IN-DEPTH: Governance insights from a board veteran
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Interview with Jonathan Foster, founder and managing director of Current Capital Partners, as he launches his new book: On Board: The modern playbook for corporate governance.
Jonathan Foster is the founder and managing director of Current Capital Partners, an M&A advisory and private equity investing firm. He spent a decade at Lazard, ultimately as a managing director, and has served on more than 50 boards, including Fortune 500 companies, private firms, and companies navigating restructurings.
What topics are explored on the realities of the modern director’s role?
A large part of the book provides a contemporary history on the past 50 years or so of transactions, mergers and acquisitions, leveraged buyouts, activism and restructuring.
I then discuss the tremendous growth in the institutional investor and the ESG issues at the forefront. For each of those topics, I discuss the court cases, laws and regulations that bring us to best practices for today.
In the final section of the book, I talk about 10 different issues that I think are critical for good governance issues that might not be entirely obvious, such as how you should interact with CEOs, or how a board can help a company prepare for a crisis.
I tried to write it with a lot of stories and anecdotes from inside boardrooms and courtrooms, CEOs, judges, attorneys, bankers and the like.
As you look at how the role and functioning of the board has changed, what needs to be improved?
The board should be focused on getting better every day. It sounds simple, but it all starts with the directors, the people. It's all about care and loyalty.
Care means that you should not be shy about seeking outside help and advisors, and you make as informed decisions as you possibly can. Loyalty means you're thinking only of the company. Not yourself, not the CEO - just the company. While that may appear easy, it's proven time and again to be challenging.
The first of 10 recommendations cited in the book is to understand board culture and chemistry. How do you define those areas?
I think you need to look for and really understand how the directors work with management and within their group. You learn about this by being a really good observer and listening before you speak. You can't be effective in any group without understanding the culture. That's why it's so important.
Are these things that you look for before you join a board or perhaps in the recruitment and interview process or are they only unpacked once you've been on the board for several meetings?
No, I think you get a good flavor from the interview process. I think anybody who's had some success in their career by definition is a pretty good people person. I think in a 45-minute conversation with somebody to which you come well prepared, you can get a good read on that person: Are they informed? Do they listen? When you ask a fairly detailed question, is there a decent answer?
I remember once when I was interviewing for a board and I asked a particular question - it was a pretty simple question. The company had two business segments; one was a world leader in a particular category. I was probably trying to show I've done my homework. So, I said, “Can you tell me what's your market, in your major business segment?” I knew it was 32%, but this director had no idea. That was pretty shocking, and it told me that this board wasn't particularly well informed.
You write that activism is not a problem when interests are aligned. What is the director’s side of the bargain and what is the activist’s, in your opinion?
It should be exactly the same thing - to maximize long-term shareholder value. However, oftentimes, activists are just seen as the aggressors, and the companies' instinct is to fight. The reality is, activists often have good intentions and good ideas, but their incentives may not be aligned with the board and management incentives.
Every activist has multiple investments, maybe in a vehicle, maybe in a fund. But the reality is they have multiple investments and so by definition, an activist can potentially be more aggressive than a board, and management would prudently be because the board and management are only responsible for one company. That drives a lot of the difference in perspective.
I think that every director should think like an activist. What would an activist say? It's all about maximizing the long-term shareholder value.
A board of management is with a company for about five to 10 years. There aren't many activists in the stock for five to 10 years. That's another example of the potential difference in perspective and objective. But again, it should be all about maximizing long-term shareholder value, which is easier said than done, as is often the case in governance in many other parts of life.
How typical is it for today’s directors to meet and engage with institutional investors?
There's a lot of different opinions on this important topic at a high level. The institutional investors should have access to the directors, but at the same time you want a consistent message about your company given to the investors, and management runs the company day-to-day, directors oversee.
Typically, once a year the board leader, be it the non-executive chairman or the lead independent director, meets with the big institutional investors and generally discusses mostly if not entirely, governance issues and the CEO and CFO are the ones responsible for discussing strategy and financial performance. Now, if you're in the midst of a hostile situation or a failed “say on pay” vote, a couple of directors might go and meet with the institutional investors, but never the whole board. That would be potentially a mixed message, and you want to stay away from that. I've found institutional investors to be happy with this approach.
