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How Directors are Changing Board Behavior By Roger M. Kenny
Never before have we expected so much from our Board Directors with so little direction, assistance or even guidance. It wasn’t long ago, the 1990’s, when Directors answered to management and that the Board Leader was the Chairman and the Chief Executive Officer. This changed in the late 90’s and early 2000’s when Directors were expected to be totally independent from management in order to represent the shareholders more completely. “Board Independence” became critical to Board Governance. No longer did Directors joke about the “Chairman of the Board who would tell the Board Directors to jump and the Directors would ask “how high”. No longer does the Board report to Management. Board Independence became the mantra for all Directors and it was a big change in behavior.
Today the power of the Board of Directors is the collection of their knowledge and by perceived flaws the gravity of their Lead Director chosen by themselves, someone who can truly speak for the Board. Having the right independent Directors can assure that management answers the right questions and follows realistic plans. The power that a Board exerts is through knowledge and experience. Really valuable are Directors whose skills match the company’s needs. They really do make a difference. As the business plans change the Directors’ requirements change, so showed the Directors. Today, all Directors have limited life span of the Board of any company.
A big factor that changed Boards of Directors at the same time was the establishment of the Lead Director, someone appointed by the Directors, ideally someone selected by the Directors, who can speak for all the Directors. This was truly not he Board in charge. Now the Directors, have to exhibit leadership, not an easy task.
The Nominating and Governance Committee has the most powerful job on the Board of Directors. Its members are responsible for both the Boards’ performance and also the makeup of the Board, itself. Does the Board have the right Directors to meet the company’s needs and are they able to oversee each Director’s contributions and evaluate each other’s behavior honestly, fairly and candidly? It’s the Nominating and Governance Committee making certain the entire Board is appropriately overseeing the operations of the Company and that each director is meeting the Company’s Charter responsibilities. If not, has this Committee actively pursued the termination of any Director who is no longer meeting performance standards? It is also this committee that asks if the Board now has a Lead Director who can speak for the rest of the Directors.
To help the Nominating and Governance Committee do its job evaluating the Board with the help of the rest of the Directors is the purpose of the Annual Board Assessment. If designed properly, each year it gives the entire Board confidential feedback and its results. Its designed to provide accurate feedback to every Director as to how to improve his or her contributions to the Company and the other Directors. Having conducted over eighty of these assignments, I can attest to how powerful they are and how much they are needed. There are still some pitfalls that need to be corrected and some Directors who are afraid to take it seriously, as it is intended. The Lead Director together with the head of the Nominating and Governance Committee makes sure the assessment is executed properly each year.
While most company Boards of Directors are in fact doing Annual Board Assessments, many are not achieving results at the individual director level. Many directors to still seem to be hesitant to undertake individual peer-to-peer reviews, or these reviews are just tacked on at the end of a meeting as an afterthought, thus depriving important personal feedback from their fellow directors, who I can attest for the most part really take it seriously and want and deserve accurate feedback.
A study conducted by the Stanford University Graduate School of Business and the Miles Group in 2017 revealed that only slightly more than half of the companies surveyed actually gave each director personal, peer-to-peer feedback about performance, even though over 90% of the directors in those same companies thought they possessed the necessary skills to accomplish this task. At the same time, 36% of the boards surveyed reported that Individual Director Reviews were ineffective. Obviously, those Directors had a negative opinion of peer-to-peer reviews and were reluctant to try, as if they didn’t trust the process. Some of them probably didn’t.
Why have so many directors decided that merely checking boxes satisfies the Annual Assessment Requirement? Are directors squeamish about participating with their peers in giving and receiving personal feedback? Maybe there are other reasons. But I have found that Annual Board Assessments and especially the personal feedback is exceedingly well received, especially when overseen by an outside individual professional.
Interestingly, less than half of the directors surveyed by the Stanford/Miles Group said they tolerated dissent and in many of the companies surveyed there were a few directors who had an oversized impact on their boards as a whole, which tended to squelch personal sharing. At the same time, the survey revealed that most of the directors surveyed believed that at least one of their fellow directors should be removed from the Board, and that wasn’t happening. It also appears that board leadership is part of the problem since only 60% of the directors believe their Lead Director “asks the right questions.” These were both daunting and revealing findings suggesting the importance of the assessment process, and making sure it is conducted truly independent from management. In other words, it should be totally an independent Board process.
Over the years we have seen huge changes in Board behavior impacted by the revolutionary call for Board director “independence” in the nineties which rocked the very foundation of Boards of Directors who were run by management. Then, nearly twenty years ago, SOX (Sarbanes/Oxley), institutionalized Board Assessments by the New York Stock Exchange so it was really discouraging that the Stanford/Miles survey revealed that only half the directors believe their fellow board members express their “honest opinions”, or most discouragingly, even challenge management, which are their most important responsibilities.
