Turning Ideas into Action through Board Assessments – Evaluating Excellence

“So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself-nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

–Franklin D. Roosevelt, 1933 Inaugural Address

Throughout history, notable speeches, insightful philosophers, and even song writers have challenged leaders to advance when faced with challenges. Rarely is the status quo fully acceptable. Humans strive to improve and to attain new levels of achievement. This call has led armies to victory, scientists to new discoveries, candidates to offices, musicians to halls of fame, and athletes to championships. The commonality that underlies great achievements is the willingness to honestly face one’s circumstances, think openly, and turn ideas into action. This axiom rings true in the boardroom.

Peter Drucker’s quote, “what’s measured improves” is a simple statement with broad implications for leaders and especially corporate boards. We live in an era of unprecedented social and economic change, much of which is driven by innovation and technology. Self and board assessment is an opportunity for advancement. We frequently work with boards and leaders who seek opportunities to promote high achievement in the boardroom. An annual board assessment has proven to be a mainspring process for maximizing board effectiveness.

Frequently, our clients have remarked that most of their past assessment processes have lacked compelling, insightful, and actionable reporting. Simplistic governance cloud surveys are not sufficient. Whether a board is conducting its process internally or utilizing a third-party facilitator, a well designed process is paramount. The hallmarks and outcomes of a well designed process will include:

  1. action points and plans for future governance needs,
  2. better understanding of the governance, operational, organizational, and financial risks,
  3. ability to respond to stakeholders’ demands for stronger governance and transparency into board practices, and
  4. more effectively fulfilling the board’s responsibilities and participating in the strategic vision for the organization’s future.

Why Should Boards Conduct Assessments?

The first point of consideration is why not. A robust well-designed assessment process will provide enhanced insight and help achieve or maintain governance excellence. Boards are facing increased pressure for accountability from stakeholders. Investors and regulators, in particular, have been reviewing how boards assess performance. Governance scandals of the past twenty years have put a spotlight on corporate governance practices globally. In light of increased scrutiny, pressure for board accountability has increased. Forward thinking boards and board members aren’t merely responding — they are leading.

Internal and external pressures for board assessments:

  • The NYSE listing rules require annual board assessments.
  • The UK Corporate Governance Code mandates annual board assessments.
  • Many regulators and jurisdictions globally require annual board assessments.
  • Investors today expect annual board assessments of all public companies.
  • A board that commits to a well-designed assessment process will achieve improvement and outperform peers who do not.
  • A board signals to all of management and employees that they care about everyone’s performance within the company.

Perspectives on the board’s role and the value of governance have evolved. Governance is now viewed as strategic. Strategic boards are responding and raising the standard of governance excellence. Engaging a useful, annual self-assessment is fundamental to governance excellence. Stakeholders expect it, and disclosure of it evidences the board’s effectiveness and commitment to its role.

Moving Beyond Good Enough to Excellent

Excellence is grounded in self-awareness and commitment to continuous improvement. A highly effective board:

  • fosters positive, maturing group-board dynamics
  • establishes strong governance practices
  • promotes engagement by all board members
  • maintains a healthy relationship with management
  • ensures focus on mission and strategy
  • cultivates a healthy organizational culture
  • regularly gauges its effectiveness through robust assessment processes

To move beyond “good governance,” boards must evaluate how to improve their practices beyond checking the box in basic practices. As it relates to the board assessment process, boards should take a holistic approach that evaluates the whole as well as the parts, namely the full board, committees, and individual directors.

  • Limiting the scope of the assessment process to only an assessment of the board discounts and overlooks the contributions and fundamental value of the committees and individual directors.
  • The effectiveness of a board is also directly dictated by the effectiveness of the chair, so evaluating a chair’s leadership is key to the development of the board.
  • Highly effective chairs invite director peer and self-assessment.
  • Board and management alignment is critical to organizational success. When appropriate, including an evaluation of the CEO and inviting the participation of key members of management gauges this alignment.
  • Management’s insights and candid observations about a board’s functioning and dynamics contribute to the board’s understanding of its own effectiveness.

Navigating when and how this feedback is collected and framed for board discussion augments the success of a process.

Optimizing the Process

As the maxim goes, timing is everything. The board should conduct its annual assessments during a time when directors’ schedules will allow them to provide thoughtful and complete input and when the board can build resultant actions into its work plan and agendas. Other key questions around timing are:

  1. How much time should directors and other respondents have to complete the questionnaire?
  2. How much time will analysis and reporting require?
  3. When should the results be shared and by whom?

Diligent governance leaders must navigate this to ensure that the process is efficient and results in action. A process that allows too much time to pass from directors giving feedback to reviewing results can diminish relevance. A digital questionnaire that guides respondents logically and easily through the assessment is the most efficient option for gathering basic feedback.

You don’t get the right answers if you don’t ask the right questions. The questions should be clearly worded and focused on singular topics. The number and scope of questions must focus on core areas and be comprehensive without being redundant. Including both rated questions and open-ended questions balances quantitative and qualitative inquiry that will enhance reporting. The balance of these factors in substance promotes engagement in the process. For deeper insights, telephonic or in-person interviews may follow the written assessment to add depth and breadth to the process.

What’s Next?

Third-Party Facilitators in Board Assessments

When boards first began to conduct self-assessments, the task of managing the process fell most often to general counsel and corporate secretaries. This not only imposed an additional burden, it also had the effect of limiting, if not eliminating, candor in responses. Not only does a third-party facilitator allow for a more transparent assessment process, they also bring expertise in assessments and best governance practices in the design, facilitation, and reporting.

Benefits of Engaging an Experienced Third-Party Facilitator

  • Knowledge of governance trends and best practices
  • Preservation of board resources for other governance tasks
  • Enhanced candor due to assurance of director anonymity
  • Timely and accurate collection, compilation, and distribution of results
  • Objectivity and integrity in the analysis of results
  • Ability to benchmark against past performance and peers
  • Facilitation of open discussion and committing to action
  • Preclusion of the appearance of bias, manipulation, or favoritism
  • Independent, objective, expert perspective from a facilitator whose primary role is the board assessment

Diligent Board Assessments Lead Towards Excellence

Whether you sit on the board of a multi-national corporation or local non-profit, as a diligent board member, you take your responsibility and duty seriously. Promoting an annual assessment and thoughtfully engaging in the process helps every committed director more effectively fulfill their roles.

