that haven’t been constrained by policies and procedures more common to public company board management.
Everyone on a good board “will acknowledge that you occasionally have to have the difficult discussion,” explained Gerry Czarnecki. “You have to be able to tell an underperforming director that it’s over, that it’s time to move on.” Age limits, he said, are a “cop out” to avoid truly tough conversations. Boards who decide to wait out an under- or non-performing director because he or she “only has a couple of years left” are doing their colleagues on the board, as well as management and shareholders, a huge disservice.
Seconding Czarnecki, Tony Schweiger noted that “one danger of avoidance is that everything drags out too long.” Once the decision has been made, there should be no delay. “After you make the move and replace the director, you wonder why you waited so long.”
Taking a different tack, Steve Walker outlined the scenario of a serving director “who may be a fabulous and insightful person but for one reason or another is no longer a good fit for the board.” This can happen when the company shifts strategy, makes an acquisition that changes company focus, or enters a business where different expertise is urgently required. “Sometimes,” Walker said, “refreshing the board is a lot more than eliminating a weak link or counterproductive point of view.” In many cases, he added, there is a mitigating circumstance that enables the board to take a long, hard look at itself and allows a graceful exit for board members who for whatever reason are not contributing to continued success of the enterprise.
Walker suggested that boards incorporate a routine and reliable method for director evaluation as a matter of course, establishing a protocol that eliminates surprises and essentially puts all directors in the same boat as it relates to process. He recommended that boards start with a “check the box” skillsets analysis that outlines who complements and who detracts from board processes. “A checklist that is used routinely creates a precedent of regular evaluations and prevents surprises in the boardroom,” Walker suggested. “Sometimes it even alerts a director that he or she no longer has the qualifications necessary to contribute to meaningful board dialog.”
Board refreshment can be a process of self-selection as well as peer review. With or without this ammunition, Czarnecki said, sometimes a board member will realize that he or she no longer fits with the boards or lacks certain critical skills and experience that may not have been necessary when the board assignment was accepted. “One indicator of a highly–functioning and mature board is the ability of its members to step down when their skills no longer match up to the strategic challenges that the company faces,” he said. “It is an aspect of self-awareness.”
John Wood pushed the discussion of refreshing the board in a different direction, asking his panelists to weigh in on the topic of ensuring cultural fit of a new board member. Schweiger observed that “it’s an important signal when a prospective director asks to meet with incumbent board members.” Czarnecki added that boards should have a process in place that gets new candidates in front of as many existing board members as possible. “Cultural fit,” he said, “is an important aspect of a great board.”
In this regard, Schweiger noted, “a patterned interview process can be a useful tool” for assessing a candidate’s responses against those of existing board members and other nominees. And Walker suggested that social media can be mined in some cases to “prospect your prospects” and “see what’s being said, what posture a potential board member takes.”
“It is essential that the CEO is part of the process of refreshing the board,” Czarnecki maintained. “The CEO has to be able to connect with all board members and has to be able to input into the selection process without controlling it.” He was adamant that a CEO with a fiduciary board should not have veto power over a new director appointment but conceded that CEOs of family-owned and controlled companies might have a little more wiggle room here. “Ultimately,” Czarnecki said, “the CEO has to be convinced of the value of the board.” Otherwise, concerns about refreshing the board and onboarding new directors aren’t very relevant.
Walker initiated an interesting discussion on the idea of a director as a disruptive force in the boardroom. “Boards need to have the courage to seek out devil’s advocates or provocative voices and thinkers who can challenge the board to view all sides of an issue.” In this regard, he said, a director who some might see as underperforming might actually be the only contrarian in the group brave enough to broach new ideas and challenge existing pecking orders.
Czarnecki agreed that this is a tightrope act: “The question, ‘Where was the board?’ is a legitimate and tricky one,” he said. If you can’t show that options and approaches have been fully explored at the board level, how can you demonstrate appropriate due diligence to shareholders? The problem, he continued, “is that sometimes management and the board are not hand-in-hand on strategy.”
Walker noted that one big challenge frequently confronted by the boards of private as well as family-owned companies is legacy. How things were done in the past – or what the role of the managing generation is in the present – often defines management’s approach to refreshing the board. It’s hard to overcome the “good old boy” network when all existing and prospective board members are part of “the club.”
As the shifting marketplace, new technologies, and globalization create new demands on the CEO and management, how can a private company board ensure that its board comprises engaged members who have the expertise and the energy the company needs at the moment and in the future? How can a board in motion balance new perspectives with the institutional memory and valuable insights of long-serving directors?
The panel endorsed a “war games” scenario where intellectual assets are monitored and measured actively and regularly, coupled with a board-wide process to put everyone on the same page as it relates to evaluations. They further counseled that the lead director never shy from the hard conversation of asking a board member to depart, keeping in mind that occasionally there are ways to soften the blow. Acting decisively pays dividends not only to the company but also to the board itself as directors individually understand the standards and the methodologies used to gauge collective board effectiveness and relevance.
When everybody is on the same page, the board can deliver true value to management as it becomes more and more effective in refreshing the talent that monitors strategy and delivers results.
Registration is now open for the fourth annual Private Company Governance Summit, May 11-13, 2016 in Washington, DC.
Session topics include:
- The Board’s Role in a Crisis
- Dealing with Conflicts of Interest on Private Company Boards
- How to Interview Director Candidates
- Cybersecurity and the Private Board
- Preparing for the Board Meeting
- Private Company Capitalization, Liquidity and Shareholder Return
Expert briefings on:
- The IPO/M&A-ready Board
- Onboarding independent/non-family directors
- Board liability and risk
- Board strategy
- Board diversity
- The dynamics of family members on the board
- Private board committees
- Director and board evaluations
- The board’s role in talent oversight and development
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