INTRODUCTION

Having a board of directors that is packed with well-known names sounds great in theory. It is often the icing on the cake of a stellar company and a first-class management team.

However, the corporate landscape is littered with companies with top tier boards that still underwent dramatic failure. Examples also proliferate where CEOs report mediocre board performance; ‘we have a great list of directors but they do not really pull their weight or engage with us in a meaningful way. We can’t help but feel disappointed’.

This paper is designed to give board directors and key stakeholders suggestions that might be useful to maximise the performance of their boards. The seven characteristics are drawn from published research from McKinsey Consultants and the Harvard Business Review.

1. Days per year

“A mediocre investment generates a mediocre return”

One of the most obvious distinctions between weak and strong boards is annual number of days served. Does the board meet infrequently and react to proposals brought by the CEO, or is it pro-active; commissioning reports as well as getting out on the ‘shop floor’, meeting staff, customers and stakeholders?

Most of the literature agrees that given the importance of their responsibilities and their personal legal liabilities, the 10 to 12 days a year many board members spend on the job is not enough. Based on a survey of more than 770 directors from companies and non-profit organizations around the world, McKinsey have identified three categories of board effectiveness¹:

• Low Impact
• Moderate Impact
• High Performance

The McKinsey research suggests that the distinction between higher and lower impact turns on the breadth of issues discussed and the time dedicated to them.

In addition to the extra days, High Impact boards had a richer set of priorities. These included regular performance & talent management, as well as extended discussions on strategy, business risk and investment analysis.

TABLE 1 – Annual number of days invested by board members

The McKinsey research showed that High Performance boards are not only more effective, but also more satisfied with their work.

Addressing the issue of mission creep, and whether High Performance boards strayed beyond their remit and into management the report suggested;

“CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction. Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them.

Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management”².

2. An explicit commitment to excellence

“For commitments to be real they need to be explicit”

If the board decides to aspire to become ‘High Performing’, this aspiration will only be turned into reality if everyone agrees to consistently bring their A-team performance to the board. No one coasts or is passive. When things go wrong, no one hides behind ‘collective decision-making’ or attempts to ‘pass the buck’. Everyone owns responsibility and agrees to a culture of excellence. Once this is agreed, there should be no turning back.

Regular reviews and accountability are important to ensure the aspiration is transformed into an ongoing reality. This means annual board evaluations. An objective 360-degree review, built on personal interviews (ideally managed by an independent external assessor), is generally a much better option than a box ticking self-evaluation.

3. Increase directors’ exposure to the business

“Do you truly understand what you are managing?”

If you don’t understand your business, you are quite likely to make errors of judgement. In a survey 25% of CEOs reported that board members did not appreciate the complexity of the businesses they oversaw. Boards seeking a constructive, forward looking role must have real knowledge of their companies’ operations, markets and competitors.

Theranos, the $9 billion-dollar blood test company which infamously collapsed as a fraud in 2018 did so partly because its board, although intelligent and representing many of the senior echelons of government, finance and business, were not qualified to understand the basic essentials of blood testing technology.

Similarly in the explosion of the derivatives markets in the 1990s most directors on the boards of banks did not have mathematical skills to understand the more complex products that their huge new profits were so dependent on. One experienced international banker described them as being quite frankly ‘very amateur’ in this respect3.

If there are gaps recruit new directors with the relevant missing skills. If the board is already full, consider establishing Advisory Boards (without formal governance authority) with additional people with the relevant skills.

To supplement industry experience, a pro-active board will develop a programme throughout the year of members visiting the site, meeting key stakeholders and projects.

4. Clear delineation between the board and management

“Agree in advance who does what”

A written protocol should be created to set out the roles of the board one the one hand, and the CEO and senior management on the other. This will mitigate the risk of conflict and help engender trust and mutual respect. Some elements of this may include;

4.1 A written protocol to distinguish between board and management roles

This should clarify where decisions can be taken by management and when they should come to Board. These can include financial delegations (spending limits, contract signing rights etc) and freedom of action within overall policy constraints.

