When Director’s Don’t Make The Grade
April 10 2006 by Beverly A. Behan
The lead director of a major financial services firm was about to do the unthinkable: He was going to ask a board member to resign for not pulling his weight.
For three years, the director-a high-profile CEO of a large manufacturing company-arrived unprepared for board meetings, then sat and read documents from his own company as board discussions swirled around him. A few directors had gently admonished him-”Hey, Phil, you’re in the wrong meeting, buddy!”- to no avail. When the CEO called for his advice, he would be told by the director’s assistant, “I’m sorry, but this is not a good time for him.”
Although his behavior was unacceptable, it had persisted, which begs the question: At a time when even mid-level managers face extensive annual reviews and incessant pressure to perform or pack up, why don’t companies pay closer attention to performance at the very top? The answer is that the reluctance of boards to face up to their members’ poor performance remains one of the most resilient artifacts of the old boardroom culture. It’s easy to understand why. Because of the professional and social status of most directors, the idea of telling them that they are doing a crummy job is awkward to even contemplate. And yet, it’s impossible to imagine how any board can hope to function as a high-performing team without finding some way to demand high performance from all its members.
As it turned out, the lead director just described was actually spared the awkward conversation by a new process some boards are adopting: peer review of individual directors. In this case, the board supplemented its annual board assessment process with a process allowing board members to give each other feedback on their performance. This peer review was designed for professional development purposes only, not for renomination decisions. This meant that only the individual directors-and not the Nominating and Governance Committee-received a summary of their own feedback. But it turned out to be enough. The disengaged director knew he’d been coasting; faced with candid comments from his peers, he resigned.
Peer review is just one of the tools boards are considering as they tentatively come to grips with the impact of individual director performance. Boards historically have relied on retirement ages to ease problem directors out rather than stepping up to the thorny issue. About 75 percent of U.S. companies have implemented retirement ages for their directors (typically ages 70 or 72) while another 18 percent have adopted term limits, according to Mercer Delta board surveys. But the sword cuts both ways: Both ineffective and highly effective directors are shown the door on reaching the same age. Moreover, retirement policies offer little real help when the problem director is 53 years old.
Failure to address director performance issues not only hampers a board’s effectiveness, it can impact credibility with management. As one Fortune 500 chairman explained, “How can you go to your management team and tell them that you are an organization committed to performance of the highest standards and then, when they walk into the boardroom to make a presentation, they see people there who are half asleep and practically drooling on the board table?”
In fact, the “boardroom dozer” is one of the more benign of the various types of problem directors. Here are some of the others:
The CEO Wannabe. This director would rather be running the company than serving on its board. In some cases, this is an individual who was frustrated in past attempts to become a CEO and sees this as his opportunity to prove himself to the dimwits who failed to recognize his talent. In others, it is a former CEO who’s restless in retirement and simply can’t kick the habit. The problem usually manifests itself in two ways:
Constantly second-guessing the CEO. This is the kind of person who says such things as, ”Well I’m not the CEO, but here’s where this company really needs to go.”
Chronic micromanaging. As described by one CEO, “You know, there’s always one director who insists on a detailed explanation of the variance on line 37 of the Philadelphia plant’s monthly operations report.”
The Pit Bull. This is the overly aggressive and combative director. His or her questions of managers and fellow directors always sound accusatory rather than inquisitive. Pit bulls generate unnecessary tension in board discussions and are prone to bully both management and their fellow directors. They inhibit open discussion and put nearly everyone around them on the defensive.
The Superdirector. On some boards, there is one particular “superdirector” whose experience and credentials are so far superior to everyone else’s that he or she assumes inordinate influence over the entire group. Every time an important issue comes before the board, the other directors look first to see how the superdirector is voting. Significant problems can arise when the superdirector uses his or her influence to create an “opposing camp” to the CEO, a situation that often leads to a showdown resulting in the departure of one or sometimes both.
The Management Lapdog. This is the director who rarely challenges management and tries to downplay or deflect issues that might create problems for the CEO. Not surprisingly, some CEOs wish they had a board full of them-but they can be dangerous animals. These directors have little credibility with their peers, and even less respect. They are incapable of “carrying the water” for a CEO on tough issues.
Appointing a management lapdog as the chairman of the compensation committee, for example, virtually assures that all compensation decisions will be approved by the full board. Moreover, lapdogs are highly inaccurate as bellwethers of board sentiment. CEOs who assume they are closely monitoring the pulse of the board by routinely checking in with the lapdog can easily find themselves blindsided.
