COMPOSITION: WHOM DO WE WANT TO DO IT WITH?

Board members are not just faces in a room, they are the driving force behind a High Impact Board. A board's composition, in terms of skills, diversity, expertise, and commitment, is essential to its ability to create value, make informed decisions and plan for the future. Let's delve deeper into the critical aspects of composition and how they shape the board's effectiveness.

The Importance of Board Composition

Imagine a boardroom where all members come from similar personal and professional backgrounds and share a similar set of experiences. It's easy to see how such a scenario could lead to groupthink, missed opportunities and blind spots. Conversely, a well-composed board, with members with diverse backgrounds, knowledge, and viewpoints, can foster robust vision and discussions, innovative thinking, and ultimately, better decision-making.

Factors Influencing Composition

Several factors influence the qualities that members need to bring to a board. Whether a board is fiduciary or advisory (see previous article about structure and processes) will have an impact on how each of these factors is weighed.

1. Shareholder Interests: Shareholder interests should always be taken into account. In fiduciary boards, shareholders elect board members and have the ultimate say in board composition. Broadly speaking, their choices can be influenced by a number of factors.  Alignment with shareholder interests, independence, integrity, experience and expertise that align with the board's objectives should all be key elements.  Quite frequently, I find that alignment with, and fidelity to, the interests of a dominant group of shareholders trumps the other elements, to the detriment of board impact. In advisory boards, power dynamics play little or no role, making it possible to give greater weight to the factors that follow. The use of advisors in a fiduciary board setting also works in balancing shareholder interests with the other factors to ensure High Impact.  
2. Executive Team Interests: The interests of the CEO and their executive team should always be considered. A CEO may have a more nuanced opinion on the areas of expertise that board members should bring in order to create value than shareholders do.
3. Board Objectives: The objectives and strategic moment of the organization should have great bearing on the skills and experiences required on the board, if it is to create impact. 
4. Independence: Independent directors are a centrifugal force on a board, bringing neutral, objective perspectives based on outside experiences. They balance the centripetal force provided by executives and shareholders, who will likely be more influenced by internal factors. Fiduciary boards need independent directors to ensure good governance and accountability. A board without a reasonable proportion of independent directors is unlikely to create High Impact.

Selecting the Right Board Members

Choosing the right individuals to serve as independent members on the board is a multifaceted process that requires careful consideration:

• Defining Detailed Criteria: The skills, experiences, and qualities required on the board should be clearly defined and mapped. This includes both the hard and soft qualities. In defining these qualities, it is not enough to say “marketing expertise”. We should be clear on what kind of marketing? In what industry? In what geography? Etc.

• Validity: we should consider if a certain skill or experience needs to be more or less recent in order to bring value to the board.  Given the breakneck speed of change in most industries, this is an important aspect to keep in mind if we want our board to create High Impact. 

• Fairness: It's crucial to avoid selecting board members based heavily on personal relationships or a desire for conformity. A board of "yes-people" or individuals who echo the CEO's viewpoints won’t have constructive debate and critical thinking and hence will not have High Impact.

• Mitigating Conflicts of Interest: Board members should be free from conflicts of interest that could compromise their ability to act in the organization's best interests. This means avoiding individuals who have financial or personal ties that may cloud or bias their judgment.

It is common for boards to fill vacancies with people from the networks of shareholders, executives, and other board members without a thorough, professional process. This approach can prevent the board from attracting the best possible talent, increase the risk of conflicts of interest, foster conformity or the creation of cliques, and hinder diversity.

Additionally, it is still commonplace to "invite" people to join a board. However, guests don’t generally leave when you want them to, and asking them to leave can be as unpleasant as inviting them was pleasant. 

Filling board positions should be done as professionally as searching for a CEO. Cast a wide net for candidates, inform them that they are competing for a board position and will be vetted, negotiate specific expectations, compensation, and other terms, and make it clear that their performance will be evaluated and that their tenure will end eventually. The best board members will appreciate this professionalism and be more likely to join.

Endogamic search processes are often justified by saying, “We need someone we can trust.” However, our experience shows that the trust attributed to a friend of a friend can be easily established with a new member who has been professionally recruited and vetted by using effective board processes that foster openness and trust (See previous Article on Structure and Processes).

Utilizing a professional to manage the search and negotiation process makes it easier and more likely to result in recruiting high-impact board members.

Is the CEO a Board Member?

CEOs should be very involved with their boards. They may even be the driving force behind the evolution of the board to High Impact, as it will undoubtedly create value for them in their executive role.  However, although the CEO should be in all meetings and most of the time, I believe it is preferable that they not be board members.  This ensures role clarity and avoids conflicts of interest. Being a Board member is one job, and being  CEO is another. In a well run High Impact board this will not detract from the CEO’s status or impair trust or openness. This role confluence may be unavoidable at times.  It is imperative to be very explicit about what is expected of a CEO under those circumstances.

Who Chairs the Board?

The chair must be someone with the time, willingness, and ability to:

• Lead without dominating – serving as a facilitator for the meeting.
• Manage the board in detail (not referring to the secretary).
• Be adept at following the agenda and  maintaining order 
• Ensure everyone is heard , and speak last 
• Not to have the last word, but to summarize the  consensus objectively and identify action items.
• Foster a culture of trust and collaboration.

The chair is not: 

• Ideally not the former CEO. Don’t use board chairmanship (or membership for that matter) as a retirement gig. Going from being the Chief Executive to heading a collegiate body is not an easy trick and doing it in the same company is an especially difficult task.  It also creates a number of difficult issues for a successor CEO.
• It's not (necessarily) the oldest member. The chairmanship is not an honor, it’s a job.

 The chair is not the solo star soloist, they are the conductor. The star is the team.

We’ve found that in many privately held companies, the chairman is someone who holds the position by dint of being the largest shareholder or as an honorary position. They are frequently stakeholders who would much rather be involved in discussions than be preoccupied with the efficient preparation and running of board meetings. This conflict almost invariably resolves in favor of participating in the meeting and effective board processes suffer in consequence. When the chairmanship is formally held  by someone who doesn’t really want to exercise it, the rolechair can be performed by an external professional facilitator, who may or may not be a member.

Term Duration for Independent Directors:

The length of board member terms is also impacted by whether the board is fiduciary or advisory and whether the company is public or privately held.  Public company boards are subject to laws or recommendations of local regulators and, as such, we won’t delve on term duration for those boards. Regarding term durations in privately held enterprises, we have the following recommendations: 

• Fiduciary Boards: Short Terms - 1 year. The objective is to facilitate renewal of board composition as needed. Short terms allow flexibility and adaptability.
• Advisory Boards: Flexible Duration Based on Evaluation: I prefer not to have a fixed duration for advisory boards and instead base it on regular evaluations which include considering whether the board’s composition is still fit to provide maximum impact for the company. Keep formal terms short, with the understanding that changes can occur outside renewal dates.
• Typical Duration for Independent Directors: Around 4 Years: In my experience, independent directors make strong contributions for approximately four years. However, on every board I’ve run there have been outliers, individuals who serve for shorter or longer periods based on their contributions and the board's needs.

In summary, the composition of a board is a critical determinant of its effectiveness. By selecting the right mix of individuals, defining clear criteria for membership, and ensuring transparency and accountability in governance processes, boards can enhance their ability to drive positive change and achieve their strategic objectives.