4.2 Delegation of detailed work to sub-committees / advisory groups

Rather than meeting on an adhoc basis, and with no regular reporting, there should be a clear mandate for each group, a timetable of meetings, and a reporting mechanism back to the main board. Some common committees include HR (covering board and management), Finance & Audit, and any others as the organisational requirements dictate.

4.3 Clarification of the board’s role in strategy formulation

The board’s core role is to co-create and ultimately agree strategy. This will take the majority of its time. It doesn’t want to get lost in the weeds of operational decisions or the minutiae of less mission critical projects. It is useful therefore to set the parameters of the board’s engagement in strategy.

4.3.1 The Board owns the long-term vision & mission

McKinsey say that “governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. In interviews with 25 chairmen of large public and privately held companies in Europe and Asia they found that directors ‘still spend the bulk of their time on quarterly reports, audit reviews, budgets and compliance – 70 percent is not atypical – instead of matters crucial to the future prosperity and direction of the business’⁴.

Boards need to take a long-term view on the company vision and mission, and ensure that strategy delivers on this. CEO tenures are increasingly short-term. Senior management staff can be less. Boards need to look out further than anyone else in the company.

4.3.2 The board engages in the process of strategy formulation

In many organisations the CEO will present a strategic vision once a year, the directors discuss it and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal and there is insufficient time for debate or and insufficient information to allow adequate discussion of alternatives.

The solution is a more fluid process where management prepares a menu of options with varying risks and resources. On a special strategy day, board and management debate, refine and agree a single plan.

At the onset of the annual planning process the board’s job is to help management broaden the number of strategy options. Mid-year it is to select a preferred route. Year end, it’s the job to implement.

4.3.3 The board monitors performance

This should be done regularly and systematically. This will include the product, the market, the senior management team, finance and the monitoring of key performance indicators.

Ideally key performance indicators should also be benchmarked against industry norms and rival competitors.

4.3.4 Minimize pet project syndrome

Board members generally don’t get involved in implementation. They advise, they don’t do. However, given that board members are often business leaders themselves and like to be people of action, there is always a risk is that individual directors can become too wedded to a pet scheme that may ultimately be a diversion or a drag on performance.

Sometimes their project may need to be let go, or significantly amended for the benefit of the business. Giving directors a fluid and regular change of focus helps dilute this risk.

4.4 Create an annual agenda

Just like management teams, the Chairman and board members should plan their annual activities. The following diagram is a hypothecated model from McKinsey⁵.

TABLE 2 – Example Annual Board Timetable

5. Regularly review and nurture the senior management team

“Results are only as good as the people that generate them”

Ultimately any brilliant strategy depends on the quality of execution. This means the board needs to ensure that not just the CEO, but also an effective senior management team is in place and working effectively.

5.1 The board oversees the appointment of senior managers

Has the CEO the right appointments under them? Are job roles effectively assigned? Are the senior managers effective and competent? Is the remuneration appropriate and realistic? The scoping, drafting and pricing of senior job descriptions should be a key part of the strategic plan approved by the board. Ideally board members sit in on interviews for new senior appointments.

5.2 Senior managers present and debate with the board

Many forward-looking boards will invite senior managers to present strategy and debate performance issues. According to data compiled by Kathleen Eisenhardt and L.J. Bourgeois, the highest performing companies treat no subject as undiscussable. Directors at these companies scoff at some of the devices more timid companies use to encourage dissent, such as outside directors asking management to leave while they discuss company performance. What is the point of criticizing management, they ask, if management isn’t there to answer the criticism?⁶

5.3 The board engages with talent review and management

Many forward-looking boards hold annual reviews of the top talents, always with an eye on those who might eventually be promoted to key roles.

6. Keep a strong eye on risk and risk management

“Sense and deal with problems in their smallest state, before they grow bigger and become fatal.”⁷

Risk management is typically dealt with through the audit or finance committee, but it can also be applied to strategy and performance. Key business risks should be identified up front and regularly monitored. Apart from a failure to execute a strategy, the emergence of these risks may be the most significant liabilities a company will face.

