What is a great board? How should be a good board be structured? What makes for a great board member? How to get on a board?
I occasionally get asked, ‘if you had a blank sheet of paper and complete authority, how would you structure a public company board from first principles?” One could break that question into four sub-questions: (i) what does a good board look like? (ii) how should a good board be structured? (iii) what makes for a great board member? and (iv) how does one get on a board?
These are important questions with arguably diverse answers depending on who you ask. I have been involved with running corporate governance programs for Columbia for years now and have been fortunate to work with amazing board members. Here is my list of suggested answers to these questions. I would love to hear from you, if you disagree.
What is a great board?
Does the CEO want advice?
A great board works with the CEO to take the company forward. The CEO, of course, must be someone who wants to see advice and counsel from the board instead of treating the board as a place where pre-cooked decisions are blessed once every 90 days when we have a board meeting.
Does the CEO think like an owner?
A hired gun as the CEO almost always has a limited horizon and short-term incentives. I often tell my class that life is clearer and simpler if you ask the question, “what would an owner do?” Compare that ideal world with what a hired gun does. In essence, join a board if you believe that the CEO thinks like an owner.
Coach and cop roles:
Boards must balance two inherently contradictory roles: to be a coach and to be a cop. None of us enjoys playing a cop but at times, the board has to step up and intervene to course-correct strategic direction, look around corners to avoid getting railroaded by technological disruption, create a culture where groupthink is discouraged, surface difficult conversations around succession planning and stop or discourage short term fixes for slow burning problems that will eventually sink the brand or the company.
How should a good board be structured?
Who appoints directors?
Ideally, shareholders should appoint directors. In practice, directors appoint directors in public companies that are owned by indexers or dispersed shareholders, usually with the approval of the CEO.
Good boards mirror the value chain:
Let us start with the so-called blank slate and think about what an ideal board should look like. For that, it may be useful to go back to Econ 101. A firm adds value by combining materials, labor, capacity, capital (natural and financial) and managerial talent to create value for the customer and hence the shareholder.
One model is to consider directors who might represent each aspect of this value chain. That is, consider a director skilled in supply chain (materials), human capital (labor), capacity (manufacturing or operating strategy or a technologist depending on the business), finance broadly defined to address deals, capital structure decisions and potentially financial statements, a sustainability type to cover human capital, someone good at strategy or a person who has run a complex organization to address the managerial talent angle. Finally, we may need a director who has experience in branding or customer interface. Depending on the business, one may want to add a director with experience in political or regulatory interface. Given how global businesses have become, international business experience has become table stakes.
You might object that this recreates the management team at the board level. I am not sure that is such a bad idea. Stakeholders, especially employees, want to know that their interests are represented on the board. Too many board members I have known have a superficial sense for how the company really operates.
It might be instructive to compare my suggested model with a classic skills matrix for a typical board. I pulled up the skills matrix used by Walmart in its 2023 proxy statement:
· Walmart states that 11/11 directors have senior leadership experience
· 7/11 directors have finance, accounting and financial reporting experience
· 5/11 have regulatory, legal or risk management experience
· 5/11 have retail experience
· 11/11 have global or international business experience
· 8/11 have technology or e-commerce experience
· 5/11 have marketing or brand management experience.
Walmart’s board potentially lines up well with my value chain perspective. A couple of gaps relate to supply chain or merchandising experience, human capital focus, and someone who cares about natural capital. Walmart’s strength lies in supply chain and merchandising. Hence, they may felt that they do not need someone on the board with such duplicative expertise.
Another observation is that boards have almost too many ex-CEOs and finance people. Of the 11 directors on the Walmart, seven are ex-CEOs. The other four are the CEO of Walmart itself and two from the Walton, the founding family. Only one director was not a CEO. As mentioned, seven of the 11 directors have held senior finance leadership positions.
Boards rarely know how the company actually works:
The CEO is usually the fountainhead of all information to the board. The window to the company for a director cannot be a 200-page power point deck.
