Maximising a board
By Soh Gim Teik
The Business Times, 12 December 2016
When hotshot biotech startup Theranos completed assembling its board of directors in 2014, it was one of the most illustrious in American corporate history.
It included former Secretary of State George Shultz; Chairman of Bechtel Group Riley P. Bechtel; former Wells Fargo Chairman and Chief Executive Officer Richard Kovacevich; former Senators Sam Nunn and Bill Frist; former Secretary of State Henry Kissinger; and former Secretary of Defense William Perry.
There was one big problem: Most of the 12 member board, with an average age of 80, did not have any expertise in medical technology.
Theranos, once valued at US$9 billion, shot to fame for its claim to test for diseases with a finger prick through a complicated medical procedure. Yet only one of its directors had a medical background.
It was therefore no surprise that, when US federal agencies started to investigate Theranos, which eventually led to a ban on its founder and CEO Elizabeth Holmes from operating a lab, the illustrious board went silent.
The rise and fall of Theranos, and the directors behind it, provide a very stark lesson for any company looking to assemble its board of directors. No matter how powerful a board is, it is useless if it is not effective.
What then makes a board effective? How can we “maximise” a board?
I believe there should be three major considerations when picking people for an effective board.
The first is looking for people who are not just qualified but who have the right skills and experience.
Much has been made about ensuring board diversity, and the subject often boils down to whether there are enough women in corporate boards. But more than just picking women for the sake of diversity, the question should be whether the individual complements the rest of the board.
US retailer Macy’s is in the one per cent of companies which have women making up at least half of their board. They seemed to have picked their directors with deliberation, hoping to understand and hence target their market segment more effectively.
Take a look at one of their recent appointees: Starbucks executive vice-president Annie Young-Scrivner. Prior to joining Macy’s board in 2014, she had no board experience. But the 46-year-old was picked because she belonged to the digital generation that the company was looking to focus on. Some 70 per cent of the firm’s customers are women.
Company life cycle
Second, companies go through different growth stages, from a start-up to a SME, a listed entity and then a global company.
At each stage, the needs of the company are very different. Start-ups would need directors who are mentors in the business, able to guide the company along in its initial stages of growth.
But when the company has, for instance, listed on the stock market, it might be good to have an investment banker or a lawyer who can contribute to its next stage of growth which will most likely involve acquisitions and mergers.
The list of needs can vary over time and companies should take heed and adjust its board in accordance with the requirements of the day.
The third crucial element in creating a “maximised board” is to ensure that there remains a pipeline of talent coming through the board.
Without proper succession planning, the company cannot refresh the board regularly.
Currently, the Code of Corporate Governance states that a director who has served on the board of a company for more than nine years should be subject to particularly rigorous review in his re-appointment as independent director.
There should not be a need to wait this long.
Every board member must be prepared to work towards leaving after a number of years, the moment he joins. This mindset is important as it carries with it the attitude of encouraging board succession.
Companies should also set some firm rules about appointing a director for a fixed number of years. The company should let the incoming director know that his (or her service) is only for a fixed number of years. Reappointment is a possibility but not a certainty.
This is a "self-check" mechanism in that every director who wants to continue will have to work at his job. On the other hand, the board can retire a director if he is not up to scratch.
Will this make good people less likely to show up? Possibly. But it will also ensure that the ineffective directors do not stay around for long.
Towards an effective board
Some of these points were, in fact, made at the launch of the Board Guide on 11 November 2016. Speakers highlighted the importance of the board’s leadership for the long-term success of the company.
The above three steps should provide firm foundations for creating an effective board that can steer the company in the right direction ahead. It is not just simply the “who” that makes a board effective, but “what” they can do, and “how” they do it.
Soh Gim Teik is Vice Chairman of the Singapore Institute of Directors.