Whack 'em with a Board!

Shareholders (and ethics) demand that boards stop sleeping on the job.

Boardrooms around the world are going through an extraordinary transition. There is a greater understanding of the power and responsibility of boards, and boards no longer exist in a black box. The message from investors now is: We’re watching you!

The Shareholder Spring, as the recent period of shareholder activism has been dubbed, shows that investors, stakeholders, regulatory bodies, governments, and the general public are taking a greater interest in what goes on behind the closed doors of the boardroom. Ignoring this new call for transparency is futile, and leads to accusations of being out of touch and tone deaf in a soundproof room.

This year has been a bit of a rude awakening for boards. HP, Yahoo, NewsCorp, Facebook, Goldman Sachs, MF Global, AstraZeneca, Barclays, Olympus, RIMM, Kodak, and many others were in the headlines for all the wrong reasons. Boards have been criticized by investors and other stakeholders on a wide range of issues, including their composition, competence, diversity, voting control, and dual stock structures. No sector is immune, no director untouchable.

Gone are the days of the rubber-stamp board. The lesson is clear: organizations suffer greatly when independent board members don’t ask hard questions, and refuse to hold executives accountable for not just the profit margins but the ethics of the company. A complacent board jeopardizes a company’s future.

Boards need to change; serving on a board needs to be considered a job, and not an annuity. As board members we are treated very well. We are sent manicured board papers in advance of board meetings. We are collected at the airport, transported to meetings, treated to lovely meals, and given slick and painstakingly prepared presentations. If we are not careful, we can become too comfortable, complacent, and lacking in a fingertip feel for the organization.

The best boards have chairs and members who are truly independent and engaged, who work hard to get a complete understanding of the business their organization is in, and the one it wants to be in. As board members, we should be assessed on how well we fulfill what I call our “grounding and stargazing” responsibilities: making sure the company manages its risks prudently and operates at all times in a responsible, legal and ethical manner, while at the same time keeping an eye on the strategy to future proof the organization, and that it is ready and able to respond shrewdly to future challenges.

It is also clear from reading the stories accompanying all the recent headlines about boards behaving badly, boards need to be more diverse in every way—gender, professional expertise, ethnicity, age, international perspective, and more. A truly diverse board will present more opinions from more perspectives, have fewer common assumptions, and misconceptions, and is more likely to understand, and relate to, the needs of all of the company’s customers, employees and investors.

It is critical to have the right group of people sitting around the boardroom table, but those directors will only be useful if they are allowed to operate with complete candor. Independent board members have to be comfortable asking hard questions, and in fact, it needs to be clear that this is a requirement. In such an environment board members can discuss a wide range of topics essential for their organization’s short- and long-term success, including sustainability, the changing work force, innovation, infrastructure, technology, internationalization, communication, and the balance of continuity and change.

Better boards require better leaders around the table, and being a leader in the boardroom isn’t just the job of the chair or lead director—it is the responsibility of every board member. Leadership means not bowing to peer pressure or groupthink. It means not acquiescing when you are the only ‘obstacle’ that stands between clarifying a point and breaking for lunch. It is about being the voice of caution when the rest of the board is in a state of euphoria.

Being a good leader also requires active engagement inside and outside the boardroom. When you first join a board, get to know the people you will be working with, and the business your organization is in—its competitive landscape, its stakeholders, employees and customers, and even the communities in which it operates. Independent knowledge is power.

Showing great leadership in the boardroom also means knowing when it is time to leave. Keeping a board fresh is important, but it is a topic often discussed in hushed tones. There is a real danger of board seats being treated like sinecures. As companies grow, boards need new faces, new ideas, new perspectives, and new expertise. As board members, it is our individual responsibility to know when to go, rather than waiting to be pushed by the nominations committee or the board chair. There are several reasons to leave a board, including: you’ve served too long, your expertise is no longer required, you’re not pulling your weight, you’re obstructively disruptive, or your actions, inside or outside the boardroom, bring distraction or disrepute. No one wants to be the person everyone around the table feels is not contributing, and you never want the board to have to take formal actions because you have outstayed your welcome. Although humbling to admit, no one is irreplaceable, and the best service you can give is to step down, help encourage board refreshment, and resist the temptation to manage from the grave.

The Shareholder Spring has been a good thing for investors, and a good thing for boards, even though many directors might not feel that way right now. It has fostered a long overdue public conversation about the role of boards and board members. A good board—one that is engaged, transparent and accountable—is a tremendous asset to an organization. The evolving boardroom requires every board member be a great leader, from the moment we are appointed to the day we step down.

Date

25 June 2012

Reuters Magazine: The Leadership Issue

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