Why Recruiting Has Become Critical to "Building Better Boards"

As Demands of Boardroom Increase, Task of Recruiting New Directors Becomes More Difficult

In Building Better Boards - A Blueprint for Effective Governance, authors David A. Nadler, Beverly Behan, and Mark B. Nadler combine perspectives combed from the work of a National Association of Corporate Directors commission, the Marshall School of Business at the University of Southern California, and their own consulting experience to issue a wake-up call for today's organizations.

"The age of the Imperial CEO and the ornamental board of directors is waning, but what comes next isn't clear," the authors write. "The path each company takes will have huge implications for its shareholders, employees, and corporate leaders."

The path your organization's board takes to meeting its strategic objectives will be its own. But given the increasing demand for new independent directors with the requisite talent and fresh perspectives that can help ensure the organization is managed effectively, we've seen an increasing number of boards rushing to adopt best practices for the recruitment of new board directors.

A task that was once left to the CEO to stock the board wholly unchallenged with like-minded cronies is being replaced with a more formalized, rigorous process to elevate the level of discourse and oversight at the board level and to populate the board with more diverse leadership perspectives.

"Fundamental to the success of any team is having the right people around the table, and the board is no exception...Recruitment of new board members is one of the areas where the shift in power from the CEO to the board has been most dramatic," the authors contend in Building Better Boards (Jossey-Bass, 2006). Further, they add: "The recruitment process is becoming more complicated and more difficult for everyone involved. Just when boards need them most, highly qualified, independent directors are getting harder to find."

Today, the best boardrooms are being transformed into highly collaborative, high-performance teams that are focused on creating value for the shareholders they represent. So what's driving these reforms?

Recent legal reforms such as Sarbanes-Oxley have pushed boards to be more accountable by mandating their financial reporting be more transparent, that their board members adhere to stricter ethical codes, and that their directors - especially those serving on the Audit Committee - have the requisite financial acumen to help smoke-out any potential irregularities in the company's financial affairs.

We believe, however, that board Nominating Committees will play an equally critical role in building the team that will help check organizational strategy, and, in the words of authors Nadler, Behan, and Nadler, "partner with senior management in an environment of constructive contention to produce better decisions that management would have made on its own."

But this evolution of board leadership won't come without at least some potential challenges. After all, as the authors point out, only 25% of all boards in the United States and the United Kingdom have established a rigorous process for regularly evaluating each director's performance and even fewer have been willing to take action against underperforming directors.

In fact, many board directors are often far more willing to fire the CEO than they are to dismiss a fellow director. As one director shared with the authors of Building Better Boards, it's important to invest a lot of time screening potential board members because, "When you are recruiting people onto your board, they are going to be with you for a very long time."

That, in part, is why it's critical for your board get the most out of its Nominating Committee. That means expecting it to collaborate with the CEO to introduce new board candidates who speak to the challenges and opportunities of the global economy, and who represent a more diverse pool of shareholders, employees, and other constituencies.

"That will require robust recruitment strategies that search beyond the personal networks of the CEO and the board - the usual suspects - to find qualified candidates," Nadler, Behan, and Nadler contend. "Boards have to expand the pool by thinking more creatively about who should be included in it."

The authors believe best practice in boardroom recruiting may hinge on looking "a level or two below the CEO" for fresh director candidates, as that talent pool is deeper, more diverse, and includes individuals with more of a long-term view of corporate performance.

They also suggest that when it comes to identifying new director candidates through board referrals and executive search firms, it shouldn't be a matter of leveraging one or the other source. To build and sustain competitive leadership advantage in the boardroom, and, "As a practical matter," the authors write, "many boards end up using both sources."

Until next time...

Kincannon & Reed
May 2006