Warren Buffett once said, “I don’t look to jump over 7-foot bars; I look around for 1-foot bars that I can step over.” Perhaps the same practical wisdom holds true with how boards can identify solutions to function at a higher level. In this article, my intent is to share important perspective so that you may elevate your board.
From 750 CEOs of American corporations I have interviewed, I’ve selected five executives who have impressed me with their wisdom and vision on board governance. Below you’ll hear their exact words providing insights like the three reasons why a company should substitute the CEO/executive chairman model with an independent nonexecutive chairman. The five experts are:
• Irene Chang Britt, Former President of Pepperidge Farm and current Director for Dunkin Brands, Tailored Brands and TerraVia.
• Peter Gleason, President and CEO, The National Association of Corporate Directors (NACD), which is the leading not-for-profit association for corporate directors.
• Patricia J. Harned, Ph.D. CEO, Ethics & Compliance Initiative, the oldest research and membership non-profit dedicated to serving compliance professionals.
• Thomas W. Jones, Former C-suite executive (Vice Chairman and CEO roles) for TIAA-CREF, Travelers, and Citigroup, and current Director of Altria and Assured Guaranty.
• Nancy May, CEO, BoardBench, the first organization to create a director succession model.
Robert Reiss: What is a lesson you personally learned about effective governance?
Irene Chang Britt: One of the foundational tenets of good governance is to have a well-curated board, with a thoughtful variety of specific skills and backgrounds, designed to accelerate the path to the strategy of the future. Not only skills that match functional competency requirements, but also diversity in its broadest sense, beyond just gender and race: age, industry/sector, tenure, geography, socio-economic background.
Peter Gleason: Effective governance requires communications—between the board, management, and shareholders. That communication is a two-way street, with multiple participants. The board needs to set expectations and goals for management; management needs to execute on its strategy and provide information to the board; and collectively, the two parties need to hear from, and provide adequate information to, the shareholders. The common goal is long-term sustainable profitability for the company. If any channel of those communications breaks down, it makes the goal harder to achieve. During my career, I’ve been on all three sides of the governance triangle and those experiences have helped me see issues through various lenses. I began my career working for shareholders, I’m now CEO of NACD, and I’ve had the pleasure of serving on several boards. Communications between all three sides of the triangle are critical to success.
Nancy May: Never assume that following “best practices” won’t hurt you. Who says they are “best” and right for you?
Tom Jones: A lesson I personally learned about effective governance is that replacing the independent public accounting firm can create unexpected risks with regard to whether the new accounting firm is comfortable with important accounting judgments and estimates, and adequacy of important internal controls and compliance procedures. It is particularly important to ensure that judgmental areas such as nonGAAP reporting disclosures are well-defined, supporting calculations are well-documented, and that the definitions and calculations are consistent across reporting periods.
Patricia Harned: Show me a company facing scandal (e.g. fraud, corruption, mistreatment of employees), and I’ll show you an organization with a leadership team that didn’t understand the true state of ethics & compliance across the enterprise and a board that failed to ask the right questions. Most of the problems that bring companies to their knees can be avoided; one essential element of prevention is a board that thinks more broadly about integrity and the systems that support it. Effective directors accept their responsibility to safeguard the culture of the organization and ensure that a high standard of conduct is central to business strategy. They recognize that ethics & compliance is not only a function; it is a mindset and an operational priority that has to be owned and led, starting with the highest levels of management.
Reiss: What’s an idea that will help boards of the future succeed?
Harnad: Performance metrics on ethical leadership positively affect an enterprise. The tone at the top truly matters. When a CEO is perceived as prioritizing integrity, and held accountable for doing so, misconduct throughout an organization is reduced by as much as 50%. Boards that insist on integrity performance metrics for CEOs reduce compliance risk and consistently strengthen organizational culture over time.
Britt: I have always maintained that boards hold a responsibility beyond basic governance...that we must help the management team see "around the next corner". We owe it to the company to spend our hours outside the boardroom voraciously studying the coming trends, and then sparking thoughtful debate and discussion in the boardroom on what might be important tomorrow, vs the issues of the day.
Gleason: Clearly in the long term, board success cannot be distinguished from company success. If a company fails, the board failed. The converse is also true. Critical to success is that boards need to know how to intervene when management is heading the wrong way, and how to step back when management is headed down the right path. This requires boards themselves have a good sense of direction and the ability to observe performance and carefully execute oversight. Therefore, we return to some governance basics for success: constructive engagement in strategy, ongoing management evaluation and effective communications.
May: Few directors find it comfortable planning for their own succession or assessing how each truly creates value for their firms. An INSEAD study noted that an individual’s contributions decline after eight years in the same position. Many will argue against this, but boards should not ignore this. Longstanding directors (and CEOs) become more comfortable and start to resist change. Change is necessary for growth and life, and is inevitable, even if denied. Resistance to change will eventually put you under a steamroller. Honest and regular assessments of who’s around the board table, if done well, will show what needs to change, so the firm can continue to compete in ever more volatile, dynamic markets.
Also, few directors are comfortable with testing how to rock the norms. Boards must support incubating and testing new ways to disrupt their markets so as to better serve their customers. No change = no customers = no company = no board. Testing and pushing “comfort” will open opportunities, and increase the board’s value to all.
Jones: An idea that will help boards of the future succeed is to embrace the concept of an independent nonexecutive board chairman. This strengthens board governance and management oversight because 1) the independent nonexecutive chairman is an independent fiduciary on behalf of the shareholders; 2) the independent nonexecutive chairman can set a strong “tone from the top” with regard to board governance, and board reliance on effective internal audit and compliance functions; 3) an independent nonexecutive chairman should be able to devote substantial attention to ensuring continuous board improvement with regard to people, skills, and processes; and 4) an independent non executive chairman enables the CEO to focus 100% on running the business, not running the board.
… In summary of the quotes you’ve read from the five governance experts, when Nancy May advises that best practices are not one size fits all, potentially a good starting point is for every board to understand its unique nature and dynamics and create the governance model that works best for them.
To hear audio and watch video of top CEOs like these, go to www.ceoforum.ceo