Let’s be clear — a survey alone is not an assessment. Governance leaders who work diligently to optimize the effectiveness of their assessment process should know the hallmarks of a quality board assessment:

  1. A process customized to advance your board’s governance goals.
  2. A process structured to encourage candor and openness and maintain directors’ anonymity in the interest of eliciting actionable insight.
  3. A process designed to drive strategic discussions by providing analysis and action points, which objectively reflect the input of all of the respondents.

At CBE, our Board Excellence AssessmentTM process emphasizes meaningful and excellence-driven board practices at every step. Our mission as a company derives from our belief that increased self-awareness drives learning, which drives improvement. We see governance not only as a tool or structure, but as a commitment to action and opportunity. An assessment process that enables director growth and development is the real mission of a CBE board assessment. This is where the real value of a well designed and administered assessment lies.

Call us at 800.645.1976 with governance questions about:

Boards Are Restoring Trust In The Social Contract

Trust is a powerful relational and social axiom historically associated with the financial sector. Business contracts, like social contracts, require trust. Among the most important social contracts is that between the banker and the customer. Whether a customer is obtaining a home mortgage, financing cash flow or acquiring a business, trust is a core element of the relationship. Yet distrust for the financial sector looms large today. Dynamic financial-sector management and board leaders are responding by advancing efforts to restore the trust in the social contract. The human, or “H”, factor within financial organizations in this social contract is essential to successfully rebuilding trust and creating sustained economic growth.

“It takes a lifetime to build a good reputation, but you can lose it in a minute.” 

–Will Rogers

Perpetuation of distrust

Leaders within the financial sector presently possess extraordinary influence and are in a unique position to create opportunity. The financial sector manages more capital today than ever before. Consider the fact that the top 500 asset managers influence more than $50 trillion globally. (By comparison, the 2019 US government budget is $3.8 trillion.) With projected global growth estimated to be 25 percent from 2017-2022, the opportunity to creatively invest in profitable areas that grow and benefit the community is significant.

Part of the challenge for the financial sector is that today, the top 5 percent of households own more wealth than the bottom 95 percent combined, with the financial-services sector paying the highest average wage rates. The fallout due to the highest paid sector allegedly causing the financial crisis has perpetuated a culture of mistrust towards the industry.

The vision of a truly great capitalist society is of one that wisely manages risk in order to maximize the financing of human endeavors. Investing in our fellow humans has steadily brought us out of financial crises in the past and particularly since 2012. Capitalism for the few is a narrow-minded, weak social model. History is replete with stories of visionary leaders, such as Ada Lovelace, who invented the first computer program, and Colman Mockler, who led Gillette for 15 pivotal years. Visionaries such as these inspire others to improve the conditions implied within the social contract, grow businesses and in doing so, promote prosperity for all.

For the financial sector, finding ways to efficiently finance additional growth and create jobs will contribute towards reducing poverty and thereby build goodwill and trust. The United Kingdom and the United States each have approximately 5.7 million private-sector businesses, the majority of which employ less than 500 employees. Directing the 25-percent expected growth towards building communities, financing new business ideas and capitalizing growth will reduce economic disparity. Promoting an H factor of empowering and educating humans to improve their standards of living demonstrates impactful leadership.

Culture and the H factor

The H factor in finance is at an inflection point. Customers are again beginning to trust financial-sector leadership. However, if the prevailing leadership returns to the pre-2008 business model, the trust factor may be destroyed for future generations. Nurturing and fostering a culture within its organization and with its customers that promotes a trust-based social contract is the responsibility of every financial organization’s directors and officers.

What challenges do financial companies face in ensuring that past mistakes arising from a toxic culture of greed and selfishness are not repeated? Technology has fueled many efficiencies and increased the top-end speed of change and disrupted the financial sector, but technology is not necessarily improving culture. A healthy culture arises from face-to-face communication and interaction between humans within an organization. As younger generations continue to show a preference for the use of technology in lieu of direct human interaction, building and maintaining a culture of trust between customers and banks will remain a challenge and an opportunity for forward-thinking leaders.

“Banks have not traditionally scored well in terms of employees finding their work purposeful. This creates a critical opportunity for banks that can make the right connections between their employees and their organization’s mission, vision and values.”   

-Bruce Van Saun, CEO, Citizens Bank

During the past 200 years, volumes of novels and social studies have examined the depravity and loneliness of greed. Rob Kaplan, CEO of the Federal Reserve Bank of Dallas, Texas (his last job was as a Harvard professor), frequently teaches that happy and inspired employees are the most productive. We are often tempted by the desire for more money and to buy more things, hoping those purchases will improve our lives. What we actually desire is unequivocal confirmation that we are valued. Few of us will lie on our deathbed wishing we’d bought more crap; rather, we will all hope that our lives were meaningful. Inspirational leaders develop human-resources (HR) strategies for work-life-productivity balance and in this way build a culture conducive to happiness.

Leaders in the financial sector teach us, within the context of the social contract, how to manage capital efficiently. Great leaders are honest, humble and give of themselves, and are keenly aware of their leadership responsibilities. Great strategy supported by great culture is an eminent goal. Beginning with the influence of great thinkers such as Peter Drucker in the 1950s, the notion of service and excellence became central to business leadership. Drucker was famous for asking insightful and poignant questions and offering proverbs such as “Start with what is right rather than what is acceptable” and “Management is doing things right; leadership is doing the right things”. This notion influenced the definition of Level 5 leadership first presented in 2005 by Jim Collins in his book Good to Great: Why Some Companies Make the Leap… and Others Don’t. “Level 5 leaders display a powerful mixture of personal humility and indomitable will.”

