Board Succession Planning - Two Tiered Candidate Criteria By Dr. Earl R. Smith II DrSmith@Dr-Smith.com www.Dr-Smith.com Boards are a relatively small number of people acting as representatives of the stockholders with the mission of protecting and expanding shareholder value. I have worked with a number of boards and have discovered that they have personalities and characteristics that often vary widely because of the range of individuals composing the board. Board culture relates directly to board effectiveness. Once a productive culture is in place, all efforts should focus on keeping it that way. However, nothing lasts forever. Every board faces the challenge of recruiting new members - a well-managed succession process is important to continuing board function. There are usually two types of board members - and two sets of criteria for board membership. Satisfying both requirements is a challenging task. The first set of criteria focus on the skill sets that each director brings to the table. Some directors are experts in ‘the business of the business’ while others are experts in ‘the business of business’. The second set of criteria focus on the distinction between the person as a professional and the person as a person. As a example of this second set of criteria, when searching for new candidates, the selection committee considers how their board members interact to reach decisions. They also review the capabilities of the remaining members and those of the departing one. Personality, work history, and expertise are all important factors, but the committee should also consider how the candidate would interact with other strong board members. Business and the Business This is a particularly difficult balance to attain - particularly for start-ups and middle market companies. I have worked with companies whose boards were entirely made up of ‘industry experts’. No member had any experience in running a company successfully. The problems became legion when the company started growing rapidly. Areas of professional management and best practices were ignored. Its poor management negatively affected the company’s operations. Boards conduct assessments of their own and the company’s performance against the strategic plan. They must have available a wide set of skills in two basic areas - the ‘business of the business’ and ‘the business of business’. The first tends to be a narrow focus of industry specific expertise to accomplish the strategy in the best interest of the shareholders. A company focusing on research and development of new pharmaceuticals would certainly need expertise in medical research and expertise in working through the necessary trials to meet the requirements of the Food and Drug Administration. Boards operating in this environment would be wise to have two-tier board criteria with a portion of the board of directors seats held by professionals with many of the following characteristics: o Peer reviewed accomplishments in medical research or pharmaceutical development o Experience with Food and Drug Administration (FDA), or o Prior Experience as project manager on previous drug trials o Experience as high-level management in FDA regulated company o Financial management experience with a research and development company In my experience, most companies do a fair job of filling this type of seat. The candidates tend to be recognized experts in their space. It is the second type of seat that is the cause of so many problems and challenges. Most boards are far better at ‘the business of the business’ than they are at ‘the business of business’. Professionals outside the company’s industry hold these other board seats. A strong set of criteria would need to ensure that needed skills are at the table. Some of the criteria would include: o Financial and accounting expertise to fill the financial requirements of the stock exchange o Management experience and expertise and successful service on other boards o Leadership experience relative to the size of the company o Ties and links to other companies that may be useful to the board o Integrity and commitment to ethical behavior o Personal maturity and a commitment to leadership development o Independence of thought and a willingness to conduct thorough assessments and deal with difficult issues o Broad business and professional experience o Deep understanding of business and financial affairs o Experience working within Sarbanes-Oxley regulations Managing the Culture Wars Adding to the Board’s expertise and experience and broadening its sphere of influence is desirable. The selection committee must consider personality as a factor as well. Boards must be able to function as a cohesive unit. Dissention in the boardroom is desirable, however, when personalities clash, free expression and independence of thought often perishes. This is particularly difficult to avoid when the board is made up of two different types - the ‘business of’ and the ‘business’ members. The Chairman’s role becomes particularly important. The issues are balance and having the appropriate members participate in the appropriate decisions. When board members allow personalities to clash - and they inevitability will the board’s Chairman becomes a referee as well as the presiding board member at the meetings. If culture wars erupt, decisions become mired in endless and often pointless debate, and the company loses focus on the strategic plan. During this period, board decisions can often be more harmful than productive. The responsibility of selecting new Board member candidates is often delegated to the Nominating Committee. Because of this, the nominating committee is one of the most powerful and influential committees a board is likely to establish. However, the entire board has a stake in the process. It is vital that new board members do not add to the possibilities that culture wars will break out. Many factors should be considered prior to recommending new Board members to the full Board for consideration. Each new Board member will certainly change the Board’s personality and level of expertise. The challenge lies in choosing members dedicated to professional governance willing to work with other strong individuals to enhance the company’s mission and the shareholder’s investment. Board management is part science and part art. I often work with Chairmen to facilitate the process and avoid the outbreak of culture wars. If you have a challenging situation with your board or want to learn more about my board management services, send me an e-mail and we will arrange a time to talk. ~~~~~~~~~~ Related Articles: Good Governance - Board Member Selection Criteria Governance - Board Culture Board Diversity - A Subtle Challenge Good Governance - The Chairman’s Role The Succession Committee - Selecting Leadership for the Future Corporate Board Succession Planning ~~~~~~~~~~ Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development - a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living - a book of Raven Tales and exploration.