The emerging art of board composition

When a board turns its attention to the judgments that cannot be delegated, the meeting can resemble a good dinner party – with a group of men and women who respect each other but have different thinking styles and backgrounds engaged in spirited conversation.   

Board composition used to be secret chairman’s business.  It was nearly as mysterious to sitting board members as it was to outsiders hoping for an invitation.  Most boards now have nominating committees.  Still, the whole process is far from transparent.  While that doesn’t necessarily mean bad outcomes, increased understanding would constitute better governance.

I use the word, “composition,” to indicate that it is not just the selection of individual directors that matters.  Effectiveness depends as much on how the group interacts as it does on the credentials individual directors bring to the table.  An analogy would be prose composition, which involves finding the right words but also the right rhythm.

Recruitment needs to be thought about from three perspectives – capabilities, diversity and impact on board culture.  Visible attention is commonly given to the first and to aspects of the second – but all three are important.

Diligent boards make charts listing the skills and backgrounds they want to have in the room and identifying gaps they need to fill.  There has to be a person who can chair the audit committee.  Maybe there should be a lawyer.  Many boards would like to have someone with “digital” expertise.  If a company plans to go public, it often seeks a director who has been through that process before.  Most major boards want to recruit some number of current or former chief executives of other public companies – on the basis that, having known the pressures of the job, they will be in a position to both support and critique the current incumbent.  If a company’s business is particularly complicated – banking and telecoms would be good examples – there is a lot to be said for a few directors who have been in the business themselves, though in other companies.  If the business is highly regulated or important enough to be in the public eye, it is smart to have directors who understand how governments function, both politically and administratively.  In extreme cases, a director with expertise the company conspicuously lacks could be valuable – a marketing professional to challenge a management full of engineers, for example.  In the end, companies typically find they want more perspectives than there are seats at the table, so the best candidates will tend to be those who tick several boxes.

There should no longer be any debate about gender diversity.  The issue is execution.  Serious companies are putting minimums in their charters.  Ultimately, the target has to be a fifty/fifty split.  Making significant progress requires that the preponderance of directors appointed in the next several years be women – which implies that some number of well-qualified men will never get the call.  It’s best to acknowledge that.

Ethnic diversity is close behind.  Target-setting could be more contentious.  Execution will probably be more difficult.  But I’ll leave that topic for another day.  Right now I want to talk about first principles.

The fundamental case for board diversity goes beyond fairness and inclusion.  It flows from the kinds of decisions boards have to make and the way that work is best undertaken.   Good governance requires directors to consider dozens of management’s actions and recommendations, most of which they will endorse.  This is what is meant by “oversight.”  It occupies a lot of board time.  But the key role of boards is making complex judgmentsI give this name to conclusions that cannot be reached through mathematical modeling or legal analysis alone.  Boards must decide, both in setting strategy and in coping with the messy situations that confront them from time to time, how much relative weight to give to long- and short-term financial outcomes, to moral obligation, to reputation risk and to staff morale.   This is like comparing apples and oranges.  It cannot be delegated to management.

The best strategy for making complex judgments is diversity.  To compare an apple with an orange, you can’t just focus on taste or color or nutrition or peelability.  You have to consider everything at once.  This is easier if your group includes people who are passionate about flavor and others whose life revolves around wellness or design.

It is easier still if at least some directors are able to look at things from alternative perspectives.  A chairman friend of mine consciously recruits directors who have lived and worked in several cultures.  He wants directors with international experience, which makes sense, given the company’s aspirations.  But he’s also looking for open-mindedness – for people who know that the views from different windows can be equally valid.

Whatever their backgrounds, directors need to work together.  I’ve written elsewhere about the importance of conversation.  The word itself means give and take.  Directors must tolerate each other’s cynicism and accept consensus decisions.  They must let one of their number tell “stories that may not mean anything” – for no better reason than that “Mary has good radar.”  But the discussion needs to end on time.

At the risk of being seen to trivialize the topic – which is not my intent – I would argue that a wise chairman constructing or renewing a board will consider candidates in the way a smart host or hostess thinks about a guest list.  When a board is doing its most important work, the meeting can resemble a good dinner party: a group of men and women who respect each other but have different thinking styles and backgrounds engaged in spirited conversation.

A mix of professions is a good start.  It would be nice to have an artist, if only because they see the world in different terms from most of us.  You need both talkers and listeners – guests who are witty and others who will laugh.  A balance of passion and skepticism makes for the best debates.  An articulate visitor from another country makes people reconsider their assumptions.  And let’s be honest, a bit of gossip is always welcome.  A few well-networked directors are a good precaution if you don’t want to be surprised.

When the time comes to replace old George or clairvoyant Mary, it might be worth considering not only the boxes they will no longer tick, but also the interpersonal contributions they will no longer be there to make.

Individual directors sometimes disagree.  Up to a point, this is constructive.  Diversity of views is what we want.  But since conflict makes many people uncomfortable, there is always a risk that important decisions will get delayed.  Old George is extremely good at persuading people to acknowledge the “elephant in the room” – and compromise.  He starts by getting the warring parties to laugh.  Sometimes all he has to do is whisper, “elephant?”  Would his proposed successor be able to do that?

The appropriate response to old George’s retirement is not to hunt for his twin, however.  To say that you want “another George” is to embrace the past, and not incidentally make it impossible for a woman – or a Muslim or a thirty-five-year-old tech entrepreneur – to be selected.   The right approach is to identify the features of current board culture you wish to preserve or moderate, and to consider how each candidate – whose styles may differ greatly – might assist in that endeavor.  The process is more like seasoning a soup than finding the missing piece of a jigsaw puzzle.

Conducting such thought experiments would make board renewal a more complex process .   Or perhaps it would simply make the existing process more transparent.  If the nominating committee is meeting, and a potential candidate is named, and no one speaks for a bit, thought experiments are going on.

For the avoidance of doubt, I should say that integrity is a prerequisite.  Any suggestions that this might be in question should receive dispassionate consideration – no one’s reputation should be carelessly impugned, even in private – but if there needs to be a long discussion, the individual in question normally ceases to be a candidate.    If on the other hand the individual in question is honest, and would bring rare and relevant expertise, but lacks some other desirable quality, well, that may call for discussion.  Not every director has to have every virtue.  A board composed of stereotypically perfect directors may not be what you want.

Board composition is an evolutionary process.  The departure of Mary or George is an opportunity for change.   Talking about their particular contributions requires and therefore facilitates a broader discussion of board effectiveness – an awkward but important topic.  If people don’t ever say, at the end of a meeting, “That was a good discussion,” why don’t they?  Old George could bring things to a head – and there were times you were very glad he did.  But perhaps in a fast-changing world, his successor needs to be good at open-ended thinking – good at approaching issues in an unconventional way.

Think about  it.

 

 

 

 

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