Corporate Boards – The Shortfall of Conventional Wisdom

Much like the conventional thoughts of how Board’s operate, there exist conventional ideas of who makes for a good Board member. The following list describes common beliefs (in bold) about the requirements to construct a high-quality Board and the regular practices of an elite Board.

1. Board members should be current or former CEOs. The skills required of a CEO are unlike than those for a Board member. CEOs must be hands-on and ready to execute strategy. Boards are more hands-off and oversee strategy. Further, only a small fraction of Board members regularly acquire education on governance expertise. While valuable to a Board, members who are external CEOs should receive schooling on successful governance skills.
2. The past CEO should be on the Board. Assuming the previous CEO resigned or retired on fine terms, some Boards keep or place the former CEO on the Board for historical reasons or stability of leadership. The principal challenge is the de facto passing on of leadership to the current CEO. Does the previous CEO’s presence help, hinder, or hurt the leadership influence of the existing CEO? Do the Board and former CEO ruminate on “how we did it in the past” versus what the present CEO believes should occur in the future?
3. Board members should be more seasoned. Many Boards are made up of members who have been on the Board for many years, sometimes many decades. While age is not a limiting factor for serving on the Board, does your Board adequately represent the demographics of your customer base? Some Boards may press to add greater numbers of youth to the Board as a balance measure. Does this take away from experience? The key is to discuss, as a Board, how your ideal Board might look, in a demographic sense. Then, over time, work to nominate or appoint Directors who fit that need.
4. Being financially invested in the company is a reliable qualification. Equity involvement does not always equal complete commitment. A very large segment of Board members for Fortune 500 companies hold very small proportion of their investable assets in the stock of the company they serve as a director. And while using your company’s products or services extensively demonstrates consumer commitment, it doesn’t mean much in terms of governance skills.
5. Regular Board meeting attendance equals appropriate governance. A popular motivational phrase might read, “99 percent of life is showing up,” but that is not the case as a measurement of successful Board habits and skills. Being physically present is extremely important; however, how one engages during a Board meeting is more essential.
6. Large Boards and committees make for better governance. A large number of Board members may add defense for a diverse Board argument, but it usually ends up as a case study for too many “hands in the pot.” The optimal size for most Boards is seven since it is large enough for an assortment of viewpoints, yet small enough to manage properly. Boards larger than seven in number work best when each Board member is wholly engaged and committed to following the tasks where the Board wants most involvement.
7. Independence makes for best governance. In principle, the lion’s shares of all Boards are independent. The accountants and examiners can verify it in their annual reports. However, because a Board is independent does not make that Board engaged and effective. Many of the publicly-traded company disasters of the past decade were businesses with an, officially, independent Board. Only the habits of progressive, engaged Boards make for the best levels of governance.