hat do CEO’s need in their boards of directors? How to Today, board composition is considered a vital element of company strategy, making the decision about who should be W nominated to serve on the board much more deliberate in terms of add- ing relevant knowledge and experience. Fill the When a vacancy occurs, most commonly after a director’s retirement, boards have a list of criteria for the new member. The list includes pre- cise experiences such as launching or managing a business in Asia, ex- plicit competencies in technology or digital media, and diversity, not Gaps only in gender and ethnicity but diversity of thinking. Board composition becomes increasingly important when companies are undergoing fundamental change, such as a media company forced to reinvent itself as a digital business. In such a case, management is deal- BY JOE GRIESEDIECK ing with a business that is changing along with its customers, as well as AND KAREN KANE a transformation in its method of delivering products and services. Jolted by seismic shifts, management can often get caught up in a scramble, struggling to keep pace with change. This is a time when the board can play an important role, if it has the relevant expertise. In times of such turmoil, company leaders come to understand the value of a board member who has lived through the kind of change the company is experi- encing. And, even if it’s not the same industry, having access to a director KAPUSTA
2013 : Q3 korn/ferry INTERNATIONAL 69 corporate governance
who has experienced rapid change and company’s operations through directors holder scrutiny of directors’ compe- transformation is enormously helpful. who have industry knowledge or man- tency. But it doesn’t stop with pay At the same time, prodded by the agement expertise. packages. New disclosure rules al- changes that directors see in the com- “The great challenge for today’s low shareholders to examine what the pany’s business, boards are becoming boards in this new era of activism is ca- board counts as the competencies of its more aware of gaps in their own ranks. tering to all the diverse ‘shareholders,’ individual members. Is it clear that the What were useful or even ideal skills which includes those with a longer in- skills and experiences listed will help to and experiences for a director a decade vestment horizon like pension funds advance the strategy of the company? ago can quickly become less relevant. and mutual funds, as well as those who And increasingly, shareholders are ask- Korn/Ferry International has ob- are seeking quick profits,” wrote Ira ing to see a more diverse board, one that served these developments as it con- Millstein in a recent posting on Deal- reflects the company’s customers. ducts board effectiveness assignments. Book. He is the co-chairman of the Investor Bill Ackman set an example The work begins with interviews with Millstein Center for Global Markets and for other activists to follow in his proxy all board members, including a peer re- Corporate Ownership at Columbia Law battle for control of Canadian Pacific, an view of individual directors, and results School and a senior partner at the law underperforming company whose CEO in an objective analysis of skills and ex- firm Weil, Gotshal & Manges. delivered a negative 18 percent return over perience. Not only are the board and the CEO able to see the gaps that exist, but the analysis also provides a road- map to acquiring the skills and compe- tencies that the company needs going forward. Getting the directors to com- mit to acquiring these competencies in their next board member nomination is critical. Through the process, the CEO often can focus less on managing the expectations of the board and more on valued input from his or her directors. In the case of a major public utility, the new CEO arrived to find that his board lacked experience in working with reg- ulators, environmental groups and pub- lic policy organizations. With his board’s Boards no longer operate behind a five-year period while topping the charts agreement, the CEO recruited two new closed doors or in a vacuum. The share- in compensation. Ackman bought 14 per- directors with relevant experience, both holder advisory vote on executive com- cent of CP’s shares in late 2011 and by May of whom could be an asset to the leader- pensation or “say on pay” has provided 2012, Chairman John Cleghorn, CEO ship team and other board members, par- a window into board oversight. Direc- Fred Green and four other board mem- ticularly with increased regulatory over- tors are mindful that what shareholders bers were announcing that they would sight and environmental challenges. view as extravagant compensation can resign their positions and not stand for Board composition is also at the convey a lack of board independence. board re-election on the eve of the rail- heart of shareholder activism. With Directors on the compensation com- road’s annual shareholder meeting. more tools to achieve their agenda, in- mittee have learned that they them- By engaging with institutional in- stitutional shareholders are less likely selves can become targets for “no” votes vestors and proxy advisers, Ackman to dump their shares in struggling com- in such a situation. shared his vision for improving the rail- panies. Activists seek board seats when Activism has gone mainstream as road’s long-term performance with a they see an opportunity to improve the say on pay has come to legitimize share- dynamic new CEO and a board of di- rectors with industry expertise. He won JOE GRIESEDIECK is vice chairman and managing director, board and CEO services. His focus at Korn/Ferry is primarily on engagements for CEO and board director searches across over key institutional investors – the multiple industries, as well as working with boards of directors on CEO succession plan- Ontario Teachers’ Pension Plan with its KAPUSTA ning and other related senior talent management practices. KAREN KANE, former board secretary for the Federal Reserve Bank of Chicago, is the principal of Board Performance $100 million investment and the Cana- Strategists, a consultancy to help CEOs and boards win long-term shareholder support. dian Pension Plan Investment Board.
