Overseeing Without Overstepping: How Far Should Boards Go

Boards have long been tasked with important big-picture issues, like hiring CEOs and guiding strategy. But in recent years, boards have come under increased pressure to focus on new and more detailed topics. In early 2018, the U.S. Federal Reserve Board issued a stunning rebuke to past and present directors at Wells Fargo & Co. for failing to ask enough questions around longstanding sales practice abuses at local branches. It also announced it was restricting the bank’s growth until the effectiveness of board oversight improves, among other conditions.¹ In 2017, harassment allegations at Uber Technologies Inc. highlighted the need for greater board oversight of culture throughout the organization^.2 Equifax Inc.’s security breach pointed to board-level responsibilities around cybersecurity. And if board directors do not effectively meet such challenges, both regulators and investors are poised to take action. Russell Reynolds Associates recently interviewed some 30 institutional and activist investors and found they are scrutinizing the quality of the board – and the directors themselves – more closely than ever (see our recent Global & Regional Trends in Corporate Governance for 2018 report).³

It is clear that the list of topics on board agendas is growing longer and more varied. Exactly how boards are supposed to address them, however, is still unclear. The answers are more art than science, and getting them wrong can quickly result in a board crossing the bright line into management’s responsibilities.

Corporate governance is not a one-size-fits-all issue: Board structure should always reflect the particular needs of an organization rather than simply applying theoretical best practices. And, it can vary widely by geography, thanks to differing country regulations. Regardless of the specifics, however, it is universally important not to allow turbulent times to inadvertently expand a board’s core mandate and scope of responsibilities. By thoughtfully considering how to address the issues of the day without compromising that mandate or scope, directors can set themselves up for long-term success instead of simply reacting to headlines.

In this paper, we explore three key organizational questions that many boards are currently struggling to answer. Using the latest marketplace research and insights from leading experts at RRA, we look at:

1. Should boards aim to recruit directors who are experts on specific or emerging topics?
2. Should board members strive to build relationships with employees below the CEO?
3. Should board members be involved in hiring beyond the CEO role?

Should boards aim to recruit directors who are experts on specific or emerging topics?

The concept of recruiting subject matter experts to boards came of age circa 2003, when the U.S. Securities and Exchange Commission implemented a section of the Sarbanes-Oxley Act of 2002 that called for public companies to disclose whether or not they had a finance expert on their audit committee and if not, why. The goal was to help identify areas of risk, and prevent the financial improprieties that led to the collapse of Enron and WorldCom.

In the years since, many companies have contemplated other areas where the company might benefit from having similarly deep expertise on the board. Currently, cyber risk is a prime focus. According to a recent survey by PricewaterhouseCoopers, only 16 percent of directors believe their boards have sufficient cybersecurity expertise. About 40 percent have some but need more, while one-third of directors said their boards currently have no members with deep knowledge of cybersecurity.4 That dearth makes it difficult to effectively oversee a complex topic. “All of a sudden, boards want to meet the cybersecurity guy, yet they don’t know the right questions to ask,” said Eric Sigurdson, co-leader of RRA’s Technology Officers practice.

In response, a number of companies including Stanley Black & Decker Inc. and Perrigo Co plc have recently appointed Chief Information Officers to their boards to help fill this hole. On a related note, a growing number of companies are also asking for non-executive director candidates with experience in digital transformation. RRA’s review of the top 300 global companies found that while directors with digital expertise are still a small proportion of the total director population, their numbers rose by 6 percent between 2014 and 2016.5

Recruiting experts is not without risk, however. In our conversations with some of the world’s largest institutional and activist investors, we have heard them express strong preferences for directors who are industry experts rather than single-purpose directors. “They think the board needs to stay abreast of technology and security generally, as part of risk management and strategy,” said Rusty O’Kelley, global leader of RRA’s Board Consulting & Effectiveness practice.

That is in part because board members cannot – and should not – become surrogate functional managers. It is also because specialty areas are constantly evolving. If, for example, you populated a board with experts on bitcoin, foreign exchange rates, and Africa, “you’d have a board who is a group of experts but no collective consciousness,” said Marc de Leyritz, a senior consultant in RRA’s Paris office. Michelle Edkins, global head of investment stewardship for asset management firm BlackRock and an advisor to RRA’s Board & CEO Advisory group, has noted that a board full of one trick ponies is nothing but a circus.

The solution, in many cases, is to look for executives who bring a combination of general management, functional, and industry experience that is relevant to the problems at hand. In response to its high-profile data breach, for example, Equifax recruited former Broadcom Corp. CEO Scott McGregor to its board. McGregor will be “an invaluable resource for the board as it continues its focus on strengthening the company’s data protection systems and cybersecurity defenses,” noted chairman Mark L. Feidler in a press release accompanying McGregor’s appointment.⁶ Along similar lines, Walt Disney Co. added two technology CEOs, including Oracle Corp.’s Safra Catz, to its board, and insurance firm The Hartford recruited former Cisco Systems Inc. top executive Carlos Dominguez as a new non-executive director.

Takeaway:

In recruiting board members, it is essential to screen carefully for candidates who can contribute to broad discussions about industry and business strategy – and who fully understand the distinction between board and management roles. Consider other areas of specialization only after those criteria are met. Meanwhile, ensure that all directors have ongoing educational opportunities, both from internal management and external providers, to come up to speed on current topics.

