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Board refreshment: An investment in the future
In recent years, board refreshment has moved into the mainstream of corporate governance. The updated Code of Corporate Governance and Singapore Exchange Listing Rules gave added emphasis to the matter, especially with the nine-year rule for independent directors.
McKinsey & Company published a compendium of insights on boards with an area of focus on board renewal. The 2016 report noted that boards need to think of the skills and experience that are three years out and can help fulfil corporates’ long-term strategy.
Futureproof the business
A benefit of board refreshment is the fresh perspectives that new directors bring to a board through the way they view the business, its untapped potential and challenges. Often it takes an “outsider” who is less familiar with a company’s business to question the status quo and the need to adopt innovation as a central thrust, or consider the likelihood of disruption from other business sectors.
A well-known example of fresh perspectives being brought into long established businesses is the introduction of ride sharing by Uber. The private transportation sector had, until then, been dominated by taxi companies, with complex booking and charging systems, supported by limited supply. With the entrance of disruptors like Uber, Lyft, Didi and Grab, the traditional business model was turned on its head. Any customer with an app can now, with relative ease, book a ride directly.
This example highlights the use of technology to disrupt a traditional business operation. Corporate leadership and board composition with a healthy mix of directors from different backgrounds can inject such new ideas. And organisations with a diverse range of board members can reap the benefit of fuller and more robust board discussions arising from different outlooks and viewpoints.
Board tenure and evaluation
Board tenure is however not the only issue here. Warren Buffett has been at the helm of Berkshire Hathaway for more than 50 years and, until recently, Rupert Murdoch sat on the board of Twenty-First Century Fox for over 40 years. Should either of them be made to step down from these roles to make room for new talent, or can one argue that they bring a sense of cultural continuity and institutional memory to the board?
Herein lies the challenge for boards – to achieve an optimal balance between the old and the new. Too many long-tenured directors may encourage groupthink, and stifle creativity and innovation. On the flipside, too many new additions (in place of long-tenured directors) over a short period of time risks the board repeating old missteps and having to “re-learn” lessons at a cost to the company.
Part of the board refreshment process should involve an assessment of directors’ continuing contributions and effectiveness. In this regard, most companies have an annual board evaluation and use this as a valuable tool to help them identify and readjust according to the company’s needs.
An effective board evaluation process can help measure both group and individual performance. Such board assessment programmes should ideally include an external component, where a third party conducts an independent assessment, say once every three years, to ensure both impartiality and a degree of external candour. In Asia, however, too much deference to the position and status of directors can impinge on this process.
Board assessments should take into consideration the unique circumstances of the board and the company, including the company’s strategy, short- and mid-term goals and challenges. The evaluation process should also factor in the evolving market environment. If the business is expanding overseas, for example, it might be timely to consider inducting new directors with expertise in other jurisdictions.
Even if there is no immediate need, it is useful for boards to keep in mind future needs and develop a list of potential candidates in emerging areas who can be approached, as and when the need arises. Often key individuals with the desired expertise to fill these roles are already committed to other boards, and it may take some time to get to know them, cultivate a relationship and await the opportune time to approach them to join a board.
Renewal and succession
Succession planning is an integral discipline for companies to plan for the orderly transition of management leadership to ensure the continued success and sustainability of a company and its business. This discipline is similarly applicable to the board which performs an equally important governance and oversight role.
Board succession goes against the “if it ain’t broke, don’t fix it” mentality. In a fast- evolving world where threats and disruptions have become the norm, businesses have to be proactive. Boards, in particular, nominating committees, should focus on the changing environment and risks, and how to plug the gaps and stay ahead.
While succession and change may be sensitive issues, the focus of the discussion should be on the value that renewal brings to the company. If done in an open and tactful manner, directors can be “tapped on the shoulder” to step down and make way for “new blood”, in the interest of the company.
Ultimately, board refreshment cannot be mechanical or formulaic, based entirely on regulatory compliance. It must be judicious, thoughtful and relevant to the company’s overall business needs and long-term sustainability.
This must be the dream – and challenge – for all boards.
The writer is a member of the Research and Advocacy Committee of the Singapore Institute of Directors.