If board directors lack expertise in particular markets, products or issues they should invite outside experts to board meetings to talk about specific topics. This may even extend to product development or strategy if they are entering a new business space.

7. And the ultimate – openness, candour and respect is sacrosanct

“Communication, communication, communication”

Great companies that suffered sudden meltdowns showed no obvious board pattern of incompetence or corruption. According to an article in the Harvard Business Review⁸, they followed most of the accepted standards for board operations. Attendance was regular; directors had significant equity investments; key committees and codes of ethics were all in place; the boards weren’t too small, too big, too old or too young. And finally, the board make-up (in terms of inside and external directors) was generally the same for companies with failed boards and those with well-managed ones⁹.

It is difficult to tease out the factors that makes one board an effective team and another, equally talented board, a dysfunctional one. ‘Well-functioning, successful teams usually have chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds upon another. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difficult information; because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions’.¹⁰

The key is to effective boards is ultimately not structural – all other factors being equal, but social. What distinguishes exemplary boards is that they are robust, effective social systems.

A virtual cycle of respect, trust and candour can be broken at any point. One of the most common breaks occurs when the CEO doesn’t trust the board enough to share information, or does so only at the eleventh hour.

7.1 It is the board’s responsibility to request full reporting

The board needs to explicitly request adequate information, and potentially the format in which it requires information.

7.2 The CEO ensures controversial or issues or bad news is brought to the fore

It makes a difference when the CEO and senior management are very open with the board on performance, share genuine bad news early and give the board time to collectively brainstorm and produce solutions or mitigating strategies.

The board can encourage this process by regularly requesting information, but also making clear that it will not engage in ‘blame culture’ recriminations when difficulties arise. Healthy boards will appreciate that mistakes can happen, that management needs to be given freedom to experiment and therefore potentially to fail, and that when problems arise the approach is always ‘solutions-focused’, not ‘blame-focused’.

7.3 Avoid back channels and political factions

A sign that trust is lacking is when board members begin to develop back channels to line managers within the company. This can happen because the CEO hasn’t provided sufficient information, but it can also happen because board members are excessively political and are pursuing agendas they don’t want the CEO to know about.

Another common point of breakdown happens when political factions develop on the board – either being driven by the CEO, or by individual board members. To minimize these risks the following actions can be taken:

• The Chairman and CEO ensure that controversial issues are brought to the fore and discussed transparently and openly.
• The CEO distributes reports on time and shares difficult information openly.
• Intermittent polls of board members, ideally anonymously, to see if members are dissatisfied with the CEO or Chairman.
• Similar polls to see if board members distrust outside auditors, internal company reports or management competence.

7.4 The Chair and CEO work together closely and regularly

The board chair sets the performance culture of the board and ultimate helps the board outperform for its shareholders and stakeholders. A key component of this role is the development of a very healthy partnership with the CEO that balances focused oversight and accountability with dedicated support to the CEO so they can excel in driving the organization forward.

Chairs should meet with the CEO regularly. In high performing companies this may occur weekly (in start-up or problem-mode), fortnightly but certainly no less than monthly.

7.5 Foster a culture of open dissent

Perhaps the most important link in the virtuous cycle is the capacity to challenge one another’s assumptions and beliefs. Respect and trust do not imply endless affability or absence of agreement. Rather, they imply bonds among board members that are strong enough to withstand clashing viewpoints and challenging questions.

The CEO, Chairman and board in general need to demonstrate through their actions that they understand the difference between dissent and disloyalty.

This can’t be legislated for but has to be something that leaders believe in and model. Home Depot Chairman Bernie Marcus, for example, notes that, for one simple reason he won’t serve on a board where dissent was discouraged. When he serves on a board, his reputation and his fortune are on the line. A lost reputation can’t be regained, and director’s insurance won’t protect anyone’s fortune, because there always exemption clauses¹¹.

