Tuesday September 2, 2014

Ensuring Great Non-Executive Board Leadership

Best practices related to the important role of a board’s lead director

The emphasis on independent board leadership may have begun with Sarbanes-Oxley, but it certainly didn’t end there. A 2009 SEC rule requiring public companies to detail their boards’ leadership structure in their proxy statements puts the spotlight squarely on the non-executive board leader.

In recent months at Korn/Ferry International, we have seen a significant shift among forward-thinking boards that reflects an evolution of the role. They no longer are appointing a board leader merely to satisfy requirements; they seek to leverage the role for maximum benefit.

For leading boards, appointing an independent board leader means far more than simply ticking the “yes” box on a compliance checklist. They recognize that the right board leader—one selected according to a competency-driven process tailored to the needs of the specific board —can add significant value to the board. And they understand the paramount importance of the right “chemistry” with both the board and the chief executive, since this individual is simultaneously a member of the board team and a sounding board for and confidant to the CEO. It is a role that not everyone can perform well, and finding the right match is critical to overall board effectiveness.

In 2009, Delphi Chairman Jack Krol and I convened a roundtable of 10 non-executive chairmen/lead/presiding directors of some of the most prestigious companies in the U.S., including Johnson & Johnson, Pfizer, UTC, Tyco International, Motorola, Ingersoll-Rand, NCR, Ford Motor Co., Comcast and Home Depot. We asked participants to identify some best practices related to the increasingly visible and important role of lead director. The chief conclusions:

  • Assume the worst. The period during which the board leader serves may be one of rough going or smooth sailing, but all board leaders must be capable of dealing effectively with the most challenging scenarios. A board should operate under the assumption that it will have to deal with at least one crisis, and select its
    leader with that criterion in mind.
  • Create a formal position and candidate specification. The spec should define the role and responsibilities, such as chairing executive sessions and board meetings; presiding over the board evaluation process; and ensuring a robust succession plan is in place for the CEO, key managers and the board itself.
  • Make sure it’s personal. It is the hard-to-quantify personal characteristics that make the difference between competent and great board leadership. Always assess factors such as the commitment and skill required to engage other directors in discussion and convey their views; stature as well as social and diplomatic skills; the ability to build trust and provide honest counsel to both board members and management; and unassailable professional integrity and an expectation of the same from fellow directors and management.
  • Be thoughtful about term limits. Views on the appropriate term for a board diverge, but the term should be defined with explicit performance requirements. A three-year, renewable term provides the board leader time to demonstrate progress against those objectives and ensures some performance assessment by the board at the end of the leader’s first term.
  • Don’t under-compensate. Board leaders have special responsibilities, which require additional time and effort compared with other board members, and provide additional value. Therefore, some boards are considering significantly increasing both the cash retainer—up to double the customary—and equity component of board leader compensation.

The independent board leader is simultaneously a member of the board team and a sounding board for and confidant to the CEO.

While initially driven by requirements designed to ensure board independence, the board leader position is now recognized as a potential source of value. Consequently, the role is evolving into a highly professional one with best practices for selection, compensation and succession coming into focus.

A great board leader can contribute mightily to forging an effective team of directors and is the best insurance a board can have when the inevitable crisis hits.

Dennis Carey is vice chairman, Board & CEO Services, for Korn/Ferry International.

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