In this era of globalization, boards have been working to adapt to an onslaught of change both in this country and abroad. The recent federalization of corporate governance rules here in the United States is just one aspect. Greater disclosure of director qualifications should prompt immediate review of existing skill-sets. Often, the difference between high-functioning and mediocre boards is regular and rigorous self-evaluation. In 2011, proxy statements will include more disclosures about board nominees, due to the enhanced proxy disclosures rule that became effective for 2010. Also in 2011, for the first time some proxies will include shareholder-nominated candidates for board seats directly in the proxy, due to the new access rule.
The emergence of Brazil, Russia, India and China into global economic powers and expanding populations in countries such as Indonesia (now the fourth largest country in the world), Pakistan and Nigeria open up enormous new markets. As companies expand into these countries—to market goods, source supplies, outsource services or even operate through a foreign subsidiary—the knowledge of individual directors and boards must keep pace.
Meanwhile, in the United States, demographics are shifting: The under-20 population is, for the first time in history, no longer a majority of white Caucasians and these “millennials” will cause a massive reprioritization of when, where and how declining disposable income is spent. We also need to be thinking about the next impending international crisis concerning shortages in water, food and energy, some of which we’re already beginning to see being played out here in the United States.
The social media movement of the last five years has transformed when, where, how and to whom we communicate. We now know that the first person likely to report on a disaster at our own company would be the blogger who follows us. One result in this near instantaneous cycle of information is that in the face of a corporate crisis, officers and directors have less than five minutes to respond. Communications plans need to be implemented in a heartbeat.
Do you think that your company’s leaders and directors are able to grasp the implications of these changes and how they might alter the strategic objectives of the company on whose board you serve and those you serve with?
Directors must carefully consider who we are sitting next to in the boardroom and whether we have the right people to help move us forward.
Globalization is changing the skills required both for those who lead and those who provide oversight. There is a need for 21st century leaders to understand different culture and business environments, to intuitively know the questions to ask and the answers to trust. They will also know how to build allies and hire third parties capable of representing their company’s best interests locally and with honesty and integrity.
The mandate adopted in December 2009 by the Securities and Exchange Commission to more fully disclose the skill sets and experience of board members, and its more recent approval of a proxy access rule, causes all directors to carefully consider who we are sitting next to in the boardroom and whether we have the right people to help move us forward.
Do our backgrounds provide us with the relevant experience to seek answers that can help us confidently assess the risks of each new strategic endeavor? Are we independent? Do we collectively represent the necessary diversity of thought, skills, leadership and experience?
Board leadership also needs to be critically assessed. Is there a strong independent leader of the board? Are committee chairs as committed, knowledgeable and proactive as we can be? In short, do we have the qualifications, rigor and discipline to meet increasing demands?
Often the hallmark of a well-functioning board is the strength of the independent leader. This criterion also extends to the chairs of the committees, whose agendas are also being rewritten by new mandates and challenges. Chairs of nominating and governance committees are being asked if the board has the right directors and committee chairs, and if the board agenda and meetings reflect that sufficient time has been spent on strategy and risk in addition to the normal governance compliance requirements.
Chairs of compensation committees are being asked about the link between pay and performance for the CEO and if that relationship is aligned with shareholder value. Audit committees, traditionally the advisory link between the board and outside auditor, must meet qualifications of independence and financial literacy. The list goes on and on. If a board on which you serve hasn’t begun to address these mandates, you may be wondering where to start.
In my career as chair of two publicly held companies, there have been two occasions when the boards decided that certain skill sets were lacking. Each board had accomplished what it was charged to do: We had resolved the potential BP-type issues the company was facing, restored the company’s fiscal health and conducted an honest assessment of our own ability as directors to carry out our duties. We replaced ourselves with new board members whose skills met the future needs of the company.
What this underscores is how necessary it is for boards to accept that the world is changing around them every day. Meeting the new opportunities that result may require a different set of skills. Having a process in place for board renewal is imperative.
As the chair of a nominating and governance committee two years ago, our committee defined and shared with shareholders our qualifications, well before such disclosure became a rule. In a five-page section of the proxy, we laid out our key strategic initiatives and spelled out the nine skill sets we thought were critical to providing the oversight necessary to assure the company’s success, along with a discussion of how each of us met those requirements. This was a comprehensive exercise for the committee that ultimately received appreciative responses from our shareholders and, just as important, underscored the value of the process.
While our temptation as directors is often to focus on compliance, our responsibility and value as a board is to oversee the company’s strategy and risk and to confidently assess its strengths and weaknesses, as well as our own.
At NACD’s Board Advisory Services, we’ve worked hard to develop a comprehensive program for Board Succession Planning, stemming in part from my experience and the experience of other professional directors whose input we sought. The goal was to develop a process that we now use in assisting a board in its skills assessment in order to identify gaps in its needs.
How boards evaluate whom and what they will need is both a challenge and an opportunity being embraced by proactive, forward-thinking directors who are meeting today’s business challenges and leading the way.
Is your board among them?
To learn more about NACD Board Advisory Services, email Suzanne Hopgood at smhopgood@NACD-online.org or visit NACD.online.org.