Keeping the Board Fresh
Even the highest performing boards have something to learn.
By Maureen Milford
As a long-time company director, David R. White has seen his share of boardroom dynamics.
At one company White observed years ago, there was one loud and disrespectful director who disrupted every meeting. Yet, the director managed to warm his boardroom chair until the mandatory retirement age. This was shocking to White, who is now a director of Menasha Corp. , the private family-owned manufacturer of paper and plastic solutions. The $2 billion in sales that has a rigorous director assessment process, he says.
Anecdotes about troublesome or underperforming directors are legion in the corporate governance world dating back decades. There are stories of directors who are continual no-shows for meetings, while others arrive late or leave early. Some attend meetings without having read and digested the material. Others rarely speak. Yet, their board positions are as secure as a tenured university professor’s. One reason for this indulgence could be the clubby and companionable culture that long dominated company boards.
“It’s hard to be tough in person with any group you know well,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “No one wants to do it. But they should.”
While awareness of good governance practices has increased at public companies thanks, in part, to calls from big investors and activist shareholders, private enterprises tend to lag behind their listed peers in keeping boards dynamic and vigorous. Even successful boards need to evolve and develop new skills and knowledge to stay successful or even raise performance.
“Being a director on a board should not be perceived as a position with lifetime tenure,” says Randall Larrimore, a long-time director of public companies, including Campbell Soup Co., and private enterprises.
Larrimore practices what he preaches. He retired in December from privately held Nixon Medical, a medical apparel and linen business. A month earlier he retired from the Campbell board. Larrimore will retire from Olin Corp.’s board in April.
“I think all boards need to be continually refreshed,” Larrimore says.
Philip Clemens, retired chairman of the 125-year old The Clemens Family Corporation pork-processing company in Hatfield, Pa., embraces that same philosophy. When he is approached to serve on a new board, he tells them he’ll commit to a minimum of three years of service and will not serve longer than 10 years.
His “sweet spot” is seven years on a board, Clemens says.
“After seven years, I begin to lose my independence because the leaders begin to become friends. The [worst] compliment you can get is that they don’t want you to leave. That is a sure sign that you have lost your independence.”
Price to pay
Board composition can be a good place to start. Today, some private company boards resemble the makeup of the stereotypical public company board from 50 years ago, as illustrated by recent IPOs. More than 60 companies in the United States and Europe went public in the past two years without one diverse board member, according to a piece written by Goldman Sachs CEO David Solomon earlier this year.
And, according to the 2018-2019 Private Company Governance Survey by the National Association of Corporate Directors (NACD), only one-third of private company directors surveyed reported that their boards had established specific goals to increase the diversity in the boardroom. By contrast, 53% of public companies reported in the same period that their organizations had formal goals to diversify their composition.
Yet, 66% of private company directors reported their boards didn’t face challenges diversifying. This is despite the fact that research has shown companies with diverse boards and management perform better. Since 2016, U.S. companies that have gone public with at least one woman board member outperformed companies without a woman director in the year after the IPO, Solomon wrote.
“I myself have benefited enormously from the honest counsel of the Goldman Sachs board of directors, where our lead director is a black man from Nigeria, and four of our 11 seats are held by women,” Solomon wrote. “I know that together, we are able to come to wiser decisions for the long-term success of Goldman Sachs than any of us would be capable of alone.”
Boards seeking to remain agile and dynamic can begin by heeding Goldman Sachs.
Marsha Everton, a director of The Fitzpatrick Companies Inc., a private multichannel home décor retailer, and Integrus Holdings Inc., an integrated designer, developer and marketer of commercial and consumer tableware, counsels companies to “use board diversity as a competitive advantage, bringing diversity of perspective into the conversation, thought process and decision making.”
For a subtler board shift, performance reviews are the way to go.
According to Christopher Austin, a partner at Orrick, Herrington & Sutcliffe law firm, boards have a duty to hold members to a high standard with regular self-assessments to determine if directors are doing their jobs.