Ten years later—lessons learned

Since the breakup of Arthur Andersen and the many listed-company failures from 2000 to 2010, corporate governance and leadership expectations have shifted. The board’s role has, is and will continue to evolve. As the average tenure of a public-company chief executive officer decreases, the board’s responsibility of managing business continuity and succession has increased. The board’s role in monitoring strategy and culture has expanded. The H factor is an increasingly significant differentiator. One example is the expanded definition of “our customer”. The updated definition encompasses both the buyer and employee as a part of the company’s customer group. The attraction and retention of talent and buyers have grown to be similar management tasks. Expanding the definition of customer causes leaders to care differently about the culture of an organization. Today’s customers care about workplace diversity, the global environment, sustainability, income equality and, yes, governance.

Ten years ago, discussions of corporate governance were mostly limited to the halls of academic institutions and regulatory entities. Strangely, corporate governance was thought to be mostly or merely legal and rule-centric. This misconception was a failure of business culture at large. Evolved and effective corporate governance includes policies and procedures that provide for both opportunity and accountability, powered by Level 5 leaders. Governance is highly strategic and is essential to elevating and sustaining a company’s culture. In this regard, it is a foundational element of the social contract of trust between customer and firm. A positive “tone from the top” can ignite a culture of continuous improvement that is attractive to employees, customers and the public.

“The times they are a-changin’,” sang Bob Dylan during the 1960s in the midst of global social upheaval and change. Today, we are in the midst of similar change, particularly within the corporate culture. We are making some progress in the boardroom and the C-suite, as the “loser now that will be later to win” is the person of difference who is earning and gaining positions of leadership. But there are still those who, if they don’t “start swimming”, will soon “sink like a stone”; those who are narrow-minded, over 65, pale-skinned and in possession of both X and Y chromosomes—if they don’t “heed the call”.

Leadership, care and governance

Fulfilling the Duty of Care is more than showing up for four board meetings and reviewing financials. Highly effective leaders exercise care on an intellectual, emotional and even spiritual level, as in, “What do you really believe about the business and its contribution to society?” The Duty of Care is a legal board responsibility; caring requires a deeper human level of engagement, including knowing the business well.

The interplay of board and management is among the most important elements of a company’s culture. Furthermore, the interplay of board, management and employee contributes to the fulfillment of the social contract and is intrinsic to corporate governance. Employees may not know their company’s board members and management personally, yet their influence is noticed and often discussed on social media.

Great governance and great leadership are inextricably linked. In his 2019 “Letter to CEOs”, Larry Fink writes, “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” And, “One thing, however, is certain: the world needs your leadership. As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions and communities where they operate, particularly on issues central to the world’s future prosperity.” A well-governed organization inspires the confidence of all stakeholders.

“Culture eats strategy [and governance] for breakfast”

–Peter Drucker

A failure of culture is a failure of governance. Wells Fargo suffered 10-figure reputational damage resulting from the misdeeds of bank employees. “It takes a lifetime to build a good reputation, but you can lose it in a minute.” How many terrific ideas have failed due to a founder’s, manager’s or board’s failure to recognize the importance of the relationship between culture and strategy? A company needs the right strategy to thrive, but strategy needs the right culture to succeed. The right culture can be immeasurably impactful.

“Ten years ago, the first wave of the millennial generation was settling into early adulthood just as the economy dipped into the Great Recession. Memories of foreclosed homes and savings lost in a Wall Street-fueled crisis continue to influence where they put their money.”   

–Kate Rooney, CNBC, September 14, 2018

Like trust and careneighbor is another word with strong business and cultural implications. “Like a good neighbor, State Farm is there” is that insurance company’s familiar jingle. Crisis often brings us—neighbors—closer together. The rising generation who have entered the workforce within the last 10 years were not impacted by the global financial crisis (GFC) in the same way as their parents. However, Millennials, who tend to choose apps and algorithms over human interaction, will need evidence that a banker or wealth manager is a good neighbor and provides benefit. In addition, this rising generation base their decisions regarding trustworthiness not on face-to-face interaction but on the news reports about security breaches and hacks, their online experiences with companies and postings on social-media channels. These interactions quickly inform their beliefs about a company’s culture.

Changing and emerging consumers are prioritizing culture, and especially where business culture can positively impact social problems. If you want to understand your customer, especially the changing customer, understand their culture.

What to know about “attracting Millennials”:

  1. They prioritize culture.
  2. They want to enjoy their working experience.
  3. They want open and honest communication.
  4. They want flexibility.

Cyrus Taraporevala, president and chief executive officer of State Street Global Advisors, said, “We believe that at a time of historic disruption, increased focus on corporate culture and how it supports strategy is essential to sustainable, long-term value creation. This is good for investors…and good for our shared prosperity.”

Our world, and especially the financial sector, is desperate for courageous leaders who will inspire future generations by caring for their neighbor and executing strategies that will grow prosperity among more humans to positively impact global issues for generations to come.

Article was originally published in International Banker, Spring 2019 Edition and the International Bankerwebsite on 12 June 2019.

Article was also published in the Corporate Board Member website on 13 June 2019.

Diversity is strategic.

This axiom has been avoided due to fear, greed, corruption, and ignorance. Diversity heightens objectivity by introducing a wider variety of skills, experiences, and opinions. Prior to 1789, French aristocracy failed to realize the gravity of their arrogance and the singularity of their social and economic viewpoint. Their lack of diversity resulted in the brutal murder of over 30,000 upper class individuals. Imagine if a social revolution in the United States took a mere 10,000 business luminaries—Zuckerberg, Dimon, Iger, Cook, Bezos, Barra, etc., all gone in a matter of weeks. No matter what your opinion of top CEOs is, their contribution is arguably fundamental. A board or board member that avoids diversity embraces ignorance and irresponsibility. Diversity enhances understanding and is critical to board effectiveness.

A good company, like a good nation, should consider whether increased diversity among its leaders will benefit shareholders and stakeholders.

