Boards are our business

WATSON Views

The Board’s Role in Change – Giving the CEO Space to Lead for Success

May 9, 2019

Posted in: WATSON Views

By: Rachel O’Connor, Practice Lead, Performance and Leadership

It seems like everyone is talking about transforming their organization, aspiring to be more agile, sustainable, resilient, collaborative, customer-centric, open, platform-based, long-term sustainable…. Do any of these sound familiar? These all describe what organizations need to do, and to be, to survive in a VUCA (volatile, uncertain, complex, and ambiguous) world.

The reality is that it’s hard to get from “here” to “there”, especially if “here” is pretty comfortable. We know it’s hard to make changes to cultures, business models, etc. without the proverbial burning platform. It’s also hard to manage expectations of shareholders and stakeholders when they may have to forgo short-term results for longer-term impacts that are not guaranteed.

The board needs to give the CEO and the organization space, time, and support to make a transition that typically won’t show results in the same year. It goes beyond patience, to active belief and confidence that the strategy is the right one and the future state can be achieved. And yet – how does a board do that while providing oversight and ensuring accountability?

Take for example Microsoft, in 2014 when Satya Nadella, as a first-time CEO, presented a compelling case for completely transforming the business model, priorities, structure, and culture of the company. If you were on the board:

  • How would you approach your work as a director?
  • How would you deal with the fact that there would be layoffs and potential short-term disruption to results?
  • What about the staff who liked the old way (after all, they had enjoyed enormous financial benefit)?
  • How would you ensure that the transformation was on track and was actually going to yield the expected results?
  • How do you find the balance between patience, engagement, and oversight?

When I see Microsoft’s success in its transformation, and its subsequent strong stock performance, I think the board must have played its role very well.  Few organizations have successfully achieved such a notable transformation, especially without the urgency of a crisis.  This board had the courage to back the plan not only at its inception but through challenge and pressure.  To keep that courage, they must have asked for and received the insight they needed to be confident that the direction was correct and the transformation was progressing.

Our advice to boards who are living through this kind of change is to:

  • Anticipate and talk about what the pressures will be and come back to the discussion at regular intervals to remind everyone that this is normal and expected; reground yourselves in your roles and where you need to focus.
  • Identify what the early indicators of success (or failure!) will be. How you will know the change is on track even if it doesn’t yet show up in the results? It takes time for this kind of change to flow to the bottom line or to outcomes, but you can monitor a dashboard of indicators and listen for the right stories.
  • Align on the board’s role both through the change and at the end of it. Make sure that how you measure performance, determine pay and incentives, and select and manage top leaders fits the future and not the past.
  • Make sure everyone is singing from the same song book – craft rational and clear messages for the change that can be repeated to those who will question you on the basis of results – and shift the conversation to the long term.

When the organization is in significant change, it needs a board that engages differently. This is a powerful opportunity for a board to make its impact and add value to the organization.

 


Mastering Peer Evaluation Feedback

April 1, 2019

Posted in: WATSON Views

Part 3 of WATSON’s 3-part Year of the Peer series

There is an old saying that feedback is a gift. Yet, for many directors, it is a gift we would prefer not to receive. It is also a gift many of us are unprepared to give. Boardrooms historically do not have a culture rich in evaluation and self-reflection. So, it should come as no surprise when directors are asked to share feedback on each other’s contributions to the board and a collective shudder ripples around the room.

Before asking directors to weigh in on peer performance, boards should ensure directors are comfortable with the evaluation process. It begins with understanding your board’s purpose in pursuing an evaluation, building a state of readiness and customizing the process. Without an upfront investment to ready (and steady) directors, there is a risk of the process causing more harm than good, particularly when it comes to relationships and board dynamics. Read up on how to ready the board and customize your evaluation.

Hey WATSON, I think there is a bigger problem in the boardroom that the survey doesn’t really address. What should I do?