¹ ‘High-performing boards: What’s on their agenda?’, Chinta Bhagat & Conor Kehoe, McKinsey Quarterly, April 2014

² Ibid. p, 5.

³ ‘Bankers: from Pillars to Pariahs’, Ian Peacock, Novum Pro (2018), p. 41

⁴ ‘Building a forward looking board’, Christian Casal & Christian Caspar, McKinsey Quarterly, Feb 2014, page 2

⁵ ‘Building a forward looking board’, p. 3

⁶ ‘What Makes Great Boards Great’, Jeffrey A. Sonnenfeld, Harvard Business Review, Sep 2002, p.11

⁷ Pearl Zhu, taken from: https://www.goodreads.com/work/quotes/52388291-digitizing-boardroom-the-multifaceted-aspects-of-digital-ready-boards , accessed 25th March 2020

⁸ ‘What Makes Great Boards Great’, p.1

⁹ Ibid., p.1

¹⁰ Ibid., p.6

¹¹ What makes Great boards Great, p. 11

Happy New Year and welcome to the latest issue of our quarterly newsletter. All at CEO Worldwide wish you a successful 2020 as we continue to bring you the latest news from the world of executive recruitment.

It’s a new year, which invites new ideas. So we’ve chosen the theme of innovation for this newsletter, something that is central to our mission at CEO Worldwide. Indeed the company was founded in 2001 because we felt the traditional methods for C-suite recruitment were no longer fit for purpose.

It was clear to us that international business required a responsive and fluid C-level recruitment service that embraced, as a matter of course, cross-border executive resourcing for both interim and permanent leadership appointments. As we approach our 20^thanniversary, this need has grown in scale and complexity. And so executive recruitment must constantly innovate to ensure that the lifeblood of successful business – a supply of vibrant, diverse and skilled leaders – continues to flow.

What’s the right skills mix for tomorrow’s high-performing leader?

The growth of emerging technologies in every facet of business operations – from production to data security – is placing additional demands on C-level executives worldwide.

Research published by Gartner shows a growing expectation that leaders must possess the right balance of both hard and soft skills in a fast-changing and volatile business world.

Gartner analysed over 400 job postings for C-suite executives across the globe, from China to the USA, to reveal their top 10 in hard and soft skills. The hard skill most in demand was a knowledge of Artificial Intelligence, followed by data science, machine learning techniques and cyber security, all required by executives to drive digital business strategies and efficiencies most effectively. Design Thinking topped the list of soft skills, but customer centric capabilities such as complaint management and customer satisfaction also featured strongly, reflecting the absolute necessity of 21^st century businesses to place customer engagement at the centre of their mission and strategy. Read more here.

Will more women in your senior management team boost your company’s innovation?

New research from Denmark suggests that, for businesses wishing to innovate, a shortage of female executives at board level could be a significant problem. A survey of 400 companies indicated a positive relationship between the number of female executives in a business, and its innovation record. (This comes as no surprise to us at CEO Worldwide and is one reason we launched our successful Female Executive Search service.)

In addition, each company needed more than one female executive for this to happen, but then the level of innovation continued to rise with each additional female C-level appointment.

So perhaps diversity quotas should be based on the need to drive innovation? Read more about the research here.

Recruiting your C-level team: can A.I. play a role?

Demonstrating cognitive ‘soft’ skills such as creativity and problem solving remains an important requirement for C-level job applicants (see article above on ‘the right skills mix’). Traditionally, these have been challenging to identify and test thoroughly using the CV and interview selection format. However the increased adoption of Artificial Intelligence (A.I.) techniques could be about to change that.

The Financial Times reports on new methods to test for these valued cognitive skills based on databases and algorithms. Candidates are asked to complete on-screen tests, but these are not designed to count correct answers to questions. Instead they measure how an applicant reacts if she is struggling with a question, and the creativity and determination she shows to find other routes to an answer.