Fortunately, the present call to action among boards that seek greatness is to embrace diversity and realize its benefits, specifically, profit from the difference diversity offers. In our experience working with boards over the past nine years, we have seen clearly that the diverse board is far more strategic and effective. During this Board Best Practices Series and over the next year, we will be closely monitoring and studying how having board members who bring diverse thought, perspective, and experience improve a board’s effectiveness.

America’s economic system is built on democratic principles of freedom, fairness, and representative government. Among the board’s core governance duties is the responsibility to represent shareholder interests. Yet while approximately one-third of shareholder wealth is held by women, women hold fewer than 20% of public board positions.

According to the Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from $34 trillion to $51 trillion. Women’s wealth also rose as a share of all private wealth, though less spectacularly, from 28% to 30%. By 2020 they are expected to hold $72 trillion, 32% of the total. And most of the private wealth that changes hands in the coming decades is likely to go to women.

Another key board responsibility is understanding the company’s positioning with respect to its current and prospective customers. Imagine a company whose customer base is 90% women of all backgrounds and yet the board is composed entirely of white males averaging 65 years of age. This notion is laughable. Yet, this scenario has been the norm. Capitalism commands us to think and act competitively. Strategy is about differentiating from the competition, connecting with customers, and identifying more efficient means of achieving uniqueness. A board composed of highly capable diverse thinkers and leaders seems obvious, but it hasn’t always been the case.

Board Diversity is Advancing, Albeit, Slowly

2020 Women on Boards 2018 Diversity Index reported the number of female directors in the Russell 3000 in 2018 was 17.7%, increasing from 16.0% in 2017.

Much of the change in board composition, albeit slow, had been a response to cultural, social, and investor pressures, and legislated requirements. Since 2015, major institutional investors such as State Street and BlackRock have changed their proxy voting guidelines, demanding more rapid change to board diversity. Take for example the BlackRock 2019 Proxy Voting Guidelines:

We expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. We recognize that diversity has multiple dimensions. In identifying potential candidates, boards should take into consideration the full breadth of diversity including personal factors, such as gender, ethnicity, and age; as well as professional characteristics, such as a director’s industry, area of expertise, and geographic location. In addition to other elements of diversity, we encourage companies to have at least two women directors on their board.

Facing mounting pressures from many constituency groups, state legislatures are taking action and mandating board diversity. California passed a law that requires public companies headquartered in California to have a minimum of one female on their boards by December 31, 2019, with increasing minimums for larger boards by 2021. Passage of this bill contributed significantly to increasing awareness about the issue of gender diversity on corporate boards. NYC Pension Funds Comptroller Scott M. Stringer has been a strong voice calling for increased transparency, accountability, and diversity on the boards of public companies where New York City invests its pension funds.

The following graph emphasizes how the gender composition of boards compares globally.

Women on Boards – Diversity Around the World

Board Governance

Diversity is a More Solid Foundation from Which to Build

Beyond merely satisfying compliance requirements, boards are beginning to realize the inherent value of diversity. A board composed of collegial, well-rounded individuals with diverse backgrounds offers elements essential to board effectiveness. Among the hundreds of boards for which we have conducted board assessments, a vast majority of board members actually embrace true, thoughtful, action-oriented diversity. By action-oriented, we mean board members who listen well and actively and comment and question thoughtfully. Recently, a public company board member commented that diversity is more than being able to check all the different colored squares representing personal characteristics and experience and to boast that in their filings and annual reports. Diversity promotes more robust and insightful discussions, and emphasizes the board’s commitment to understanding and representing all stakeholder groups (shareholders, employees, consumers, and customers), ultimately ensuring that the board is adding value toward the company achieving the highest possible shareholder benefit.

Diverse Perspectives: Why?

  • Mitigates “inattentional blindness”
  • Improves bias understanding
  • Augments strategic discussions
  • Reduces risk
  • Defines commitment to stakeholders

Negative bias and inattentional blindness are the enemy of diversity. “Inattentional blindness is the psychological phenomenon that causes you to miss things that are right in front of your eyes.” Almost certainly, inattentional blindness existed in the boardroom and C-suite prior to Lehman Brother’s failure and eventual bankruptcy.

Benefits of a Diverse Board

  • Promotes robust discussion and constructive debate through new and broader perspectives.
  • Optimizes connections for the board through directors’ broader circles and deeper resources for the board to tap into and inform their decision-making process.
  • Maximizes opportunities for innovation and advancement.
  • Minimizes the development of group-think and the possibility of missing major red flags.
  • Promotes a culturally inclusive environment and strengthens global reputation.
  • Passes the “smell test” for progress and evolution.

Making Diverse Perspectives Felt

After a board has determined what new perspectives and characteristics it needs to optimize its functioning and effectiveness, it must shift its focus to making those new diverse perspectives felt. This side of diversity moves from representation to inclusion and speaks to the board’s culture. To analogize, when you pour oil into a bowl of vinegar and add in seasoning, the ingredients remain isolated. However, stirring the contents so that they interact creates a more interesting and vibrant new substance—a vinaigrette. Similarly, boards that add new members but fail to effectively onboard or include them in the culture will not realize the full benefit of the diversity.

Great board culture includes active listening, inquiry, and continuous improvement. Boards, particularly their chairs and other leaders, must make concerted efforts to build respect for diversity and foster a culture of inquiry by acknowledging the benefits of each different personality and a sum that is superior to its parts.

Closing Thoughts: Tearing Down Walls that Prevent Beneficial Evolution

A barrier to expanded economic progress is global businesses’ historical resistance to diversity. Diversity elevates competition, reduces risk, and promotes healthier markets. This plays out in both business and politics. In her 2019 Harvard Commencement address, Angela Merkel reflected that:

The Berlin Wall limited my opportunities. It quite literally stood in my way. However, there was one thing which this wall couldn’t do through all those years: It couldn’t impose limits on my inner thoughts, my personality, my imagination, my dreams and desires.

