Let me first start by saying, I’m as guilty as anybody. For 25 years I have contributed to creating board education programs that included the phrase “high-performance board” in the title. Never once was I asked to define a high-performance board—not by a board member, corporate secretary, investor, or even by my staff or editors. How exactly should a high-performance board be defined? Can a board be high-performance if it isn’t diverse or compliant with regulations?
To answer the definition question, I turned to the internet and found a host of descriptions that varied greatly. Unsurprisingly, the most common performance characteristic or measuring stick was whether the company was achieving a consistent growth of operating profits and shareholder value.
I wasn’t satisfied with my research, so I decided to ask industry gurus their views to see if I might gain some clarity when forming my own definition. I sought the counsel of the following sources: Doug Chia, the former assistant GC and corporate secretary for Johnson & Johnson and current Executive Director of the Governance Center at The Conference Board; Dr. Richard LeBlanc, a leading expert and speaker on corporate governance and boards and the author of The Handbook of Board Governance; and the CalSTRS team of Anne Sheehan and Aeisha Mastagni, who lead and support the retirement system’s corporate governance.
I posed two questions to this esteemed group.
Did I find any notable consistency in their responses? The simple answer is no—perhaps a testament to the multifaceted nature of my questions. But I did gain some valuable insight from their answers. Here is an excerpt from LeBlanc’s description of high performance:
“A high-performance board is a board whose management and company outperforms its industry peers. This definition is narrow and is the way that activists view a board.”
Chia, on the other hand, was very methodical in his definition, citing several fundamental characteristics of good governance: an independent leader, a good rapport with the CEO, a willingness to meet with investors, a devil’s advocate approach and a keen sense of corporate culture. But I actually learned more about how he felt when he responded to question number two on diversity: “‘High performance’ is not something that can be measured in dollars,” he said. “It is very hard for an outsider to see. In fact, I don’t agree with people who judge directors and boards by financial metrics like revenues, EPS and TSR.”
Finally, there was the feedback from the CalSTRS team. Sheehan and Mastagni made some great points about the challenge of measuring any board or a particular characteristic over a short period of time. Without them saying it directly, I came away with the idea that the shareholders are perhaps the best judge of whether a board is high-performance or not. Unfortunately, not all shareholders think alike, as we’re witnessing with recent short-term versus long-term performance debates.
In my mind, a board that is not constantly challenging itself and the status quo shouldn’t consider itself high-performance.
It was interesting that neither Chia, Sheehan nor Mastagni felt that a board with no diversity could be considered high-performance, regardless of its operating earnings and share price growth. LeBlanc took a much harder short-term activist view. “If a board has a stellar bottom-line growth trend and ever-increasing stock price, then yes, you are a high-performing board,” he said. “The focus should be on the value creation mindset of directors, first and foremost, and then diversity, not the other way around.” His book verifies that he is a great supporter of board diversity, but his point, in this case, seems to be that even a diverse board could fail. While the two are tied in many ways, a value-creation mindset is not necessarily dependent on a director’s diversity profile.
All my research and discussions proved helpful on my quest for a definition. In the end, I was able to settle on one I was comfortable with—its foundation stemmed from an excerpt of an old Heidrick & Struggles publication on building high-performance boards. I have taken the liberty to update it to fit today’s governance landscape.
“A high-performance board governs by continually challenging—in a positive way—every significant aspect of the company’s and the board’s operations: its structure and business models, its strategies and underlying assumptions, its operating performance, and its leadership and leadership development. In doing so, a board should seek to create a culture of rigorous, relentless examination and press for continuous improvement. This way, it can set a ‘tone at the top’ that reverberates throughout the organization—to employees, to customers, to shareholders, and to the communities served by the company.”
What I really like about this definition is that it eliminates any time reference from the measurement of performance. Whether one is talking about financial performance, stock price, environmental impact, board composition and/or diversity, the focus is on constant evaluation and an unceasing quest for improvement. In my mind, a board that is not constantly challenging itself and the status quo shouldn’t consider itself high-performance.
On whether a board with no diversity could be considered high-performance, by my definition above, I can’t believe that a board could be “constantly challenging itself”—including its strategies, its composition and its leadership— and not see the value in diversity of thought, skill set, gender, race and so on. I do look forward to the day when there is no reason to label board members as “a female director” or a “director of color,” but just a “corporate director.” Not sure I will be around to witness that moment, but hopefully my daughters will.
TK Kerstetter is the CEO of Boardroom Resources LLC and is a second generation pioneer of governance thought leadership and board education. He can be reached at tkkerstetter@boardroomresources.com.