One of the most difficult jobs facing CEOs and chairmen of the board these days is deciding how to remove an underachieving, non-performing, or disruptive outside director-and do it gracefully, without unusual commotion. The director in question may be a nice person who has faded physically or mentally, who has not kept up with the growth and complexity of the corporation, or who simply turned out to be a bad appointment.
I have seen four removal methods tried that have met with varying degrees of success:
1. Set an age limit for directors and wait until the offending director reaches it. However, this ducks the issue and may take years.
2. After checking with a majority of the board, meet with the director (or ask a senior director to do so) and ask him not to stand for re-election. Unfortunately, many CEOs can’t or won’t do this, and most directors are loath to take on the assignment. More often than not, hurt feelings and hostility result from this approach. It works best when there is a strong and secure CEO as chairman.
3. Have the directors evaluate each other’s performance, perhaps with anonymous ratings. Then, use the negative findings to force a resignation. I know of several companies that have tried director self-evaluation programs, but the only ones reported to be successful were those with an unusual CEO and board culture. In any case, the “fired” director still leaves with hurt feelings and hostility. The Conference Board, in its recent survey on “Corporate Boards and Corporate Governance,” contends that “a formal process of performance assessment (of individual directors) is an idea whose time has not yet come.”
4. Establish a project to review and reappraise the fundamental makeup of the board. Decide upon the ideal blend of talents and experience, of committee service, of director information and communication, and board meeting procedures. Appoint a committee on the board to review the material and recommend changes. In the process, find a way to “reorganize” an unwanted director out of existence by reducing the number of directors or changing committee charters. There still will be some hostility, but the removal can be wrapped in a restructuring reason.
One of the best ways to accomplish the reappraisal process is by using an outside consultant who, after full briefing, can hold interviews with each individual director. It is not necessary to bring up the subject of an underperforming director; invariably, the issue is raised as part of the answer to making meetings more efficient and the board more effective.
Where do you find consultants capable of carrying out these delicate interviews? It isn’t easy, but I suggest CEOs seek advisers who have had board exposure, business school faculty members, or retired executives who are directors of other companies.
Another opportunity to get a message through to ineffective directors sometimes arises after the CEO has had his performance evaluation by the board. If the CEO has an individual follow-through session with each board member, he can say, “You told me things I could do to improve myself; here’s something you can do to make things better for the board.”
It may not always be necessary to remove a difficult director. I know of one instance in which a director, seemingly anxious to prove he had carefully read all the financial statements, would take up an agonizing amount of board time seeking answers to his detailed questions. The CEO asked him if he would be willing to meet with the vice president of Finance before the meeting. The director did so, the meetings went better, and the directorship was saved.
The climate is right to improve the overall quality of board members. We have seen several cases in which institutional investors have insisted that boards be upgraded. For example, it was reported that IBM was encouraged to add directors with technical skills as replacements for some directors who lacked them or who were inside directors. I predict that more and more companies each year will be called upon to defend or change some of their directors.
It just doesn’t make sense to put up with Old Joe or Old Susie who doesn’t do the homework; doesn’t ask the hard questions; accepts the easy answers; and hasn’t kept up with the changing world of technology, globalization, and corporate governance. Directors’ chairs are getting harder to fill with talented, experienced, independent board members who have the time to serve, who are without conflicts of interest, and who work to make the company better.
And it is no exaggeration to say that, as chairman and CEO, if you don’t weed out the underachievers on your board, you may be the unwanted director who gets fired.
Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear is chairman of CE’s advisory board. He also teaches at Columbia Business School, where he is Executive-in-Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stow Venture Capital Co.