Typically, there are two or three parties engaged in the process of recruiting directors. They include the boards of directors, the potential candidates, and executive search firms, which while historically to a lesser degree, today play an increasingly important role.
With more rules, regulations, and intense scrutiny from investors, boards have become more deliberate in their director selection processes. Notwithstanding proxy access and activist engagement, the director succession process continues to be straightforward and collegial. Today, as in the past, boards seeking directors are likely to source candidates from “friends of the family.” Although this approach can be effective, today it is insufficient. Boards are searching longer and harder to find qualified directors that meet their needs, because the pool of traditional candidates is shrinking.
The Candidates: The number of board opportunities for currently sitting or retired CEOs seemed plentiful. Opportunities were being generated as a result of new companies being added to the public exchanges. Further, directors could serve on as many boards as they deemed appropriate. It was typically the directors’ choice. However, women and other diverse candidates would usually not make the short list of aspirants because of the very few candidates in the positions where boards generally sourced their candidates.
The Board: The supply of currently sitting, or retired, CEOs seemed to be abundant. The “good old boys” network was very effective and well respected. In the past, this process worked effectively because the supply of experienced directors willing and able to serve exceeded the demand.
The Search Firm: Their personal relationships provided near exclusive access to most of the highly desired candidates. Usually five or six strategically placed phone calls would yield a very strong list of highly qualified, interested and available candidates.
The Candidates: The current risks and challenges associated with being a corporate director have discouraged many qualified CEOs from serving on outside boards. Further, new guidelines by regulators concerning the number of boards that CEOs and other active executive officers (e.g., CFOs) have also dampened the interest of candidates. But perhaps most importantly, the challenges these candidates face within their own companies do not allow time for many outside activities. Opportunities are fewer because directors are serving longer and the number of public companies has shrunk. However, directors are expected to invest an average of 4-6 hours per week to board service.
The Board: Today, more boards complement their informal “friends of the family” approach with the professional services of executive search firms. Boards recognize that limiting their candidate pool to people they know might cause them to miss outstanding individuals. Finally, there are fewer active CEOs available and willing to serve.
The Search Firm: Recruiters can no longer simply rely on personal relationships. The Internet provides equal access to all candidates and information is available for all public company executives. While access to the information is no longer a competitive advantage for the executive search firms, access to the individual continues to be the key to successfully engaging with the most highly qualified candidates. In addition to the impact of the Internet, several search firms have dedicated their focus to the boardroom versus the executive suite.
What has not changed
Representing the shareholders’ interest is of paramount importance. Fundamentally, what remains the same is that boards continue seeking highly qualified directors who have the interest and capacity to serve.
2016 Fourth Quarter