Independent board members can play an extremely valuable role in building healthy companies. They can also turn into boardroom bullies to the management team and cause distractions and defocused efforts.
The best value from independent board members comes from bringing a unique perspective of expertise to the business, viewing issues without heavy political or financial filters, and providing a trusted ear as someone who understands the business well and is purely there to help the investors and senior management team.
I’ve been serving as an independent board member on two companies that were taken private through recent transactions, driving a personal focus on how to provide value as a business builder. In addition, having spent a good deal of my career in corporate strategy and now in running a management firm that focuses on top-line growth, the work has placed me in the midst of many tough board-level strategic decisions in both private companies and public companies. Through that experience, it has become clear that there are vast differences in how independent board members show up and add value in their roles.
In 2008, executive recruitment firm Heidrick & Struggles published an article, “Boards Think They’re Doing a Good Job…But CEOs Disagree,” where they identified that while effective at compliance and risk management, only 59 percent of directors believe their board is effective at supporting the CEO in strategy and direction. The same study found that less than two-thirds believed that the board was effective in supporting executive succession planning, which was viewed as a key function for the board. Discussing strategy and succession planning are both key areas where independent board members can fill an important gap.
There is a responsibility of the independent board member to serve the needs of the investors, but clearly the value comes in bringing a different perspective than investor board members. The independent member is often asked to join the board based on expertise in the industry or market and to be more engaged in conversations around the business strategy with senior management. In this role, the careful balance exists of how to best provide perspective and support in building the business while not becoming board bullies who are disruptive and defocusing to the organization.
For senior management, one of the toughest perspectives to hold is that of an objective outsider. Having a trusted thought partner who understands the idiosyncrasies of the business as well as the external market can be invaluable. Independent board members are in the ideal role to provide this perspective, which brings signifcant value. McKinsey Quarterly published survey results of over 800 corporate board members in 2007 that indicated that 78 percent of board members believed that sector specialists should sit on boards to maximize board effectiveness, compared to 71 percent for majority shareholders, 63 percent for company management, 35 percent for retired executives and 24 percent for academic experts.
Often the sector specialists who serve as independent board members also are partners to investors in conducting market and strategic due diligence. When providing market due diligence on prospective transactions, it is very easy to remain completely neutral to any internal perspectives. The job is to take a quick and hard outside-in look at the business. How is the company perceived and valued by customers, how does it stack up to competitors, and how is it performing in the marketplace both competitively and financially?
In that due diligence role, it is necessary to get to know the management team and their perspectives well, mostly to determine if their understanding of the opportunities for the company can be validated externally as well. The challenge in making the shift to the role as an independent board member is that it is easy to begin viewing the world through the same lens as the entire management team. As you continue in board meetings to look at management’s strategic plans and operating metrics as well as support decisions based on certain market assumptions, the internal perspective can set in. As that occurs, the value of an outside-in perspective is diminished.
It takes a balance and trust with the management team and the board to be able to provide a continuous confronting of reality without sounding like a constant contrarian or non-believer in management’s strategy and view of the markets. However, as an independent board member, you have a unique accountability to understand the company well enough to know the realities and also provide the external perspective that is required to identify blind spots in the plans and new opportunities to innovate. One practice that can be helpful as an independent board member is to periodically think through a market due diligence checklist and write down your concerns or questions as if looking at the company for the first time. Share the perspective with key board members and senior managers as simply a way to maintain an edge and a watch on the outside-in perspective.
Relationships and Resources
The primary role of the board is to oversee the financial interests of investors in the company. In addition, the board is responsible for selecting the CEO, working to make sure they are successful, and making a leadership change if they are not. The role of CEO can be particularly difficult in terms of being able to truly receive unfiltered and honest input and feedback over time.
Often an independent board member is selected for the ability to serve as an unbiased sounding board to the CEO. The CEO will clearly have many contacts and sounding boards in the industry, but often those deep relationships are based on commercial working relationships, social connections, non-profit board work, or other areas that add a layer of filtering to any feedback. In addition, those other advisors to the CEO may not have a deep enough understanding of the business itself to provide informed counsel on specific business decisions. Independent board members are uniquely positioned to provide that targeted counsel.
In addition to a personal working relationship with the CEO, the independent board member can add value by introducing other industry or market experts who can both create opportunities for the business, but also to serve as additional resources to the CEO and executive team.
Getting to know the CEO and executive team well enough to truly understand their strengths and experiences in relation to the requirements for executing the company strategy can identify gaps in knowledge that can be filled through proper introductions. If the company is moving into a new market area, introductions to executive leaders of organizations that are now becoming important customers or channel partners can accelerate learning and avoid wasted time or mistakes. Or, if the company is moving towards a new profitability model, such as moving from commodity services to high-value solutions, introductions to other CEOs who have led organizations through those specific types of changes can be invaluable as well.
Ask Tough Questions
In my recent board roles, I’ve had the great opportunity to work with some very experienced and highly successful private equity investors. I know them as being smart, having strong opinions and being quite decisive in terms of making decisions. In attending the first few board meetings, I wasn’t sure what to expect from them. The first board meeting for the investors was very much an exercise of listening and learning about management’s plans, getting to know the key leaders themselves, and aligning expectations. That was all fairly straight forward.
Then, the economic crash hit and clearly everything would not be as simple had been planned. With such a hard correction in the markets, it seemed that everyone on the board might have an opinion on the changes necessary as the economy deteriorated. And with tough conditions, the investors might have a tendency to grab the wheel and start calling out directives. What transpired was a series of highly targeted conversations consisting of tough questions about cost structure, organization design and health of the target markets. Once satisfied that management had considered all areas and had decided on a specific direction, the investor board members got behind the management team’s plans and moved into monitoring results.
This interaction was a good reminder that the board is not in place to run the company, and making demands on the company regarding strategic or operational changes would completely undermine the ownership and accountability of the management team. Maintaining the clear role as advisor versus operating executive is essential to serving appropriately as a board member. This can feel awkward or passive to the operating executive used to making decisions and driving action. So, it is something to remain conscious about and to do with intention in serving as an independent board member.
After thinking about the sources of providing value as an independent board member for this article, I realized that these are not much different than serving as a good leader overall. In 2008, a PriceWaterhouseCoopers study indicated that 53 percent of board members believe there is a shortage of qualified directors. We’ve all certainly witnessed ineffective boards that micro-manage decisions, second-guess management and undermine leadership, so we know that effective service is not automatic just based on overall executive experience.
The role of an independent board member is often a unique one on the board and can be a very valuable resource to the CEO and executive team. Preparing to effectively serve as an independent board member comes down to maintaining a careful watch on the market realities from a customer or external perspective, asking tough questions yet allowing leaders to take the lead, and helping to generate valuable relationship connections. If these are the key sources of value you bring, you’ll certainly be helping to build the business, not be viewed as a boardroom bully.
Michael Kanazawa is chief executive of Bedrock Dissero, an international management firm that works with clients on driving top-line growth and also co-author of BIG ideas to BIG Results (FT Press/Pearson, 2008).