70 Briefings on talent + LEADERSHIP Proxy advisory services Glass Lewis and ethnically different individuals. It is di- Last year Jill Smith was elected to ISS supported Ackman, resulting in an versity of thinking and experience. the board of Endo Health Solutions, a overwhelming number of investors who Competencies are key. How could company that prides itself on delivering were willing to upset the status quo of a board without digital and social me- “solutions for 21st century health care.” one of Canada’s largest and best-known dia business experience fully grasp the Smith brings technology and interna- businesses. Cleghorn and Canadian Pa- need for strategies that promote the tional experience to the board. Hav- cific had been “Ackman-ed,” the new product through direct engagement ing begun her career with technology business term for the fate that befalls with the consumer, shareholders could companies in London before becoming an unresponsive and ineffective board. ask. As Stephen Davis, associate direc- chairman and CEO of DigitalGlobe, the The Ackman lesson is not lost on tor and senior fellow at Harvard Law satellite company, Smith oversaw Digi- CEO’s. They are looking at their own School’s Programs on Corporate Gover- talGlobe’s stellar growth and transition boards and the boards of their competi- nance and Institutional Investors, says to a publicly held company. She also be- tors as well. CEO’s who see competitors “If you’re not on social media, you can’t came the second female on the board, adding technological know-how and quite appreciate its power as both an as- adding to the board’s diversity. global experience to their boards are set and a liability. I’m not saying every By recruiting Gina Bianchini, likely to be more vocal about recruiting director should have that experience, founder and CEO of Mighty Software directors with strategic capabilities. but you need one or two or you won’t be and former CEO of Ning, Scripps Net- At the same time, as legacy directors asking the right questions.” work Interactive expanded its board’s age, their skills may become less rele- The business case for diversity at the critical capabilities. A pioneer in social vant. Even in the face of greater scru- board level is compelling. networking, she helps clients use social tiny, most directors like their jobs and A study by Wellesley Center for Women software in a way that connects them online and off. Bianchini brings critical expertise to the board while raising the number of women on the board to three. Creating a winning board demands more A company that has long been focused than simply recruiting directors with the on technology and diversity, Wal-Mart recruited another talented female vice desired skills and backgrounds. ... president of Google to its board in 2012, It is diversity of thinking and experience. increasing the number of female board members to four. Months later, Marissa Mayer was named CEO of Yahoo. It’s fair to say that boards are look- believe that they should continue un- some years ago documented that the ing around the table and realizing that til retirement. Some have likened board number of women on a board makes a they may not have the relevant exper- service to a tenured faculty position. In difference. While a lone woman can and tise to help the company deliver on its 2012, the number of new director po- often does make substantial contribu- strategy. The new generation of direc- sitions in the S&P 500 fell to 291, a de- tions, and two women are generally more tors will provide general management crease of 12 percent in five years and a powerful than one, increasing the num- and industry expertise along with fi- 27 percent drop from a decade ago. ber of women to three or more enhances nancial business knowledge. Boards Meanwhile, shareholders are pay- the likelihood that women’s voices and are defining their specific needs in -di ing closer attention to the diversity of ideas are heard and that boardroom rector candidates who provide insights boards as it relates to a company’s strat- dynamics change substantially. into new customers, technology lead- egy, along with the relevance of each di- Additionally, studies by Catalyst have ership – particularly as it pertains to rector’s experience on the board. Diver- validated a performance-based ratio- channels and transformation – as well sity, technology and global involvement nale for adding women to boards. Results as international market experience and are the game changers. have demonstrated that companies with diversity in gender, ethnicity and age. Creating a winning board demands women board members outperform com- As directors continue their board ser- more than simply recruiting directors panies with only male directors. Most vice in this increasingly transparent and with the desired skills and backgrounds. boards have received the message from demanding world, boards understand Diversity in the boardroom is not simply their shareholders that they need to in- that they sometimes need additional the inclusion of women and racially or crease the number of women directors. help in overseeing CEO and board suc-
