Be strategic about board composition
By Curtis J. Crawford

BOARD COMPOSITION Be strategic about board composition It is nat've to assume that all directors are equally capable in every respect. Boards need to be built on multiple diverse talents and perspectives to execute their responsibilities effectively. BY CURTIS J. CRAWFORD B OARD COMPOSITION is the cornerstone for enlightened corporate governance. I believe a smartly composed board is the most pivotal tactic for making boards more independent and effective. Board composition is the foundation for venturing beyond compliance and demonstrating conviction to maximize long-term shareowner value. While board independence is defined and man- dated by regulators, knowledge and engagement demonstrate enlightened director independence. The more you know, the more you engage in board deliberations. The more you are engaged, the better you understand board issues and challenges. Board composition is not legislated; it is a choice. Boards have an option to disregard the need to be strategic about board composition or to capitalize on the opportunity. In simple terms, board composition is a function of size and diversity. It is defined by the number of directors and their multiplicity of experiences, backgrounds, and perspectives. Corporate directors are chosen from a pool of highly qualified people, and being selected as a shareholder representative is a very significant achievement that demonstrates that the director has cleared a high hurdle of competence. However, it is naive to assume that all directors are equally capable in every respect. While traditional boards might find it useful to maintain this polite fiction, all directors and boards are not equal. Maintaining this position is an excellent way to enforce a status quo that limits the board's performance. Although all directors are high-achievers with equal legal re- sponsibilities to serve, exercise duty of care, and act in good faith, they differ substantially in the kinds of value they can contribute to the board. Each director embodies differences in experience, back- ground, interests, and tenure, which is desirable. considering that multiple talents are necessary for the board to execute its responsibility effectively. Taking size into consideration The size of the board is an important factor in board performance, because the effectiveness of each director is strongly influenced by the number of other directors with whom each individual must interact. Today's corporate boardroom is the set- ting for serious work, not friendly chitchat. Board membership should balance congeniality with in- dependence. A director on a board with too few members will experience isolation, limited input, interaction with a narrow field of vision, and pressure to reduce his or her independence. A director on a board with too many members will find it difficult to partici- pate in board proceedings, confront the company's challenges, and build solutions. In general, boards should have a minimum of seven, and no more than 15, directors. Enlightened boards typi- cally limit their sizes to about nine to 13 members. This size is large enough to staff several board committees, but is small enough to allow each board mem- ber the opportunity to participate fully in the board's leadership process, which Curtis J. Crawford, Ph.D., is president and CEO of XCEO Inc. (}, a consult- ing firm that provides governance support to corporate boards. His previous corpo- rate positions include sen/ice with such companies as IBM, AT&T, and Lucent Technologies. Dr. Crawford currently serves on the board of directors of E. I. du Pont de Nemours, ITT, ON Semiconductor, and Agilysys. Also, he is a trustee of DePaul University. He is the author of two books. Corporate Rise: The X Principles of Extreme Personal Leadership (2005), and Compliance & Conviction: The Evolution of Enlightened Corporate Governance (2006). FIRST QUARTER 2008 33 BOARD COMPOSITION Even CEOs who are genuinely great leaders do not necessarily make the best directors. includes intense listening, thought-provoking questioning, and adding insightful comments and perspectives. In 2006, two-thirds of all corporate boards had 12 or fewer directors. If the board is composed of an even number of members, directors wil! have more difficulty reach- ing consensus, which is one reason that some cor- porations limit the size of their boards to a small odd number, often five, seven, or nine. One positive ef- fect of smaller board size is that it deters the forma- tion of hierarchies in the board. Understandably, some directors are more opinionated and deter- mined to exert their will, even at the expense of losing opportunities to hear and benefit from the opinions of others. In this re- gard, a large board is likely to encourage formation of an inner faction of directors that suppress the exchange of ideas. Therefore, why seek larger boards if smaller boards are more effective and also less expensive in terms of costs and benefits? The answer is, while boards need to be small enough to promote timely discussion and efficient decision making, they also should be large enough to gain sufficient input and encourage debate. Small boards may limit diverse points of view. On the matter of diversity In terms of diversity, the enlightened board in- cludes both male and female executives from the racial, ethnic, and cultural backgrounds most rel- evant to the company's operations and present and anticipated customer base. Board composition that reflects the global ecology raises the professional tension of constructive debate and introduces di- rectors to more taxing challenges, making board meetings more valuable. Although many societal needs provide the basis for persuasive arguments for board gender, racial, and ethnic diversification, my arguments for these kinds of board diversification are based on labor force and domestic and global market demograph- ics. The enlightened board seeks diversity as a com- petitive advantage. In my view, seeking diversity for diversity's sake is good business, and a board seeking diversity in its membership is engaging in