Swann Newsletter - Volume 2, May 2009

Reviewing Board Performance 

We have discussed in these pages previously aspects of talent management that are increasing the work of Boards of Directors in order that they stay informed and vigilant on behalf of stakeholders, in identifying areas of weakness and potential risk. The financial crisis has reached a point where organizations are looking for opportunities to differentiate competitively in preparation for the gradual upturn. Summarised in this article are the themes from recent client projects from different parts of the world in the form of a “how to” board review kit.

Talent Management – our work with investment markets prior to last fall, highlighted investors views that execution risk was increasing because of the shortage of qualified people and the absence of effective people management. This was not just a lack of succession planning which is actually pure risk rather than talent management, but the business of building an appealing employment brand capable of attracting and retaining high performing individuals.  Talent management means appropriately qualified people in key positions, evidence of a process to grow replacements and move them through the organization with stretching and rewarding assignments (velocity) and aligned reward and other terms of employment.

The demographic valley, the lost generation and the new cohorts entering middle management have not gone away nor have they changed as a result of the downturn. An acute shortage of talent in the resource sector will return and the employment offerings that we have relied upon for so many years will not respond. Having the wrong people in the wrong jobs may not impact the next quarter but over time blown schedules and budget overruns will negatively impact financial results, corporate credibility and in turn its ability to attract the best performing people. Currently managements tell us that there is no shortage, they are able to hire all they need. In numbers this may be true but high performers continue to be difficult to attract. Boards should be looking for evidence of management process and satisfying themselves that long term problems are not being created through current short term expediency. There is no doubt that the available talent is of a higher quality than one year ago but are the best being added to your organisation or just the available?

Reward – As the Chinese might say we live in interesting times with the US having had several attempts at (and clearly failing) to control executive compensation through legislation, Canada having gone through its first reporting season under new abstract disclosure rules and with Australia debating the creation of a new watch dog. Where will all of this lead to? In the short run there is no doubt to a more compliance driven, tick the box mentality. Incentive caps, maximum tax write offs and claw backs are all important features in suppressing excessive compensation risk – more is not always better. However, in the boom and bust mentality of the mining industry this will be difficult to overcome and could deter talented individuals from joining the industry. With the crash of financial markets the compensation vehicle of choice amongst most organizations below the majors, stock options, have taken a fearful reduction in value.

Directors and Remuneration Committees will be challenged to comply, legal and investor relations specialists will no doubt continue to argue for minimum disclosure while compensation consultants will caveat and generalise their now disclosed recommendations. Directors must not be distracted by all of this. Their focus is to ensure alignment; that compensation is reasonable and appropriately delivered when the business goals of the company are achieved. We never cease to be surprised how even in the most sophisticated companies compensation can become payable for behaviour and achievements that are not directly aligned with the stated goals of the corporation. More rather than less disclosure is not a bad thing; it will help investor and employee understanding and promote a stronger brand. Ask how competitive compensation levels are determined; is it reasonable to measure incentives paid by your company’s peer group and if so how, by target or amounts actually paid? It may be time to align amounts with specific business plan targets rather than competitive practice, after all no one has figured out how to measure the inherent risk in the business plans of their competitor group.

Relevance – Directors need a thorough understanding of the business over which they have oversight. Without this they cannot effectively opine or approve programs relating to people. While no one disputes the importance of a strong relationship between CEO and the Board, a stronger relationship that should be pursued is that of the Board with the management team. Boards should ask themselves whether they have sufficient access to lower levels in the organization to gain a deeper understanding of issues and to be better prepared for management proposals as they come forward. Boards of directors are also of course enormous sources of wisdom and making this available to the management team will directly enable them to fulfil their wider obligations. Are there in place processes that create opportunities for management and the board to effectively interact?

Board talent remains in short supply – there simply are not enough people to fill available positions. Qualified former executives will be in short supply as retirements are delayed while executives replenish retirement pots to cover their market losses and increasing concerns about liability and the financial crises are not helping supply. Recent well publicised corporate failures have increased attention on the monitoring role of Boards, and resulted in frameworks to improve corporate accountability (e.g. Corporate Governance Principles and Recommendations). Ensure that there is a talent management process in place for the board that is as robust as that for management.

We have focussed on the people issues about which investors are increasingly concerned. As an introduction to considering Board performance the following questions apply to all board operations and not just people matters.

1. How does the Board compare with that of its competitors?
    a. What are the benchmarks of effective performance?
    b. What does outstanding performance look like?

2. Do your standards measure up to those set by the market?
    a. What measures are in use by the competition?
    b. How are different measures compared?

3. Does the Board work as a team?
    a. Do Committees work effectively with the Board?
    b. Is there duplication or effective overlap?

4. What is the relationship with management?
    a. Do the executive team have formal and regular access to the Board?
    b. Does the Board have adequate insight into the senior management?

5. Is the Board appropriately populated?
    a. Does it have the skills to match the business strategy going forward?
    b. Is there a regular review of Board strengths?

6. What is the Board’s relationship with the Chief Executive?
    a. Through the Chairman?
    b. Do all directors have access to the CEO?

A board review should address amongst other things these questions and involve the entire board in discussion. Board performance is an important component of employment brand assessed by current and future employees.

Paul Pittman,
Managing Director, The Americas and Swann Consulting

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Chris Eckert,
Associate Director