February 1, 2010 (Vol. 30, No. 3)

Objective Method Supports the Successful Creation and Modification of Corporate Boards

A corporate board should be composed of members having high character and the proper collective skill set to guide corporate strategy successfully. Achieving this end through the initial selection of board members or by adjusting the membership of an existing board is nevertheless a high achievement.

Board creation and especially changes in board membership are often difficult processes for the individuals affected. The process can be derailed by perceptions of unfairness and by the sting of status or income lost by those overlooked or displaced. This is especially prone to occur when there is no objective rationale for the choosing of board members. The following board composition planning process incorporates objectivity, participation, and fairness to assist key stakeholders in the creation of a new board or in the successful modification of an existing board.

Stakeholders Defined. The process differs slightly if you are planning to initiate the development of a new board or if you are assessing an existing board for change. If the former is the case, the stakeholders who should be involved include the CEO, founders, and selected investors. In the case of the latter, the stakeholders are the existing board members themselves. The stakeholders in either case must be fully engaged in the entire assessment process.

Process Management. Because board design/assessment processes require unbiased equal participation by the stakeholders, it is important that a nonstakeholder third party (the facilitator) manage the process.

Solicitation of Key Criteria. Since every company’s board member skill needs will be defined uniquely, it is important to ask the stakeholders to first list those board member descriptive criteria that are essential to the company at the time of assessment.

Descriptive board member criteria are requested in two main categories:

Character Criteria. These include those personal characteristics that each board member should manifest. Examples include honesty, integrity, team player, commitment, active participation, and the like. These tend to be similar between boards. Despite this, it is important that the stakeholders carefully delineate these criteria themselves.

Skill/Experience Criteria. These include those capabilities and prior experiences that enhance the probability that the board can be a positive force for the company. It is here that wide variation between corporate boards is most often seen. Examples include financial acumen, prior CEO experience, sales and marketing experience, and deal-development experience.

The stakeholders should be asked to think carefully about these categories and to each provide as full a list in each category as they consider appropriate. These are then sent to the facilitator for aggregation into common criteria themes that incorporate all or nearly all of the criteria provided.

Criteria Clustering and Naming. The facilitator, who should have experience in this process, collects the criteria provided and clusters similar criteria with one another. An overarching name is provided for each cluster that substantially incorporates the common meaning of the criteria in each cluster.

Stakeholder Review of Criteria. Stakeholders review criteria for the appropriateness of clustering and of naming. Unanimous agreement is the ideal outcome.

Quantitative Ranking of Criteria and of Optimal Board Size. Using a survey mechanism, Character and Skill/Experience criteria are each ranked for their importance using a numerical scale that converts qualitative impressions to a quantity. The combined ranked responses enable an assessment of the degree of criticality of Character and Skill/Experience criteria as seen by the stakeholders as a whole. The stakeholders are also asked to agree on the optimal size of the board.

If the stakeholders are constructing a new board, they need to be guided by the most highly ranked Skill/Experience criteria to recruit board members until the optimal board size is reached.

Board Member Familiarity and Criteria Ranking. When a board is already in existence, the stakeholders suggest an optimal board size and rank their familiarity with one another, criteria criticality, and mutual Character and Skill/Experience criteria at the same time.

Since in this process board members are ranking themselves and one another against critical criteria, it is important to have a measure of how familiar board members feel that they are with one another. This enables optimal interpretation of mutual-ranking data. For this reason, a board-familiarity assessment is carried out using the following numerical scale. Board members rank themselves as well as all other members:

1. Relationship of long standing that has been tested under multiple circumstances;
2. Sound assessment possible based upon substantial work interaction;
3. Sufficient interaction to enable a reasonable assessment;
4. Working acquaintanceship; and
5. Insufficient experience with the board member to form an opinion.

The survey is structured so that beneath the criticality ranking of each Character or Skill/Experience criterion, all board members are listed and are ranked using a numerical scale. Board members rank both themselves and one another and submit unsigned surveys in order to maintain anonymity.

Expression and Interpretation of Results. Data from all rankings is entered into an Excel spreadsheet, analyzed, and plotted in radar charts that immediately enable visualization of strengths, weaknesses, and overall balance.

Board Member Familiarity. To properly assess one another, all board members should have a familiarity rank of ~

Criticality of Criteria. When the board carefully selects Character and Skill/Experience criteria, the mean grade for each is usually >3. If less, then this should prompt discussion regarding the criticality of that criterion.

Character Criteria. In general, all board members should be ranked at level 4 or above for all character criteria. If not, this should prompt discussion regarding the appropriateness of service on the board.

Skills and Experiences. When individual board members are ranked, they tend to exhibit strengths in one or more but rarely all of the Skill/Experience criteria. If an individual board member does not manifest significant strength in any of the critical criteria (generally above 3.5 on this scale), this is cause for concern and discussion regarding membership on the board. The radar chart will show gaps in needed skills. The radar charts for individual board members, when overlaid, will easily show areas of unnecessary overlap. Board adjustment can then be discussed openly and objectively.

Board size. The board size is reported as a mean, though wide variability should be reported with a standard deviation. Board membership changes needed to achieve this target can be discussed openly in light of the pattern of skill and experiences overlaps and gaps.

Building a sound board and making changes to board composition are difficult goals to achieve. However, they are important to achieve since, when properly constituted, a board has unique asset value to a company. Objective board-composition planning accomplishes two things toward this end: It provides stakeholders with the opportunity to work objectively and equally together toward this goal, and it converts the nonquantitative to the quantitative to enable a visual analysis of board strengths and needs.

Consequently, goals for new board structure and imbalances in present board structure can be identified rapidly and communally, setting the stage for consensus action thereafter to achieve desired ends. All parties are aware that a fair evaluation has been performed, which supports group cohesion in the decision-making process that follows. The stakeholders themselves, based on the objective data that they have generated together through their self-analyses, may then make these decisions collectively. 

Peter C. Johnson, M.D.

Peter C. Johnson, M.D. ([email protected]), is president and CEO of Scintellix. Web: www.scintellix.com.

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