Private Company Director

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.

Why Refresh?

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.

Peer Review

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.”

Cultural Fit

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.

Seeking Disruption?

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.”

War Games

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.

Directors Record