This article originally appeared in Directors & Boards. It is reprinted with permission from MLR Media.
Last year Lauren Smith placed a director on a Fortune 500 board. It was something the executive search professional had been doing for two decades, but this placement stood out from those earlier in her career. The candidate was in his late 30s, had spent most of his professional life in politics and consulting, and knew nothing about being a board director. What he did have was deep expertise in entertainment and technology.
“Our client said, ‘Wow, here’s somebody who brings the generational perspective, who sees where the ball is going and who understands the integration of technology and entertainment, which is how our business needs to morph in order to stay competitive,’” recalls Smith, a managing director at Diversified Search.
The placement is notable, not because it’s an anomaly, but because that fledgling director represents an increasing shift in how boards view the core competencies of the job. There are some basic factors that are table stakes: a proven track record of growth, strong ethics and an ability to read and understand financial statements. What’s changing is that breadth of leadership experience, including service as a CEO, is not always sufficient as boards consider who needs to be sitting at the table.
“The question is now, ‘Are you T-shaped enough?’” says Rob Galford, who serves as lead independent director for Forrester Research. “The top part of the ‘T,’ going across a variety of capabilities, is expected of everybody.” The vertical portion comprises the areas where a board member has deep knowledge and experience, Galford says: “Do you have a specific capability in a particular element that is helpful to the entity itself?”
In short, what qualifies someone to be a director is shifting and mirrors how the overall expectations of boards are changing.
“Until five years ago, we only talked about shareholder and investor activism. And now, you have consumer activism and you have employee activism,” says Ana Dutra, who serves on boards including CME Group and First Internet Bank. “To a certain extent, the board represents all of those key stakeholders in the boardroom. Rather than solely hiring and firing the CEO, directors need to help the CEO and management find success.”
The subtle morphing of the board’s role from top-down to engaging more collaboratively with the C-suite requires a new perspective on directors’ qualifications.
“I’m seeing a shift toward boards bringing in skill sets, knowledge and market understanding they have not sought before,” Smith says. “I have clients who say, ‘Although we’re a manufacturer, we need to understand how technology is being used to market to the consumer for us to really be effective.’ Many companies are thinking not just about technology, but which new markets they’re entering, how they are going to succeed and what new and fresh perspectives they need in the boardroom for the company to excel.”
This focus on bringing new and fresh skill sets into the boardroom also signals another fundamental change in who makes an ideal director — a shift away from the old-school mentality that only certain kinds of professional experience qualify a candidate for board service.
“If I were to summarize in one phrase what it takes to be a good director, it’s ‘been there, done that,’” says Dutra. She echoes a growing sentiment that there is a need to look beyond the usual suspects in order to fill gaps on the board that align board composition with a company’s long-term strategy. “In the past, there was this idea that we’ve got to get a sitting or a former CEO and CFO. I think that has expanded now to many, many more titles in the C-suite: CISO, chief diversity officer, chief digital officer, CIO or chief compliance officer. There is demand for those titles, where there was not before.”
The data bears this out. A 2019 analysis of Russell 3000 companies by Institutional Shareholder Services (ISS) found a marked increase in the percentage of new directors who brought expertise in areas like technology, sales, international experience and strategic planning. The same study found a decrease in the number of new directors with traditional skills, like financial expertise, audit expertise and CEO experience.
Smith sees this as a direct reflection of boards’ understanding that they need skill sets and points of view that match the pace of change in the business environment.
“One of the biggest shifts I’ve seen over the past few years is a focus on recruiting active executives. Many boards — even today — have mostly directors who are otherwise retired,” she says. “Rapid changes and the fast pace of our world make directors who are currently sitting in executive roles at other corporations incredibly valuable to the management team as they deal with real-time challenges like the pandemic, labor shortages and global supply chain issues.”
It’s not that former CEOs need not apply. The expertise they bring is a critical part of a balanced skills matrix, but the key word is balance. “If you have a majority of former CEOs on the board, you get a CEO-centric viewpoint,” says Galford. “Unless your CEOs directly represent your demographic and your future, you’re lacking a perspective about which they may have limited firsthand knowledge.”
As boards work to map composition to the company’s medium- and long-term strategic plans, more are finding that the most qualified directors are those who can meet the moment of an increasingly dynamic business environment and understand firsthand the real-time risks and strategic questions that management must navigate. Just as CEOs know they cannot apply decades-old thinking to the business if they want to stay competitive, more nominating and governance committees are starting to view director job specs with that same lens.
“I’m on a board where we’re conducting a search and we need somebody with proven experience in digital transformation,” Dutra says. “The interesting thing is that you talk to CEOs who have led enterprise-wide digital transformations and they get it on one level, but then you talk to the chief digital officer, or the CTO, and it’s just a very different conversation. So, I think that many boards are becoming more clear and more targeted on what they need.”
