Board Strategy

March 27 2023

Demand for Board Director Diversity is Soaring

Fiona Lu Board Diversity, Board Strategy, Corporate Governance

As it nears the end of 2023, many of America’s top public companies showcase increasingly diverse boards of directors. Although there has been significant progress in expanding director appointments, to reflect many types of diversity, there is always room for improvement. Recently, the corporate sector has been overwhelmed by the impact of the pandemic, geopolitical shifts, environmental changes, and social justice movements, which have taken the country by storm over the past few years. Pressure from stakeholders and regulators for company leaders to acknowledge such events, and actually take a stance, is continuously increasing. Diverse boards are seen as better equipped to navigate complex, multifaceted issues, adapt to change, and sustain companies in the face of evolving global challenges. So, the search for more diverse perspectives in the boardroom continues, meaning that demand for diverse directors, with varied backgrounds, knowledge, and experience, are still on the rise.

According to the seventh edition of “Missing Pieces,” historically underrepresented groups, including women and Black/African, Hispanic/Latinx, Asian, Native American/Alaska Native, Native Hawaiian/Pacific Islander, or multiracial men, continue to make strides in the boardroom. In 2022, women held upwards of 30% of board seats in the Fortune 500, which marks about a 5% increase from just two years prior. The number of Fortune 500 board seats held by racial and ethnic minorities also saw about a 5% increase and now stands at 22.2%. 53 companies in the Fortune 500 have more than 60% of their board seats filled by individuals from historically underrepresented groups, the highest percentage in its history. Additionally, from the 2023 Spencer Stuart Board Index, 67% of all new directors, at S&P 500 companies, are from historically underrepresented groups and 48% of all directors are diverse, a 2% increase from 2022. These findings indicate progress, albeit at a gradual pace. At the current rates of increase, for diverse board membership, it will take several decades for America’s leading corporate boards to truly reflect the diversity of the actual population.

In recent years, overwhelming amounts of evidence have come out showing the improvements that board diversity makes on performance and leadership. Expanding the boardroom to be more diverse and inclusive often increases financial returns and improves corporate reputations. Diverse boards are also associated with stronger risk management and strategy planning. Positive effects, such as these, serve as strong incentives for investors to actively seek out boards that prioritize diversity. With the increasing value of diversity, board selection should address existing gaps in the board’s makeup, keeping gender, age, race, and ethnicity, but also professional experience, in mind. By setting goals to fill these gaps, boards gain diverse perspectives and are able to contribute to many aspects of organizational success and financial effectiveness. It’s important for board members to align themselves with the interests of the groups they represent, to ensure the board is held accountable to satisfying the diverse needs of these groups. If boards are diverse, they make better decisions, which keeps these groups engaged. Informed decision-making is necessary to keep internal matters at bay, keep up with market trends, and maintain healthy public relations. This will also maintain the sustainability and long-term success of the board and strengthen stakeholder trust, as investors want companies to be socially responsible and have diverse employees. Keeping this in mind, it is often most beneficial for companies to focus on prioritizing what is in the best interest of investors and the public.

The demand for board diversity and recognition of its importance continues to grow, and many legislative measures have been implemented to ensure increased diversity within public companies. The U.S. Court of Appeals for the Fifth Circuit recently upheld Nasdaq’s board diversity rule, originally approved by the U.S. Securities and Exchange Commission in 2021, which requires Nasdaq companies to have a minimum of two diverse directors, including at least one woman and one individual from an underrepresented minority or self-identifying as LGBTQ+. Despite resounding support for board diversity and its benefits, there has been some concern over the Supreme Court’s landmark affirmative action ruling. While this ruling only specifically ended race-conscious college admissions, Justice Neil Gorsuch has insinuated that it should and will apply to the hiring process of employers wanting to hire diverse employees. Regardless, stakeholders appreciate diversity in the boardroom, as organizations that prioritize diversity are seen as more resilient, innovative, and socially responsible. Embracing board diversity is a moral imperative, necessary for business success. If companies continue to build more diverse boards, it shows further progress in addressing the complexities of a diverse world.