If your feedback is about big issues that you feel are not properly addressed through a survey, speak with your Chair about other ways to address and resolve the issue. The director evaluation process is not your only avenue to deliver feedback to colleagues and is not an ideal avenue for more serious issues. If you feel the issue is with the Chair, talk to the Vice Chair or Governance Committee Chair about how best to proceed.

Have a governance question?

Ask WATSON

How to give the Gift of Feedback

To ensure your feedback is valuable and valued, employ these tried and true techniques:

Focus on Facts – High-quality feedback is low in judgment. Instead of stating your opinion about the person, identify the facts and your observations.

Example: “Mary is unengaged” vs. “Mary spends a lot of meeting time on her phone. During our last meeting, she asked several questions that were already addressed in the risk register update presentation.”

Be Specific – The more specific you can make the feedback, the more the receiver will be able to recollect situations or examples you may be describing and think about how to address them differently next time.

Example: “Bob talks too much” vs. “Bob can dominate a conversation at times. Last month during the conversation about our new office space, he didn’t let other directors ask their questions and I know this caused frustration.”

Emphasize Strengths – Highlight contributions so that directors understand where they are particularly effective and what they should keep doing.

Example: “Jane comes to the meeting with a list of thought-provoking questions that engages the entire board at the right strategic level.”

Take Personality Out – When raising shortcomings, try to provide specific examples and keep comments constructive. Try not to label behaviour with absolutes. Avoid personality-related comments that usually only serve to create bad feelings.

Example: “Tony is like a lemming. He never takes a stand. He votes with the majority every time. Might as well not show up” vs. “At the last meeting, Tony did not raise any questions to management nor did he provide any insight during the discussion on fundraising options. When it came to a vote on direction, he voted with the majority. This is a fairly common approach for him.”

How to Graciously Receive the Gift of Feedback

You’ve just been handed a thick report on your performance in the boardroom. Try these top tips to help you work through your director evaluation feedback:

Wear Three Hats. Read your report three times with three different lenses:

  • What – what is the feedback?
  • So what – what are your reactions to the feedback?
  • Now, what – what are you going to do with the feedback?

Pause and Coach Yourself. Consider the following guiding questions in preparation for your one-on-one debrief with the Chair:

  • What do you think about the areas of greatest contribution identified by your peers?
  • Where do you see opportunities for you to improve your contribution?
  • Are you surprised by any of the feedback?
  • What specific development actions will you take as a result of the feedback?

Don’t Ignore the Good. It is basic human nature to brush the good aside and focus on the ‘what did they say about me’ negatives. Or even worse, ‘who said what’. We can’t stress this firmly enough – don’t skip over the positive feedback.

Consider the Context. The feedback included in your director evaluation is based on observed behaviour in the boardroom as a director, at a given point in time. Behaviour can change over time as you grow in your role and dedicate time to expanding your knowledge and skills.

 

Remember, the purpose of the process is to help you improve in your role as a director with the overall goal of continual board-wide improvement. The gift of feedback may not always be easy to give or receive, but if you let it, it can be a valuable gift that keeps on giving. Better directors, better board, better organization.


Is Your Board Ready to Go Public?

March 25, 2019

Posted in: WATSON Views

By Rachel Colabella, Governance Consultant

You’ve decided to take your company public. This is an exciting time in your company’s evolution, but there is a lot to think about – starting with who should be on your board. This is something most boards do not think about enough. Yet, if you want to take your company public, being intentional about how you design your board is critical. For any organization, having the right people around the board table with the right complement of skills, experiences, and perspectives is a critical first step in having a well-functioning, successful organization. As a public company, it is no longer sufficient to simply have founders, family, and friends sitting around the board table.

So, how do you best set up your company for success in the public markets? It starts with understanding why board composition matters, what you need to consider in designing your board, what good board composition looks like for public companies, and how to get there.

Why Does Board Composition Matter?