Women on boards, people of difference, diversity in general are elevating global economic standards. We aren’t talking about diversity for diversity’s sake; we are talking about diversity for prosperity’s sake. Diversity liberates creativity, dreams, desires, and growth. The belief in a universal dream of prosperity should be encouraged for all. Boards hold trillions of dollars of responsibility and influence. Acting diversely is a conviction that many board members now hold dear.

Time will help determine the strategic value of diversity, but early results indicate that diverse boards reflect diverse companies that think and act more nimbly and creatively and are producing superior results.

Resource from Women Corporate Directors 2019

Find the resources for your board to assist in the full scope of governance responsibilities.

Call us at 800.645.1976 with governance questions about:

Board’s Role in the Company’s Culture

Imagine moments in which culture impacted your life. Perhaps it was a Van Gogh painting or a ballet or an energizing business forum. Culture connects and impacts our lives profoundly. Culture happens. In business, good or bad, evil or benevolent, culture is a motivator and a key ingredient to our purpose and meaning as employees. Each of us, CEO or intern, board member or CMO, who works for a company as an employee, is a member of the team. Teams have leaders and, depending on the team’s complexity, many sub-level leaders. The responsibility to set the tone for the right culture for the team starts with those leaders.

Great leaders – Level 5 leaders to use Jim Collins’ jargon – possess a relentless drive to succeed but do so with humility.  “The X factor of truly great leadership is humility,” according to Collins. What sets a Level 5 leader apart is that their “energy and drive and ambition is channeled outward into a cause, into a company, into a culture, into a quest, into something that is bigger and more enduring than they are. Level 5s lead in a spirit of service.” Great leadership is about inspiring a positive culture so that each member of the team is moved to perform at their highest or best purpose. Success isn’t about the leader. Success is about the team.

How a Focus on Culture Is Driving Change

The recent emphasis on “environmental, social, governance” (ESG) and Corporate Social Responsibility (CSR) is born from a concern for our culture. Anyone who ever lived near a polluted river or lake as a young person has a keen sense of the importance of a healthy environment from time spent yearning to swim or play in clean waters. The #MeToo movement was a very public response to a culture that for too long ignored or covered up workplace behavior with a wink and a nod to those who were complicit. CEO compensation has made headlines as the media spotlight on the pay gap between CEO and the rank-and-file pay has grown. How companies respond to issues like these factors not only into shareholder and investment decisions, but also into decisions made by, just to name a couple, cities considering which new businesses to court and by prospective employees considering which opportunity best matches their personal and professional priorities. The response is a strong indicator of a company’s culture.

Governance is the foundation on which an effectively managed organization is built and culture is promoted and elevated.  This foundation includes policies and procedures that provide for both opportunity and accountability. An effective corporate governance framework includes structural elements that facilitate valuable, coherent, board, management, and stakeholder communication and interaction.  These elements include:

  • Charters that clearly articulate board responsibilities and limitations
  • Fundamental principles that promote long-term growth and value
  • Provisions for effective two-way shareholder communication
  • Board selection criteria and an annual assessment process that promote effectiveness
  • Following the rules and regulations of culture, a nation, and a jurisdiction
  • Oversight of both individual leader and corporate culture bias
  • Allowing management to manage for the long term

In today’s often hyper-competitive business environment, when two similar teams face off, the team that exercises superior governance outperforms rivals. Governance and culture are inextricably linked.  By definition, great governance affords teams and, therefore, companies greater ability to capitalize on opportunities.  The operative word in our definition of corporate governance is opportunity.  Often academics and leaders will opine about the need for enterprises to “think like an entrepreneur.” Well, entrepreneurs eat, sleep, and drink opportunity.  An excited, excellence-focused business culture will devour a stale, uninventive one.  To borrow Peter Drucker’s often quoted phrase, “Culture eats strategy for breakfast.” The greatest strategy in the world will perish in the hands of an unmotivated, fatalistic culture.

How Leaders and Boards Influence Culture

Business culture gave Steve Jobs a “pass” because, in spite of his rude and harsh behavior, he motivated people to be the best they can be.  Historically, a toxic culture of machismo tolerated and promoted rude behavior from men. Was his behavior part of or essential for his and Apple’s success? Truth is, we’ll never know.  Possibly a more evolved leader in the future will accomplish Jobs-like success as a fiercely driven but humble Level 5 leader. And this notion of a more evolved leader will be part of the board-leadership-gender debate.

Are we learning from these lessons?  Like many workplace evils of the past, disrespectful and rude behaviors are certainly less tolerated than they once were. There are signs that we are improving and evolving towards a more enlightened culture shift in business globally. For starters, the expectation for boardroom gender parity is gaining widespread acceptance. Groups like Corporate Board Member, the Society for Corporate Governance, both in the U.S., Financial Reporting Counsel and ICSA in the U.K., and the Pearl Initiative in the Middle East are active promoters of governance excellence. The Cadbury Report (U.K.) issued in 1992 and the King Code (King I, 1994, South Africa) were early corporate governance and board excellence initiatives.

Stakeholders are calibrating their leadership expectations to include board-management alignment and the extent to which the relationship, vision, and interaction set the right tone for the right culture. As we’ve noted, among highly skilled young workers, a company’s culture is central to considerations of employment options. Our research and experience with clients indicate that this will continue as long as employment conditions favor the job seeker.

What to know about ‘attracting Millennials’
1. They prioritize culture.
2. They want to enjoy their working experience.
3. They want open and honest communication.
4. They want flexibility.

To attract top talent, boards and management must understand this: An important distinction exists between two dominant culture groups: one, a culture of continuous improvement that rewards the drive to succeed creatively, and two, a culture of fear and rebuke where the spirit of confidence is inhibited.  “Stress can be either a triggering or aggravating factor for many diseases and pathological conditions.”

Cyrus Taraporevala, president and chief executive officer of State Street Global Advisors, recently stated in a January 2019 letter, “We believe that at a time of historic disruption, increased focus on corporate culture and how it supports strategy is essential to sustainable, long-term value creation. This is good for investors…and good for our shared prosperity.”

