HR''s Role in Improving Board Effectiveness

- Boards that ask hard questions, collectively support yet challenge management, and spend time on strategic issues that will provide the most value to shareholders.
The Latest Challenge
The last few years have found many corporations being drawn into scandals involving unethical leadership, corrupt analysts, accounting fraud, conflicted boards and questionable executive pay. This is a climate where practices are increasingly being scrutinized and shareholder commitment is at risk. Corporate boards are being held to much higher levels of accountability, and investors are demanding that boards not just provide fiduciary oversight. They are asking for initiatives that move beyond those that protect shareholder value to those that enhance value.

We believe that enhancing value in governance requires sound policies, effective practices, and great people - board members who are independent advocates, available and knowledgeable to serve the best interests of all shareholders. Boards that ask hard questions, collectively support yet challenge management, and spend time on strategic issues that will provide the most value to shareholders. Effective and transparent corporate governance will be critical to creating long-term shareholder value in corporate America´s new reality.

Research has shown that effective governance correlates to better company performance and greater access to capital (Gompers, et.al., "Corporate Governance and Equity Prices" July 2001; Lavelle, Louis "The Best and Worst Boards" BusinessWeek October 2002; McKinsey & Co. "Global Investor Opinion Survey" July 2002). Outcomes of effective governance can also include reduced potential for corporate liability litigation (which can lower D&O insurance rates), and increased competitive positioning for attracting director talent.

Where are Boards Struggling?
There are four areas in which Boards are being challenged:

First is board culture. Creating an environment of trust and collaboration in increasingly contentious circumstances is not easy. Boards need to provide appropriate discernment and insightful questions, while operating as an effective and efficient team They need to play a dual role of, supporting and guiding the CEO, while also challenging the direction and alignment of the organization. As you can imagine, this is a never-ending process of improvement.

A second is director recruitment and retention. Fewer CEO´s will be available for multiple Board assignments, and those that continue to serve will be spending more time and scrutiny in these assignments. Finding appropriate skills and experience will get harder, and holding on to the best and brightest will mirror the difficulties organizations face in keeping their other talented people.

A third is board and committee demands and requirements. With the need for more independence and expertise in committees such as audit, compensation, and governance, board members will be asked to know and do more. From contracting with consultants, to establishing and monitoring various decision matrixes and performance measures, directors will need to be ever so vigilant in what they do and how they function in both venues. Strengthening committee activity will be required to preserve the integrity and efficiency of the full board, and the board meetings themselves will need to shift to reflect the enhanced role of the committees.

The final challenge is information and knowledge exchange. The volume of data available and needed to provide appropriate oversight and insight for Boards has been growing. In addition, the overall communication demands among the Board members themselves, between the Board members and management, and with the Board and shareholders is increasing. Managing the process and flow of communication is a critical success factor for effective governance.

If all of this sounds familiar to you in HR, that is because you are influencing and oftentimes accountable for similar activities within your organization as a whole, and thus are well-positioned to help your boards as they grapple with improving their own effectiveness. In fact, if you analyze the stated objectives of the recent Sarbanes-Oxley Act, many of them fall within the direct purview of HR:

Why Is HR Well-Positioned For This Added Demand?
In recent years HR´s role has shifted to being more of a strategic partner, administrative expert, employee champion and change agent. Typically, in today´s organizations, the HR function helps execute strategy, build infrastructure, ensure employee contribution and manage transformation and change. (Ulrich; "Human Resource Champions", 1997)

The fact that shareholder value creation in companies with superior human capital practices is three times that of companies with inferior human capital practices (Pfau, Kay; "The Human Capital Edge", 2002) speaks for itself - it is exactly this type of value creation that is needed in most of today´s board rooms.

