Just as boards need to regularly ask if they have the right mix of directors to meet current and long-term strategies, so too should individual directors determine and decide if their contributions add continuing value.
In recent years, “board refreshment” has gained considerable attention in corporate governance dialogue — not surprisingly, given the increased frequency of board composition and tenure changes sought and wrought by institutional and activist shareholders.
In 2015, corporate governance activists submitted a record number of proxy access proposals to directly nominate director candidates. Simultaneously, hedge fund activists successfully gained board representation at a growing number of companies.
In response, boards are increasingly more likely to adopt long-term refreshment-related policies. For instance, in the last two years, McDonald’s added three new directors well outside of the company’s traditional Chicago-area geographical base for board members. General Electric recently instituted a 15-year term limit for directors as a board refreshment tool.
Just as boards need to regularly ask if they have the right mix of directors to meet current and long-term strategies, so too should individual directors determine and decide if their contributions add continuing value. As the bar for director excellence and performance rises, far better for directors to ascertain for themselves whether they should remain with a board than to be nudged or voted off by others.
We suggest directors adopt a two-part approach to their self-assessment. First, consider what your board needs from its members, individually and in aggregate — an “outside-in” perspective. Then, candidly evaluate the degree of your engagement and satisfaction as a director — an “inside-out” view. We explain these two steps further below.
Step 1: What does your board need?
As evidenced by increased shareholder interest in proxy access, shareholders aren’t necessarily waiting on boards’ own director assessments and nominations to take action. You don’t need to wait, either. Don your own shareholder activist hat and ask yourself: “If I were to objectively look at our board from the outside in, would I be impressed? And if not, what does our board need to get to a higher level, including from me?”
No matter your formal role on the board, it’s fair for you to ask what it requires, now and in the future, relative to your own skills, talents and contributions. Ever-changing market forces, technologies, issues and risks related to strategic goals mean directors must regularly and vigilantly assess themselves relative to these factors. Questions to ask include:
1. Does our board (and do I) have the skills, experience and expertise required to properly advise management on the organization’s strategy?
2. Do we have any directors, including myself, who are noticeably less effective than when they originally joined the board?
3. Do we have any directors, including myself, who would be considered below average compared with newer, better-fitting directors?
4. Are our current director evaluation and nomination processes sufficient?
5. Are we adding new board members who clearly meet our board’s needs and gaps, if any?
6. How is our board, collectively and individually, learning, developing and refreshing itself?
Questions like these are behind the spirit of the National Association of Corporate Directors (NACD) 2016 Blue Ribbon Commission on board engagement. According to an announcement from the NACD, the commission is exploring “building and maintaining a strategic-asset board, focusing on such issues as board composition and diversity, succession planning, board-evaluation processes and ongoing director skills development.”
The NACD commission, comprised of 25 experienced directors, investors and leading governance professionals, has been meeting throughout the spring and summer of 2016 and is expected to deliver a report soon afterward. “The commission’s aim is to help directors move beyond the traditional approaches to board refreshment and develop a continuous-improvement plan that keeps board skill sets and processes in tune with the company’s strategic needs,” said Bonnie Hill, commission co-chair.
Step 2: Step up to self-assessment
Candidly assessing one’s self is never easy. Part of that challenge — especially among highly intelligent and talented individuals (such as board members) — comes from our natural tendency to overestimate our own abilities. It’s called illusory superiority, or the above-average effect: our tendency to believe our qualities and abilities are superior relative to others.
In any group of individuals, even including boards made up of exceptional individuals, it’s mathematically impossible for everyone to be better than the group’s average. Yet in multiple, distinct studies of illusory superiority, the majority of respondents rate themselves above-average in ways as varied as cognitive abilities, memory, popularity, interpersonal skills, work performance and even driving ability (in one study, 80 percent of U.S. drivers considered themselves above-average!).
Unfortunately, such self-perceptions are likely not matched by reality. PricewaterhouseCoopers’s (PwC) 2015 Annual Corporate Directors Survey found that 39 percent of 783 directors believe at least one of their peers “should be replaced.” That’s up from 31 percent in an identical survey three years earlier, indicating increased director interest in board composition and potential changes.
The top reasons for directors to be dissatisfied with their peers, according to the PwC survey, involve diminished director performance due to aging, unpreparedness for meetings, and a lack of required expertise.
To help ensure you’re not among the directors whose role and status are questioned (openly or otherwise), take the time at least once annually to ask yourself these questions:
1. Am I passionate about the mission and ongoing purpose of this organization?
2. Why did I join this board and why do I continue to serve? Is it due to the attributes of the company, the CEO, or my fellow directors? For the income and prestige? Something else?
3. What am I helping this board address through my skill sets and current experience, and what does this fulfill for me?
4. Are my ideas and contributions to the board valuable and acted upon? Am I contributing significantly and at the same level I was earlier in my tenure?
5. Given our organization’s strategy and goals for the next x years, will I likely still be able to add valued input?
6. Relative to my other interests, is my board role what I really want to be doing in life right now? If not, what else could I do? Does this still bring me a sense of purpose?
In particular, directors who are retired or nearing retirement, or no longer current in their field of expertise (e.g., IT, HR, finance, etc.), should ask themselves hard questions about their motivations and value, because others will. We recall a director who had outlived his usefulness and when pressured to leave, admitted he had stayed on because he had counted on his board service as part of his retirement income. Sadly, shareholders’ interests were not foremost in his thinking.
Your next steps
The combination of answers to your outside-in and inside-out queries should sufficiently help guide you in determining your status and next steps with your board. However, if you believe additional perspective or insight is needed, consider sharing your observations with your board chair, CEO or a trusted peer. Ultimately, you’re seeking someone who can confirm or properly question the conclusions that you’ve drawn.
If your answers help you determine that it is time for you to step off a board, the insight you’ve gained through this exercise might prove invaluable for advising the board on your timing and/or replacement. Conversely, if you decide that you are ready and eager to continue serving on a board, you can re-use this exercise in the future. Just as you expect excellence in the organization you serve, so too should you require the same ongoing standard for all directors, including yourself. ¶
2016 Third Quarter