Are there governance lessons Indian businesses can learn from the best global boards? Head hunting firm Spencer Stuart’s top honchos offer their perspective.
When you have been speed-dialled in to restructure some of the most troubled boards in corporate history, including those of the government-seized US mortgage giants Freddie Mac and Fannie Mae, it’s not hard to imagine you’re among the most influential voices on board governance issues. Global executive search firm Spencer Stuart’s US Chairman Thomas Neff and Dayton Ogden, global leader of its CEO Practice, have, between the two of them, at least 500 of the biggest global board searches. So when the recent Satyam accounting fraud turned the spotlight on corporate governance for the first time since Enron, who better than Neff and Ogden to turn to for a heads-up on global best practices. Too little attention, they tell us, has been paid to the process of getting the right people into the boardroom, and for the right reasons. The good news, however, is that the dialogue on improving corporate governance structures is far from over.
In the aftermath of the financial crisis a lot of board restructuring work must be coming your way. Can you tell us about the issues clients are raising?
Tom Neff: The strategic focus today is on having the right mix of skills and experience on boards. I think it’s become very evident that some skills have been lacking from boards of financial institutions for example. Also boards are far more independent of management than in the past. Certainly in Europe, the separation of chairman and CEO is standard, but in the US although close to 40% of companies have separate chairmen, three-fourths of those were formerly CEOs of the company. In order to improve and upgrade boards there has also been a serious move towards performance audits of the board itself. How is the board doing? Does it have the right structure and composition? Is it getting the right information from management? The more serious boards have members assessing each other, to ensure each director is maximising his or her contribution.
Dayton Ogden: What has become a bit problematic for global companies is that while they’ve shown a real appetite for getting people on the board who are foreign to their headquarter locations, it has been a difficult proposition to attract these people because of the time and travel commitments involved. And in a company that is seeing poor performance or consolidation or CEO transition the job of an independent director becomes enormously consuming.
One of the key problems in India that is no matter what structures are put in place, in promoter-led companies, the power of the boardroom rests with promoter…
Ogden: US governance has evolved way past that stage. I don’t think board service for the overwhelming majority of US companies involves having to tolerate high handed practices by the promoter.
Neff: There are stages of a company or situations where a promoter does set the agenda — emerging, early stage companies or where a PE firm has taken ownership of a company— and in the early stage dominates the board. Most of those boards though then transition to more modern board structures. One trend in the US is the voice of shareholders looking for a more active role from earlier; they are now even looking to get onto the nominating process of directors. Last year had close to 400 proposals that shareholders were voting on for various issues important to them. They are interested in getting the attention of the board and initiating change, and this puts pressure on the boards.
Is board service still attractive in the US?
Ogden: Board service is becoming less and less attractive to top executives and unless that situation changes you are going to be left with academics and people who are perhaps not as senior in operating or financial experience as we have become used to. Reputational risk, financial risk and the time commitment required to deal with compliance issues have meant that it’s not as attractive anymore to serve on public company boards. Neff: The most sought after directors historically are those with CEO experience. In the year 2000 the average number of outside boards a CEO would sit on was two, today that number is down to 0.7; the average CEO of the top 500 largest companies sits on less than one outside board. This is a pool of talent that is less and less interested in serving on boards. Of the new directors added to those 500 companies in the last two years, roughly a third of those directors had no prior board experience. Active executives are just not available or their boards are not allowing them to take on any outside activities because of the challenges of their own roles.
Global boards certainly seem to be recruiting more Indian directors. Is it a fad or is there real value addition given that there are time constraints?
Neff: Yes, it’s highly desirable to have someone with experience in India or China sitting on a major global board but if one is making a commitment to be serving on an international board, there needs to be real due diligence done by the company and the individual as to whether they can realistically put the time in. We do global board searches for directors from Asia and Europe for US boards and the reverse. And what we try to find are those individuals who have the time and also a reason to be in the other part of the world on a fairly regular basis — business or family interests there. In the board reports that go to shareholders now in the US it is clearly highlighted if any director hasn’t attended 75% of the meetings. There is a backlash to that now where institutional shareholders will vote against their renewal regardless of their business credentials.
When boards are reorganised, like Satyam is undergoing now, what are the key issues in a transition environment?
Ogden: The most important thing we do at the outset of a restructuring is a diagnostic of the skills that already exist with the board and look for the gaps that exist.
Neff: We recently worked with the US government to restructure the boards of Fannie Mae and Freddie Mac where we helped each of them recruit six new independent directors. Now obviously that’s an example of a crisis situation but it is very important to be realistic from the beginning as to who you can attract to this kind of board. Firstly he has to have the right skills and then he or she should be able to make the time commitment. A board may have six scheduled board meetings a year but in a restructuring environment boards there are often weekly discussions.
Can you share some new boardroom global best practices?
Ogden: One is the executive session, which are sessions of independent directors without management present. This has been a breakthrough in terms of providing an honest open transparent forum for assessment of how the management is faring. Also the practice of planned strategic retreats, a time scheduled for strategising over and above the day to day work of a board. Then there is what you call a lead director, an independent director not called chairman but who is independent from the management; virtually every company has a lead director.
Neff: Also there are more formal and frequent reviews of succession planning, not just annual reviews. This is viewed in the surveys as one of the most important functions a board has along with strategic planning. Too often it was getting lip service, now it is a formal part of the agenda as often as twice or three times a year.
How important is the issue of diversity of board composition to customers and shareholders today?
Neff: It’s certainly desirable to have directors who represent the different geographical markets you’re dealing with. But also most of the largest boards have at least one woman and at least one minority serving on the board, some have 5 or 6. About 25% of the boards we work with are specifically looking for women or minorities. But here I have to quickly add that the credentials to serve on the board are not compromised at all.
Getting back to Satyam — many blame the independent directors for negligence. Are you more sympathetic?
Neff: It’s up to each board to decide what information they need from the management and ask for it. Assuming they are getting the right information, that’s a start, they also need to ensure they’re getting enough information. Some boards will supplement their own regular scheduled board meetings with site visits or meetings with management groups or more common these days is the practice of hiring independent consultants to assist them with their jobs. Every compensation committee in the US now has their own independent consultant helping them assess the right compensation of the top team. Audit teams are getting outside expert help. It’s recognising that sometimes you may need to pay for some help from the outside.
Do you believe that corporate governance in India will benefit from this whole debacle?
Neff: In the US when there is a major blow up that takes place there is a change that follows. The Enron debacle was responsible for Sarbanes Oxley and accounting regulations. The Tyco and Worldcom disasters focused attention on board reform. The best practices that most boards have adopted today were triggered off by the specific events of high profile companies or management that got into trouble.
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