Sibson´s High Performing Board Model identifies five critical levers, many of which HR has existing resources and expertise to effect:

1. Monitoring Board Effectiveness
The cornerstone of board functioning is the standards they establish for themselves, the CEO and senior teams. Sarbanes-Oxley is requiring more serious scrutiny of the performance metrics of many of the elements of organizational performance, including those of the Boards themselves, as well as their evaluation and rewarding of the CEO. While less than one-third of boards currently evaluate their own performance, that number will be growing. The rigor around CEO evaluation will also be changing. Connecting pay and performance will continue to be a lightning rod for many organizational constituencies, and managing the process and results of these efforts will need to be more transparent to all concerned.

2. Clarifying Roles and Accountabilities
While boards have been functioning with broad charters, by laws, and decision-matrices for years, many of them need to be reviewed in light of the recent changes in laws and requirements. This is especially true of the interrelationships between the committee and full board activities. Specifically defining where decisions are made and by whom, and the documentation and process requirements of these is critical. While some are considering lead or separate director/CEO roles, others are trying to clearly articulate the nature of board activity going forward, and how the process of governance will be managed.

There is a fine balance between oversight and micromanaging in the boardroom. Continually challenging the depth of discussions and the need for boards to be involved will likely be a focus in the near term due to the environment of heightened scrutiny. Focusing the board on strategic and risk elements of the organization´s activities and ensuring management has solid procedures and policies in place will be another area in which HR can be of help.

3. Ensuring Optimal Composition
The bar has been raised on director skills, experience and qualifications. Optimal board composition leads to a balanced and highly-functioning team of directors, which in turn attracts better and more knowledgeable directors.

Deciding what specific criteria will be used, the right number of people, best sources of those people, and effective processes for screening and selecting them used to be fairly straightforward. Now all elements are being reconsidered, and it is not unusual for the entire effort to take time and resources neither planned for nor easily available.

Succession planning for CEO and senior executives has been a key requirement for Boards, but now they are being asked to plan better for their own succession as well. While these activities may reside mainly in the governance committee, they are requiring a new level of interaction among the board as well as external consultants and advisors.

4. Establishing Appropriate Rewards
To attract and retain the best directors, companies need to take a hard look at what they have to offer. The financial rewards of directorship include cash compensation, benefits and perquisites, and stock. The mix of these is changing, and the distribution of each is now often effected by the demands of specific roles and responsibilities, such as the members of the audit committee.

However, research suggests (Sibson Consulting/Spencer Stuart, "Corporate Governance: A Human Capital Perspective", April 2003) that most people sit on boards for reasons beyond just the financial rewards. Learning from peers, looking at other ways of doing things, establishing a broader network of respected colleagues, and status and prestige are a few. Taking into account all of these things will provide a more robust value proposition likely to attract and retain the more competent people, much the same as you do in attracting top talent in other parts of your organization.

5. Modifying Dynamics
Simply establishing sound rules of engagement does not necessarily guarantee board effectiveness. As a well-respected academic has reminded us-"It´s not rules and regulations. It´s the way people work together." (Jeffrey A. Sonnenfeld, Associate Dean for Executive Programs, Yale School of Management)

Boards with strong dynamics raise issues that advance critical thinking, challenge the status quo among the board members and within the executive team, and examine the strength, effectiveness, visibility and accountability of the board and make appropriate changes on a continual basis.

These interpersonal dimensions are often the hardest to select for, manage, and appraise. Leadership within the board is likely to be the best vehicle to improve the interactions among the board itself, as well as with management. Facilitating and developing these skills is another way in which HR can support the Boards´ ongoing growth and development.


"The board is the single greatest underused resource in corporate America, and it is a criminal waste of time, money and capacity to fail to take advantage of what directors bring to the company" (Nell Minow, Founding Principal of The Corporate Library)

HR is asked to be the strategic resource to ensure the rest of the organization is high performing---it only seems right that they also be instrumental in helping boards be high performing as well.


Mary Jo Potter, Senior Vice President, Sibson Consulting, San Francisco, works with senior leaders and Boards of companies to improve the effectiveness of their organizations and to support change efforts from strategy through implementation. She also offers expertise in work and organization design, acquisition integration, consolidations, and restructurings. She can be reached at mpotter[at]sibson.com.

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