Editor’s note: Through our work, we have seen an increase in the number
of first-time board directors joining boards. This trend was reaffirmed in the
research for our 2008 Spencer Stuart Board Index, which found that nearly one-
quarter of new independent directors on S&P 500 boards are serving on an
outside public-company board for the first time. In light of this trend, we
thought it would be valuable to share this perspective, which appeared
originally in BusinessWeek.com.
Institutional investors and activists have got their wish for more independent and powerful boards, but not without unintended consequences.
In a time when more is demanded of corporate boards, new
directors often have less experience than their predecessors had when
they joined a board — a potential problem for board effectiveness.
Boards, through the nominating and governance committee, have
assumed responsibility for identifying and recruiting new directors.
Spencer Stuart’s experience working with boards shows this committee
is more strategic now than in the past in identifying criteria for new
directors. The committee is casting a wide net to identify and contact
the best candidates, going beyond the traditional practice of looking at
people they know. However, boards are experiencing increasing difficulty
in getting candidates to accept director positions. The result is boards
with more diverse backgrounds, but with less experience, maturity and
scope than boards of the past.
Finding Alternatives to CEOs
The principal challenge now is that few
active chief executive officers, who bring
the most experience in running a company,
will serve on boards of other corporations.
The job of CEO is more demanding, and
the job of a director requires more time
and preparation than ever before. As a
result, most CEOs don’t have the time to
serve on a board. Second, the job of a
director carries greater risk than in the
past of lawsuits and loss of reputation,
and there is the threat of heavier pressures
from institutional investors and shareholder
activists.
Further, more boards are telling their own
CEOs to stick to their jobs and not to
serve on outside boards, or at least to limit
their involvement with other boards. Today
the average number of outside boards on
which active S&P 500 CEOs sit is less than
one, a dramatic decline from 10 years ago,
when the figure was two. Among the top
20 CEOs in the S&P 500, only six serve on
an outside board. In 2007, active CEOs
represented 33 percent of all new independent
directors, down from 41 percent
in 2002 and 53 percent in 2000.
Activists may smile because this change
has disrupted the so-called “old boys” network,
but boards now are missing much of
the collective wisdom that CEOs bring
from facing comparable issues, making
decisions under pressure and responding
to multiple constituents. Because they cannot
readily attract active CEOs, today’s
boards are turning to other sources for
directors, among them divisional executives
with strong general management
credentials but without enterprise-wide
experience, and specialists in disciplines
such as finance or information technology.
First-time directors
As a result, for each of the last two years,
about a third of newly added independent
directors are serving for the first time on a
public company board. The increasing
share of new directors across the entire
S&P 500 is consistent with what we are
seeing in Spencer Stuart’s own placements
of directors.
As companies appoint more directors who
are new to the role, it will take them longer
to have the most effective boards. To learn
the job of a director takes time. Moreover,
since many first-time directors are active
executives, they are limiting their service to
one board rather than several. So it will
take longer for first-time directors to gain
the experience required to serve effectively
than it would if they served on several
boards.
All new directors have challenges that limit
their value for their first year or two. They
must learn about the company, its business,
its management team and the culture
of the board. For first-time directors,
there is even more to learn. They must
learn how to translate their narrower experience
into guidance of a total company.
They need to understand their role of governance
versus management, and they will
see issues that normally do not reach a
divisional executive. As a result, new directors tend to defer to senior directors
with more experience, but this is not optimal.
Today’s boards are small and require
every director to pull his or her weight. A
new, first-time director may slow down or
weaken effectiveness.
Boards need seasoned executives in the
room. This is one reason why more
boards are raising the mandatory retirement
age for directors — both in recognition
that it is getting harder to recruit
experienced directors and in hopes of
retaining the good ones already in place.
Two-thirds of the S&P 500 boards that
specify a retirement age now set it at age
72 or older, up from 35 percent in 2002.
And 11 percent now set their retirement
age at 75 or older, compared with only 1
percent five years ago.
How effective boards operate
Boards are like any team. Directors have
to find their roles and know how to work
with other directors to achieve consensus.
A well-functioning, mature board
understands its advisory role and does
not meddle in management decisions. It
has a solid understanding of the company,
the culture, the management team
and its dynamics. It fosters trusted relationships
among directors that allow free
and open discussion and harmonious
action. It encourages strong communication
among directors, and it has a high
degree of self-confidence.
An effective board operates in the best
long-term interests of a company, and
offers a wealth of experience to the CEO
and management team. It knows how to
lead and has in place an independent
chairman or strong lead director. While
some of this can be learned through diligent
study and director-education programs,
much of it depends on experience
gained in the boardroom.
There are some things boards can do to
help first-time directors. New directors
should receive an in-depth orientation in
all aspects of the company upon appointment.
Boards should assign new directors
to committees where they can gain
experience quickly. Some boards are
assigning unofficial mentors. Lead directors
or chairmen should go out of their
way to ask new directors for their insights
in relevant areas, to incorporate the newcomers
into the team more rapidly. In
regular self-evaluations, boards should
ask how far along new directors are in the
maturation process, how much farther
they have to come and, specifically, what
the next steps should be.
Boards need to recognize the challenges
they face with inexperienced, first-time
directors. It is not enough to assume they
will catch up. Boards face too many
issues and too much pressure to assume
that a laissez-faire approach is sufficient.
About the author
Julie Daum is the practice leader for the Board Services Practice in North
America.
Reprinted by permission from the January 29, 2008, edition of BusinessWeek.com.
Copyright © 2008 by The McGraw-Hill Companies.
Notes
This article is included in
Point of View 2008.