reasonable and expect- ed behavior. Whether in gender, ethnicity, or other dimensions, diversity always should be pursued as an opportunity to broaden the perspectives at the boardroom table in pursuit of increased long-term shareowner value. Like size, diversity is too impor- tant an ingredient of enlightened director indepen- dence to be pursued casually. The challenge of developing a board that reflects the customers and communities targeted by the company is amplified by the preference of most boards for mining the wealth of knowledge and experience offered by current and retired CEOs. Boards undoubtedly need directors with leadership experience, but enlightened boards recognize that all great directors do not necessarily run publicly held corporations. Moreover, as we have learned from disasters at Tyco, Global Crossing, Computer Associates, and WorldCom, among others, not all CEOs are great leaders! In fact, even CEOs who are genuinely great leaders do not necessarily make the best directors. Great directors are to be found not only in cor- porate settings, but also in government and in not- for-profit cultural and academic settings. Given the substantial shortage of CEOs available to serve as directors, boards should develop strategies for tapping into the eclectic pool of highly qualified candidates working in nontraditional settings. No board should accept the assertion that qualified candidates for directorships cannot be found. Broadening the pool One way of broadening the prospective director pool is to consider qualified foreign executives as poten- tial candidates. Ofthe more than 6 billion people in the world, fewer than 5 percent are residents of the United States. For a company with global reach, there is no substitute for a director with current, real-life, day-to-day experiences outside the United States. Although directors wanting greater insight into an established or emerging foreign market initially might feel more comfortable recruiting an American executive who has lived and managed operations in that market or a foreign national of that market currently residing in the United States, recruiting a foreign national living in that foreign market instantly expands the board's point of view. Such a director possesses cultural insights that can prevent operational misunderstandings and mar- keting blunders in the market he or she represents. He or she also can provide access to key foreign de- cision-makers and industry leaders who can help the company forge new business alliances. In 2004, only 30 percent of U.S. corporate boards had at least one foreign director. Progress in this direction has been impeded by several difficul- ties in recruitment and implementation. Identify- ing foreign candidates who are both interested in and able to serve on boards of U.S. corporations Continued on page 75 34 DIRECTORS a BOARDS BOARD COMPOSITION Board composition Continued from page 34 is difficult, largely because corporate governance structures in many regions of the world make it difficult or impossible for foreign executives to serve on corporate boards. For example, although directors of European supervisory boards and corporate management boards can be excellent candidates for U.S. corporate directorships, many European companies prohibit their senior execu- tives from serving on other companies' boards. The pervasive Japanese corporate tradition in which a company's senior executive officers function as its corporate board of directors prevents Japanese ex- ecutives from serving as directors of other publicly held corporations. Time-zone differences present another barrier to the recruitment of foreign executives by U.S. corpo- rate boards because scheduling meetings for a set of directors residing in different time zones around the globe is extremely difficult, even if the meeting contemplated is only a conference call. Further- more, language differences once impeded recruit- ment of foreign executives to American boards be- cause many otherwise desirable foreign candidates were not fluent enough in the English language to communicate easily and openly in an American boardroom. However, with English now quite well established as a global business language, this bar- rier has faded as a reasonable rationale for failing to achieve global representation on the board. Corporate governance works best when direc- tors are selected for business savvy and shareholder orientation. Consequently, some suggest that corpo- rations create problems when they select directors merely to add diversity or prominence to the board. Boards will sometimes seek prominent directors to gain better insights, seek improved access to custom- ers, develop an image, or merely to make the board and company seem more notable than they really are. Adding prominent people to the board of direc- tors can be important, but, in general, boards should require much more of their directors than fame or celebrity. The core selection criteria of competence and experience in areas of importance to the com- pany never should be compromised tor show. A look toward the future Boards can improve their functioning in a radically changing environment by maintaining an effective number and mix of directors that encourage com- munication among members. A wisely selected group of directors representing diverse experiences, opinions, and cuUures should act as resources for the CEO. Again, board composition is the corner- stone for enlightened corporate governance — en- hancing director independence and maximizing long-term shareowner value. M The author can be contacted at ADVERTISER INDEX Columbia Business School PAGE 27 Marquis Jet PAGE 17 Crowe Chizek BACK COVER Daylight Forensic & Advisory LLC PAGE 29 Drinker Biddle & Reath LLP PAGE 3 Family Business Magazine v^fv^w. fa mi PAGE 22 FTI Consulting PAGE 9 GDES PAGE 7 Gevril PAGE 23 Harvard Business School Press PAGE 20 Heidrick & Struggles PAGE 5 KPMG PAGE 13 SAP PAGE 11 Semier Brossy Consulting Group LLC INSIDE FRONT COVER Spacenet PAGE 15 William Blair & Company INSIDE BACK COVER FIRST QUARTER 2008 75

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