Ten Lessons for Board Members adapted from Peter Drucker’s Ten Lessons Learned
1.   First, manage thyself
2.   Do what you’re made for — contributing to the board
3.   Work how you work best (and let others do the same)
4.   Count your time, and make it count
5.   Prepare better board meetings (particularly if you’re the committee or board chair)
6.   Don’t make a hundred comments when one will do
7.   Find your one big distinctive impact
8.   Stop what you would not start
9.   Run lean and think strategically
10. Be useful to management

Great leaders infuse the culture around them with that magical sense of “I can be the best me” at this job. In the best organizations, a deep sense of purpose saturates the organization and becomes a cultural value. Culture is ethereal and yet describable.  A senior management team and board aligned on being the best they can be are likely to positively infect their company’s culture, as well. Great culture promotes good governance. Good governance sustains great culture. Team efforts that encourage employees are solid ground on which to build a successful company.

“People don’t leave jobs, they leave toxic work cultures.”

Dr. Amina Aitsi-Selmi, The #1 toxicity factor at work, March 20, 2019

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Duty of care: it’s more than legal

“Care” is a strong word. Care is ubiquitous and imparts responsibilities on people in many aspects of their lives.

In personal relationships, care stems from moral, cultural, and religious ideals that drive human interface. In business, care forms the standards by which we conduct ourselves and uphold professional responsibilities. Care extends beyond the individual and into organizations. A well-run organization is composed of people at all levels who carry out their duties with great care, engendering stakeholder loyalty and market confidence.

Ten years ago, the world was in the midst of the worst financial crisis since the 1930s. From 2008 to 2012, 465 banks in the United States failed, whereas only 10 banks failed in the 5 years prior to 2008. (See FDIC Failed Bank List.) But the crisis was not predicated on mere financial failures; it was a crisis of character and care. Many other iconic institutions have failed or struggled in recent years due to engaging in excessive risks, including financial, behavioral, and culture. What has changed? The notion of care has broadened.

Legal Perspectives on Care

Historically, the duty of care has been of such importance that it has been codified into corporate laws. It along with the duty of loyalty and duty of obedience are the three major fiduciary duties imposed on directors. The duty of care is deemed the most important responsibility owed by a director to an organization. The Model Business Corporation Actrequires that directors “shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” Many states, including Delaware, have similarly modeled laws. The duty of care is frequently tested through legal proceedings that assess whether or not a board exercised due care in fulfilling its responsibilities.

Courts and legislatures have worked to define the breadth of requirements to uphold the board’s duty of care. In recent decades, in cases such as Smith v. Van Gorkam (Del. 1985), Unocal Corp. v. Mesa Petroleum Co. (Del. 1985), Revlon v. MacAndrews & Forbes Holding, Inc. (Del. 1986), and In re Caremark Int’l Inc. (Del. 1996), among others, the courts have sought to identify whether a board upheld its fiduciary duties in varied circumstances and decisions. Basic legal standards have evolved that allow a board to show it has upheld its fiduciary duties by applying their best business judgment, acting in good faith, and promoting the best interests of the corporation. These standards developed during the late 1900s limited the reach of the board’s duty of care.

Care Informed Governance

The latter half of the 20th century will be known in business circles as the era of management, with seemingly endless volumes of management books highlighting the vast study of how to manage a company well. The financial crisis of 2008 significantly impacted the business world’s view of risk and governance. The focus on management performance and especially short-term performance contributed to hundreds of bank failures and thousands of business failures. The distance between board and management precipitated these failures and broadened the concept of care and good governance. As a result, the first quarter of the 21st century will be known as the era of governance.

From a board governance perspective, meeting basic legal requirements is insufficient. As fiduciaries of an organization, directors are entrusted with ensuring the organization’s financial, operational, and cultural health and sustainability. Construing the duty of care narrowly to only major board decisions for the purpose of avoiding legal liability inherently limits the effectiveness of a board. Boards should aspire to exceed the minimum legal requirements for meeting the duty of care required by laws and courts and look to exercise care in all governance practices, striving for a higher standard of consistent governance excellence.

Cloudy Governance Signals a Lack of Diligence and Lack of Care

caring and diligent board maintains:

  • Clarity and Transparency
  • Accountability and Independence
  • Diversity and Inclusiveness
  • Interactive Culture and Engagement
  • Preparedness and Full Information
  • Discipline and Keen Observation
  • Inquisitiveness and Thoughtfulness
  • Proactive Approach

Exercising Duty of Care in Governance Practices

These characteristics should guide the practices and dynamics of the board to ensure it exercises requisite care in its oversight and in major board decisions. A holistic approach to care ensures that a board’s governance practices promote a healthy corporate culture, which influences the overall health, functioning, and success of an organization. An effective board embeds care into its practices through key action points:

  • Regular assessment of board composition
  • Candid and open discussion
  • Thoughtful selection, evaluation and oversight of the CEO
  • A healthy, collaborative relationship with management
  • Alignment of the board’s role in strategy
  • Oversight of financial and operational performance
  • Thorough review and approval of major transactions
  • Understanding of talent development and culture
  • Annual assessment of the organization’s governance policies
  • Timely disclosure of conflicts of interest
  • Cyber and physical protection of the organization’s assets
  • Reviews to ensure integrity of financial statements and compliance with laws
  • Engagement of outside experts, as necessary
  • Regular assessment of the board’s practices and effectiveness

Care and governance are tightly linked concepts. Boards and board members who care are ones who understand the business. Care is more than showing up for four board meetings and reviewing financials. Highly effective leaders exercise care on an intellectual, emotional, and even spiritual level, as in what do you really believe about the business and its contribution to society. The Duty of Care is a legal board responsibility; caring is deeper human level of engagement.

Too often boards segment the function of internal audit into one solely of financial reporting. In this world of fast-paced change, this perspective severely limits the opportunity for effective risk mitigation. Internal audit can position the Board to assess risk more effectively. While boards typically rely on management for risk information, internal audit plays an essential, but too often an underutilized role in the information flow between senior management and the board.

