The role of lead director has become an increasingly important one. According to NACD data published in 2011, 65 percent of boards currently have a lead director (up from 39 percent five years ago) and 88 percent of those boards claim lead directors enhance the boardroom’s effectiveness to a great extent. Once seen as somewhat nominal counterweights to chief executives who also hold the chairman title, the role of lead director has steadily gained influence. Today, the impact of lead directors extends far beyond the functional scope of their board position. In the current corporate landscape, CEOs and boards are under intense scrutiny from shareholders, the government, and the public at large. This increased pressure has caused the psychological dynamics between the board and the CEO, and within the board itself, to become far more complex and delicate. As a result, the lead director’s most important contribution is how well he or she navigates these relationships to ensure everyone is working toward the greater good of the organization.
Thomas J. Saporito
Even as lead directors’ influence and impact has grown, there has been surprisingly little public discussion about what is required of these key board leaders, the qualities they must possess to be effective, and how they should be selected. Given the bearing lead directors have on board and CEO effectiveness, their requirements for success deserve thorough consideration.
First, let’s look at the evolution of the relatively new role of the lead director. It was created in the post Sarbanes-Oxley era as a compromise for lawmakers who wanted to crack down on corporate misconduct without requiring companies to split the CEO and chairman roles. While some governance advocates believed the lead director arrangement to be less effective than leadership by independent chairmen, heightened regulatory accountability has transformed it into far more than a figurehead.
In February 2010, the Securities and Exchange Commission began requiring companies to include a discussion regarding board leadership structure in their proxy statements. A board must disclose whether it has chosen to combine or separate the CEO and chairman positions, and if it has a lead director or not. The board must also state why it believes its chosen leadership structure is the most appropriate one for the company. This requirement has prompted many boards to expand lead directors’ duties.
Most lead directors I know believe their true mandate is to ensure the internal workings of the board and its relationship with the CEO are operating as effectively as possible. While a board is a legal structure, organized around various governing functions, it is also a constellation of people with different styles, personalities, biases, and agendas. It is, in a way, its own social system, and lead directors must understand that and manage it as such. This is an amorphous directive, especially when tensions are running high in an uncertain business climate that has caused many companies to falter.
Effective lead directors are brokers between the board and the CEO; in a sense, they represent the voice of the board and the voice of the CEO to the board. This dual responsibility can be arduous, and requires an executive with a unique skill set. While each board will have specific needs for their lead director, effective ones fulfill three overarching duties: They promote consensus among board members, become a trusted advisor to the CEO, and create alignment between directors and the CEO. These responsibilities are not black and white. Subtlety, nuance, and human behavior all powerfully impact the interactions between board members and the relationship between the CEO and the board. To manage these forces and steer things in the right direction, an effective lead director must consistently employ good judgment, keen insight, and deep wisdom.
Bring board members to a consensus point of view on important issues
Board members often view key issues like strategy, CEO compensation and CEO effectiveness through different lenses. These are powerful people in their own right, and their varying points of view can cause disagreements that derail decision-making. The lead director must prevent these progress impediments by synthesizing and consolidating different views, representing these opinions fairly and accurately in whatever situation requires intervention, and uniting board members in a common voice. Here is where judgment is crucial. Effective lead directors see what is important, what makes a difference, and what is practical, and this skill helps them guide conversations toward useful dialogue. Securing directors’ trust is equally essential.
“You never want to let an individual director or the board as a whole be surprised,” said Walt D’Alessio, who serves as lead director for Exelon Corporation and non-executive chairman for Independence Blue Cross. “You have to constantly take the temperature of board members on all different kinds of issues, get to know them personally, and build trust with them.” By finding schisms on their boards and healing them, lead directors ensure issues that could spiral out of control don’t ever reach that point.
Interpret the CEO’s needs and expectations, incorporating a psychological perspective
External pressures cause some CEOs to become guarded in their conversations and resistant to vital board feedback. As the key figure connecting the board to the CEO, the lead director is responsible for ensuring an open line of communication. According to RHR International’s own research, 50 percent of CEOs view the lead director as the board representative to whom they can speak most honestly about performance or important decisions. They must build deep trust with the CEO so he or she feels safe in discussing needs and problems, and develop the insight to see beyond the obvious and intuit any concerns the CEO may be holding back.
“Lead directors are problem-solvers, deeply analytical, and effective at asking good questions,” said Freeman Hrabowski, a director who sits on the boards of Constellation Energy and McCormick & Company. Finally, good lead directors maintain an objective clarity that allows them to keep emotions – theirs, other directors’, and the CEO’s – in check and promote rational discussion around unpopular or difficult issues.
Foster a platform of partnership between the board and the CEO
CEOs and boards must work together in a balanced environment that includes not only board oversight, but collaboration – and the lead director is the engineer of this healthy balance. If a board member gets more involved than is necessary in certain situations, the lead director often steps in to ensure this director is part of the management process, but not dominating it. Similarly, if CEOs bristle at input from directors, the lead director must guide them away from their emotional reaction to a place of productive discussion around issues. Successfully managing these interactions and maintaining a constructive relationship between board and CEO requires a lead director who has wisdom developed through years of boardroom interactions. They analyze and carefully apply lessons learned through past triumphs and failures to current challenges.
The Selection Non-Process
What all these requirements have in common is that they are somewhat intangible. And this is why there is no easily-defined process for identifying and selecting a good lead director. Of course, a formal process does exist: The board’s governance committee orchestrates lead director selection, which is natural given that group’s work around director selection and performance. However, both Hrabowski and D’Alessio agreed that as much or more happens informally than formally when choosing a lead director. One person (though sometimes more) naturally emerges as the trusted person who can step into this critical role.
Contrary to popular belief, pirate crews selected their captain, not the other way around. Each member of the crew had a say and a captain could be replaced at any time they were thought to become ineffective. While lead directors cannot be replaced at any time, their selection format is similar. There is no magic formula or management book that defines the process; it evolves differently for each organization, in a very informal way. The best way for a board to inject rigor into lead director selection is to actively assess directors’ abilities against the requirements and behavioral qualities listed above. D’Alessio also stressed that the CEO’s input, while not the deciding factor, is very important to consider when choosing a person who will be responsible for facilitating trust and communications between the C-suite and the board.
Dr. Thomas J. Saporito is chairman and chief executive officer of RHR International, a global firm committed to the development of top management leadership.
As a Lead Director, I believe that this article concisely and insightfully identify the unique balance that an individual serving in this capacity must manage. We have effectively used this structure, and it has enable our organization to deliver enhanced performance between Executive Management and the Board.
Nice work.