The role of boards of directors has become increasingly complex in recent years. Investors, academics, legislators, regulators, and the general public are increasingly concerned about how effectively boards and individual directors are performing.
Whereas in the past a board was mainly evaluated on how the company performed financially, including shareholder returns, the scrutiny has broadened considerably.
“While the board represents shareholders from a governance perspective, it must also ensure that the company’s strategy, as led and executed by management, also considers the interests of a much broader group of constituents: employees, customers, investors, and the community,” says Tierney Remick, vice chairman of board and CEO services at the consulting firm Korn Ferry.
In recent years, large institutional shareholders and legislators have begun examining public companies and their boards on nonfinancial factors, says Jason Frankl, senior managing director at FTI Consulting.
They look at organizations and their boards using metrics such as environmental impact, how they pay executives relative to typical employees, and the diversity of their workforce and the board itself, among other factors, Frankl says.
The new business environment shaped by the COVID-19 pandemic, including the massive shift to a work-from-home model, increasing economic uncertainty, and a growing emphasis on digital transformation and automation, has clearly had an impact on boards of directors.
“The dramatic increase in the pace of change caused by the pandemic, economic uncertainty, and social unrest is now being increasingly understood,” says Tierney Remick, vice chairman of board and CEO services at Korn Ferry.
“Now, board members have strategies for more aggressive scenario planning and different market conditions,” Remick says. “One example would be reevaluating the strength of a supply chain and the supplier network to avoid shortages that were experienced in many sectors.”
In addition, there is an enhanced focus on board and C-suite succession. “Coming out of the pandemic, many boards and leadership teams realized a need for new or different skills,” Remick says. “The board and management learned a lot about each other’s resilience, creativity, and how to lead and support a company through a crisis with incredible ambiguity.”
The way boards meet and connect may move to a new model, with a hybrid of virtual and in-person meetings. “The board calendar may adjust to accommodate for more frequent meetings, depending on the needs of the organization,” Remick says. “We anticipate that board commitments will increase, and scenario planning will be expanded.”
The shift to virtual meetings will not likely revert anytime soon. “Such meetings can take place more frequently, on shorter notice, and with less cost than in-person meetings,” says Jason Frankl, senior managing director at FTI Consulting. “Furthermore, annual shareholder meetings may allow shareholders to participate both virtually and in person, making it far easier.”
The pandemic “has reinforced the forward-looking emphasis on boards,” says Gerry Salontai, CEO at Verdantas LLC. “Those that had little emphasis on the future are now retooling their agenda with this in mind.”
The global health crisis and resulting shifts have created opportunities for the engineering industry more so than other sectors, says Salontai. “We are sailing with strong tailwinds in many sectors of the business,” he says. “That said, it has caused us to look at what might be over the horizon for our clients and their companies. In particular, there also needs to be a focus on our workforce of the future and how we can continue to collaborate, maintain quality, coach, and build culture.”
“More groups measuring a board on more factors makes that board’s role inherently more complex.”
JAson Frankl
Senior Managing Director
FTI CONSUlting
“More groups measuring a board on more factors makes that board’s role inherently more complex,” Frankl says. “This is compounded by the fact that directors whose careers have been focused on business are likely to be less well-versed in ESG, or environmental, social, and governance factors, than in traditional measures of business success.”
Income and wealth inequality have increased in the U.S. in recent decades, Frankl says, and that impacts the way boards are evaluated. “The biggest companies have gotten bigger, absolutely, relative to others—in large part due to how technology lends itself to scalability,” he explains. “Think about how much less capital and management oversight is required to sell additional online search ads or software versus how much is required to open an additional retail store or manufacturing plant.”
“An effective board is one with an agenda that is balanced with forward-looking topics rather than just reporting on results, has a diverse set of individuals who bring different perspectives, and challenges the status quo—all in an environment of great teamwork and collaboration.”
GERRY SALONTAI
CEO
Verdantas LLC
Some of the largest companies in the world, such as Apple, Google, and Amazon, are used by individuals every day, giving them tremendous visibility with the public, Frankl says.
At the same time, the notion that companies should focus more on nonfinancial metrics, including ESG metrics, has gained broader acceptance among investors and others, Frankl says. “All these items have led noninvestors to look more closely at boards,” he says. “However, many non-investors care far less about how boards perform their core function—oversight of the business—than how the business performs on ESG metrics.”
So what constitutes an effective board of directors, given the broadening criteria for evaluating performance?
“An effective board is one with an agenda that is balanced with forward-looking topics rather than just reporting on results, has a diverse set of individuals who bring different perspectives, and challenges the status quo—all in an environment of great teamwork and collaboration,” says Gerry Salontai, CEO at Verdantas LLC.
A strong board also has foresight. “The board has a responsibility to ensure that there is a vision and strategy for the company, one that supports its continuity and sustainability,” Salontai says. “It’s crucial that a company’s purpose and values align within each other and with the strategy set forth by the leadership team and the board.”
When planning and executing a corporate strategy, it’s important to distinguish the board’s responsibilities from those of the executive management team.