D&O Questionnaire

Limiting the function of internal audit to financial risk reporting, leaves the board vulnerable to missing threats from other risks such as data privacy and cyber security. Internal audit brings value in its ability to provide assurance as to the accuracy, completeness, or transparency of allinformation sent by management to the board. Yet, boards rarely utilize internal audit for assurance of the information they are given. In a recent study nearly 60% of chief audit executives indicated that internal audit “rarely or never provides assurance on the quality of information given to the board nor does internal audit have formal discussions about the information with the board and management.” Nearly one-third reported providing assurance to boards “only for unusual situations.”

Analysts and those who critique governance are beginning to take note. Certainly the seeming rise in governance failures that have made headlines recently begs the question, did the board not have the right information to know what was going on? If they had had the right information, could the risk have been mitigated? Because the board’s risk oversight role requires directors’ close attention to the accuracy of all information provided to them, boards must commit to utilizing internal audit to provide assurance consistently for all information, and to asking these pertinent questions to make certain the information provided to them is reliable.

  1. Is the financial information accurate?
  2. Are business and strategy plans realistic?
  3. Who is managing third-party risk and is it being updated regularly?
  4. Are management and the board aligned on addressing fraud opportunity risks?
  5. Does the company culture breed integrity?
  6. Who is responsible for protecting the company’s crown jewels and what are the threats?

The latest pronouncements from Volkswagon’s Chairman Hans Dieter Pötsch, would like to paint his company’s recent wrong doings as a “chain of errors”.  Basically, it was just some buggy code, right?  A few errors that were just missed and then built upon themselves.

There is nothing in this story of corporate misdeeds that truly resembles an error.  This scandal is the result of a very calculated set of decisions motivated by money.  In a recent NPR piece, John Ydstie says that, “VW developers couldn’t figure how to meet U.S. emissions standards within the timeline and budget they’d been given, so they developed the software defeat device.”  Basically, they couldn’t figure out the answer so they cheated.

These kinds of things don’t just randomly happen at a company the size of VW.  This was not just the result of a chain of errors. There is a fundamental cultural problem at VW that will not be fixed until the Board of Directors itself is cleansed and indoctrinated with sound governance and ethical practices.

As technology has brought increased awareness of individuals and their public identities and reputations, it has also brought greater access and understanding of the interworking of organizations and the people that run them. Perceptions of corporate boards as “Oz” like institutions have dissipated, and people have come to understand that board members are people with individual characteristics and defining qualities.

The traditional homogeneity of corporate boards faces increasing criticism. A corporate board not only has an identity as a whole of being a governing/supervisory body, but now also reflects the composite of the identities of the individuals serving as board members. Members of the public who are customers, clients, and stakeholders of these organizations expect boards to be conscious of their total and individual identities and regularly evaluate and make concerted efforts for self-improvement.

Over the past decade, the pressure to increase female representation on boards has continued to mount. Approaches to effectuating this change vary. Some countries regulate the minimum percentages of female board members.

  • Norway was the first country to pass a female board member quota law requiring all public limited liability companies to have at least 40% women on the board or risk dissolution.
  • Similarly, Spain, France, Finland, and Iceland set their minimums quotas of female board members at 40%. Denmark also requires a 40% minimum, but does not attach sanctions to the requirement.
  • Italy, Belgium, the Netherlands, Malaysia, and most recently Germany all require 30% or more female representation. Sweden and the United Kingdom do not have binding minimums, but set goals to increase female participation.
  • The United States has a minimally instructive rule for gender diversity on boards through the Securities and Exchange Commission, which requires boards to disclose how they consider diversity when choosing board members.
  • European nations lead gender parity rankings with all of the aforementioned EU nations having well above 20% and some reaching 40% of board seats held by women. Growth in the United States has been significantly slower, with only about 10.7% female representation on boards of 6,920 companies according to Catalyst (a nonprofit research firm studying women in business), but with about 19.2% percent of women on the boards of S&P 500 companies.

Quotas are effective in increasing the number of women on boards according to Dan Konigsburg, Deloite Global managing director in “Deloitte’s Women in the Boardroom: A Global Perspective”; however, they are subject to criticism and raise questions regarding the qualifications of women being elected to some boards, especially those in male-dominated industries.

The idea that there are not a sufficient number of qualified women to serve on boards has been rebuked on a number of fronts. Instead, the quotas and policies behind them and thought leadership influencing this change increasing female presence on boards challenge a long-standing, unsavory status quo and open networks of highly qualified women to join the ranks of their male counterparts on boards.

Board directors increasingly are recognizing the imporatnce of diversity. PWC confronted the thoughts and perspectives regarding diversity on boards in their 2015 Annual Corporate Directors Survey.

  • In surveyed directors, over 95% viewed diversity as at least a “somewhat” important director attribute, but 70% of directors also believe there are impediments to increasing board diversity.
  • Interestingly, PWC discovered that over 67% of mega-cap company directors think diversity is “very important” to board composition, contrasted with only 31% of directors at micro-cap companies granting diversity that same ranking, which raises questions about smaller companies’ recognition of the benefit of increased diversity.
  • Further, a vast majority of directors (over 80%) believe diversity enhances board effectiveness and company performance.

Recent research shows that companies are more profitable and have higher market performance when women are on boards. An article in the Academy of Management Journal featured the results of such research combining results from 140 studies, which highlighted better prerformance based on an internal view on asset utilization and income generation and on an external view on perceptions and stock performance when women are on boards. The differing experiences, backgrounds, and communication and interaction styles of women enhance all functions of boards through more productive and effective deliberation and keener oversight from a broader viewpoint and expertise.

“The idea is that when a group is held to a higher standard of accountability, it will draw on the knowledge of everyone in that group, leading to better decision making” said Corienne Post, PhD., a professor at Lehigh University and author of the article. This negates traditionally held notions that there exists a largely unsuitable pool of diverse candidates and instead points to either a board’s inability or unwillingness to recognize a major weakness, which can be easily remedied through board evaluations. It may require thinking outside of the restrictive traditional confines of director eligibility and recruitment pools to ensure boards are properly constituted with appropriate gender representation.