“As the company grows, you have to have conversations with people [about] the need for change,” Austin says.
Boards should work on creating a culture of clear communication that will allow for difficult discussion if a board member has lost his or her edge.
“It requires conversation and diplomacy,” Austin says.
But while nearly 58% of private company directors reported their boards do a full board performance evaluation, just 36.5% indicated that individual director performance is evaluated, according to the NACD private company survey.
What’s more, the majority of private companies don’t attempt to manage director tenure based on a skills gap analysis of the board or director performance evaluation. Only 22.9% of directors indicated their boards rely on individual director performance evaluations to manage board tenure, the survey found.
Larrimore recommends boards conduct a director evaluation annually. Every three to five years boards should use a third-party evaluator to determine how a director could add more value to the board and if a director with a different skill set would add more value.
“In most cases there will be suggestions on how the director could add more value by speaking more or speaking less, sharing more of their own experiences, be more involved in the board conversation, etc. The comments should be shared with each director anonymously. Suggestions on improvement will improve the functioning of the board,” he says.
“If it is determined that a director’s skill set has become less relevant or is not being utilized, then that director should be asked to retire (or not stand for election) and a more appropriate director should be elected/appointed. I also think that after a director has served 10 years, the board should affirmatively confirm that this particular director is still adding value and should be retained as a director.”
Such a process helps create a performance-based culture at both the individual and group levels, Everton says. She suggests the responsibility be assigned to the governance and nominating committee with a report to the full board.
At Menasha, White describes a “robust assessment process” done by an outside consultant. It begins with a written appraisal of his own performance. He is also asked to rate the other board members, including strengths and issues.
In addition, there is an hour-long phone call with the consultant.
“She sends back an appraisal: ‘Here’s what I think about you, good, bad and ugly.’ I’m given a numerical rating that is sent to the chairman,” White says.
White says input from his Menasha performance appraisals has helped him become a better director. For example, when he first joined the Menasha board he tended to limit himself to speaking up only during discussions of his areas of expertise, such as supply chain operations, manufacturing and logistics.
During his first appraisal process, White was told not to restrict himself to just those areas and to jump in on all the issues brought up at meetings.
“They told me they value all my feedback,” White says.
Menasha also has another appraisal component that White thinks is very valuable. Every four to five years the executive management team gives their input on the overall board performance. This provides another perspective on ways the board can improve.
For Eileen McDonnell, chairman and CEO of The Penn Mutual Life Insurance Co., intellectual curiosity is one of the most important characteristics of a board candidate.
Continual learning and training for directors helps boards meet the rapidly expanding expectations for business today, she says.
“Education should be at both the individual level as well as full board training” in governance, regulatory matters, industry specific issues, technology and cybersecurity, McDonnell adds. “Today’s board members should view board work as a profession and seek to remain relevant through continuing education.”
For example, some Menasha board members have attended multi-day conferences at Kellogg School of Management at Northwestern University, which White is planning to attend. White himself has taken courses given by the National Association of Corporate Directors.
White says he is looking forward to attending Kellogg sessions, including one for family enterprise boards. That course of study offers an in-depth way for directors to learn about the issues affecting boards, such as best board practices, different models of corporate governance and boardroom effectiveness. He also hopes to attend Kellogg’s program called Governing Family Enterprises, which deals with effective governance of complex family enterprises.
Michael Montelongo, who serves on a number of private boards and is a director of Herbalife Nutrition Ltd., says to practice the great governance, directors must stay abreast of latest developments, trends, advances and best practices, both formally and informally. He recommends programs by governance organizations like NACD as well as literature, webinars and other educational offerings published or sponsored by thought leaders.
“It’s critical that directors engage in continuously refreshing their knowledge and skills,” Montelongo.
Maureen Milford is a Delaware writer focused on corporation law and governance matters.