That increased clarity and more focused approach to the board skills matrix has also led many to reconsider the minimum requirements of the job. For example, financial literacy is universally recognized as a key skill for all board members. Indeed, directors must be able to read a balance sheet and understand the financials well enough to assess the health of the business, flag risks and ask smart questions. However, as boards increasingly look farther afield for talent across the C-suite, down the organization and even outside of their business sector, there is a realization that skills like digital transformation, market expertise, supply chain management and cybersecurity expertise don’t always go hand in hand with deep profit-and-loss expertise. Some boards are deciding that less financial experience, once a deal breaker, might be OK, as long as candidates show willingness and ability to learn, as was the case with the first-time director Smith placed. “He was self-aware and proactive and said, ‘I know nothing about being a director. I need to really learn the finance side. How do I do that?’ He was open about what he didn’t know and committed to learning what it takes to be a good director.”
Beverly Cole, who serves on the board of Bank OZK and is often asked to tap her personal network to help with board searches, agrees. “There is that need for financial skills,” she says, “but having an insatiable appetite to learn and to ask questions really surpasses all, because, depending on the type of company, you can get some basic financial education that meets a given company’s needs.”
Her point speaks to another critical qualification for all directors, regardless of tenure or prior experience: a deep sense of curiosity and the willingness to take the initiative to seek out the information and knowledge necessary to stay current — and effective — in the boardroom.
“That mindset is just such a total prerequisite,” says Galford, who adds it’s a key factor in his vetting of potential board colleagues. “I ask if this person is a continuous learner, or are they willing to be? And I think you have to be explicit about this, to say, ‘We expect our board and our board members to be at the top of their game and not just rely on the expertise they originally brought to the board.’ What got you there won’t keep you there, so what are you doing as a board member to ensure that you’re at the top of the game and as current as possible?”
There are many options for formal continuing director education, but it needn’t involve a classroom. Colleen Brown, who serves on boards including True Blue and Spark Networks, finds she gets a lot out of experiential learning and peer-to-peer discussion. “I find great value in getting outside perspectives in discussions with other directors in director forums. But by far the best director education, in my experience, is to visit facilities, ask questions and talk with employees.”
Given the increased importance of continuing education, there has been some debate about whether or not it should be a formal requirement for board members. “A good director is always pursuing continuing education, but I don’t think it should be mandatory,” Brown says. “We have mechanisms in place within the structure of the board to solve for that. Ideally, evaluations and peer surveys run by the nominating and governance committee would handle any director that isn’t keeping up.”
It’s also something that board recruiters increasingly test for as part of the vetting process. Those who are not committed to continuous learning are less likely to make it onto a candidate slate in the first place. “As part of the initial interview process, we try to understand what board candidates are doing to learn and to continue evolving their skill sets,” says Smith. “We want to know where they get their information and how they’re changing their mind based on new information. We ask them for examples of how their thinking has changed on a given issue. If they are tapping only into people that are from the same sector and generation that they come from, then they are less likely to be agile learners than those who surround themselves with a broad and diverse group of sources.”
The skills, qualities and experience that make someone a good director do not exist in a vacuum. So much of what makes for a successful fit on any given board is dependent on a multitude of factors, including whether the company is public or private, the industry and where the company is in its lifecycle. What qualifies a candidate to be a director also comes down to more subjective criteria that can’t necessarily be found on a CV. The board meets infrequently, and when they do meet, they face an increasingly jam-packed agenda driven by compounding disruptive forces. This makes efficient and effective use of the board’s precious time together critical, and in turn, more subjective criteria like interpersonal skills and culture fit are not just nice to have — they’re essential.
“Identifying the cultural style of both the organization and the candidate is key,” Smith says. She points to things like boardroom communication style as a prime example. “Digging deep to understand how people interact is critical. If someone is a down-to-earth communicator who calls it as they see it and frequently shares creative ideas, and they walk into a boardroom where things are formal, buttoned-up and everyone only speaks only when it’s their turn to speak, that would not be a good fit, whereas if that same director were placed on a more entrepreneurial, fast-moving, innovative board, they could be a phenomenal director.” Assessing for fit is dependent on nominating and governance committees having a clear-eyed view of what they’re looking for, and on candidates being honest about what they can — and can’t — bring to the table.
“A mistake I see some candidates make is building a bio and résumé based on what they believe the search words are going to be. If you cite expertise, it can’t just be something that you believe you have some knowledge of. That doesn’t fly anymore,” Dutra says.
She cites as an example a candidate who claims to be an expert in cybersecurity, procurement and digital transformation. “By the third thing, your credibility is already tarnished.” Candidates should focus on areas in which they led — and be able to cite multiple examples of how they did so, she says.
Candidates should also do some soul-searching and be honest with themselves about how engaged they are in the company’s business. “It is so important to take the time to say, ‘Is this a board that’s going to interest me, that I’m going to have a passion for, where I’m going to really be interested in and invested in its future?’” says Smith.
There’s another critical director skill: knowing what questions to ask and when to ask them. Directors must be willing to ask tough questions, have a point of view and sometimes push the board or management team to consider other options and alternatives. It is as much art, as science and it’s critical in order for board members to suss out whether or not the management team has its arms around enterprise risk and strategic challenges.
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