Having a strong, balanced, and independent board is widely accepted by securities regulators and institutional shareholder groups as being a critical element to enhancing a company’s long-term sustainability. This is a key consideration for investors and in fostering fair and efficient capital markets. Intentionally designing your board composition practices can create significant strategic value for your newly-listed public company:

  • A diverse board that includes independent viewpoints will expose your company to opportunities and ideas not otherwise available. It also helps establish a good check and balance on the sustainability of key strategic initiatives.
  • The right directors can give your company a long-term perspective and help you intelligently manage growth and deliver on strategy. They can also help forge strategic relationships and provide access to needed capital, markets, customers, and resources.
  • Your company is more likely to attract investment capital from a diverse base of investors, including institutional investors, who may be key to achieving your company’s strategic goals.

What do You Need to Consider in Designing Your Board?

The Canadian Regulatory Framework

Designing your board should not simply be an exercise in compliance. It should be a thoughtful process that addresses your company’s strategic needs. That being said, as a public company, you do need to consider the Canadian regulatory framework which can be complex and challenging to navigate. If your company is new to the TSX, your board must at a minimum, comply with the board composition requirements set out in the TSX Company Manual as well as your company’s incorporating statute. Your board should also consider incorporating the composition requirements and guidelines adopted by most provincial and territorial securities authorities, including those in National Instrument 52-110 – Audit Committees (NI 52-110), National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101), and National Policy 58-201 – Corporate Governance Guidelines (NP 58-201).

These guidelines are not prescriptive and instead use a principles-based approach, suggesting recommendations for best practices for board and committee composition. This approach allows your board considerable flexibility in designing its composition to suit the company’s needs. Your company, however, will be required to publicly and meaningfully disclose whether or not your board complies with these guidelines. If you do not comply, you will need to disclose why not and how you otherwise ensure objective and independent decision-making, nominations, compensation, and governance practices. Securities regulators are clear that they expect all public companies to adopt practices consistent with those outlined in the regulations.

Public Company Governance Beyond the Regulations

Along with the regulatory framework, your board also needs to consider the voting and disclosure guidance issued annually by proxy advisor firms such as Glass Lewis, Institutional Shareholder Services (ISS), and by the Canadian Coalition for Good Governance (CCGG). Glass Lewis, ISS, and CCGG all serve institutional investors and provide guidance to promote good governance practices in Canadian public companies. Some larger institutional shareholders issue their own voting policies regarding specific board composition issues.[1] These guidelines provide important insight into the investment community’s views and expectations on different aspects of corporate governance practices for TSX-listed companies. Board composition is at the top of this list. In a world where accessing much-needed capital is becoming more competitive, it is imperative to pay attention to this guidance and to design your board with this in mind.

What does Effective Board Composition Look Like?

Minimum Composition Requirements

At a minimum your board composition must reflect the following:

  • Director Skills and Competencies: All directors should have experience and technical expertise relevant to your company’s business and industry. Your directors should also have public company experience.
  • Independent Directors: At the time of listing, your board must have at least two independent directors, meaning directors who have no direct or indirect material relationship with your company. A material relationship is defined as “a relationship which could, in the view of the board of directors, be reasonably expected to interfere with the exercise of a member’s independent judgment”[2]
  • Audit Committee: Your board must have an audit committee, composed of three independent[3] and financially literate directors.

Additional Good Practice

As a newly-listed public company, you should also strive to meet the following standards to promote effective board composition:

  • Independent Board and Board Chair: At least a majority of your board should be independent. Additionally, your board chair should be independent, and CEO and board chair roles should be separated.
  • Board Renewal: Your board should have a clearly-articulated philosophy and process for director and chair succession. As part of this process, the board should have mechanisms to identify gaps in board composition.
  • Board Evaluation: To identify gaps in board composition, your board should regularly assess itself, its committees, and each director on their effectiveness and contribution.
  • Defined Nominations Process: Your board should clearly define a process for nominating directors to your board which sets the skills, competencies, and experiences required for the board as a whole, assesses the skills and competencies of existing directors, and identifies gaps to be filled.
  • Board Diversity: Your board should clearly articulate its philosophy with respect to board diversity and how it will achieve diversity, particularly with respect to gender representation.
  • Committees: In addition to an audit committee, your board should have one or more committees dedicated to board governance, director nominations, and director and executive compensation. All directors on these committees should be independent.