March 4 2020

Tone at the Top: Why Board Member Values Matter

Fiona Lu Board Strategy, Corporate Culture, Corporate Governance board culture, board of directors, board of directors best practices, board organization, company values, corporate culture, corporate governance, tone at the top

No matter how many policies and guidelines a corporation issues regarding standards of behavior, the lessons that matter are not expressed through writing. Tone at the top tier management level is all about trust, and trust is earned through actions. People on all rungs of the corporate ladder notice on a daily basis the attitude of their leaders and talk about it at the water cooler. If leaders do not act in a trustworthy and ethical manner that upholds consistent company values, its effects will be amplified throughout the organization. This can generate a detrimental cascade of morale loss and productivity plummets whose effects extend beyond the company to its shareholders, ultimately hurting one of every firm’s most important intangible assets— public goodwill.

It won’t be long before these effects are reflected financially as earnings per share begin to drop and the company’s reputation falls apart. Not to mention, the loyal employees of the company will also lose respect for its management, causing efficiency to decline and structural organization to weaken. Employees value the sense of pride and integrity that comes with working for a company, beyond simply turning a profit. When choosing where to work, employees look for companies exhibiting strong, cohesive values that resonate with the public.

Hence, establishing and exercising core values in the boardroom early on is imperative to ensuring a company’s credibility and unity.

Strategies Proven to Improve “Tone at the Top”

Establish clear values and expected standards of behavior. The CEO and upper management should design and publish operating principles that reflect the company’s principles as well as provide stringent operational and ethical expectations for its workforce.
Strive for consistency between standards and actions. When dealing with corruption cases, companies must issue a swift response and honor its guidelines. It is important for board members to focus on enforcing company principles rather than depart from them during high pressure situations to mitigate the damage of such cases. Failing to comply with company standards or trying to slide the problem under the rug will result in a larger scandal down the road and risk a major breach of corporate trust.
Stay vigilant for internal dissatisfaction. Monitoring corporate buzz and internal affairs will afford a richer understanding of company culture from the perspective of different stakeholders. This gives management a better idea of what’s working and what isn’t in striving to achieve greater employee satisfaction levels and productivity.
Reward principled performance. Successful companies develop a framework for recognizing and rewarding ethical performance, especially in ambiguous or difficult circumstances. Spotlighting and rewarding good behavior throughout the company, regardless of status, will incentivize others to follow that same model.
Manage upward paths carefully. Management should be careful not to promote anyone with blemishes on their ethics or compliance track record. Negligent promotions feed the belief that poor compliance records are overlooked and acceptable, leading to future nonconformism should ethical issues re-arise.
Genuine networking to spread company ideology. Businesses are all about connections, so it is well-recommended for the CEO and board to establish connections with key stakeholders both within and outside of the organization. Leaders must openly communicate their values on an ongoing and transparent basis, using different platforms and dissemination systems.
Communicate with top management. While the behavior of all members of an organization carries a weight, remember that the CEO’s behavior is the most publicized when it comes to telling the company story and holding responsibility for a company’s growth or mishaps. Behind the scenes, boards hold a direct responsibility in overseeing and understanding how management’s actions are perceived by the public. Establishing collaborative communication between the two parties will keep company performance in check and boost the company’s public standing.

Key Takeaways

Setting the right company tone is pivotal to ensuring company success and reputability. Communicating the right values to both internal and external players will facilitate healthy corporate relations with investors, employees, suppliers, regulators, and other constituents. Many corporate failures can be linked to CEOs and governance boards who have neglected to develop a cohesive company culture grounded in integrity, leaving room for scandals to arise. Sometimes, all it takes is a single rumor of impropriety and inefficient conflict management to turn a company’s reputation on its head. Ultimately, the moral fiber of an enterprise rests upon the collective effort of its board members and management to monitor these rumors, deliver judicious consequences, and enforce strict company regulations.

