Members of the CEO’s senior team gain important developmental benefits when they
serve on an external board of directors, including valuable experience and board-level
perspective they can apply in their current role and that can position them for future
leadership positions.
Spencer Stuart consultants spoke with board directors and senior executives in Canada
about the developmental value of board experience and the practices that ensure that
the individual leader and the organization achieve the intended rewards. These include
affiliation with highly respected companies and experienced directors, exposure to other
governance processes and the opportunity to gain new ideas valuable to the executive’s
own company.
THE VALUE OF BOARD SERVICE
Outside board service is a broadening experience for members of the CEO’s team,
providing exposure to different leadership styles, corporate cultures and business
models. It expands these leaders’ perspective, training them to see issues from a board-level point of view. Board assignments also extend individuals’ professional and
personal networks, introducing them to senior executives from other industries, some of
whom may serve as sounding boards and even mentors.
Joseph M. Natale, a director of Livingston International and executive vice president
and president
of consumer solutions for Telus Corporation, a customs and compliance services firm,
describes
outside board service as a sort of laboratory, where executives can test and refine
their leadership
and communication skills. “Stepping away from your day-to-day activities for board
meetings forces
you to take a higher-level, more macro perspective. There’s also a lot of value in
having to articulate
ideas and solutions to problems to a varied audience. It readily tests your logic and
convictions
about management policies. Convincing other senior leaders of your views is a great
test. They
are not part of your corporate-think and come from other industries, cultures and
sometimes generations. It helps provide tremendous
clarity,” said Natale. He said he draws on the
insights he gains into the success and challenges
of other companies and other leaders to evaluate
his own management style and leadership traits.
“By keeping an open and self-assessing mind,
you create a real laboratory to advance
your capabilities.”
Executives also find that outside board service
improves their ability to interact with and effectively
present to their own boards by deepening
their knowledge of governance and enhancing
their understanding of board dynamics and
director expectations. In short, by sitting around
a board table outside of their own company, they
learn how directors think and the concerns they
have about key issues. “When you have only
45 minutes to make your pitch to the board, you
need to make sure you are focused on the most
important topics,” said Leo Houle, a former chief
talent officer at BCE who serves on the board of
CNH Global, a leader in the agricultural and
construction equipment businesses.
Businesses benefit from having executives in
the top management team with board experience
because they are able to view business and
management issues from different perspectives
and draw on knowledge gained from situations
encountered through board work. Sarah E. Raiss,
executive vice president of corporate services for
TransCanada Pipelines Ltd. and a board director
for Shoppers Drug Mart, said her boss and the
TransCanada board were very supportive of her
joining a large corporate board, both for the leadership
development opportunity and its value to
the business. She said she is able to bring to
TransCanada best practices and good ideas that
have been used successfully in large companies
in other industries. “Since outside board service
takes time away from the company, it’s great that
the company gets something back,” said Raiss.
MORE BOARD OPPORTUNITIES FOR THE CEO'S TEAM
Ten years ago, senior leaders reporting to the
CEO had few opportunities to serve on an outside
public company board. Since then, several trends
have converged to open the door to directors with
a broader range of profiles. CEOs — traditionally
the most desirable director candidates because
of their leadership and management experience,
big-picture view and knowledge of current business
challenges — and other experienced directors
are accepting fewer outside board roles than
in the past. Why is this? The scope of the board’s
role has grown in recent years, increasing the
amount of time required for board service —
both during and outside of formal meetings.
Similarly, the job of the CEO has become more
demanding and time-consuming, causing CEOs
to be more selective about their outside board
commitments. For this reason, many boards are
limiting their CEOs’ outside board activity, citing
the time demands and the potential reputational
risks, and some boards even restrict the number
of board assignments directors may accept. In
1999, CEOs of S&P 500 companies served on
1.6 outside boards, on average; today, the
average has dropped to 0.7 outside board
directorships. A similar trend is seen among
Canadian CEOs.
