Board recruitment: The issue for 2017 (and beyond)

Independent director: a much used governance term but one which is often open to interpretation and wherein exclusions are too narrowly defined. Company bylaws and governance principles are quite clear on only the obvious types of conflicting relationships between management and board members that constitute a dependent rather than independent director.
Many boards are rife with examples of cronyism and unholy alliances: board members having taken numerous family vacations with the CEO using the company plane; a university president serving on the board of a company that contributed millions of dollars to his institution; a board member who is also a vendor to the company; hard-to-get tickets for Broadway shows and Super Bowl seats given by companies to their directors, as well as various board boondoggles. Activists who peel back the onion have found other similar unnoticed and unreported connections between directors and management. Not in the interest of good governance to be sure!
The issue for 2017 and beyond is how to achieve a truly independent board in the purest sense. That all depends on whether the board and its chair view independence as a compliance issue or, like diversity, as a strategic differentiator in fulfilling the corporate mission of maximizing value. Studies have proven that companies with totally independent and diverse boards are better performers.
Before I analyze how to achieve such a board in 2017 and thereafter, let's examine several instances of what merely passes for independence.
New directors generally owe their board seats to another director or company officer, perhaps even the CEO, with whom there is an abiding friendship, possibly social or borne of a former, but not forgotten, symbiotic business relationship. This creates an unspoken loyalty that inhibits complete independence. Indeed, the recommending director may be a member or chair of the nominating committee. Thus, in a boardroom controversy it would be only human nature for that new director to side with their sponsor, (perhaps sub-consciously) fearing that he/she won't be renominated. 
Thus, when board members or officers recommend potential board candidates, they ought to submit a detailed written disclosure including any past social or business relationship. Just how a director is brought to the board's attention should be set forth in the proxy statement. Indeed I would favor the inclusion in the D&O questionnaire the following qualifier recommended by a prominent law firm:
 
“Is there any arrangement or understanding between you and any other person or persons (naming such person or persons) pursuant to which you were or are to be selected as a director of the Company, other than arrangements or understandings with directors or officers of the Company acting solely in their capacities as such? If yes, please describe.”
 
To insulate the board from any criticism that prospective nominees suggested by sitting directors or officers are perceived as partial to management, perhaps beginning in 2017 there ought to be a trend toward new directors being largely sourced by outside consultants and who initially are likely strangers to the board. To that end, more-frequent consideration ought to be given to successful executives who have never served on a public board but who are experienced in settings with similar group dynamics.
Additionally, a valuable source of new independent directors is the company's own shareholders. Issuers should establish a formal suggestion process to facilitate that. Perhaps a reserve pool of promising future directors could be recruited informally as bench strength.
When I speak of board independence, I include board diversity in the broadest sense of the term, not just ethnicity and gender. Boards tend to become cozy when populated with members from the same club, fellow alumni, and citizens of the same community. That creates an unspoken culture of “professional courtesy” which inhibits independent thinking, stifles debate, and promotes sheep-like behavior in the boardroom. Board diversity tends to have the opposite effect. The goal for 2017 should be board heterogeneity, not homogeneity.
One way to promote independence is a vetting process that goes well beyond what's in the D&O questionnaire and what professional reference checking firms may unearth. I urge that going forward, face-to-face reference interviews be conducted with fellow members of other boards with whom the prospective nominee has served. Critical is asking the tough questions aimed at learning how the prospect behaves in the boardroom. Is he/she a “go-along to get-along” type or a truly independent thinker who defends his/her beliefs constructively and convincingly? That is the kind of director that boards should hopefully strive to attract in 2017 and thereafter.
 

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