TheCorporateCounsel.net

Board composition is always a hot topic. During the past several years, investors have pushed for skills matrices & diverse backgrounds – in order to provide some comfort that the board is well-positioned to address dynamic business risks & opportunities. But, board quality is difficult to measure. This 47-page report from JamesDruryPartners’ takes a stab at it.

The report offers a number of public company board stats that could be useful for benchmarking, and even ranks companies based on their “average director weight” (fortunately, this is referring to business acumen, not body mass). The report also offers commentary and recommendations. Here are a few points that jumped out:

1. The the number of board seats filled by active & retired CEOs has been declining:

The percentage of CEOs serving on external boards ticked lower, continuing a prolonged decline that began decades ago. Examining the 582 boards common to both this report and our last report, the number of board seats filled by CEOs (active and retired) decreased by 4.9% (from 2,079 to 1,978). Board seats filled by active CEOs decreased by 11.8% (from 536 to 473); those filled by retired CEOs decreased by 2.5% (from 1,543 to 1,505).

2. Only 52% of “financial experts” have CFO or public accounting expertise. The report urges boards to consider CFOs for board seats:

We remain concerned that boards undervalue the disciplined financial perspective that CFOs and Public Accountants can bring to boardroom deliberations. When we ask boards about the underrepresentation of CFOs, the most common reply is, “If we were to consider a CFO for our board, they would have to have a broad-gauged, strategic business mindset, not a corporate controller’s perspective – perhaps a CFO who is now, or might become, a CEO.” We certainly agree with the strategic mindset requirement; however, in our experience, other than the CEO, CFOs are very often the second ranking corporate executive most engaged in the company’s total business operations. Therefore, we strongly encourage boards to challenge this outdated thinking.

Directors designated as Financial Experts should truly be independent financial experts, not professionals who qualify simply because they work in the finance industry or are P&L executives who have a finance department reporting to them. One board in our study even designated a director as a Financial Expert based solely upon their service on another board’s Audit Committee.

3. Based on the number of mentions in a survey of experienced directors, page 14 of the report identifies the “Top 10 Most Essential Attributes of Effective Board Directors.” Here are the top 3:

– Communication Skills (73%): Thoughtful, logical, and articulate. Doesn’t dominate boardroom conversation. Knows when to speak. Understands the impact of words and tone. Not compelled to contribute to every topic discussed. Does not comment just to get credit. Listens more than speaks. Speaks only when has something valuable to contribute. Able to build on the commentary of others and take it to the next level. Focuses discussion on the right strategic level. Does not rush to conclusions. Objective in their commentary.

– Professional Collegiality (67%): Good social and people skills. Likeable. Proactive in developing relationships. Collaborative. A team player. Contributes to the success of others. Not a “gotcha” type. Discreet, diplomatic, and tactful. Respectful of tradition. Sensitive to the views of others.

– Relevant Experience and Knowledge (63%): Track record of high accomplishment and success, ideally in business. Leads from competency. CEO experience is considered most valuable, ideally in a large, complex organization. Business intelligence is most relevant, compared to intelligence in non-business fields. Best directors tend to be all-around athletes with significant breadth. Can grasp a broad range of business issues. Seasoned, mature, and resilient. Understands risk. Able to deal with the good and the bad. Capable of boardroom leadership impact when necessary and appropriate.

4. Governance capacity & “average director weight” aren’t necessarily correlated to company size.

Some large companies score poorly and some small companies score very well. Page 24 offers a “governance capacity worksheet” to use when filling a board vacancy.

5. Expanding your board size and replacing retiring directors with individuals who have more substantive experience are two steps that can help improve your board’s governance capacity & board weight.

– Liz Dunshee