The ideals of increased accountability and efficacy of boards are at the basis of the continued efforts to increase gender parity on boards. Boards are required to be cognizant of diversity matters and reputation based thereupon in order to remain competitive. Through proper board and peer evaluations, boards can assess strengths and weaknesses of the board as a whole and of each individual director to determine the number and expertise of female directors necessary to enhance their ability to properly govern and lead their organizations to higher successes.

Just as you would not stock your football starting line-up with all kickers, the notion of boards continuing to be comprised of all or an overwhelming majority of men is similarly absurd.

Few activities within the corporate world garner more angst than the annual assessment or evaluation process. This is true at all levels: from the individual employee processes conducted by HR, all the way through to the process undertaken by the Board of Directors.

Employees are expected to write a self-critical analyses of their performances, walking the tightrope between bragging and self-confidence while also acknowledging areas for improvement (at least to the extent their managers think improvement is necessary). In most cases, annual bonuses, salary increases and retention decisions are tied to the process. Few companies get this process right— yet, nearly every company I know requires all employees and managers to participate. Although the evaluation process at the employee level is imperfect, it aims to be a substantive process. It provides a full view of the employee’s performance and skills in light of the duties of the role, and provides a basis for setting goals and benchmarks of achievement.

In the Board context, each Board member is essentially an employee of the investors.  While many directors might balk at this notion, it’s not a big stretch.  In the Boardroom, the evaluation concept is similar, but the investors don’t often get much of a report about the Board’s performance. I’ve never heard of compensation of any kind being linked to the evaluation, and it’s quite rare for there to be any outcome at all, other than checking a box that the process was completed at the required interval. In fact, in PwC’s, 2014 Annual Corporate Director Survey, they found that 63% of directors felt that the board self-evaluation process was a check-the-box exercise.

If directors are completing evaluations solely for the purpose of completing them, should we then expect thoughtful and thorough results from these evaluations?

While there are some companies where governance has a prominent seat and the evaluation process is a rigorous and serious endeavor, it is still quite rare for companies to conduct third-party anonymous evaluations. And yet, in that same PwC survey, 70% of directors said that it was challenging to be frank in the board evaluation process. Could this be because the chair of the nominating and governance committee and the general counsel are reading everyone’s evaluations?

It’s no wonder that institutional investors are asking more questions about the board evaluation process. You might ask what took them so long. But, what do they want to know? We heard recently from Raki Kumar, head of corporate governance for State Street Global Advisors and Glenn Booraem, principal & fund treasurer, Vanguard Group Inc., at a panel about Board refreshment at the ACC Annual Meeting 2015. Both stressed the importance of the evaluation process. Kumar outlined the four things she looks for in the Board evaluation process:

  1. Identify which director is responsible for the evaluation and empower that person to carry it out;
  2. It should be an annual exercise;
  3. The Board as whole as well as each committee and each individual should be evaluated; and
  4. There must be an outcome.

Booraem emphasized the outcome aspect, saying that, “having a rigorous board evaluation process with some form of outcomes, is perhaps the most important thing when considering board refreshment.” These outcomes can be as simple as more training around cyber-security or as complex as needing to remove (or simply not nominate) certain directors and look for ones with different skills. But the point is that investors want to know that your company has a rigorous process and at the end of the process they want to know your outcomes.

As more boards contemplate board refreshment and other pressures from investors, a thorough, objective evaluation process with clear outcomes may not be a golden ticket, but it will show a commitment to at least asking the questions.

GREENSBORO, N.C. and SEATTLE, Oct. 13, 2015 – The Center for Board Excellence (CBE), the leading provider of compliance and governance solutions, today announced that it has appointed Phil Neiswenderto the role of president and Kaley Childs to vice president, client services & business development. Neiswender will also remain as a member of CBE’s board of directors, which he joined in 2013.

“Phil has been an integral part of shaping CBE’s strategy and innovative products since day one,” said Byron Loflin, chief executive officer of CBE. “Having served as general counsel and corporate secretary to public and private companies, Phil brings a wealth of legal and business understanding that is invaluable to our customers. Kaley and Phil are both committed to the CBE vision and know the challenges facing governance leaders today.  They each have the skills and experience we need to take CBE to the next level.”

Prior to CBE, Phil held roles as chief legal officer and executive vice president for operations & corporate development at UIEvolution, Inc., chief operating officer at Garagiste, Inc., and general counsel, vice president of legal at BSQUARE Corporation.  He also held both legal and business roles at Getty Images, Inc. and was an attorney at Graham & James, LLP and Riddell Williams, PS, in Seattle. Phil also currently advises several early-stage startups and is on the board of Vinzar, LLC. Phil obtained his J.D. degree from the University of Virginia and his B.A. from the University of Washington. He is a member of the Washington bar.

“CBE brings together two things that I am very passionate about: technology and business excellence,” said Neiswender. “Having advised CBE as a board member for several years, I now have the privilege to work with this amazing team on a daily basis. The company is on a fantastic trajectory right now, and I am very excited to be a part of this next chapter.”

As vice president, client services and business development, Kaley will use her experience and talent to further develop our products and customer channels.

Prior to joining CBE, Ms. Childs served as general counsel at Clarolux LLC and practiced law at two firms in New York. Ms. Childs is currently the chair of the board of trustees of the Northside Charter High School in Brooklyn, N.Y., and president of YP Civitan of Greensboro, N.C. Ms. Childs received her B.A. degree cum laude in political science from Samford University and her J.D. from Pace University School of Law. Ms. Childs is admitted to practice law in the state of New York.

Founded in 2010 by attorneys and technologists, The Center for Board Excellence has built an innovative governance platform for board assessment, directors’ & officers’ questionnaires and other compliance processes. CBE streamlines laborious, costly and previously paper-based processes in order to allow directors and governance professionals to focus on what they do best: provide strategic advisement and guidance on matters that critically impact a company’s performance. For more information, please visit the company’s website at www.boardevaluations.com.

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