Talent shortage is a reality not only for executive positions but also, increasingly, for corporate boards. Research for the 2008 Spencer Stuart Board Index in the US showed that nearly a quarter of new independent directors on S&P 500 boards are serving on an outside public company board for the first time. In India, board directorships are still network-oriented, but as the need for more independent and impactful boards intensifies, the trend of first-time directors may become a reality sooner than later.
This discussion has become even more relevant in light of the global financial crisis, as companies and investors ask questions about board quality and gaps in governance that could have been identified well in advance, which could have averted or reduced the adverse impact. A related issue is board composition.
At a time when more is demanded of corporate boards, new directors often have less experience than their predecessors—a potential problem for board effectiveness. Given the higher risk of lawsuits and loss of reputation, there is also the threat of heavier pressures from institutional investors and shareholder activists— requiring more time and preparation from a director than ever before.
However, as the jobs of CEOs become more demanding, most of them do not have the time to serve on boards. In India, many companies also limit their CEOs’ involvement with other boards. So, companies are being forced to look beyond the practice of looking at people they know.
This change could disrupt the so-called “old boys” network, but boards could also miss much of the collective wisdom that CEOs bring from facing comparable issues, making decisions under pressure and responding to multiple constituents. Because they may not readily attract active CEOs, boards would have to turn to other sources for directors, among them divisional executives with strong general management credentials but without enterprise-wide experience and specialists in disciplines such as finance or information technology.
Illustration: Jayachandran / Mint
At the same time, as board compensation in India has some way to go before meeting global levels, first-time directors could be more accepting of existing levels and bring in relevant experience. First-time directors also bring in “freshness” and careful inclusion could actually help?firms?combine inputs from both—the older, mature board members and the young blood—resulting in more effective decision making.
The key is arriving at the right balancing act. Boards realize they need seasoned executives. More boards are raising the mandatory retirement age for directors—in recognition that it is getting harder to recruit experienced directors and in hope of retaining the good ones. Two-thirds of the S&P 500 boards that specify a retirement age now set it at 72 or older, up from 35% in 2002; 11% now set their retirement age at 75 or more, compared with only 1% five years ago.
At the same time, boards need to understand the pros and cons, and incorporate processes that address the challenges first-time directors face, enabling them to become effective members.
Spencer Stuart experience has shown an effective board operates in the best long-term interests of a company and offers a wealth of experience to the CEO and management team. And, much of it depends on experience gained in the boardroom.
Companies will need to understand that as they appoint more directors who are new to the role, it will take them longer to have the most effective boards. To learn the job of a director takes time. Moreover, since many first-time directors are active executives, they would limit their service to one board—so it would take them longer to gain the experience required.
All new directors have challenges that limit their value for the first year or two. They must learn about the company. For first-time directors, there is even more to learn. They must learn how to translate their narrower experience into guidance of a total company. They need to understand their role of governance versus management and they will see issues that normally do not reach a divisional executive. As a result, new directors tend to defer to senior directors with more experience, but this is not optimal.
To tackle this, new directors should receive an in-depth orientation and boards should assign new directors to committees where they can gain experience quickly. Some boards are assigning unofficial mentors. Lead directors or chairmen should ask new directors for insights in relevant areas to assimilate them into the team more rapidly. In regular self-evaluations, boards should ask how far new directors are in the maturation process and specifically, what the next steps should be.
Boards face too many issues and too much pressure to assume that a laissez faire approach is sufficient.
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Anjali Bansal heads the India practice of Spencer Stuart, an executive search consulting firm, and is based in the firm’s Mumbai office. This article contains inputs from a Spencer Stuart article, Trends in Board Membership: The Rise of the First-time Director, by Julie Daum, consultant, Spencer Stuart.