Other statistics from Canada and the U.S.
illustrate how these trends are affecting board
composition. A decade ago, CEOs, COOs, chairmen,
presidents and vice chairmen represented
more than half (53 percent) of new independent
directors on S&P 500 boards. In 2009, the proportion
of new directors with these backgrounds
fell for the third year in a row to 26 percent. As
fewer experienced directors accept new board
assignments, boards are recruiting more firsttime
directors. A Spencer Stuart study of 100
of the largest publicly traded Canadian companies,
for example, found that 24 percent of directors
recruited in 2009 were first-time directors,
consistent with the previous couple of years.
By comparison, between 2004 and 2006, 18 percent
of new directors on average were new to
corporate boards.
With experienced directors less able to (or
restricted from) accepting new outside board
assignments, boards have become more receptive
to recruiting executives from the top management
teams of leading companies, especially those with
valuable operating expertise, a strategic mindset
and relevant industry or functional expertise.
Boards now seek directors with experience in
finance, risk management, human resources and
technology, for example, or look for executives
with global experience. While this change has
undeniably resulted in the loss of some of the
leadership experience and big-picture perspective
CEOs can bring, it also has infused many boards
with a broader diversity of perspectives.
BEST PRACTICES FOR MAKING THE RIGHT BOARD MATCH
More CEOs and boards recognize the valuable
experience senior executives can gain by serving
on outside boards, and there are more opportunities
for executives to join corporate boards. To
ensure that these benefits are realized, boards,
CEOs and senior executives should understand
the potential challenges and be prepared to manage
potential risks.
What are the challenges? Board service typically
represents a significant time commitment
because of board and committee meetings and
preparation work between meetings. Serving on the board of a troubled company, or one
undergoing a CEO transition, can take even
more time. Corporate boards find themselves
under intense scrutiny today from investors,
regulators and the press, and when problems
occur board directors may be held responsible.
Beyond that, Marc Guay, president of PepsiCo
Foods Canada, points out the potential reputational
risks to a senior executive — and his or her
company — of being associated with a troubled
company through a board assignment. Finally,
a poor match may not provide the anticipated
developmental benefits.
Boards, CEOs and the senior executives pursuing
outside board service should work together to
ensure that external board experiences deliver
the intended benefit with little disruption to the
organization. Below are questions that organizations
should consider to help ensure outside
board assignments are successful — for the
senior executive and the company.
What board service policies make sense for the
organization? If they don’t already have one in
place, CEOs and boards are working together
to determine a board service policy and framework.
Policies typically address a range of issues,
including: what limits, if any, should there be on
the number of outside board assignments executives
may accept; guidelines related to the types
of companies that an executive may or may not
join, including what constitutes a conflict of
interest; and process issues, such as whether
formal approval is required before an executive
can accept a board role and who should be
involved in reviewing or approving outside
board invitations.
Nestlé, for example, requires executives to gain
corporate approval before accepting an outside
board position and generally limits executives
to one outside board assignment. Nestlé also
strives to avoid obvious business conflicts by
prohibiting executives from serving on the
boards of companies related in any way to Nestlé
business units. “This is hard to do in the
consumer goods space because there are so
many organizations that do have a conflict with
the wide range of the Nestlé businesses,” said
Robert G. Leonidas, president and CEO of
Nestlé Canada.
Some companies are more supportive of
executives joining the boards of nonprofit
organizations or industry associations because
they provide many of the developmental benefits
of corporate board service to the individual
and enhance the company’s profile in certain
circles that are relevant to the business,
said Timothy H. Penner, president of
Procter & Gamble Canada.
Who should serve on an outside board? In
general, boards look for director candidates with
a combination of broad business experience and
specific knowledge relevant to the company, such
as technical, regulatory or international expertise.
The best directors have the time to commit, know
the company’s business well, review board materials
thoroughly and participate actively in debate.