This is just one example of the growing role A.I. can play in your business. As technology advances, predictions that eventually machines will take over all jobs are looking increasingly naïve. The demand for lower skilled workers in sectors such as construction and agriculture remains robust and this is likely to continue.

However A.I. is increasingly being used to measure the performance and productivity of the human workforce through wearable devices. This may appear a little sinister but such data monitoring could also be used to improve working hours and environment. Read the FT’s report on AI here.

Innovating with creativity to make your business more competitive

In each newsletter we like to showcase one of our talented vetted iCEOs and share their views on a current business issue.

Dr. Valérie Lejeune has 20 years’ experience in Innovation, Research and People Management in industry. She believes that creativity is a vital mindset needed to overcome damaging, obsolete thinking patterns within companies.

Dr. Lejeune has invented a method to develop individual and group creativity to help companies in their cultural transformation. Called ‘Attitudes for Creative Thinking in Group’ (A.C.T.I.N.G.), it focuses on the importance of sincere feelings and emotions that stimulate trust (see the Stanislavski Art Theatre and Actors studio principles).

The underlying scientific model is based on two mechanisms: ‘emotional detour’ and ‘swing attitude’. The outcomes are rich in terms of trust, performance (production of original and robust ideas) and competence.

You can watch her video here where Valerie talks about her experience of introducing innovation into companies and the four factors, including creativity, required for this to take place.Is there anything you’d like to see in the next issue of our newsletter? Let us know at search@ceo-worldwide.com

Alberto Elli looks where the resources are concentrated during the three major temporal blocks of an acquisition

After so many years of being involved in business development, I think one of the most critical moment in an acquisition is the integration phase, when there are great chances to destroy shareholders’ value.

Let’s see where the resources are concentrated during the three major temporal blocks of an acquisition:

1. Strategic intent, target setting and proforma decision to justify the deal price. Great focus from top management, quite unrealistic expectations pushed both from inside (needs for growth) and from outside (bankers driven by fees as a percent of acquisition price).
2. Negotiations and closing. Seller, buyer and advisors have strong vested interests to get the deal done, also stretching proforma. Maximum peak of resources involved: multi-functional team from the acquirer and handsomely paid consultants from outside: lawyers, environmental experts, tax experts and accountants, bankers for financing and for advising on the deal. Once Due Diligence is completed (and at times it is done too quickly and without depth) and Purchase Price is set, all these actors tend to disappears because they have reaped the biggest rewards.
3. Once Senior Management is on a new acquisition and the “clock” of external advisors has been stopped, the local team and a bit of divisional support is left with the huge task of integrating the new acquisition and to deliver the shareholders’ value they are committed to.

RISK ASSESSMENT

To better understand the challenges of integration, an analytical risk assessment will help to highlight the areas that will need most management attention and dedicated resources. The following model can be run both in a qualitative way (describing the issues) and in a quantitative way (assigning values to each variable based on prior integrations experience). The latter approach is particularly valid for “serial acquirers” that will quickly size the risks and assign internal or external resources based on prior experiences and … lessons learned!

Nature of the transaction
1   Clarity of Strategic intent
2   Board of Directors Approval
3   Highly leveraged
4   Proforma on more than 5 yrs.
5   Acquisition and integration costs budgeted
6   Target, public or private
7   New Market Entry
8   Bolt-on acquisition
9   Transformational
10  Joint Venture
11  Minority Participation

Complexity “up-front”
12  Sales $10 – $50 Mill. Or more
13  Multi-divisional
14  Multi-geography
15  Plants to shut-down
16  People to reorganize / downsize
17  Due Diligence -> major adjustments
18  Net Worth Adjustments
19  Ear-out on multiple years

Customer Facing / Front Office
20  Key Management to Retain
21  Criticality of customers – Sales retention
22  Criticality of customers – Terms&Condition
23  Bad Debts Reserve
24  Compliance issues / severity – FCPA specific