March 30 2020

Representing Shareholders Best Practices

Fiona Lu Board Strategy, Corporate Governance, Shareholder Relations board culture, board directors, board of directors, board of directors best practices, board strategy, corporate governance, Institutional Shareholders, shareholder relations, stakeholders

Corporate governance is an important topic of interest to many investors because it represents a key metric for a company’s future sustainability and success. Both shareholders and stakeholders alike are keen to notice strong governance and a comprehensive board strategy, leading corporate governance to become a paramount determinant of corporate reputation.

Best Practices for Improving Shareholder Relations

Establishing a strong foundation of governance principles the board should operate by is the first step to establishing a good reputation with the public. Strong values are intrinsic to forming trust with a company’s shareholders and can lead to a higher valuation of the company. Setting the right values and tone also ensures transparency and provides guidelines that hold the company accountable for any potential abuses of power or fraud. Creating a sense of corporate liability within the board is a key component of board culture and effective leadership, which prevent scandal outbreaks such as Enron’s downfall.

When shareholders see that a company has a clearly structured framework of guiding principles and values, they are more willing to invest in the company. This is important for raising a company’s Earnings Per Share (EPS). Thus, company’s should keep their investors’ values in mind when forming such a framework. A robust and flexible set of shareholder rights must be established at the forefront to protect their stake in corporate ownership. Investors want to know that their investments are being protected against security and system risks.

Once the basis of corporate guidelines is formed, boards must remain vigilant of the changing consumer landscape, digital trends, and market demands to be able to consistently update and improve upon their principles. Modern governance must evolve and adapt to technological advancements, current events, and information spread. Maintaining a fresh perspective on current affairs is necessary for understanding shareholder interests.

How Much Control Should Shareholders Maintain?

The post Sarbanes-Oxley corporate climate defines a clear distinction between ownership and control. Security laws of the 1940s set up checks and balances to ensure that management operates in the best interest of all parties. The shareholders have ownership of the company, management controls the operations, and the board of directors are responsible for overseeing the operations and representing shareholder interests.

Board directors are responsible for making nonpartisan judgement based on the company’s established principles to reign back management’s decision-making power. They act as agents of the shareholders and must have a strong understanding of policies that create long-term shareholder value. Shareholders typically have limited power to influence how a company is run; but if company performance drops, shareholders exercise their right as the owners to ask questions, examine board practices, and elect a new board should the existing one fail to meet their fiduciary duties.

Board members are elected by shareholders based on the expectation that they will equally represent all shareholders, regardless of their ownership stake. During the annual meeting, all shareholders should have their opinions voiced by the board in terms of company values, goals, and vision. Board members must abide by a code of conduct which mandates there be no conflicts of interest between ownership and management. Should such conflicts arise, boards must ensure that management sets aside their personal gains for the interests of the company.

These practices ensure that a company is operating with integrity, honesty, and corporate responsibility. Board members must maintain a transparent relationship with shareholders and be prepared to answer their questions to demonstrate that their investments are safe.

May 27 2020

Choosing the Right CEO

Fiona Lu Board Strategy, CEO, Corporate Governance, Executive Management board of directors, board strategy, CEO, corporate culture, corporate governance, Corporate Roles, executive committee, executive management, senior management, succession planning

One of the integral responsibilities of the board of directors is choosing the right CEO for the company. Directors must carefully weigh and discuss this decision, keeping in mind the company’s performance needs and actively planning for succession. The integrity of the CEO is essential to a strong company relationship and enabling the board to meet its expectations. The board of directors and the CEO work closely together in monitoring and managing the company; thus, boards must wisely choose a CEO who exhibits the same company founding principles and with whom they can work well with. If done successfully, this can lead to a wonderful symbiotic relationship of strength and leadership. However, if done poorly, the lacking communication and trust between a CEO and the board can present the downfall of a company.