As always, the 80-20 rule works. In most organizations, 80% of the work is done by 20% of the people. Companies are, in essence, all about culture and people. If one of the 20% were to leave, the value loss to the firm is disproportionately higher than if one of the 80% left. Boards don’t know who is valuable and who is walking out the door. Directors need to delve deeper. If your area is operations (finance), go spend a day with the heads of operations (FP&A). Ask these leaders how their work is aligned with the strategy of the firm. Reading between the lines will suggest what is not working.
Private equity boards of portfolio companies usually address this well by bringing in one or two operating directors who have worked in a similar industry or company and can hence better appreciate how the company actually ticks and adds value.
What makes for a great board member?
Again, this is a rich topic where board members will offer great advice. Here is my short list:
Understand the business:
A good board member understands the business well including what is the firm’s strategy, what are the key value drivers of the firms, what are the barriers to imitating the firm’s strategy and how do materials, labor, capacity, capital (natural and financial) and managerial talent combine in this specific firm to create value for the customer.
Board conduct:
In terms of board conduct, a good board member is willing to fit in before standing out. Getting on a good board is hard. You don’t have to try too hard to impress after you are on the board.
A good board member asks questions that furthers everyone’s understanding of a topic instead of going down rabbit holes that would be a better fit in an academic seminar as opposed to a board meeting. It is useful to have a board member take the lead on issues that fall within expertise and educates other board members in their specialty.
Groupthink:
A good board member is not afraid of gently challenging the CEO, should the need arise. Groupthink is a serious challenge in board members. A wonderful idea to combat groupthink is employed by good hedge funds: find a designated dissenter. That is, this year, Kevin’s job on the board is to argue the “con” case for every proposal (say a major acquisition). Next year, Sally is the designated dissenter. Such role playing makes it easier for directors to disassociate the person from the criticism. Failing which, specific directors get labeled as squeaky wheels and eventually get managed out.
Diplomacy:
A useful skill for a board member is the ability to synthesize feedback in a constructive way for the CEO to take the business forward. The job is as much about tact and diplomacy as it is about a functional expertise that you bring to the board.
How to get on a board?
A job you cannot apply for:
I often joke that it’s hard to get on a board of a public firm but it’s even hard to get off! Having said that, this is not a job you apply for because someone needs to nominate you. Someone who has seen you in action and likes how you conduct yourself in solving a business problem. So, network, network and network. Tell people that you would like to be on a board. Let successful board members know that you are on the market. Occasionally, these successful directors might pass on a referral your way as the same people tend to be asked again and again to be on different boards.
Are you passionate about the firm or its product?
Do your research and ask what you can offer and where can you make the biggest difference. Are you passionate about the product or the industry? The money per se is not enough to compensate you for your time. On the surface, $250,000 sounds like a lot of money for a few board meetings. But when you break down the math, you are effectively paid to travel and show up. A typical public company has six board meetings a year. That is three days each or 18 days in total. Assuming you are at work for 12 hours on those days, the company is paying you for 216 hours a year, on average. Your wage rate is at least $1,000 an hour if you are board-worthy. So, all that travel and meeting time adds up to $216,000. On top of that, a board member typically has no budget to hire her own staff, counsel or consultant. Many board decks can run into 200 pages. It is difficult enough to ask perceptive question, but it becomes even harder to do so if directors have not read the deck carefully.
Look for expertise and demographic gaps:
Target expertise and demographic gaps on boards you are interested in. The sad reality is that many board slots are somewhat formulaic. If the board has two women, the chances of a third woman getting on are low. If they have one Indian on the board, the chances of the second Indian getting on are low. Board appointments are usually incremental hole-filling exercises. They are looking for a particular profile, usually months ahead of time (e.g., a large private equity firm was looking for someone who can be on an audit committee and has experience in insurance, overseas businesses and someone who has built a business). Research these opportunities when you look for a fit with the firm.
In sum, being on a board can be a hugely rewarding experience. You will meet smart, committed people with diverse backgrounds and experience and you will learn a lot. But it can a job that can frustrate attempts to isolate the exact value that the board or a specific board member added to the firm. Regardless, proxy advisers and activists will judge your performance as a board member with very little or no information about the value you have added as a board member. This is partly because boards are opaque institutions. Boards, in general, would do well to share with investors and stakeholders more about how they themselves define success.