Today’s business ecosystem is fraught with complexities and variables that contribute to greater risk exposure and liabilities for boards and the organisations they serve. Strategic planning and time-to-market cycles continue to shrink. Stakeholders’ expectations are changing rapidly. Boards must be swiftly decisive and responsive, provide zealous oversight and corroborate with management for strategic long-term value.
The effectiveness parameters for boards must evolve to new standards. A board must adopt a well-thought-out strategic approach to composition to ensure that it is not just a group of individuals who can exercise their fiduciary responsibilities, but that they can also work collaboratively.
Investors in corporate/public companies have an increasing interest in board composition. Companies are invited to review and enhance their proxy statement disclosures to ensure that their board directors’ qualifications are explicitly tied to the company-specific strategy and risks and that their board’s approach to diversity and succession planning is transparent.
In my tenure as a consultant to executives and boards, I’ve had the rare and wonderful opportunity to peek behind the closed doors of a variety of boards and management teams around the world. This insider perspective has convinced me that a strategic approach to board composition is an absolute necessity for any board or management team. The members of the Pivotal Leadership TrioTM (PLT) – board, CEO and executive team – all need to be strategically selected and leveraged to maximise the success of an organisation and its leaders and to deliver full value to its stakeholders. It is an art to master this process.
Past definitions for ‘the ideal director’ and ‘the ideal board’ are no longer valid. Modern boards can’t afford to recruit new members based on friendship alone, avoiding scrutiny about the depth of their knowledge and experience and their ability to stay on top of current trends. A director can no longer be assured of securing a seat at the board table until his/her retirement. Homogeneity is a thing of the past, while diversity is the future. Consciousness of a decision’s impact on the environment and social conditions is in. Simply approving a ready-made strategy is out, while engaging in creating and altering strategy is in. This is a new era for what we require in effective boards and directors, how we build, augment and refresh boards: how directors are invited into the boardroom and how boards are governed.
“It is critical for boards to skillfully balance strategic contributions, risk oversight management, mitigation and good governance”
Board composition must be approached strategically, from conception (if possible) to alterations to the board roster and even alterations to the strategy. In this fast-paced world, it is critical for boards to skillfully balance strategic contributions, risk oversight management and mitigation, and good governance, while also adequately exercising their authority to manage the uncontrollable. A strategic approach to composition is a necessity for a board to be vigilant and more transparent about board composition.
The board must be fully responsible
The board is responsible for strategically achieving the optimal composition, while it can delegate aspects of the nomination to the nominating committee. The nominating chair and the committee members must understand the strategy of the organisation, be mindful of director term limits and prioritise diversity of skills, knowledge and industry experience represented in a healthy mix genders, ethnicities and ages.
■ The board must ensure proper balance between the retention of existing members, who have an invaluable historical recollection of the organisation’s trajectory, with the need to inject new knowledge and perspectives within the PLT. The board must avoid having a talent deficit at the board level and provide for the smooth transition of directors on and off the board
■ The board must have a transparent process on how to best address board composition gaps as they surface, they must drive and sustain a relentless focus on succession planning and bring effective oversight of executive talent development and recruitment
■ The nomination process should be documented and disclosed regarding how directors are selected, recruited, nominated and retired and how the board is augmented and refreshed. As a result, investors will know that directors individually and collectively have the skills and knowhow to engage in strategy and manage and mitigate risks
■ The nominating committee must be assessed for its effectiveness on a yearly basis. An under-performing nominating committee or nominating chair is detrimental to an effective board and to an effective organisation
■ The board must review and alter the nomination process to strategically achieve optimal board composition at least once a year
Strategic steps to board composition
Recognise what is needed This is critical. It applies when the board is first created, augmented and refreshed, given the resources constraints of boards.
Prioritise Prioritise your core competence needs, knowing that some will be fulfilled by new directors and some can be addressed by long-term and short-term outside experts. Prioritisation will lead to proactive succession planning, proper onboarding, adequate training, timely integration of new directors and increasing the board’s effectiveness.
Nominate Define how to strategically optimise composition based on the present and future. What do you need, what will you need, who do you have to fill these roles and who will you need to recruit?
Evaluate core competence Having a clear and succinct understanding of the strategy, the strategic roadmap and key milestones to be achieved enables the nominating committee, the chair and CEO to align on key underlying strategic assumptions that will fuel, stall or kill the success of the organisation. Core competence needed at the board can then be clearly identified.
Create a board climate Boards should no longer be a group of homogeneous individuals. In these times, a board is a team of diverse, independent directors who come together to foster opportunities to benefit all stakeholders (shareholders, customers, employees, strategic partners/partnerships and communities at large). Boards must identify the underlying board climate they intend to create. Strive for a board inclusive of genders, ethnicities and ages from inception; one where collaboration, respectful opining, constructive objection, maturity and values (respect and trustworthiness) rank on the list of priorities and influence the approach to board composition. How the board plans to address risk (environmental, social, cybersecurity) and governance diligence will also affect the tone.