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cession. They recognize how crucial it ented and diverse individuals with spe- positive business outcomes to their cli- is to assess and attract leaders who can cific expertise as they ascend in their ents. It’s a way that Korn/Ferry is look- motivate the work force to deliver the careers. This process, called “pipelining,” ing more holistically at its business, not shareholder returns that investors seek. helps boards see the talent available in simply recruiting talented leaders but Korn/Ferry recently acquired Global a level just below the CEO. Many CEO’s helping companies to build enduring Novations LLC, a widely respected and chairs of nominating/governance strength by harnessing their work force global provider of diversity, inclusion committees have made this a priority. to do great things. and leadership development strate- Korn/Ferry and Global Novations In the end, effective boards, willing gies, to deepen its capabilities in work- work closely with CEO’s and boards to exert their authority by representing ing with boards and leadership teams. in assisting them in their talent man- shareholders and holding management Global Novations has developed pro- agement, enabling them to build the accountable, are a vital tool of modern cesses to help boards get to know tal- high-performing cultures that deliver capitalism. K/F/B
by karen kane thinking differently
vidence abounds that “While this focus is not Diversity in the board- candidates proactively and a group of diverse in- entirely new, the intensity room, defined simply as the making board introduc- E dividuals is likely to and deliberate speed of the inclusion of women and ra- tions before the position is make better decisions, mak- efforts has significantly in- cially or ethnically different open. This practice helps the ing boardroom diversity a creased,” said Stuart. “This individuals, is just one as- board to better understand key shareholder concern. is partly due to the rec- pect of board composition, the value and availability of The Securities and Exchange ognition that past strate- which also involves having a broader range of talent in Commission affirmed this gies have yielded very lit- the right skills and experi- the marketplace. when it updated its proxy tle change in board makeup. ences. Many boards now de- “As diversity increases disclosure to require boards The increased focus also re- velop a matrix of skills that and boards become more to include their consider- flects the critical nature of members bring to the board complex, we also work with ation of diversity. this topic to the board’s and, along with a gap analysis of boards to build a culture of Increasingly, boards are in turn, the organization’s what the board needs in its performance and collabora- looking critically at them- overall performance.” directors going forward. tion,” said Stuart. “Over the selves and developing strate- Strategies for building di- “Pipelining,” or position- past 20 years, we have be- gies to expand the breadth of verse and inclusive boards ing executives within the or- come experts in onboard- backgrounds, experiences and vary by organization. Sev- ganization for board ser- ing executives to a new en- perspectives of their direc- eral approaches, however, vice at other companies, is a vironment. This experience tors. “Boards recognize that a have been identified as best growing practice. “There is allows us to help our clients shift towards more diversity practices. “Our clients are no better proving ground for form a more inclusive cul- and building an inclusive cul- pursuing several means to- an executive leader than be- ture and create the kinds of ture are essential if they are wards increasing the diver- coming a director for another teaming relationships that to successfully navigate the sity and inclusiveness of company,” said Stuart. Not enable directors to work to- economic, societal and demo- their boards. Some of these only is the executive able to gether more effectively.” graphic changes shaping the include establishing for- bring his or her skills and ex- The rising importance of global marketplace,” said Oris mal targets for nominating periences to the board, but board diversity coincides with Stuart, CEO and managing slates, expanding their reach he or she learns firsthand the increasing complexity partner of Global Novations, for new candidates, building about serving in a strategic and globalization of busi- a global provider of diver- or reinforcing tenure limits, rather than operational role ness. Global Novations is a sity, inclusion and leadership proactively pipelining, and and gains experience in gov- natural extension of Korn/ development coaching. The creating rigorous onboard- ernance in the process. Ferry’s capabilities in guid- firm was recently acquired by ing processes for new direc- Another aspect of pipe- ing boards to higher levels of Korn/Ferry International. tors,” said Stuart. lining is identifying diverse performance. K/F/B
72 briefings on talent + LEADERSHIP