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Board Leadership ~ No One Sized Fits All Approach

There is a lot of prescriptive dogma about board leadership, from academics, rating agencies and shareholder groups, espousing a board chair separate from the CEO, even though the academic evidence is that having a separate, independent board chair does not necessarily result in a better board or even shareholder performance.

The prescription permeates into guidelines and codes for Canada, the UK, Australia, New Zealand and South Africa, where independent chairs are called for. The Americans however have largely incorporated a different approach, in the concept of a lead director.

A lead director is the independent counterpoint to a board that has a combined Chair and CEO role vested in the same person, or has an executive Chair role (e.g., a founder or major shareholder). A very good guidebook was recently released by the National Association of Corporate Directors outlining the responsibilities and important characteristics of Lead Directors. Some 2/3 of NACD members surveyed responded that they have the position of Lead Director, and 90% of respondents believed that effective Lead Directors enhance board effectiveness. I recently moderated a Lead Director panel in Dallas, Texas to discuss the report.

What matters in terms of board leadership is not whether a board of directors is led by an independent Chair or an independent Lead Director, per se, but the effectiveness of that person in that role at that time. And specifically: the leadership skills and personal attributes of the person, and the relationship with the CEO and other directors. Researchers, if they have any hope of drawing causal relations between boards and performance, should focus more on the behaviors and skills of board leaders and other directors, inside the boardroom. Companies in turn should be comfortable with designing – and defending – a leadership structure that works for them, given the individuals involved and circumstances and ownership of the company.

How can either a board chair or a lead director be ineffective? By being captured by the CEO (losing independence); by not being able to run meetings effectively (board meetings or executive sessions); by being too dominant or weak; by not understanding the industry; by not investing the time to fulfill the job description; by not ensuring proper agendas and information flow; and, most importantly, by not having the right leadership skills. Some attributes of a successful chair or lead director, other than independence of mind and leadership, include integrity, teamwork, consensus-building, constructive challenge and mentoring and development.

It is also a myth that a lead director is necessarily less effective than a non-executive chair simply because the board chair conducts board meetings and the lead director does not. A competent lead director can have a significant effect on a meeting even without chairing it. A separate board chair can be over-ridden by a dominant CEO or other directors even if that person is chairing a meeting but cannot do so effectively. Some of the least effective meetings I have observed had non-executive chairs leading them. See my recent paper (PDF) with Katharina Pick here.

Board leadership is an art. Not all – or even many – directors are cut out to lead a board. The qualities and selection of that individual – next to the selection of CEO – is probably the most important decision a board can make. Any dysfunctional board will likely have an ineffective independent board leader, whether that person is chair or lead director.

The focus should be on the skills, attributes, selection, effectiveness and assessment of the person, not the structure, or one particular model over another.

Rethinking what it means to be an “independent” director

I remember an institutional shareholder speaking at a corporate governance conference and proclaiming that what boards of directors need most is “unconflicted directors giving unconflicted advice.”  “Unconflicted” directors – otherwise known as “independent” directors without ties to the company or its management – are thought to be disinterested and more effective at monitoring management and operating in the best interests of the company overall.

Assessing whether directors are conflicted, however, occurs differently compared to that of senior management and other employees.

In directors’ cases, the assessment of conflicts is done by the board, inside the boardroom. Directors assess whether they have “material relationships” that could be “reasonably expected” to interfere with their “independent judgment.”

There is no reason why the review of independence of directors should not be subject to an objective standard of reasonableness, as it is for managers and other employees, to accompany the subjective view of individual directors.

For management and employees, conflicts of interest are subject to senior management or board of directors review (typically under a Code of Conduct). The perception of a conflict is as important – if not more important – than whether the manager believes he or she is conflicted.

A good conflict policy focuses not only on the subjective view of the manager or employee, but an objective “reasonable perception” viewpoint as well. A manager could believe that he or she is not conflicted, but when a relationship is viewed through an objective lens, the perception of a conflict may exist.

Directors may be subjectively of a view that a director or group of directors may not be conflicted, but that view may not be objectively reasonable. Further, social connections among directors, and between the directors and the CEO, may not be reflected in formal independence standards, or even detected. We saw this recently in News Corp whose directors had social and personal connections to Rupert Murdoch. Lucy Marcus and Nell Minow have done very effective jobs scrutinizing the statutory independence of News Corp directors, who have direct ties company management and the controlling shareholder. Media stories and scrutiny breeds skepticism and undermines the credibility of good boards.

My own research suggests that formal independence standards may not equate with independence of mind within a boardroom. A CEO may try to “capture” a director through gifts, trips, vacations, charitable contributions, jobs for his or her children, and other forms of social favoritism (documented in my research). Long serving or “interlocked” directors, or directors with affiliations to service providers, may also not have independence of mind.

Directors may quite simply be the CEO’s friends.

A few weeks ago at a research symposium I attended at University of Texas, a paper was presented that addressed the pre-existing social connections with the CEO that independent directors had. The finding by Professor Huijing Fu were that these social connections between the CEO and directors compromised the board’s ability to monitor.

Boards are afforded considerable latitude in terms of how they assess their own conflicts of interest, and perhaps this shortcoming should be addressed. Directors may have vested interests in having narrow, limited, subjective categorical standards of independence. Lawyers may as well, in providing assurance to clients.

The review of conflicts of interest is crucial, as corporate governance effectiveness – including oversight of transactions between insiders by a subset of independent directors – is underpinned in large measure by whether directors – including the Board Chair – are independent or not. Proxy advisory and rating agencies tend to assess director independence by the outputs or decisions a board takes. Perhaps independence should be scrutinized earlier on, before decisions are taken or even before directors come to the boardroom.

It is time to rethink how the independence of directors is assessed.