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'Board Doctors' Help Supervise the Supervisors

 


The Wall Street Journal | February 17, 2015


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Illustration: James Yang

​Many U.S. corporate boards need help making hard decisions.

Amid unprecedented pressure from investors, more boards are tapping outside experts so they can monitor management better and clean their own house. The legion of advisers—which some dub “board doctors”—scrutinize boards’ inner workings and prescribe cures for such ills as an entrenched chief executive, 800-page briefing books, or even a director who plays Sudoku during management presentations. The experts often enable board members to make tough choices they are too squeamish to do on their own.

About 19% of the largest public U.S. companies chose an outsider to evaluate their board in 2013, up from 17% in 2010, conclude surveys by executive recruiters Spencer Stuart. Businesses doing so since 2012 include First Niagara Financial Group Inc., Integrative Device Technology Inc., HealthSouth Corp. and Principal Financial Group Inc.

As investors ratchet up their expectations for board performance, as many as 35% of major companies could follow suit within five years, predicts George Anderson, a Spencer Stuart consultant who does board assessments.

A 2013 external assessment at Signet Jewelers Ltd. led directors to seek a wider role in crafting strategy and prod executives on the need for takeovers, recalls Thomas G. Plaskett, a board member.

“That ultimately opened the Zale negotiations,” he says, referring to Signet’s $1.46 billion acquisition of jeweler Zale Corp. in May 2014.

Signet used the National Association of Corporate Directors, whose facilitators conducted 88 board assessments last year, up from 47 in 2010, according to Steve Walker, head of the organization’s advisory services. And “we have seen a big increase in the first quarter,” he adds.

Board doctors charge between $25,000 and $250,000 for an in-depth assessment. An increasing number of professions are getting into the act. Executive recruiters, leadership coaches, law firms, academics and governance consultants now offer checkup services for boards.

Spencer Stuart, along with rivals Heidrick & Struggles International Inc. and Egon Zehnder, describe assessments as a fast-growing U.S. business. Russell Reynolds Associates Inc., another major search firm, launched its board-effectiveness practice last summer.

Some boards are calling in the doctors “so they can identify their weakest members before activists do,’’ says Jack “Rusty” O’Kelley, who runs Russell Reynolds’ new practice.

Activists scored a board seat or other concessions in about 73% of all proxy fights last year—including those settled before investors voted—and topped the previous year’s record of 63%, researchers FactSet report.

Yet boards frequently find it hard to clear out dead wood without outside assistance. About 36% of directors polled in 2014 by PricewaterhouseCoopers LLP said someone on their board should be replaced, up from 31% in 2012. The biggest impediment? Board leaders’ discomfort over broaching the issue.

Directors say that is partly why they pay for a thorough external evaluation every few years. The multi-month assessment process typically involves lengthy, confidential interviews with board members and senior management as well as questionnaires.

Executives at one midsize financial-services concern complained about a director because he had played Sudoku during board meetings for six straight years, says governance consultant Beverly Behan, who did its assessment. The executives told her they felt the director didn’t respect them.

The board chairman warned the game player that “doing Sudoku was no longer cool,” Ms. Behan continues. The long-tenured director soon decided not to stand for re-election.

Outside experts also empower certain boards to challenge a domineering leader. David Boren, president of University of Oklahoma, went through that tense experience while a director of a public company that he declines to name. Among other things, newer board members wanted to review their leader’s potential successors. The CEO resisted, to the point it was like a “war,” Mr. Boren recalls.

Encouraged by its consultant, the full board took responsibility for CEO succession and refused to let the incumbent pick his replacement. The assessment “gave the board a lot of backbone to do the things that needed to be done—and credibility,” Mr. Boren says. The CEO left in 2012.

Assessments often suggest ways to cut back on the information overload that hampers directors’ ability to keep tabs on the top brass. “We have boards with 800 pages of reading (from management) before a meeting,” says Russell Reynolds’s Mr. O’Kelley.

After a 2014 assessment at First Niagara, executives began sending key reports to audit committee members when they were issued, rather than delivering 20 reports during a panel meeting. The change gave the committee more time to tackle pressing issues, says Carlton Highsmith, a director of the regional lender.

In other cases, a board assessment will point out ways to refresh governance practices. That happened last fall at Integrated Device, a chip maker. Spencer Stuart consultants briefed the eight directors about their findings for three hours in late January. A key recommendation: rotate committee chairmen and members every three to five years.

“There was a little bit of grumbling” before the board agreed a rotation policy made sense, recalls Chairman John Schofield. He already has relinquished command of the nominating and governance committee, a role that he took in 2006.

By contrast, Integrated Device directors disliked an assessment by a different search firm about seven years ago. Its report described well-known shortcomings of several members without recommending how the board might persuade them to improve or resign, Mr. Schofield recollects.

The assessment cost about $100,000, he continues. “We paid a lot for very little.’’

Write to Joann S. Lublin at joann.lublin@wsj.com

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'Board Doctors' Help Supervise the Supervisors