Qualities to look for in a good CEO

A strong and capable CEO is one who is committed to the long-term value growth and success of his/her company, as well as someone who is receptive to the robust oversight of the board and willing to collaborate in effective teamwork. A well rounded set of analytical skills, social awareness, and communication skills is a key criteria to selecting qualified candidates. Beyond this, the board must have a well understanding of the company’s development needs and future direction in order to identify executives who will be able to fulfill their role amid these complex and ambiguous dynamics. Being able to forecast the challenges that potential CEOs may face is a helpful component in recognizing areas for improvement early on and establishing benchmark goals. Addressing these future challenges head on will provide boards and executives ample time to assess the readiness of each candidate, develop workshops, and establish mentor relationships to guide the company towards future success.

In addition to setting company-tailored criteria for CEOs, boards should maintain awareness to external benchmarks for executive success. Understanding how other company’s executives are performing is a good way to assess the relative strength of internal candidates. According to The Conference Board, between 2013 and 2016, the proportion of “internally” appointed S&P 500 CEOs grew from 76% to 86%. It is clear that boards are increasingly placing an emphasis on internal promotions, so it is well advised for boards to have an accurate and up-to-date overview of where their internal candidates stand against proven executives outside of the organization.

Finally, the board should include the incumbent CEO’s opinion during this consequential decision making process. Talking to the CEO about their experience in the role, what challenges they faced, and what areas they see for improvement moving forward is a good method for addressing future criteria needs. The incumbent CEO plays the important role of grooming succession-prepared executives at the senior management level and will thus likely have suggestions for who they think is a good fit.

Long-term succession planning

It is never too early to start thinking ahead about what the next CEO’s profile should look like. With the ever changing market and social landscape, an organization’s needs are also constantly evolving. Wise boards will try to foresee these changes and predict what the next step in company leadership is. What will the future of the company look like? What leadership skills and personality traits will be advantageous to navigating that future? How will or should company culture change? What kind of leader is able to promote that change?

Discussing these possibilities and building a consensus on a general criteria for the next CEO is an important step that facilitates a smooth transition process. Having a broad leadership profile in mind will help boards to develop needed leadership qualities among internal candidates and keep an eye out for executives whose strengths match these needs. Furthermore, it will prevent companies from falling into the trap of selecting repetitious candidates reminiscent of the incumbent CEO.

If concerns about the current CEO’s conduct, ability, or actions arise, they should be brought up and discussed immediately to determine if an early succession is required. Thus, having a sense of strong backup candidates is a smart way to stay prepared for any leadership scandals, emergency vacancies, or interim management. This ensures that issues with the CEO’s performance are caught early on and do not manifest in the company’s performance.

Getting to know the management team

Developing a forward-looking approach to seeking executive talent involves getting to know the senior management team. Directors and managers are both well-served by maintaining a mutual relationship of trust and understanding. Directors are endowed with a clear insight into what it takes to conduct key business decisions, and managers benefit from the ready ability to draw upon the independent judgement of directors.

Getting to know management comes in various forms, from conducting executive meetings to annual talent reviews to regular outside engagement. Staying involved with management on a continual basis will enable board directors to observe patterns of performance, identify the strengths and weaknesses of executives, and develop a more tailored approach to succession planning. It also gives boards the opportunity to expose senior management to opportunities that encourage entrepreneurship, leadership, and intelligent risk-taking in order to establish preparation for a healthy “succession culture.”

An assessment of the best succession planning processes noted that the top companies all exhibited several key commonalities:

Continual discourse between board members and the CEO to discuss the future outlook of the company and the needed skills of likely successors
Frequent exposure of senior levels to the board and fitting outside board service opportunities
A simultaneous top-down and bottom-up approach in which all levels of the organization are equipped with the right tools and training for advancement while maintaining an eye out for successors

As long as boards fulfill their objective oversight duty, the board and management teams should operate hand in hand and build upon each other’s roles to create a robust succession framework that fosters the company’s long-term success.