What to do if your board is too friendly

Nearly half of board members at US publicly traded companies believe a fellow corporate director should be replaced, a new survey shows. Yet, several reasons exist for why many boards remain resistant to change, fresh ideas, and even dissent in discussions of strategy, CEO pay, and other topics.

Forty-three per cent of directors say it is difficult to express a dissenting view inside the boardroom, according to PwC’s 2019 Annual Corporate Directors Survey. The annual report’s most recent edition focuses on “the collegiality conundrum”, its term for how being too friendly with one another can hamper the board’s effectiveness.

The survey of more than 700 board members, who combined hold more than 1,100 board seats as some serve for multiple companies, shows several major barriers to board refreshment. The top five are:

• Board leadership’s unwillingness to have difficult conversations with underperforming directors, 24%
• Ineffective processes for director assessment, 20%
• Collegiality or personal friendships between board members, 18%
• Lack of meaningful term limits, 17%
• Lack of a mandatory retirement age, or the retirement age is set too high, 15%

Paula Loop, CPA, the leader of PwC’s Governance Insights Center, believes that board leadership can encourage fresh thinking in several ways. One way is to make it clear to board members that opinions should be shared respectfully and that those opinions will be heard and considered, even if they go against the thinking of other board members.

“Board leadership needs to make sure the environment is such that people can have a dissenting view, and others can discuss it and debate it, and you come to a conclusion, but at least you get all that diversity of thinking in the room,” Loop said in a phone interview.

But the bigger issue, according to the survey, is one of board refreshment. Once people get a coveted seat on a public company board, they tend to want to keep it. A 2018 Willis Towers Watson survey reported median director pay of nearly $270,000 for Fortune 500 companies. And Charles Elson, a US corporate governance expert and a holder of board seats himself, said there are other reasons that board members get entrenched.

“It’s because people are happy and comfortable,” he said. “It’s a lot of money, a lot of prestige, and people get comfortable with what they’re doing.”

While 61% of board members say that individual member assessments are performed, those that do not conduct individual assessments give a host of reasons:

• 53% say their existing process is sufficient.
• 22% cite a potential negative impact on board collegiality.
• 17% say the board does not feel that individual evaluations are appropriate.
• 11% say board members are reluctant to be evaluated.

So, while boards conduct overall evaluations of board or board committee performance, nearly 40% of directors say their boards are not taking a close look at individual director performance. Loop said that such conversations should be taking place, especially if they are reframed as feedback instead of assessments.

“I’m a strong believer that you do want to spend time delivering feedback to people,” she said. “It’s important in the work environment. Once you get to the board level, I’m not sure why that would put you into a category where it would not add to or enhance your performance. Providing people feedback gives them an opportunity to get better and to improve themselves, and it gives the board the opportunity to be more effective as a group. By holding back on that, I think you’re missing an opportunity to up the game of the board.”

The best boards encourage dissenting opinions in a respectful way, Elson said.

“That’s what you’re supposed to be doing,” he said. “If it’s get-along, go-along, you miss the point.”

Elson believes the best way to ensure board refreshment is to have term limits. He recommends 15-year terms. Some boards don’t have term limits or age limits.

“You can’t look at a board seat as a sinecure,” Elson said. “It’s something that moves. There’s a lot of talent out there, fresh perspectives, and I think it’s important over a certain limit of time to refresh the board. And that’s why term limits make sense.”

Loop said that board refreshment must be a strategic decision that may involve difficult conversations with board members who may be limited by a lack of relevant skills. Just as boards are thinking beyond just C-suite talent and paying more attention to a company’s overall workforce needs, so should they be developing a strategy for the overall talent of the board.

“It’s not something you just wake up one day and say, ‘Somebody’s retiring. We need to replace them,’” Loop said. “There needs to be a long-term strategic plan. You need international expertise, you need financial expertise, cyber expertise, technology expertise. It’s a fairly complex Rubik’s Cube that you have to really think about strategically and plan out.”

— Neil Amato is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact him at Neil.Amato@aicpa-cima.com.