ESG backlash continues to gather pace, fanned by the government and regulators. How hard is it for boards to set a consistent course on the questions of shareholder versus stakeholder value?
It’s really hard because investors have different perspectives. It's really important to listen to all of your shareholders, not just the noisiest ones, and try to reconcile conflicting issues. They own the company of course, but we're also in a political environment where everyone's politics can be threatened on issues like ESG and DEI. Some of the backlash against ESG is overstated and many companies are still very much committed to environmental, social and governance objectives, but may be moving away from the somewhat stigmatized ESG acronym.
[BlackRock CEO] Larry Fink insisted on a new focus on ESG about 18 months ago in a speech at the Aspen Institute. He said he was embarrassed to have been associated with the now weaponized term ESG, and he backed away from it.
Sometimes, the commitment to ESG can expand the pie. One of the people I interviewed for my book was Dan Swift, litigation partner at law firm Cravath, and he gave the example of when Paul O'Neill became CEO of Alcoa. He made safety the number one priority and by doing so, really energized the workforce and set Alcoa on a whole new path.
The pendulum has also been swinging on board diversity. Investors no longer seek quotas or minimum representation. How have decisions around nominations and board composition changed?
Some have cut back on DEI efforts and there's a little bit less focus on it at the board level at some companies, but I do know that many believe that diverse groups make better decisions. Another interesting person I interviewed for my book was Admiral Mike Mullen, head of the U.S. military. He's been on a lot of boards including Sprint and General Motors. I met him on the Wheels Up board and he's a big believer that diverse groups make better decisions. That's a strong statement from a guy who ran the U.S. military.
I think it's a good reminder that we're going to talk less about diverse boards and more about just good directors. I'm always focused on companies where we're talking about DEI on management ranks about two or three levels down. Do we have people of color? Do we have women? Do we have foreign nationals? Because where the rubber really hits the road are the 2,000 hours-a-year workers, the management - not just the directors. We're only there for about 200 hours a year.
The board’s most important role is arguably succession planning. What do the best boards do well in this regard?
Succession planning is a key board responsibility because there's a good argument that the board's most important single responsibility is overseeing the CEO.
It's really important when it comes to succession to start early. Understand what you're looking for and put an effective search process in place with both internal and external candidates. Any good CEO should be grooming a successor, and most CEOs understandably want an internal person to succeed them, but at the end of the day, the board is going to live with a new CEO, not the outgoing CEO. It’s got to be a board decision.
How hard is it to manage the CEO’s feelings around succession planning?
It is really hard. Nobody wants to think that someone is potentially unhappy with them or that somebody's getting older or that their tenure has an endpoint that's not terribly far away.
But most CEOs recognize the importance of grooming a successor. Jim Citrin, a CEO recruiter at Spencer Stuart, told me a really interesting story concerning John Chambers, who ran Cisco where under his leadership, revenues went from about $2 billion to about $50 billion. The board started looking at a replacement and that transition from an iconic CEO went really well. On the day of the announcement of an internal successor, the stock was flat. To have the stock not go down is a real accomplishment. Start early, be thoughtful. Get help, look at internals and externals.
Which board committees are the most challenging and rewarding?
I think it's changed a lot. In many ways, the audit committee is the most demanding, but the other two committees are changing a lot and getting busier. The compensation committee is more a human capital committee in most companies today. It's not just determining compensation for the CEOs and signing off on compensation for the other C-suite executives. It's talking about workforce development, succession, equal pay for equal jobs and DEI. Nominating and governance used to be the easy one, but it's not anymore because in many companies, parts of ESG are now in this committee.
You often see the chairman and head of the nominating and governance committee threatened. If the activist is going after two directors, those are the two seats they often go after at least first.
This interview formed part of a recent webinar hosted by Diligent Market Intelligence. For more, access the replay here.