In a way you can’t blame the directors themselves, for not wanting to receive personal feedback from Peer-to-Peer reviews if they are not confident the reviews are honest, objective, and strictly private. Lead Directors have the additional burden of playing a key role in keeping discussions on topic and assuring that Directors are given objective feedback while, at the same time earning the respect of fellow Directors, not an easy job, and certainly not for everyone. The right Lead Director selected by fellow Directors make this happen and in fact maybe the most important factor in improving Board performance.
Let’s face it, nobody likes to receive negative feedback, especially if its threatening. In most cases, board directors enjoy and covet their role as company leaders and want to keep it. To them a Board Directorship is very important personally and professionally, and let’s face it, it’s usually financially rewarding, which is not an insignificant factor. Some directors are known to have balked at the idea of independent peer-to-peer reviews for that very reason, not wanting to “rock the boat”… and certainly not wanting to receive bad news. While there are still some Chairmen of the Board, some chairs have also been a source of downplaying the importance of personal reviews. Fortunately, the Chairman role is becoming more of an integral position replaced by the Lead Director who can totally delegate this procedure.
Obviously, one way to assuage most of these concerns would be to have a trusted, independent professional who has no affiliation with the company execute the Assessment. An assurance of strict confidentiality not only promotes more candor on the part of directors, but also removes a burden from the head of the Nominating and Governance Committees who can totally delegate their procedures. Since Boards have to refresh themselves periodically with new members, this is another reason for keeping the process independent, professional and most importantly strictly confidential.
The Stanford/Miles study confirmed that peer-to-peer feedback is still not fully accepted. “Only 26% of Directors believe they are very effective in giving direct personal and constructive feedback to fellow Directors.” This is obviously not good news. Good board directors want honest and unfiltered feedback, especially as to how they could add more value to the company and to fellow Directors. An Assessment should never be perceived as a “witch hunt”, rather it must be very positive, professional and personally rewarding. There was a frustration expressed by the Directors that they were not receiving the level of personal and professional feedback they were hoping for which would have made the process much more valuable professionally.
Enormous improvements follow when directors receive honest feedback about their contributions to board dialogue and learn how they can add more value to the board and to the company’s needs which is their purpose for being on the Board. Just breaking the impasse in Board dialogue has an incredible impact on the Board’s performance, once Directors become aware of what their colleagues really want and expect from them. Helped by the Stanford/Miles Survey, we see there are many opportunities presented just by having more objective and well-designed peer-to-peer reviews. In fact, the most significant result of Board Assessments is the personal feedback received from fellow directors. It is a powerful process and its use should never be compromised. Obviously, it must be clearly perceived as independent, strictly confidential and professionally administered. Unfortunately, this isn’t always the case as we have found especially when some company management representative is involved in the process. We have found that even a hint of an insider can queer the process from becoming truly “off the record” in the minds of directors. Let’s face it, the thought that there could be an insider viewing the confidential feedback can reduce the amount of openness shared by the directors, who then end up just checking the boxes, which has been a major complaint of the process. Let’s face it, their job is to be independent from management and that can’t be violated.
At the same time directors must be more effective in giving personal feedback to each other. It must be substantive, at the same time truly respectful of the professional views of fellow directors; never watered-down comments to ease communications. Obviously, it should never just be “checking off the boxes” which has been the case in too many situations.
If directors are to receive honest and unvarnished feedback from their fellow directors as to how they really can improve their contributions to each other and the Company then there must be a qualified outsider: someone not connected to the company to conduct it. The best time to do it is when the Nominating and Governance Committee meet with the actual feedback after the Board Meeting; ideally reaching the Directors at their homes when they are relaxed and more open to personal feedback and can reflect on the recent Board Meeting, and can absorb the unvarnished feedback from their peers. We have found that it is the best time and place for personal feedback and private discussions.
If annual Director Assessments are to be effective, it must be clear from the outset that there will be absolutely no attribution given to anybody. There can’t be any question about this. This must be totally understood by all members of the Board. The Assessment can’t ever be delegated to a corporate “insider”, not even a Board Chairman, CEO, or the General Counsel. If this happens, the director’s comments become worthless. The improper execution of this requirement has made the Annual Board Assessment distrusted and ultimately ineffective. It has led to just “checking off the boxes” or worse, making only positive comments which has been the most negative critique of the process.
When the Directors receive the call at home after the Board Meeting, from the independent professional conducting the Assessments, this is a heavy-weight part of being a director; knowing that seven or eight other directors are sharing their thoughts about you and their experiences with you. It can be exceedingly intense. How one responds can be significant to his or her performance especially as to how their Director can make greater contributions and this is the survey’s ultimate purpose. The feedback is very powerful and sometimes its quite surprising, even shocking to some Directors.
