Best practices for governance emphasize independence in the boardroom. While independence prevents some of the problems of boards that are too insular, having too many independent board directors presents the problem of the board being too distant from the business. Inside board directors bring a wealth of knowledge to the board. They also have a strong personal commitment to its success and they're more likely to be successful because of their day-to-day involvement with the company and their deep understanding of its challenges.
Under the best circumstances, independent board directors must have a sophisticated understanding of the business, know how to create value in the business and have the time to make a viable impact.
What Are the Characteristics of a Forward-Thinking Board?
In considering how best to transition toward taking a long-term strategy toward goal setting, it's necessary to compose a forward-thinking board that is committed to corporate success. All board directors need to be intelligent, prudent and collegial and to have the type of experience that's relevant to the company's strategy. Ultimately, companies need a board that's qualified and committed to upholding the long-term vision of value creation for the business.
Best practices for board composition have also focused on overboarding. This issue came about because large numbers of board directors accepted appointments to five, six or more board directorships. Serving on too many boards doesn't allow directors to provide the due diligence that's necessary to commit to working on long-term strategies. Certain independent board directors may need to deepen their involvement in the business, particularly the committee chairs.
Compensation also plays a role in developing a board that's primed for focusing on the long term. Boards should set up a pay structure for board directors that reflects their expectations. The level of compensation for board directors should be representative of their need for stronger engagement. Compensation for chairmen should take into consideration the increased level of responsibility that accompanies their roles.
Another way to approach a forward-thinking board composition is to consider seeking board talent from industries that are long-term by nature. For example, many board directors hailed from family-controlled businesses. These directors have long-term mindsets because they share a belief in preserving the company for future generations. Many of the largest and most successful businesses appointed board directors who were formerly executives of other family-controlled businesses or those who were recruited from other businesses that were run in a similar fashion.
Germany gives us some good examples of large, successful corporations that began as family-run businesses. German companies like Bosch, Metro, Merck, the Aldi Group, Schaeffler, Bertelsmann, Tengelmann and Rethman are family-owned businesses that are thriving.
Forward-thinking boards are also more likely to take risks than companies that focus primarily on the short term. Companies that focus on short-term prosperity spend their time protecting the company's reputation and avoiding problems, rather than making critical decisions that may not pay off until later. Spending too much time on avoiding risk is as prohibitive to success as impatient or impulsive decision-making.
The Chair's Role on a Forward-Thinking Board
Board leadership sets the tone and direction for the board. The nominating committee chair needs to ensure that the board has the appropriate financial, human and technological resources to implement their vision. All board committee chairs need to have the proper influence, conviction and resilience to stay strong when faced with pressures related to short-term goals.
It's important to consider that board chairs can't change the beliefs and attitudes of other board directors overnight. It will take time to get the entire board in tune with long-term planning. Board chairs who are skilled in setting and managing the agenda have the ability to allocate sufficient time at board meetings for longer-term planning. Other board directors may pressure the chair to crowd out the agenda with matters that have a lower priority. An experienced chairperson knows how to prioritize agenda items and to run meetings efficiently.
The long-term mindset begins with the board chair and should infiltrate that philosophy through the rest of the organization. The CEO also has a role in actively managing the culture and values and actively communicating the company's strategic vision consistently. The board and the CEO need to continue reiterating the long-term vision to internal and external stakeholders in ways that communicate the importance of the long-term health of the company.
How Technology Can Help to Compose Boards with a Long-Term Vision and Mindset
A board effectiveness review is necessary for ensuring that boards have the proper mindset for their companies to be successful in transitioning the board and management to focusing on long-term strategies. A board effectiveness review can be a powerful tool when boards are able to discuss their performance candidly and openly. These discussions should consider the questions that are relevant to working toward a board composition that has the right skills and talents to be forward-thinking.
To help boards that are actively working toward a specific composition, The National Association of Corporate Directors (NACD) and Diligent Corporation partnered to create a digital solution to help boards modernize and improve the level of board performance.
Nom Gov is a tool that provides access to real-time data on the profiles of tens of thousands of board directors and executives. The tool assists boards in getting the right level of diversity, independence and talent on the board. It provides a way for boards to be proactive in the areas of board effectiveness as compared with peers, to address ESG concerns, and to plan for succession and long-term strategies. Nom Gov uses the same data as proxy advisors, and it gives boards the data and analytics they need to spot issues and risks to elevate board performance. Nom Gov is a game-changer for boards because it allows boards to be bolder and more courageous in fulfilling their desire to set the tone for the business to think about vision and strategic planning in a more modern way. Having the right tool for recruiting will help the board and the executive team to make a deeper commitment to the long-term vision. The end result is that directors will be able to create and foster an environment that assures sustainability for all stakeholders.
To learn more about how to make the shift to long-termism, see Developing Beyond Your Board's Historical Growth Strategies, Part I: Shifting to Long-Termism.