Years ago, a highly regarded director and board chairman confided, “We have to be better about getting the poor and mediocre directors off the board.” The issue was the collegiality of the boardroom and the reluctance to confront a non-performing director.
Today, according to the latest PwC 2013 Annual Corporate Directors Survey conducted during the summer of 2013, directors have signaled increased concern about their peers in the boardroom. With 934 public company directors responding, 35 percent now say someone on their board should be replaced compared to 31 percent in 2012.
And why do fellow directors worry about their peers’ performance? Aging, lack of required expertise and lack of preparation for meetings are the three main reasons directors are not performing, according to the PwC survey.
Today, corporate governance continues to evolve at a rapid pace with directors taking on expanded roles and responsibilities. Expectations for board members have increased in response to regulation and greater shareholders demands.
It’s not the money (4 percent) or prestige (3 percent) that motivates directors to serve but rather intellectual stimulation (54 percent) and staying occupied and engaged (22 percent) that attracts directors to board service, according to the survey.
One of the unintended consequences of power moving from the CEO to the board is that directors themselves decide when they should step down. It’s still rare that shareholders succeed in removing directors. Retirement, reaching the age of 72 or 75, is the main reason for a director to leave a board.
One governance expert noted that some boards are reluctant to invite 40-year-olds to become directors because “they could be on the board for 30 years.” Why? If it turns out that the director is not effective, board leadership is uncomfortable addressing the issue, which also implicates the inadequacy of the board’s own self-evaluation.
Is entitlement part of board service? Do some retired-CEOs-turned-directors regard “intellectual stimulation” and “staying engaged” as their right to suitably interesting post-CEO careers regardless of the value they bring to the enterprise? The old saws of being a director as a “lifetime achievement award” or “a victory lap” may still be true.
Shareholders are noticing.
When JPMorgan was recently recognized for enlarging the powers of its lead director as a positive development for the firm’s corporate governance, one of the company’s large investors expressed concern for the age and long tenure of the individual in the post. Dieter Waizenegger, CtW Investment’s executive director, said he wants lead director Lee Raymond removed from that role because he has been a director for 26 years. “We need someone who can lead a new and refreshed board that departs from the problems of the past,” he told the Wall Street Journal.
Boards need to develop and execute a robust evaluation of its members and the effectiveness of the board as a workgroup. Directors need to get the right help to carry out the task. They need-someone who knows business and governance and is independent, not selling ancillary services to the company as a result of his or her advice. And, they also need to follow-through on their evaluations. If the director is too old, does not have the expertise required or is unprepared for meetings, the board should tell the director to step down.
Isn’t it better for directors to take the steps to ensure effectiveness themselves, rather than waiting for shareholders or regulators to assert greater authority in the boardroom?