What Does It Take to Build a Better Board? -- Effectively Dealing With Underperforming Directors

CHICAGO and NEW YORK, Nov. 8, 2010 /PRNewswire/ -- "Boards are beginning to apply the same tough performance standards to themselves that they now use with their CEOs and executive leadership teams," says Stephen A. Miles, Vice Chairman at Heidrick & Struggles.  

"Best-practice boards are opening themselves up to more rigorous performance evaluations, often by external advisors – a trend we expect to see a lot more of in the coming months and years as other companies follow their lead," says Bonnie Gwin, Managing Partner of Heidrick & Struggles' North American Board of Directors Practice. "We are seeing boards move from a compliance-based review to an actual performance review: how is the board – as well as its various committees and individual directors – really doing?

"Being a director isn't a lifetime appointment anymore," says Ms. Gwin. "There is now increasing pressure to evaluate actual director effectiveness, contribution, and performance."

The weakest links

"Very few boards today are able to say truthfully that each and every director is adding real value to the company and CEO," says Mr. Miles. "In fact, boards struggle with board succession, effectiveness, and renewal. It is fairly typical to have one or two directors who are viewed as not adding value over time, yet, in many cases, nothing is done.

"Unfortunately, it is often the practice that boards avoid dealing with their weakest directors, while at the same time they have become a lot more aggressive in pushing their CEOs to hire and keep only the best people around them. Addressing director performance requires the same focus and good process."

Moving from a compliance to a performance focus

"In the post Sarbanes-Oxley era, almost all boards engage in some form of compliance-based board review. These reviews are often led by a law firm and are in place to ensure that the board is following its mandated bylaws and procedures," says Mr. Miles.

"The problem is that the standard process misses a fundamental point: is the board just checking boxes or are they truly 'high performing'? Do the board members add value for shareholders and their Chief Executive Officers?

"The best boards today are tackling this by adopting measures that are very similar in approach and methodology to the assessments being done at the CEO and upper management level. These include everything from 360-degree feedback from their boardroom peers and upper management to an examination of how each director is performing as a chair, lead director, or chair of a committee. Typically conducted annually with check-ins throughout the year, these evaluations are used to form a set of recommendations to the overall board as well as personalized development plans for each individual board member.

"While this rigorous process might seem daunting at first, experience has shown that this approach has real and lasting impact at both the overall board and individual director level," says Mr. Miles.  

When a board member underperforms

"For a variety of reasons, many boards are reluctant to confront underperformance," says Ms. Gwin. "While they acknowledge it exists with certain board members, unless it has reached a dysfunctional level, most boards work around underperformers – instead of tackling the issue head on as they expect their CEO to do.

"But when you develop the criteria for performance consistent with the needs of the company and the needs of the CEO, you have something against which you can evaluate directors. When directors aren't measuring up, or simply have been outgrown or outpaced by the company, you have a process to start the discussion with them around improving their performance or, in some cases, transitioning them off the board in a respectful way – as you would expect the CEO to do in dealing with a similar issue in the executive ranks. Many boards have already employed age and term limits, but a true evaluation and focus on performance, combined with these measures, provide a real vehicle for building great boardrooms," says Ms. Gwin.

Prioritizing the nominating/governance committee

"Boards must also make sure that their committee chairs are indeed qualified as experts in their respective roles," says Mr. Miles. "This comes into play particularly with the nominating and governance committee, which leads what is arguably the board's most important function – succession planning.

"Too often this is the committee that is simply filled with directors who do not meet the criteria for audit or risk, instead of being staffed by directors who are deeply experienced and truly qualified. Most boards do not think about hiring succession expertise and experience onto the board as part of their recruiting efforts, which can lead to a lower performing nominating and governance committee.

"Boards need to make sure they have a chair of nominating and governance who has experience leading a succession effort and as much as possible that this committee is staffed with board members who have succession experience," says Mr. Miles. 

Defending your director slate

"All of these new procedures and practices will become even more relevant with increased outside scrutiny of boards," says Ms Gwin. "We are moving into a new era where boards will have to defend their slate of directors and be able to provide substantive rationale for why each director is qualified to sit on a board."

If you would like to speak with Stephen Miles or Bonnie Gwin, please contact Davia Temin or Suzanne Oaks of Temin and Company at 212-588-8788 or [email protected].  

Stephen A. Miles is a Vice Chairman of Heidrick & Struggles. With more than 15 years of experience in top-level succession planning, he runs the firm's Leadership Advisory Services and is also a member of Heidrick & Struggles' CEO & Board Practice.

Bonnie W. Gwin is Managing Partner of Heidrick & Struggles' North American Board of Directors Practice. She focuses on searches at both the director and CEO level across a wide range of industries.

About Heidrick & Struggles

Heidrick & Struggles International, Inc., (Nasdaq: HSII) is the leadership advisory firm providing senior-level executive search and leadership consulting services, including succession planning, executive assessment and development, talent retention management, transition consulting for newly appointed executives, and M&A human capital integration consulting. For almost 60 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles' leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. For more information about Heidrick & Struggles, please visit www.heidrick.com.

SOURCE Heidrick & Struggles