How Do You Get There?

As a board, you have a lot of latitude under the current regulatory framework to design your board composition. Be strategic and thoughtful about what works best for your company. To set your company up for success in the public markets, consider implementing the following practices for balance board composition:

  • Appoint an independent nominating committee to drive the nominations and recruitment process. To ensure key skills and competencies are properly accounted for, have your nominating committee develop a skills matrix and nominations process to assess your board and committee composition. As your board’s needs will change over time, review and update your skills matrix annually. Focus your nominating and recruitment process on the skills, experiences, and perspectives not fully represented on the board.
  • Be thoughtful and intentional but recognize that Rome wasn’t built in a day! The investor community and regulators accept that newly-listed companies need time to put these governance standards and practices into place and offer a one-year grace period. It may not be practical to achieve the gold standard of board composition on day one. Have a plan in place for how you will adopt these standards within the first year or two after listing and as your shareholder base evolves.
  • Ensure your prospectus and ongoing disclosures give your investors enough detail for them to understand how your board composition plans will develop and how your board will ensure objective and independent decision-making.
  • Keep the following questions top of mind when thinking about your board’s composition:
    • What is your company’s purpose and what is its strategy for the next 3-5 years?
    • Do you have enough independent directors?
    • Does your board include a diverse mix of directors to enhance your board’s oversight and guidance in achieving your company’s strategic objectives?

Some Final Thoughts

Your company has a lot to think about when it comes to going public, including the implications on its corporate governance structure. As you position your company to go public, board composition should be top of mind. Having a strong, balanced board can provide significant strategic value to your company and can be a powerful source of competitive advantage. It’s an exciting time, so be intentional and enjoy the journey.

 

References:

[1] See for example, the December 21, 2018 global voting policy issued by the Canada Pension Plan Investment Board which sets out its voting practice relating to gender diversity on public company boards.

[2] As set out in NI 52-110.

[3] Newly-listed companies are given a grace period in achieving this independence requirement – specifically, requiring only one independent director at the time of listing, a majority of independent directors within 90 days of listing, and all independent directors within one year after listing.


WATSON knows governance

March 14, 2019

Posted in: WATSON Views

WATSON knows governance. Period. Our Governing with Intention™ 2-day course is facilitated by WATSON’s very own governance experts. Through the course, we deliver practical tools and clear guidance incorporating on-trend and current governance practices to help uncover and navigate through difficult scenarios faced boards.

So, what is the fuss about WATSON’s governance education:

  1. We understand what it means to be intentional. Intentionality means doing what makes sense for your organization and being thoughtful in designing processes that support organizational success.
  2. Maximize contributions from key individuals on your board and management team. Determine roles, responsibilities, and relationships that support effective governance. We lay the foundation for directors to hit the ground running, be successful, and make impactful contributions.
  3. Your time together as a board is precious. WATSON breaks down the time your board spends together showing how imperative is it that your meetings, agendas, forward calendars, and meeting practices are highly evolved. Work smarter, not harder, to make the hours count.
  4. Strengthen board culture. If you are not intentional in designing the type of board dynamics you need, the dynamic will create itself. Learn how to identify problem areas, craft meaningful solutions, and introduce new practices to improve relations.
  5. Shed light on the grey line between governance and operations. Over time, WATSON has seen a shift in the types of activities directors should be involved in to carry out their responsibility to the organization. From strategy, planning, risk, and ethics, to stakeholder engagement, boards must be mindful about when they lead and when they collaborate with management.
  6. Forward thinking. We analyze and discuss leading renewal practices to help ensure the organization has the board and executive leaders it needs to achieve its goals over the next five years.
  7. Questions about directors’ legal responsibilities? From fiduciary duty to reasonable reliance on management, we cover all the basics and shift the conversation from theory to practice with real-life case studies.

 

Register today for an upcoming WATSON governance course to learn more.

 


1 2 3 11