“We often hear that the board should be discussing and developing strategy,” says Dilip Choudhuri, president and CEO of Walter P Moore. “The vision and vivid description of a firm should be developed by the board in conjunction with the CEO and other key stakeholders. The vision informs the strategy, which should be driven by the CEO.”
Boards must create quantifiable and realistic goals for the company and its leaders—and that means rewarding successes and holding accountable those who don’t make their goals, Frankl says. “An effective board functions as a team focused on the long-term strength of the company,” he says. “It is curious and digs into the details so that it can understand what has been happening with the company, as well as future opportunities and challenges that the company may face.”
The mission, vision, and core values of an organization are fundamental pillars to its operation, and the strategic plan should be aligned with these pillars, says Kathleen Tamayo, a consultant at Spencer Stuart. “They are the north star for the board,” she says. “The board might shape them in terms of reviewing, probing, asking questions, and pressure testing. But ultimately it is the executive team that brings them forward. It is the board’s job to approve what is presented and oversee the execution.”
“We often hear that the board should be discussing and developing strategy. The vision and vivid description of a firm should be developed by the board in conjunction with the CEO and other key stakeholders. The vision informs the strategy, which should be driven by the CEO.”
DILIP CHOUDHURI
PRESIDENT AND CEO
Walter P Moore
Another key consideration is the makeup of the board. “Highly effective boards have a diverse composition of members, including experienced and first-time directors and executives from inside the company’s industry as well as relevant adjacent sectors,” Remick says.
Boards are most effective with a thoughtful cross section of executives who represent different functional orientations, ages, genders, and ethnicities, Remick says. “There is solid data that shows when a board has broad representation, that is typically reflected in management and leads to higher performance and a commitment to innovation,” she says. “Highly effective boards also ensure that all voices in the boardroom are heard and optimized.”
“Stakeholders have become more explicit in demanding that boards demonstrate that they are being thoughtful about who is sitting around the table and that directors are contributing,” Tamayo says.
The focus on diversity must extend into the workplace. “Boards have been discussing the issue of diversity and inclusion for some time, but the biggest shift we’ve seen in the past year is moving from words to actions,” Remick says. “This includes making systemic structural as well as behavioral changes to support the creation and development of a sustainable, inclusive workforce.”
“There is solid data that shows when a board has broad representation, that is typically reflected in management and leads to higher performance and a commitment to innovation.”
TIERNEY REMICK
VICE CHAIRMAN OF BOARD AND CEO SERVICES
Korn Ferry
Adds Tamayo: “Companies are on a journey, and most are probably not where they should be. Companies are going to need to be strategic and intentional about promotion, development, and retention. With thoughtful intention, they will see an increase in diversity in the boardroom and C-suite.”
Stakeholders are also pushing boards to seek greater transparency about how they address their own performance and the suitability of individual directors, she says.
Boards should be using assessments as a catalyst for refreshing membership as new needs arise, Tamayo says. “The board must continually reinvent itself and evolve as the company’s business evolves, as its strategies and risks evolve, and as the management team evolves,” she says. “Boards need to have the courage to refresh and move people on and off.”
Leadership can set expectations at the outset of a director’s tenure that renominations are not simply assumed, Tamayo adds. “They are based on the needs of the board and require the sustained high performance of individual directors,” she says. “Boards are better prepared to conduct these reviews when they are disciplined about developing a board composition matrix or similar exercise that identifies gaps or overcapacity of director skills relative to the future-looking company strategies and risks.”
Salontai also warns of board member stagnation: “The board should continually be refreshed and avoid the ‘director for life’ concept, where there are no term limits, and fresh, diverse perspectives are introduced continually,” he says.
Despite the emergence of relatively newer concerns such as diversity and environmental responsibility, one of the main functions of the board continues to be maintaining a strong partnership with the CEO. The effectiveness of the board and the chief executive are interdependent.
“It has been said that a board’s most important job is to pick the right leader as a CEO,” Frankl says. “That is virtually unassailable. The second most important job of a board is to help define the company’s strategy and related goals.”
The board and company management, led by the CEO, must work together and be willing to ask difficult questions to achieve a positive outcome, Frankl says, or “a competitor will likely outperform them in the marketplace.”
Remick goes so far as to say that the most important relationship in an organization is the one between the board and the CEO. “The board is in place to support the company’s strategy and management team,” she says. “The board and CEO need to be able to discuss critical issues with confidence and open collaboration.”
If the board and CEO have differences—whether those involve a merger and acquisition, capital investments, or succession planning—they need to be able to work through them, Remick says. “If there is unhealthy tension between a board and the CEO, it will affect the communication and trust,” she explains. “This may result in topics or ideas not being discussed and/or innovative strategies not being shared or being shut down altogether.”
As firms face ongoing challenges and adapt to new ways of doing business, having strong, effective boards will be a key to their success.
“Boards need to have the courage to refresh and move people on and off.”
KATHLEEN TAMAYOCONSULTANTSPENCER STUART
Bob Violino is a business and technology writer based in Massapequa Park, New York.