Assessing Your Board’s Needs: A diverse set of directors can help navigate even the most unexpected crisis.
Good governance is not a “set it and forget it” proposition. The board must be assessed continually to be sure the right people are at the table and they are talking about the right issues.
The best governance includes an independent board with experienced and talented directors who can oversee the business with objectivity. Manuel José Carvajal worked in his family business, the multinational Carvajal S.A., for 20 years during a time of governance transformation.
“When I joined the company in the late ‘70s, the governance positions were very much held by senior family members,” Carvajal says. It wasn’t that they weren’t qualified — directors all held university degrees and grew up and worked in the business — but they were all male family members serving as an operational, not strategic, board.
“Through the years, we went from that position to what we have right now, which is a nine-member board of which five are external members,” he says. “The four family members are elected to the board based on their competencies. They do not represent shares, and they are not elected by certain shareholders.”
For both family and independent director roles, candidates submit their résumés and a consultant is hired to analyze board needs and vet candidates before they are put up for a vote by the family assembly.
Board needs evolve over time. Experienced private and public company director and Directors & Boards magazine’s executive editor-at-large Charles Elson says the pandemic is the perfect example of this.
In the aftermath, managers are going to focus on communication and empathy more so than ever before, he says. “That’s going to be a change in managerial style that is going to affect how the board reviews the manager. How do you evaluate someone where you typically didn’t — when you weren’t really concerned how empathetic they were?
“There are going to be a lot of things that we’ll look at differently and a lot of expertise that we didn’t have in the past that we may, in fact, have to bring in. Now, that's the change. But the fundamental nature of the board overseeing management for the benefit of the investor doesn't change.”
And in overseeing the company, the board needs the skills to identify future problems and act on them.
“Governance needs should be evaluated in light of the danger that’s coming if you don’t do anything,” Carvajal says. “If you bury your head like an ostrich, you are going to be dead sooner or later.
“Ernest Hemingway asked a friend how he went bankrupt and the friend answered, ‘Two ways: gradually, then suddenly.’” Carvajal recalls a time when one of his family’s companies was losing 30% or 40% of revenues a year. The board was reluctant to sell the business, but eventually was shocked by the losses and finally let it go.
“And that’s just an example of what happens if you are not able to see what is really happening,” he says. “You need to be able to allow yourself to be shocked. Then it’s about the result of what you do once you’re shocked.”
Elson says a board should have both managerial and entrepreneurial skills and the ability to balance the former, which may not be very creative, with the latter, which may be too creative. He adds that a good, independent board can be the best bet to get through an unexpected crisis.
“They’re independent of management,” he says. “They can be objective and they are people with courage who can do the right thing at the right time. That’s really about all you can do.”