A consideration for the board and CEO is which
executives are suitable for an external board
assignment. Some companies may encourage
certain business or geographic leaders or functional
heads to pursue an outside board assignment
as part of the individual’s development
plan, particularly executives who might be a
future candidate for the CEO role.
“Experience on external boards can play a key role
in the development of senior corporate executives
from a wide spectrum of backgrounds and areas
of specialization,” said David Cheesewright, president
and CEO of Walmart Canada. “Not only
does it broaden the perspective of the individual
beyond the borders of their own organization, it
often heightens their abilities to influence, communicate
and distill complexity.” Guay agreed,
“More important than an executive’s functional
role is where the individual is on his or her personal
learning curve and personal development.”
Leonidas argues that “the busy executives are the
ones best suited to handle outside board opportunities
as they seem to be incredibly well organized,
action-oriented and will definitely act as
impact players.”
Is it the right board opportunity? A potential
pitfall for an executive is joining a board that
is not a good fit with his or her experience and
capabilities or doesn’t represent a strong developmental
opportunity. “A great deal of thought
should be given to the type of industry, type of
company and type of board role that one is looking
for,” said Cheesewright. “If this is not done
properly, the executive can end up in a situation
that is not appropriate for learning purposes and,
consequently, may be a significant waste of time
for the executive and the company.”
The ideal match is typically with a company
in a complementary industry, such as an industry
experiencing similar growth patterns or addressing
similar challenges, while avoiding potential
conflicts of interest. Most boards and CEOs
prefer that executives join the board of a similarly
sized company, but executives may have to
be open to serving as a director of a smaller
company if they have not previously served on
a board. Boards of smaller companies are more
willing to recruit knowledgeable executives
who are new to board service, providing the
executive with an opportunity to gain valuable
board experience.
Executives will want to make sure they join a
high-functioning board of a well-run company.
Therefore, it is important that executives fully vet
board service opportunities through careful due
diligence. Director candidates typically meet with
the multiple members of the governance/nominating
committee and the CEO and, increasingly,
other senior executives such as the chief financial
officer and general counsel. Director candidates
should conduct extensive reviews of publicly
available financial information and mine information
from contacts in the industry and other
trusted business contacts. Some executives are
able to tap their internal legal, investor relations
and public relations departments to help vet the
board opportunity. Others check the company’s
ISS corporate governance ratings, examine its
public policy positions and speak with industry
and financial analysts about the company.
Another factor in considering whether a board
opportunity is appropriate for an executive is the
likely time commitment and how the required
time commitment fits in with the executive’s
workload and other demands of his job. Executives
will want to find out the number of board
and committee meetings that are scheduled and
where the meetings are held. A board requiring
a significant time commitment or significant
travel may create conflicts that interfere with the
executive’s job or make him or her less productive
as a board member. One experienced board
director told us that, when he is invited to join a
board, he checks the prospective board’s meeting
schedule for potential conflicts before considering
any other issues related to serving on that board.
“Board service broadens an individual’s perspective
and gives them better insight into other businesses,
industries and challenges. The pitfall is
that boards can eat up a lot of time if you don’t
get yourself on the right board. This time trap is
true whether you’re involved with a board for
business, professional or personal reasons,” said
Penner. “Know what type of board you’re getting
involved with, know the challenges that you are
there to address and get a good understanding
of what the time commitments are.”
An external board assignment can provide
many important developmental benefits for
members of the CEO’s team, who gain exposure
to new ideas and fresh perspectives through
their work with senior leaders from other industries
and functions that can be applied to their
own business. To ensure that external board
assignments are valuable both for the individual
executive and the company, boards and CEOs
should consider establishing a framework for
reviewing opportunities so that executives are
placed on the boards of well-run companies of
a similar size and with similar strategic priorities.
Boards and CEOs also may want to consider
whether senior leaders who have the potential
to become CEO succession candidates should
be encouraged to join an outside board as part
of their development.
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