Not all directors are satisfied with the performances of their colleagues. More than one-third of directors feel someone on their board should be replaced, according to the 2016 Annual Corporate Directors Survey conducted by PricewaterhouseCoopers, For PwC’s study, which provides new insight into the issues directors believe most influence board performance, some respondents name shortcomings like unpreparedness and lack of expertise as the source of their concerns, while others note age and the tendency to overstep boundaries.
All of this begs the question: How do you know when it’s time to refresh your board?
The Harvard Law School Forum on Corporate Governance and Financial Regulation has called board refreshment “a topic on fire,” advising public companies to consider it in the context of self-assessment, succession planning, and shareholder engagement. In the interest of building and maintaining effective boards, here are some of the factors that influence a board refresh, along with when companies should seek new directors.
Why Is Board Refreshment Necessary?
Close to 70 percent of institutional investors and members of the corporate community surveyed by Institutional Shareholder Services Inc. agreed that having a large number of directors with long tenure is “cause for concern.” Lengthy tenures, ISS notes, are believed to prevent boards from introducing new skills such as Contently 1 product management, marketing, and conflict resolution, and can also stall membership diversification. A refresh, on the other hand, lets companies make improvements. When it’s time to refresh, begin by determining the company’s needs. “If you have directors who are energised, understand the issues and are productive in committee meetings, things don’t need to be refreshed,” Joseph DePaolo, CEO of Signature Bank and a director himself, tells American Banker. Still, there’s something to be said for new viewpoints. When Chipotle added four new board members in December, its founder, chairman, and CEO Steve Ells, was quoted in a news release as saying that the company gained “the oversight,
When it’s time to refresh, begin by determining the company’s needs. “If you have directors who are energised, understand the issues and are productive in committee meetings, things don’t need to be refreshed,” Joseph DePaolo, CEO of Signature Bank and a director himself, tells American Banker. Still, there’s something to be said for new viewpoints. When Chipotle added four new board members in December, its founder, chairman, and CEO Steve Ells, was quoted in a news release as saying that the company gained “the oversight, accountability and leadership we need as we continue our efforts to reestablish Chipotle as the leader we have been for much of our history.” These new directors weren’t brought on to radically shift the company’s business model, but rather to sustain Chipotle’s momentum.
As noted, adding and replacing directors offers a chance to increase board diversity — and profits. Adding women to a board, for example, can result in a greater return on sales, according to ongoing research by Catalyst, a nonprofit dedicated to expanding business opportunities for women. Catalyst has also indicated that there is a link between more female board directors and improved stock growth.
When Should Boards Explore a Board Refresh?
Whether the goal is to maintain your existing level of satisfaction with your board or to enhance it, the ideal timing can vary.
Some board refreshes are driven by a perceived need for change resulting from a major business event. Such was the case with Wells Fargo. As Reuters reports, multiple shareholders pushed for the financial services company to reinvent its board, which Reuters says they felt was slow to respond to a scandal involving 2 million fraudulent bank and credit card accounts. In situations like this, adding or replacing board members can help a company get back on track.
Other board refreshment efforts have followed new corporate appointments. In 2015, a shareholder’s group requested that McDonald’s engage in a “robust refreshment” of its board after the fast food company replaced its CEO and added a new director. The Chicago Tribune reports that while the executive director of the Contently 2 investment group called the arrival of the new board member “a positive step,” he also stated that McDonald’s — which was noted to have many long-tenured directors — needed to “critically review its performance and culpability” and add directors from outside of Illinois, where the restaurant chain is based. Sometimes, a few new additions can be the impetus for greater change.
The board refreshment process isn’t unlike that of building your first board of directors. Make decisions that are designed to maximise the benefits to your organisation, and the outcome can be a positive one for the company and for your directors alike.