10 Governance trends that’ll put you at the top of your class
by Tim Querengesser
Since the 2008 financial collapse, when corporate boards and the executive compensation they control began to look rather out of touch, the boardroom has been forced to embrace change. Ignoring the publicly demanded rethink of how boards are built and governed can now bring instant scorn. Indeed, in April, Barrick Gold became something of a first in Canada when its shareholders very publicly voted against an $11.9 million signing bonus, endorsed by the board, for its new co-chairman (it didn’t help, of course, that its shares were performing badly).
The shareholder activism behind things like the say-on-pay movement is the driving force for change within boards, experts say. But while shareholders are still mostly concerned with their returns, there are some societal-level changes in attitude and expectation that are driving change as well. Boards are playing catch up, so what’s trendy are efforts to change today’s boards that still remind us of yesterday’s boards. The boardroom trends that are “hot” right now, says Richard Leblanc, associate professor in law, governance and ethics at York University, are those that are examining “over-boarded [and] over-tenured directors,” as well as tackling board diversity and experience.
The lessons being meted out to boards are perhaps being learned most obviously by public companies, but they still apply – if less directly – to the private firms that form the backbone of Alberta’s economy. Here are 10 lessons for building better boards.
1. Enter the Matrix
How do you start? The answer, says Paul Gryglewicz, managing partner with Global Governance Advisors, is to figure out where your current board is and isn’t strong with a skills matrix. “The matrix is an evaluation of understanding based on the slate of current directors – what skills they represent and then, theoretically … what are the desired skills that are required to properly govern the organization?” he says. By knowing what you have and what you want, you can start building.
2. Prep to Go
The next generation of corporate leaders is studying how to be better board directors and chairs in university programs like the one Gryglewicz will soon teach at York University. In the past and into the present, Gryglewicz says, “we tend to have to mold and shape economists, strategists, finance people, HR people, into being a compensation advisor.” But in the near future, these skills will be yet more credentials on a candidate’s CV. Studies in these emerging courses, Gryglewicz says, focus on training future board directors to be aware of the various sub-committees, and “the level of detail required in order for them to effectively carry out their fiduciary duty.”
3. Independence Day
Okay, let’s get down to the details. Your board chair must have independence from your CEO. Some countries have even made it law. Why? “The job of the board is to question the management team,” Leblanc says. This trend applies to both public and private companies, but for public firms the pressure is becoming relentless. Long gone (for most companies, at least) are the days of dual role leaders. While the private board doesn’t have these pressures, and their relevance is largely dependent on the size the company has grown to, it can learn from them.
For a growing company, the company’s founder or its main entrepreneur should “have no skin” in the board, Leblanc says, because as the company expands, new pressures will emerge. “When push comes to shove, when it comes to family succession or taking a company public, you’re going to have disagreements. A venture capital or private equity firm [investing in the company] would want its directors on the board to represent its interests, but there should also be one or two directors who are completely independent from the shareholders and the founder and management.”
4. Industry Experience
But hold on: while professionalization is changing modern boards, another change is recognition of how critical good-old industry experience is. For instance, when CP Rail examined its board a few years back, the company (and many critics) realized “there wasn’t a single Canadian director with rail experience,” Leblanc says. In the past, this might have been okay, but no longer, he says. “You need to know something about the business and the industry [to] hold management accountable.”
5. Strong Chairs
“If you show me a bad board, you’ve got a bad chair,” Leblanc says. “Show me a great board and you’ve got a great chair. So the selection of chair, next to the selection of CEO, is the most important decision a board makes.” And what should a committee look for in a chair? Leblanc says public companies should seek out a person who’s not a CEO, but still one who has C-suite experience and who has “leadership skills, who can run a good meeting, who can mentor, who can coach, who can hold management accountable, who doesn’t want the CEO job, and understands the business.” And, as he acknowledges, “that’s a huge ask” (see lesson 10 for a reality check on that). For private firms, trust, honesty, independence and integrity are the key attributes, Leblanc says.
6. Time Limit
How long have your directors and chair been, well, on board? “We don’t want to see directors that have served for 10, 20 or 30 years,” Leblanc says. “We want to see sort of seven, eight, nine or 10 years.” The reason is independence (see lesson four), both real and perceived. Regulators in many Commonwealth countries (though not Canada) are now putting caps on board tenures. “They’ve said if you serve for more than nine years we will presume that you’re not independent anymore,” Leblanc says.
7. Commitment Limit
You probably know this guy in Alberta – the one who’s on a half-dozen boards. Well, he’s going to be an anomaly in the future, Leblanc says. The reason is time: An average directorship now involves between 200 and 300 hours of work per year, he says, and research shows that sitting on more than three boards limits a given director’s effectiveness. “If you’re sitting on three boards and you have a full-time job, what ends up happening is you short change your boards – you don’t short change your job.” Leblanc says 80 per cent of board directors in Canada serve on just one board.
Succession planning is a new factor to consider in risk management. “We’re going to have over the next seven to 10 years, major turnover at the highest level,” Gryglewicz says. “It’s certainly a trend that we see that boards have a longer-term planned succession plan, and they also have an emergency ‘unintended-exit-by-the-CEO’ plan in place.” As the board’s biggest task is hiring the right CEO, knowing what the current CEO brings to the company is an important question for it to answer, Gryglewicz says. “One of my Edmonton-based clients is going through that process right now. The CEO announced they will be departing in the next few years and he possesses a very unique skillset … so they know that in two years, the business will look different, and they are going to have different challenges, of which the new CEO is going to have to succeed on.”
Unless you live in a cave this lesson should be obvious, but it’s threatening to the club mentality that boards still personify. Aside from the unacceptable optics, evidence shows that boards composed of people with diverse skills, cultural backgrounds, gender and experience – just like the real world – are more effective than less diverse boards, Leblanc says. “There’s a group-think mentality if you’re from a homogeneous background.” He adds that the Canadian government has struck a task force to look at how it can improve board participation on the part of women, whose numbers have stagnated at 13 to 14 per cent. “It used to be that gender was dismissed out of hand as unimportant, but boy has that changed in the last two years,” says Laura O’Neill, director of law and policy with SHARE, an advisor group to institutional shareholders. “The drumbeat just gets more and more rapid, and louder.”
10. Enough Excuses
School’s out. Well, almost. The last lesson is that you need to quit with the excuses. A recurring myth, according to Leblanc, is that finding board talent that fits new values and mores is just too hard. “Show me the evidence that these directors don’t exist,” he says, pointing to the example of CP Rail. “[People said] there wasn’t a single Canadian director with rail experience. Well, in a country of 35 million people with three railways, to say that we can’t find qualified directors …” He leaves the thought unfinished, but it’s obvious what it is. And no wonder: it wasn’t long after the company’s board made that assertion that most of its members were replaced. It’s not clear whether the company’s terminal underperformance relative to rival CN was a product of that lack of suitable industry experience on its board or merely a coincidence, but it’s safe to assume that other boards have learned their lesson regardless.