Should board members be involved in hiring beyond the CEO role?

A key function of the board is to select a CEO. Thanks to a variety of external pressures, though, directors may be tempted to insert themselves in the process of making other important hires.

For one, activist investors continue to force unexpected CEO transitions, putting the spotlight on the board’s succession planning activities. Fifty-eight percent of directors responding to the NACD survey said CEO succession planning was a critical improvement area for 2018, up from 47 percent the previous year.10 In connection with this trend, some directors feel they need to exercise more control over the executives who join the organization to ensure a viable pool of CEO candidates when the time comes.

The changing nature of business risk may also spur directors to want to expand their involvement in hiring processes. With cyber risk top of mind, directors may want to ensure that the CIO or Chief Information Security Officer meets certain standards, for example. To mitigate culture and legal risks, boards may also take an interest in general counsel and Chief Human Resources Officer selections. The specific dynamics in any given industry will also drive a board’s interests – and fears – when it comes to hiring.

In reality, board members often weigh in on the strength of the executive team, RRA consultants said, and may even push a CEO to replace some members who are perceived as weak. Board chairs or lead directors also commonly play a role in interviewing finalists for an open position close to the CEO. For example, audit committee chairs will want to ensure a CFO candidate is going to appropriately balance and challenge the CEO, and typically have veto power when it comes to hiring decisions. That’s particularly true if the CEO is nearing the end of his or her tenure. “At the CEO’s request, board members can be involved in hiring direct reports who are potential succession candidates in the short term,” said O’Kelley.

All of these levels of director involvement in company succession planning can be seen as reasonable and even advisable parts of a board’s mandate. In general, though, when it comes to making final decisions to hire (or fire) executives beyond the CEO, board members need to step back. Directors can advise that an executive needs to be replaced, or suggest the creation of a new position, but if the CEO does not take action, “at the end of the day, boards either have to live with it or replace the CEO,” said Goodman.

That does not mean directors should shrink back from succession planning, it just means that they should not take responsibility for deciding who should go and who should stay, or sourcing and vetting candidate pools. Rather, “the role of the board is to create the process through which potential successors will be groomed, and they’ll want to make sure development programs and policies are first-class,” said de Leyritz.

Takeaway:

Boards hire CEOs and CEOs hire everyone else. However, the best CEOs will keep the board apprised of key new hires and take their input seriously. To ensure a high-quality candidate pool when it comes time to replace the CEO, directors should focus their efforts on the architecture of leadership assessment and development programs.

Leading from strength, not fear

Boards are under more scrutiny than ever, and it is understandable that many directors will want to explore new ways to increase their oversight and influence. In such times, it is useful for boards to revisit their mandates. The goal is not for boards to manage the business, but for boards to have confidence that the management team has the right people and right processes in place to thrive in challenging and changing situations. The board can both challenge and support the management team (and there are problems if they feel they cannot), but it is not the job of a non-executive director to be on the frontlines of company operations.

Additional Authors

Alix Stuart is a senior writer with the Center for Leadership Insight. She is based in Boston.

Footnotes 

1 U.S. Federal Reserve, Responding to widespread consumer abuses and compliance breakdowns by Wells Fargo, Federal Reserve restricts Wells’ growth until firm improves governance and controls (Feb.2, 2018), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180202a.htm

2 Letter of recommendations from Covington & Burling LLP attorneys Eric Holder and Tammy Albarran to Uber board based on their investigation of Feb 2017 sexual harassment allegations, https://drive.google.com/file/d/0B1s08BdVqCgrUVM4UHBpTGROLXM/view

3 Jack “Rusty” O’Kelley III, Anthony Goodman and Melissa Martin. Global and Regional Trends in Corporate Governance for 2018 (December 8, 2017), http://www.russellreynolds.com/insights/thought-leadership/global-and-regional-trends-in-corporate-governance-for-2018.

4 The governance divide: Boards and investors in a shifting world, 2017 PwC Annual Corporate Directors Survey, https://www.pwc.com/us/en/governance-insights-center/annual-corporate-directors-survey/assets/pwc-2017-annual-corporate-directors-survey.pdf.

5 Digital Directors 2016: Diverse Perspectives in the Boardroom (Nov. 1, 2016), http://www.russellreynolds.com/insights/thought-leadership/digital-directors-2016-diverse-perspectives-in-the-boardroom.

6 Equifax Corp, Equifax Names Scott McGregor as New Independent Director (Oct. 26, 2017), https://investor.equifax.com/news-and-events/news/2017/10-26-2017-140351428.

7 Jack “Rusty” O’Kelley III, Anthony Goodman, Harm van Esch, Rae Sedel, Emily Meneer. Global Board Culture Survey: Understanding the Behaviors That Drive Effectiveness (Oct. 19, 2016), http://www.russellreynolds.com/insights/thought-leadership/global-board-culture-survey-understanding- the-behaviors-that-drive-board-effectiveness.

8 The National Association of Corporate Directors 2017 Blue Ribbon Commission on Culture as a Corporate Asset Report (Oct. 4, 2017), https://www.nacdonline.org/culture.

9 2017-8 NACD Public Governance Survey, Executive Summary (Nov. 28, 2017) https://www.nacdonline.org/Resources/Article.cfm?ItemNumber=50360, p. 5.

10 Ibid, p. 6.​​