How this honest feedback is perceived can sometimes be earth-shaking. As examples, “I had no idea that was how I was coming across” … “If only I had known this before” … “I could have made very different contributions” … “I’m pleased, I wasn’t sure my message was getting through” … “I’m encouraged that my fellow directors want to hear more from me.”
Board independence does not mean individual director independence, on the contrary, Board Directors must work as a team. There can’t be divisions among members of the board who also cannot be supervised by any member of management, not even the CEO, or a Chairman if there is one. It’s a delicate balance for any Board Director, requiring true professionalism and personal honesty. Any and all comments are intended to be helpful and should be received that way.
The comments received from fellow directors are more than just advisory. Each member of the board must act upon the personal comments they receive as to how they can improve their contributions to the company and to each other, and if they can’t, they should not stand for reelection. It’s that serious and as the Stanford/Miles study has reported, there’s frequently one director who shouldn’t stand for reelection. Which is another benefit of the Assessment, it helps make this happen, rather than wait for the Director to retire which may take a number of years; so it has a very important purpose, making the way for a new Director with needed skills.
At the same time, total board independence is required where the board directors are not “managed” by a chairman or CEO and must be free to manage themselves. They must freely engage in their Annual Board Assessment themselves and not be directed by any member of Management so they can feel totally free to express their opinions and observations and truly digest honest feedback from each other. Show me a board that can do that and I will show you a “truly independent board” … one that has a strong independent Lead Director and Nominating and Governance Committee.
Since it’s the Directors who are responsible to the Shareholders and must represent them in all of the company’s actions as well as account for its results, there can be no secrets from each other. In fact, for the sake of the Company, all the Directors must help each other succeed. If that is not possible, for any reason, its incumbent of that Director to not continue and not stand for reelection. So it’s important then that every director be convinced they are receiving the unvarnished feedback from the rest of the board and especially how they can add more value to the company. There can be no obfuscation, even if it means termination. Incidentally, it has already been shown by the Miles Group at Stanford that this must be done more frequently as a positive way to refresh the board rather than wait for retirement or term limits. And certainly, “no Board seat is forever.”
Not surprisingly, Boards of Directors have done a less than perfect job in giving this important feedback to each other. Still, most Directors are relieved to have found some new ways of adding value as a Director. As examples, “Jim was shocked to find out his fellow Directors really valued greatly what he had to say but did he have to wait until the end of each board meeting? Ann kept using “personnel phrases” and needed to be more business focused in order to be credible with her fellow Directors. Bill was extremely independent, was pretty much a solo act and had to be asked “to join the team”. John already knew he was in big trouble and asked, “Kenny, how much do I have to change, twenty percent?”. The answer was “No John, more like 40% according to your fellow directors…” John is now a great director. Not everyone was able to follow their fellow Directors advice, and some eventually left the Board. In many cases they had already made their contributions.
When it is clear a director has made all the contributions that can possibly help the company, we would advise that Director to inform the Lead Director that it is time to make the change. As the Miles Group Study revealed, a majority of Boards had a least one Director who had to leave in order to make the Board better. In other words, it’s a positive next step, not a negative one.
With today’s emphasis on Board diversity, there has already been an improvement in Board Assessments, with the addition of women and blacks, especially as it relates to board dialogue with each other, and therefore, the feedback quality has improved and diversity has been a factor. The richness of the comments received by fellow directors include, … “I had no idea that’s how I was perceived” … “I didn’t know that’s how I was coming across” … “I’m really grateful for this feedback.” Having the right Lead Director who can truly speak for the rest of the directors is also exceedingly important.
Boards will never be the same again. Directors will have to get comfortable sharing personal feedback and individual perspectives because they will have to do more of it in the future and stockholders will expect to hear more from them. We have witnessed the addition of blacks and women on Boards who have dramatically improved Board dialogue, much so that Board effectiveness is significantly better. This recent trend has made a significant difference in Board performance and should accelerate. Board Assessments will play an even bigger role in helping Nominating and Governance Committees perform their job in the future and will continue to make good Boards better.
By: Roger M. Kenny, Managing Partner, Boardroom Consulting, rkenny@kennybc.com, former Director National Association of Corporate Directors, New York, Alexander Proudfoot, Global Advisory Board. His articles include: “The Future of Board Leadership” (The Corporate Board, May 2020) and “Lessons Learned from Board Assessment” (The Corporate Board, September/October 2016) and the book “E Board Strategies, How to Survive and Win” with Ram Charan -2000