Back Office
25  IT integration complexity
26  ERP to implement
27  Business Intelligence
28  Supply Chain established
29  Production Planning
30  Safety Procedure
31  Inventory management / slow moving
32  Centralized Purchasing
33  Critical Suppliers
34  Finance – closing and reporting in less than 5 days
35  Finance – monthly B/S reconciliations
36  Finance – Cost Accounting
37  Finance – Bank relationships, complexity
38  Finance – Cash Flow Management
39  Finance – Tax strategy
40  Risk Management – Insurance and Legal support
41  HR – Payroll (internal or Outsourced)
42  HR – Labor Contracts repository
43  HR – Benefits defined, perquisites definition
44  HR – Pension Plans assumptions understood and funded

Others
45  Culture, consonant or dissonant to acquirer
46  Regulatory and IP protection, criticality of issues
47  Warranties on long term sales contracts
48  Warranties on long term purchasing contracts
49  Documentation of Labs procedure
50  FX hedging in place

WHO HAS TO LEAD THE INTEGRATION PROCESS?

Every each integration is different but the best practices on the resources needed have informed the following considerations:

1)  CFO (Acquiring or the acquired)

Given the ultimate goal to deliver on expected shareholders’ value creation, the involvement of the acquiring CFO is very important but cannot be the sole responsible, given the many others concurrent responsibilities. At times, the acquired CFO has been asked to lead the integration; results are mixed because the internal knowledge can be over weighted by the temporary nature of his/her mandate. Only if the acquired CFO will have a long term place in the organization, the integration role works pretty well, actually if executed with excellence is the best entry in the new organization.

2)  Internal Project Leader (Full time or part-time)

PMO skills are needed; either imparted through internal training or available in specific professionals but the true integration leadership is quite different: best is to have a manager that is slotted to become the leader of the acquired entity or the leader of another acquisition.
Depending the size of the organization and the frequency of acquisitions, the investment of full-time resources is to be considered; the experience is usually multi-functional and the resource can be redeployed quite easily.

3)  External Project Leader

Solution to consider when the acquisition is one-off or is particularly complicated from a geographical/cultural point of view. Difficult to recruit the right profile but once is individuated the scope, the timing and the cost is fixed, even more important is the independence from internal politics and divisional agendas.

4)  Internal Team (permanent or ad-hoc)

Best practice is to form a full-time internal group of experts that can be redeployed after the acquisition is integrated or kept as a team if more are foreseen. To be noted that integration can be a relatively compressed time frame but full achievement of synergies can be a longer effort, like for Supply Chain and for IT in the contest of ERP implementations.

5)  External Team

Risky proposition in term of having the right quality and number of resources for all the time needed to complete integration. Once a resource is hired for a functional area, always ask to identify a back-fill. If possible, try to shy away from time and material contracts in favor of closed end sum, or based on payment at milestones’ achievement.

CONCLUSION

Clarity of the objectives to achieve, well defined timetable, proactive risk assessment and correct deployment of resources are key to a successful integration that will deliver the full value of an acquisition.

About the author: Alberto Elli for the last three years has been Interim-Chief Financial Officer for private and PE-owned companies in the space of consumer electronics and fashion, leading processes of turnaround and exit strategies.

From 2008 to 2013, he was Vice President and Controller of Sherwin-Williams Global Finishes Group (OH) (Automotive Finishes; Chemical Coatings; Protective and Marine Coatings and Emerging Markets) with about $3 billion Sales. Since inception, in 2008, the Group grew sales 70% both organic and with several acquisitions. Alberto joined Sherwin-Williams in 2006 as Vice President and Controller of the International Division after ten year experience in the pharmaceutical industry with Schering-Plough. His first assignment was as Finance Director in Italy and he was later promoted VP of Finance for the Healthcare Division headquartered in US-NJ and after three years was named VP of Finance, Pharma International, a group of $4 billion Sales. From 1985 to 1996, Alberto held various financial positions in Italy, the last of which was from 1989 to 1996 as Finance Director for SCA, a leading Swedish multinational in paper and packaging industry.

Alberto earned his degree of Dottore in Economia e Commercio from the Universita’ L.Bocconi, Milano, Italy