In little more than 10 years, the nine board seats of a global, cloud-based connectivity company (which we'll call CloudCo) have turned over entirely. No business crisis, no investor pressure, no scandal attended this remarkable transformation. Departing directors left without regret or rancor, happy to cooperate in the board's constant reshaping of itself in line with the company's rapidly evolving strategy. Similarly, a leading global provider of digital content (DigiCo) has recruited four new board members in the past five years, driven by a carefully phased-in makeover of its business model. This board transformation, too, has been drama-free.
Because the technology industry changes so rapidly, it offers a particularly good laboratory for examining board transformation and provides numerous examples of well-managed processes. Even large companies in the sector must often pivot sharply to grow and thrive (and, in some cases, survive). The need for CloudCo's board to change over the past decade was particularly acute. Ten years ago the company had revenues of $500 million and offered a narrow product solution.
Further, they found themselves operating in the shadow of an industry giant who might easily attack if its strategy were to take a sudden turn. The CEO and the board recognized that the company had to execute flawlessly to survive in the near term while moving toward a longer-term strategy of product diversification to drive growth. The company did so brilliantly, developing and executing on a compelling strategy, developing new product lines, successfully acquiring numerous companies, and increasing revenues to nearly $5 billion today — creating tremendous shareholder value along the way.
DigiCo also dramatically changed its strategy. The company radically altered its business model, moving from a consumer to a business-oriented solution set, requiring new go-to-market capabilities and superb execution to pull it off. Over the course of this multi-year transition, the company's stock price has quadrupled and earnings have increased five-fold. During these journeys, both technology companies smoothly altered the composition of their boards as the strategy, scale, and complexity of each company changed — along with the critical skills needed for board oversight.
A sensitive subject
Most corporate stakeholders — shareholders, directors, and management alike — agree that board composition should reflect the critical expertise the board needs. And they recognize that as those needs change, so too should the makeup of the board. Yet few board issues are more sensitive than moving directors out to make room for new directors, even when the needs are obvious in the face of new strategies, business models, and the ever-changing competitive landscape. Longstanding personal relationships among directors make it difficult to suggest that a colleague move on. In fact, the subject of board succession is so sensitive that many boards rarely discuss it head-on.
To date, term and age limits have been the only programmatic means of addressing board succession. For both approaches, the results have been, at best, mixed. Often, directors whose skills have been rendered less relevant by a change in strategy do not exceed the term or age limit. For example, we worked with a board to recruit a expert in emerging markets only to find five years later that the organization was going to refocus on domestic markets. The director stepped off the board without issue.
In other situations, however, problems can arise when directors don't recognize the appropriate time to decline to stand for reelection. Conversely, many directors who have reached their age or term limit threshold are often quite capable of making remarkable contributions to the board. We've spoken with many CEOs who were openly unhappy to let go of long-tenured or older directors whose skills and expertise were still highly valuable to the company.
How they did it
How, then, did the boards of the two technology companies manage their transformations? By adopting these principles and practices:
• Think evolution, not succession. “Succession” connotes a one-off event, or a short-term activity, usually focused on one or a few directors at a static point in time and often reactive rather than proactive. “Evolution” suggests a natural and continual process of change and development that is holistic and adaptive. As a company grows and changes, it is natural for the board to change along with it. Using “evolution,” with its suggestion of ongoing development, instead of the episodic and mechanistic “succession,” makes the conversation less provocative and often, subtly, encourages those who have exceeded their capacity to contribute to “raise their hands” and volunteer to exit the board. Both technology companies consciously adopted an evolutionary mindset and they discuss board composition in those terms, creating an environment where all of the directors understand that the day will come when they will no longer serve on the board. Further, “evolution” evokes the notion of an adaptable system of oversight and governance that is dynamic and alive — language that often resonates with new directors exploring the possibility of joining the group.
• Continually update and maintain an ideal “competency portfolio” for the board. The CEO and the nonexecutive chair of CloudCo regularly discuss the competencies that the board will need as strategy and business circumstances change, as does the CEO and the lead director of DigiCo. Rather than specifically tie these competencies to particular individuals, they treat them as a portfolio of skills that could be satisfied in a variety of ways but that in the aggregate represent the ideal mix. And they are discussed in those terms in the nominating committee and with the full board, depersonalizing the issue for any director.
