Building a Resilient Board Through Dynamic Recruitment, Strategic Onboarding and Nurturing a Robust Culture
How can boards become higher performing, increasingly diverse and more resilient? Participants discussed this question at the recent Directors Dialogue held in Philadelphia. It was organized by the Raj & Kamla Gupta Governance Institute at Drexel University’s LeBow College of Business.
In an era marked by rapid change and increasing complexity, board size and director tenure have remained notably stable for the past decade, in stark contrast to the pace of regulatory, economic, social and geopolitical change. Boards require regular refreshment and consistent upskilling to stay in front of issues, lean-in to emerging topics, and provide informed oversight.
Strategic Planning
Boards traditionally focused the most time on operations and compliance with only one meeting per year focused on the annual strategic review. As massive shifts in strategy over relatively short periods of time become increasingly common, this approach to time management is being turned upside down. Today’s boards should devote time during every meeting for a deep dive into a component of the strategy and to reassess the company’s risk profile and board’s risk appetite. Boards must not only oversee implementation of the strategic plan, but actively and repeatedly challenge the assumptions that underly it and thoroughly interrogate options discarded by management they may need to pivot to if plan A is disrupted.
Board Tenure
Participants agree on the need for boards to rethink term limits and board succession planning. The boardroom is arguably the company’s most powerful real estate, yet director turnover is often tied to retirement age rather than board performance, strategic shifts that call for different skills or technologies that require new competencies. Few U.S. public companies have term limits, and those that do often grandfather existing directors, making exceptions more common than the rule.
Alternatives to fixed term limits include average banded tenure or staggered tenure, which would both promote systematic turnover without sacrificing flexibility. Implementing principle-based structures rather than rigid rules will enable a consistent flow of new talent, including those still in the trenches, while retaining the gravitas and historic insight of longer-tenured members.
Board Evaluations
Recognizing the value of boardroom real estate is not enough; boards also need a methodology for evaluating which directors are earning their seat, a succession plan for those who are not, and a process that goes beyond the traditional skills matrix for identifying and addressing skills gaps.
When properly conducted, evaluations reveal honest peer assessments, result in consensus on which directors add value, and accurately identify skills gaps on the board. Advisors recommend that boards conduct annual surface evaluations internally and engage a third party for deeper evaluations every few years to ensure quality and objectivity.
Succession Planning
Boards should maintain a five-year evergreen book of prospective members and work on a three-year cycle for leadership succession. Evaluations will help identify current directors interested in future leadership roles and those interested who are likely to have their peers’ support.
There is no one-size-fits-all answer to what makes a good director, nor can the term be defined in isolation. When evaluating directors, boards should consider their fitness for purpose by asking themselves whether they have the right mix of the right people in the rights seats for the current strategy and reevaluating the answer after regulatory change, technological disruption, or a major shift in strategy.
Third parties can highlight potential blind spots. UnitedHealth Group’s Nominating Advisory Committee, for example, provides nonbinding advice on desired director characteristics and board composition. Comprised of major investors and at least one medical community member, the committee’s input has led UnitedHealth to find directors in unexpected places, enhancing the board’s skills diversity.
Leadership v. Domain Expertise
Between 2022 and 2023, the percentage of new independent S&P 500 directors who were active or retired CEOs rose, while those with narrowly specialized functional experience dropped. Reasons for this shift include the realization that domain expertise is quickly outdated and the impracticality of addressing every issue with domain experts. It was also noted that over reliance on domain expertise can result in key person risk and increase the risk that the board will defer to a single director’s expertise on an issue of strategic importance rather than engage at the board level.
Boards increasingly seek directors with broad business knowledge and leadership experience who also have relevant functional or industry expertise. When a multinational technology company whose board was composed entirely of former CEOs added a director with a finance background, technology expertise, and experience in the technology industry, it significantly enhanced the board’s ability to engage with the CEO on technology trends.
There is too much at stake in today’s dynamic environment to remain stagnant and change requires a multifaceted approach. By embracing flexible, principle-based structures, enhancing board evaluations, and prioritizing both broad experience and domain expertise, boards can remain agile and effective. As the landscape continues to evolve, boards must be committed to continuous improvement and adaptability, leveraging diverse perspectives to navigate complex challenges and seize emerging opportunities.
This article is part of the 2024 Directors Dialogue Digest series, Changing Leadership for a Changing World. Join the Institute’s mailing list for early access to valuable research, industry updates and more.
