Corporate boards are entering a perfect storm with more boards adopting majority voting as well as annual elections, which puts the entire board up for re-election each year. Shareholders are questioning boards on how their composition addresses the skills and experiences needed to develop the long-term strategies of the corporation.
Add to this the number of sitting directors who are nearing retirement, and boards are experiencing an environment that is unusual for them — a growing number of exceptional CEO and other director candidates who are declining to serve. Directors are investing over 240 hours annually for each board on which they serve, and this is before the call for directors to increase their engagement in this rapidly evolving business environment of technology and strategy disruption.
This provides an opportunity to expand the pool of candidates beyond the traditional categories to a group of senior executives below the CEO which includes a growing cadre of women and minorities who are experienced, qualified and interested in serving as board members. Nominating committees are seeing that adding members from this expanded pool can help boards better reflect the makeup and experiential background of their customers, employees and shareholder bases. Yet progress is glacial.
Artificial methods like term limits or age limits may open up slots but do not guarantee that they will be filled by diverse candidates. Unlike some European countries, we are a nation that is reluctant to impose diversity quotas in the boardroom. But we can no longer afford to marginalize women, who still occupy only 21% of board seats. Minority women lag even further behind, holding roughly 4% of board seats although demographics clearly show the shift in the United States toward minorities with the accelerating growth of Hispanics, Asians and African-Americans leading to a cultural gap in a younger, more racially diverse population.
What the academics say:
Racial diversity has a positive impact on sales revenue, customer base, market share and profits relative to competitors. Gender diversity has a positive impact on sales revenue, customer base, and profits relative to competitors. The median return on assets (ROA) and return on equity (ROE) of companies with a strong diversity culture are higher than firms that don’t have a focus on diversity. There is a positive correlation between the number of women on the board or in executive positions and the return on investment (ROI) and ROE. Diversity on the board of directors is linked to improved ROI and ROA and more gender diverse boards have higher profitability. A reputation for diversity increases the value of the company.
— Hilary Hawley, student paper.
Hilary Hawley is special projects coordinator at Windway Capital Corporation. She is a graduate of St. John’s College with a B.A. in Liberal Arts, and is currently earning her MBA from Marquette University’s Graduate School of Management.
This transition is not about political correctness; it is about the responsibilities of boards and long-term shareholder value. Boards need to tackle the fundamentals:
1) Understand the company’s long-term strategies and drivers of value along with the skills and experiences needed on the board to support them. A lot of boards are using skill matrices to identify gaps in areas such as technology, public policy, building businesses in China, or in age, gender or ethnic diversity. This helps to shift the nominating discussions away from “who do you know” to “these are the characteristics needed in our next candidate.”
2) If needed, board leadership must change board culture to make the very tough call to tell a director that he or she will not be asked to stand for re-election to make room for a candidate who brings more current or different but critically needed, skills and/or experiences to the table.
3) Adopt a “Rooney Rule” used in the hiring of NFL leaders, requiring board candidate slates be diverse.
4) Adopt a type of “blind audition” concept in candidate evaluation that has been used in orchestras to add diversity. By focusing more on the skills, experiences and track record of the candidates, boards have a better chance at “allowing the music to be heard” free of unconscious bias.
5) Perform annual or periodic individual director evaluations to continuously assess and improve a director’s board contribution.
Potential candidates need to:
1) Check your company’s permission to serve on outside boards. Do you have the flexibility and control of your calendar to put in the time required?
2) Hone your skills through your “day job” and, if possible, not-for-profit leadership roles. Define how you can add value to a board.
3) Enhance your visibility. Are you known as an expert or “go-to” person in some specialized area? Do you share your expertise by participating in speaking engagements or outside committee work?
4) Know what others will say about your abilities and character. Are you honest and ethical? Are you willing to defend your opinions and lead others to consensus? Are you comfortable making tough decisions?
5) Recast your bio to focus on your qualifications and success from a governance perspective, and get it out to board search professionals, directors and your network’s director registries. Boards need to know your skills and experiences in order for you to get put on their slate.
And shareholders need to continue reinforcing the importance of board composition in the oversight of long-term strategic value to the company. Sunshine is indeed the best disinfectant.
Michele J. Hooper currently serves as president and CEO of The Directors’ Council, a firm that specializes in corporate board advisory services and board recruitment and focuses primarily on diversity candidates.
She has served as senior independent director as well as chaired key governance committees on the boards of directors of a number of public companies. Hooper currently serves on the boards of PPG Industries and UnitedHealth Group and previously served on the boards of AstraZeneca, Warner Music Group, Target, Seagram Company and DaVita Corporation.