corporate governance 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.