• Recruit directors who embrace board service as a “tour of duty.” During board searches, the head of CloudCo's nominating committee discusses with candidates the board's approach to board composition. The concept of an evolving board is a part of the recruiting discussion, where other directors openly share their enjoyment of their board service along with their understanding that they do not expect to be on the board forever. Framing the recruitment conversation in terms of an open-ended “tour of duty,” rather than as a series of automatically renewable terms, provides potential directors with an understanding that the board is always evolving. Their tours on the board will be reconsidered along the way as new strategies and missions call for different skills.
DigiCo practices what might be called “soft” term limits. Director candidates are advised that the company has found that in the fast-moving tech industry nine years — three three-year terms — is about the limit of most directors' relevance. If appointed, the director can expect in year six, and every three years thereafter, an open and frank conversation about whether they should remain for another term.
• Understand what motivates exceptional directors. As both companies fully understand, outstanding director candidates typically want to join boards for three reasons: 1) their perception of their unique ability to address in a meaningful way the challenges and opportunities at hand; 2) their desire for intellectual stimulation and the opportunity to learn from other directors; and 3) the opportunity to extend their personal and professional networks. Note that director compensation is not, and should not, be on the list.
As CloudCo embarked on its quest for growth with a newly appointed CEO, the board recruited a former tech leader with extensive experience, great gravitas, and proven team-building skills. He was an ideal addition and, in short order, he took on the lead director role and begin to partner with the CEO on the board's evolution. But just as important, he was motivated not by a desire to burnish his reputation, or other personal considerations, but by the opportunity to coach and partner with the CEO. A subsequent audit committee appointee, with little experience in the company's markets, was motivated by intellectual stimulation and the opportunity to become a part of this highly accomplished board. Such intellectually motivated and self-aware candidates are not only eager to make unique contributions to board deliberations, but they are also particularly receptive to the idea of departing when their capacity to make relevant contributions has begun to wane.
Boards should beware of prospective directors who need the board position, either for prestige or compensation. When their ability to contribute declines they will likely be reluctant to voluntarily step aside, impeding the evolutionary flow of talent in the boardroom.
• Make sure that the replacement for a board member is a tangible upgrade. When CloudCo brings in a new director it doesn't do so simply to make incremental improvements in the board's skills. Rather, the new director's skills are so superior and so closely tied to emerging strategic or business needs that even the supplanted director sees and accepts the logic for their departure. Both companies have made remarkable additions to their boards, helping put at ease departing directors.
• Consider temporarily expanding the board. Rarely are extraordinary director candidates readily available. They are often fully boarded up or they may be snapped up by another company before a board vacancy occurs. They may also possess skills that are suddenly in high demand but in extremely short supply. (For example, see “The New War For Talent In Analytics And Marketing Services,” on Heidrick.com.) This is something CloudCo realized when it began moving into a new business market. Nevertheless, the opportunity to serve with the highly accomplished members of the company's board, which now included the former CEO of one of Silicon Valley's most storied companies, attracted two highly qualified candidates. Both were willing to join and they possessed complementary skills: one had been CEO of a digital advertising company and the other had been a CMO experienced in buying the solutions that represented the company's new market.
However, the board had only one pending vacancy and did not regard any of its other members as dispensable. Instead of choosing one candidate over the other and forgoing a much-needed set of skills, the board expanded the number of seats from eight to nine and appointed both candidates. When another member retired two years later, the board, satisfied with its competency profile at the time, reverted to eight seats. Though flexible, the board understands that evolution means organic development of a well-functioning and adroit entity, not an unwieldy body that simply keeps adding skills.
A constant process of evolution and renewal
Not all boards need to evolve as rapidly as the boards of these technology companies, but they do have to evolve. And with business life cycles growing shorter in many industries, the pace will certainly accelerate. For many companies, the failure to adapt increasingly means extinction. Though researchers disagree on the precise figures, all agree that the longevity of S&P 500 companies has dropped precipitously in the past several decades, by some estimates from a rolling average of about 60 years in the 1950s to less than 20 years today. Faced with this environment, companies must undergo a constant process of evolution and renewal — now more than ever — and so must their boards.