The Problems with Boards
Boards of directors can become dysfunctional for a number or reasons: if members lack the right skills, don't prepare for board meetings, or seek to dominate the proceedings, says Roger Kenny, president of New York-based Boardroom Consultants, a unit of Slayton Search Partners. Doing the job of a director requires a delicate balance between being more assertive than in the past but not so assertive as to undermine management, he adds.
Here are edited excerpts from a recent conversation:
Overall, are boards of large, publicly traded companies managing themselves better than they were in the Enron era?
A lot of incredible things have happened. Five years ago, we didn't always have a leader of the board. Ten years ago, we didn't have executive sessions on boards without the chief executive officer being present. Fifteen years ago, we didn't have governance committees. All that has happened.
So what goes wrong on a board?
There are always a couple of directors on each board who need some help or some feedback. The worst thing a board member can do today is not be prepared, because then all the reading material has to be re-presented to the board. That cuts into the time they have for dialogue, and they have to have dialogue or die as a board.
Sometimes they have the wrong leader and it's hard to change that leadership. If you have a nonexecutive chair, which is becoming more of a trend, that person not only manages the board, but also manages the agenda and the meetings, separate from the CEO. It's hard to give that person critical feedback.
Another problem is that strong directors can cross the line and not stay at the strategic level.
Do some directors simply lack the skills to be effective?
You have some directors who have been on the board a long time and they've made wonderful contributions, but they may not be the right person to be sitting in that chair today because the board may need something entirely different. You may need directors who understand strategy or directors who understand CEO succession. The board may need people with experience with the Internet or technology or marketing. And they probably need a lot more international people on U.S. boards since global sales are becoming an increasingly large part of the business.
Or in some cases, you have board members who don't know enough about the company and the industry. There may have been an inadequate amount of preparation for directors. The job of educating new directors is often delegated to the general counsel or corporate secretary. It's all done in one day and that's not enough. There needs to be a number of more concentrated education sessions so that they have a clearer understanding.
Isn't it pretty shocking to have directors who don't understand the strategy of their companies?
You'll remember the three aging white men addressing Congress about Enron? They couldn't articulate the strategy of Enron and they were directors.
At the opposite end of the spectrum are directors who are too intrusive?
There's a close correlation between the board members who cross the line and those who are disrespectful to management. That's very serious and that needs to be corrected. Some directors hold their views very strongly and they try to intimidate other directors. Even worse, they have trouble moving on to the next subject.
You may have a loquacious director, the fellow who's so articulate he feels he has to expound on every subject, sometimes even on both sides of the subject. I've had to give this kind of feedback: "Sir, here is what your board is telling you. Your fellow directors love you, but you're so articulate that you intimidate them."
Why do boards turn to outside consultants such as yourself for assessments?
It takes a third party to give independent directors the kind of feedback they need.
We've gone from assessing whole boards to now assessing specific committees and specific directors. We've told people: "You've served your time and it's time to move on." That's not easy for a fellow director to do.
But isn't it the job of the nonexecutive chairman or the lead director or the head of the nominating/governance committee to sit down with a problem director and have a quiet chat?
It's hard. There's a sense that this is a peer group. And when you're in a peer group, people are reluctant. A case in point is this one fellow on a board whose fellow directors said he was impossible to work with. Yet because of who he was, no one on the board was giving him feedback. That's not unusual. These individuals are shocked when told they are engaged in dysfunctional behavior.
Of the largest 500 public companies in the U.S., what percentage would you say have boards that are really performing well?
I think too many boards think they're doing well and are afraid to rock the boat. They've delegated the assessment to a simple questionnaire that is tabulated by the corporate secretary. It doesn't produce much substance at all. We have a long ways to go. Back in 1988, only 12% of the Fortune 1000 used any kind of third-party help in selecting directors. Today more than 90% do it. We have the same kind of opportunity now for third-party assessments. Our firm has done 28 of them.
Don't lawyers tell boards to conduct only internal assessments for fear that any outside assessments will be subpoenaed and become the basis of shareholder lawsuits?
Yes, but it's been five years now since the New York Stock Exchange mandated assessments and I don't know of any company where the materials of assessment processes have been subpoenaed.
CEOs used to really drive the compositions of their boards, and allegedly stack them with pals. What role can CEOs play in today's environment?
It's a mixed bag. With all the changes that have come about and with the obvious problem of attracting directors today because of liability and time commitments, no one is going to go on a board if they learn that the CEO doesn't really want too much help. That's the first sign of a dysfunctional board. If the CEO is making all the decisions with regard to new members, that's a bad sign and good directors would back away.
We're seeing a shift toward nominating and governance becoming a real committee. In the past, nobody wanted to be on it because it didn't do anything.