The Checked-Out Director. He or she arrives at meetings late, hasn’t read the pre-meeting package, sits silently, or occasionally lobs in a completely off-the-wall question or comment. He or she whiles away time on the BlackBerry or leaves the meeting to make cell phone calls in the hallway. By and large, checkedout directors have little direct impact on their board’s effectiveness, apart from the fact that they’re filling a chair that could be used by someone who actually contributes to the board’s work.
The Deer in the Headlights. This director is clearly over his or her head and can become paralyzed during substantive discussions of finances or business strategy. Recognizing that they lack the requisite experience to make a meaningful contribution, these directors tend to employ one oftwo strategies: They either say little for fear of being off the mark, or they say too much in striving to make a worthwhile point and demonstrate their value. This typically results in eye-rolling and frustration on the part of the others.
Director Performance Issues
There are three things that a CEO should consider when it comes to the thorny issue of director performance:
Set Expectations for Individual Director Performance. Most CEOs inherit the boards of their predecessors, and with them can come directors whose performance issues have been overlooked for some time. Alternatively, there may be some who functioned well with the predecessor’s leadership style but are not going to cut it if the new CEO seeks to use the board as a resource and source of value, rather than a rubber stamp. There may yet be others who were added to the board at an early stage in the company’s growth, but whose ability to contribute has diminished as the company’s complexity has grown, even though they may offer historical perspective and continuity.
Whether a CEO is new to the corner office or has served for some time, it is important to set out expectations for individual directors- either by finding a vehicle to put this in place, or reviewing and updating whatever may have been done in this area already. Director performance can actually change simply by the process of defining expectations, provided that this is done in a way that engages the directors in the process and is not merely hammered out in an ivory tower. It also can be an important step in setting the stage for the board to implement an individual director assessment process.
Have the Lead Director Take the Lead. One of the greatest recent boons to CEOs in dealing with director performance issues has been the creation of lead directors. Such directors have now been appointed by nearly 40 percent of U.S. boards, according to a 2005 survey by the National Association of Corporate Directors. It is generally much easier for the leader of the independent directors to deal with director performance issues than it is for a CEO. Even if someone holds the combined title of Chairman/CEO, the board is still the boss, which makes it inherently awkward to raise performance issues with one of the board’s members.
As the lead director of a major company points out, “A good lead director can add a lot of value by delivering tough messages to the board or to individual directors. For example, if you have a director who’s micromanaging, that’s an awkward situation for a CEO to address. A lead director can be very helpful in dealing with this.”
Implement Individual Director Peer Reviews. In a director peer review process, board members provide structured feedback on each of their fellow board members. This is quite a different process from having directors score themselves against a list of performance criteria-which can be a useful consciousness-raising exercise when done once or twice but thereafter typically runs out of steam. It is not unheard of for directors with performance problems to give themselves outlandishly positive scores in this sort of self-assessment exercise.
Individual director peer review involves having all directors-including the CEO-provide input on the performance of all other directors and typically, on themselves, as well. A recent survey by Corporate Board Member/PricewaterhouseCoopers showed that 37 percent of U.S. boards have now adopted an individual director evaluation process and 70 percent of those surveyed found it to be “very effective.”
Either surveys or interviews are generally used for individual director peer reviews and they’re typically done once a year, often in conjunction with the annual board assessment. Interviews have some decided advantages for boards just starting out with director peer reviews. First, the underlying reasons for survey scores may not be apparent, leaving the recipient to wonder why he or she was rated highly by peers on a certain element and lower on another. While most surveys provide for write-in comments, therein lies the second downside: If the comments are merely personal and not very constructive, they have limited use and great potential to foster ill will. Interviews, on the other hand, allow for probes and follow-up questions that both help flesh out the underlying themes and keep the feedback constructive and helpful for the recipient.
Because director peer reviews are sensitive, it is also worthwhile to consider having an experienced third party collect, tabulate and analyze the results, and then provide the feedback.
If done right, director peer reviews can be both informative and constructive. They can enhance the accountability and effectiveness of individual directors, which, in turn, can help the entire board function more effectively.
Managing director performance is a hallmark of an effective board. When there are bad apples in the boardroom, stepping up to these issues is never easy. But ignoring them can impede a board’s effectiveness and impair the credibility of a CEO. It takes courage, confidence and diplomacy to address director performance issues-but it is the ultimate expression of setting “the tone at the top.”