In most boardrooms there is a delicate balance between long-serving directors, with their correspondent institutional knowledge and the fresh perspective that naturally comes with an infusion of new talent.
The appropriate length of service for corporate board directors is being hotly debated these days. There is fervent focus on long serving directors. The reasons for this are multifaceted. According to recent research reported in Harvard Business Review, “companies that replaced three or four directors over a three-year period outperformed their peers” (Anderson and Chun, April 2014).
Board composition has a huge impact on the efficacy of the board and in turn how well it governs. As companies are ever-evolving, their boards must keep pace. The only way to change a board’s composition is to turnover its members.
Diversity on boards (or the lack thereof) is another area of extreme attention these days. Some of the impediment to improving board diversity again comes down to lack of turnover. If board members don’t depart with some regularity there are limited open seats in which to add new and varied directors. According to Institutional Shareholder Services (ISS), in 2014 approximately 9% of corporate board seats at U.S. firms were filled by new nominees.
But long-serving directors do not have to metamorphose. They don’t have to become entrenched. It is important however, to be able to identify a board which suffers from the latter and is thus suboptimal. Here are some clues:
(Debate (or the Lack Thereof) Constructive disagreement and healthy debate are the cornerstones of the functioning of any board. Board directors must deliberate on the information they are presented. Opposing ideas and viewpoints are desirable. To be fully functional, the board must arbitrate, not necessarily all the time or on everything but the capacity must exist. Anything less can be considered entrenchment.
Independent Thought Directors must be independent enough to “ask the tough questions” and appropriately disagree when necessary. Independent thought also implies the resistance to pressure from one’s peers. Everyone around the table may agree with the presentation or the new capital expenditure however the un-entrenched board still leaves room for the sole dissenter to ask questions and probe on details.
Continuous Improvement Boards that are entrenched don’t necessarily continue to improve. They are comfortable with the status quo. They may not be interested in evaluating their own performance and may not monitor their contributions to the organization.
Misguided Focus Boards are responsible to the shareholders of the corporation and all of their actions and activities must be navigated accordingly. An entrenched board may begin to alter its focus. When directors have worked together for some time personal relationships and personality traits can permeate. Directors may find it harder and harder to maintain distance and objectivity. There is a fine line between positive relationships amongst board members and familiarity that breeds casualness.
Complacency about the CEO Perhaps the clearest sign of an entrenched board is when a non-performing CEO gets to remain in their role. When the board consists of many long-serving directors who have become entrenched their objectivity may be compromised. Additionally, evaluating the CEO can be tricky because in many cases these are the very same people who hired him or her.
This list is not meant to be exhaustive and there are undoubtedly additional signs of entrenchment amongst corporate boards. These should however be considered warning signs. Warning signs suggesting some change needs to be made. It can initially be in the behavior of the existing directors and dynamics of the board and if this doesn’t work, a replacement (or two) may be warranted.