The aim of diversity
I strongly believe that the priority should be on appointing directors who are best qualified for the needs of the board based on the contributions that are most needed. I believe equally as strongly that it’s possible to honour this priority while also consciously recruiting a diverse selection of directors with different ages, races, genders and backgrounds.
■ Map out the current make-up of the board within a diversity matrix that includes skills, industry, international markets, globalisation, niche domain expertise, board governance, technology and risk (environmental, social, regulation, cyber)
■ Map out the current make-up of any outside experts who advise the board temporarily and/or longer-term in the areas of board governance and insurance, legal, capital markets, corporate financing and compensation
■ Assess and confirm what contributions are most needed and if they are needed within the board or could be satisfied with an outside contributor. Confirm if you must retire and/or replace a director, and/or refresh the board, and/or augment the board, and/or are in need of changing board advisors or finding new ones
■ Would you benefit from having a retired expert in a niche sector in your organisation’s domain or a retired CEO who has gone through M&As and the challenging stages of scaling revenue? Do you need an expert in the law, digital media, technology, strategic marketing, corporate finance or capital markets? Can you find someone with cross-functional expertise?
Individual director and external adviser profile
Cognisant of your recruiting needs for the board (or outside advisers to the board), do not rush to an appointment. Hurrying through the recruiting process can limit the board’s composition and resulting effectiveness. Clearly define the profile of the ideal director or expert: the required skills, experience and expertise.
Recruit Determine how to best identify the individual who fits the profile. Don’t fall into the trap of nepotism, bringing on people whose primary qualifications are their connections to the existing board members, which can lead to imbalance, as well as a deficit in needed skills and expertise.
Interview Ensure that the individuals you consider have the capacity to be independent, don’t have conflicts of interest and don’t serve on too many boards. Assess if/how they will blend into the board climate you’ve committed to, and what his/her value-add will be at this particular stage of the organisation’s strategy. It is OK to work around potential shortcomings, as long as this doesn’t create vulnerability in the board’s composition. (The same applies to external experts who will act as advisers to the board.) Always check references and it would be wise to do at least a basic web search and scan of your candidate’s social media presence.
Elect director After having gone through a very thoughtful process, it is imperative that you have a proper onboarding process in place to accelerate the ramping-up of the director and maximise their contribution from the start. Don’t skip relevant governance training and introduction to the company’s strategic plan. Take the time to integrate the new director into the board, especially if the board hasn’t seen any recent turnover, ensuring that the new director doesn’t dilute the board climate.
Evaluate After the first board meeting, conduct a genuine exchange with the new director or/and expert to assess how the meeting progressed from their perspective and from yours. Learn to communicate openly up front. You should feel at ease exchanging about what works and what needs improvement, individually and collectively, within the board. He/she may have insight regarding how to enhance the board climate and the level of competence within the board and the PLT.
Take the time to evaluate any new director’s effectiveness within the board as part of your annual board leadership evaluation. Evaluate whether you have met your expectations for optimising the composition of the board. Determine what needs to be addressed in your succession plan and your strategic approach to achieving optimal board composition.
Part of an effective composition strategy is identifying the key inflection points at which an organisation’s board will need refreshment. For example, preparing for an Initial Public Offering (IPO) requires specific skills from everyone in the PLT and may be a time when the board needs to be refreshed with directors or leadership suited to the specifics of the situation. Preparing for substantial organic growth also requires a more focused strategy and it is important that all members of the PLT can scale their responsibilities without being overwhelmed and overly stretched. If that isn’t the case, this would be a time for refreshment. Again, when a growth strategy is executed and/or altered, management/the Executive Team and the board must be in alignment.
“Part of an effective composition strategy is identifying the key inflection points at which an organisation’s board will need refreshment”
Refreshment doesn’t necessarily need to be replacing board members – valued members who aren’t quite at the right level needed to meet specific challenges can be mentored or guided until they are. At these times, conduct a leadership effectiveness evaluation of the PLT. The findings will give you valuable insights into how best to optimise the board going forward. They’ll also help you identify whether anyone on the board could be a mentor to executives who are candidates in the succession plan.
A strategic approach to board composition is a blueprint to maximise the potential of the leadership resources within the board and the executive team. It is a process and must be revised on a continual basis.
If you don’t already have a strategy in place for the make-up and evolution of your board, it’s time to consider developing one. Start with a conversation with the directors at your next meeting and create a concrete timeline for the development and adoption of the strategy. Ensure that your strategy is clearly stated and can be easily communicated.
