Private Company Board Succession:
Navigating an Evolving Landscape

Trend by Jeff Leopold, Managing Director

In a recent study by a leading management consultancy, the economic crisis was said to have dramatically impeded management decision making. When companies cannot accurately forecast sales, understand rapidly evolving customer preferences, or anticipate the effects of government intervention through regulation or subsidies, the Board of Directors can be an important guiding force for the company's success.

If we assume that boards must have the ability to question and/or debate some of their strategic assumptions, then it follows that some boards will have to alter their mode of operations. And while some boards will be able to adapt without changing the team, others may have to change their composition in order to provide the right kind of leadership.

So what happens when the board itself needs to adjust, and add or change a director?

According to two industry experts, only a combination of the right fit, approach, environment and compensation will ensure a successful board appointment.

The Right Fit
Jeff Leopold, Managing Director with leading executive search firm Cook Associates Executive Search, says he's seen some companies go wrong by taking an opportunistic or hurried approach when augmenting their board.

"Early-stage companies occasionally get caught up in the idea of adding someone to the board primarily on the basis of reputation-a ‘trophy director' if you will-without adequately considering the strategic needs of the company or conducting the proper due diligence," Leopold says. "Just because a prospective board director may be extremely accomplished, it doesn't mean they're the right fit for your organization's needs."

Nat Stoddard, Chairman of Crenshaw Associates and author of The Right Leader, maintains that in order to define the traits of the ‘right director,' those responsible for filling the board seat must clearly understand the role that the new director needs to play and assess the board's culture.

Stoddard opined, "Without fully understanding the needs and the culture of that leadership group, they cannot select someone who possesses the right abilities, personality, energy, and character to be an effective contributor. In other words, by first understanding the true shape of the ‘hole' they can define the properly shaped ‘peg.''

The Right Approach
In private and public companies alike, board searches are conducted less frequently than traditional executive-level searches and the process and approach for each kind of search differs widely. While CEOs and heads of nominating committees generally recognize these differences, they sometimes inadequately consider proper succession planning at the board level. Leopold suggests that the most successful board searches-the ones that result in the most effective placements-are the ones in which the nominating committee conducts an analysis and reflects those results against the skill sets of current and potential director candidates in advance of a specific board vacancy.

Leopold also offers that companies should be aware that board searches can take longer than executive searches. "Unlike the CEO searches we conduct where the board can consider promoting a CEO from within the client organization, the notion of promoting internally simply doesn't exist in the context of a board search."

Another factor that can lengthen a board search in contrast to a CEO search, for example, is the fact a lot of activity in a board search tends to be executed serially while the same process in a CEO search can be conducted in parallel.

"For traditional C-level searches, we have the ability to cast a wide net and start a dialogue with a broad set of executives quickly," Leopold explains. "But in the case of board searches, we try to examine the web of relationships for prospective candidates up front to avoid any conflict of interest once everyone is engaged. We need to carefully examine relationships between the candidate and the company, between the candidate and other board members, and between the candidate's current employer and the company for whom we are conducting the board search."

In addition to the extended due diligence, a smaller talent pool can contribute to a longer timeline than that for CEO or other executive-level searches.

The Right Environment
Oddly enough, one key predictor of success may have less to do with the candidate and more with the environment and culture established by the board itself.

"The most successful boards are committed to the independence of its members, the diversity among backgrounds represented on the board, and the diversity of ideas," says Leopold.

A board is, in some ways, like any other group of people. Certain personalities can dominate the conversation and in turn drive the agenda. Leopold suggests, "The board as a whole must create an environment where every voice is heard, differing opinions are appreciated, and healthy debate can drive effective decision making."

Stoddard cautions that boards should also pay particular attention to creating the right kind of debate. "Some of the most dysfunctional boards are those populated with brilliant ‘thought leaders' and people who are inclined to engage any topic under the intellectual guise of being ‘a provocative, devil's advocate'," he warns. "Board issues are far too important to be subjected to theoretical debates or abstract conjecture. The kind of robust discussions characteristic of highly effective boards, where directors can freely raise any question or concern about a given topic, are those where the diversity of experiences and the commonality of shared values affords them pertinent insights which are relevant to the decisions or resolutions that come before the board."

The Right Compensation
Until fairly recently it was common that, except for the Audit Committee Chair (who was typically an active or retired CFO), independent board members were current or retired CEOs. But nowadays, board recruitment efforts commonly extend beyond the corner office to include a broader pool of potential candidates.

"Companies are increasingly focusing their board search efforts on director candidates that reside at one level beneath the CEO of the target organization, and particularly for those with specific expertise in areas such as finance, technology, and marketing," notes Leopold.

With the rising prevalence of consideration for board directors who are not current or retired CEOs (i.e. executives who are not as far along in their careers), there will be a need to accommodate a more diverse set of financial needs for these recruits.

Leopold says, "Boards are changing the way they think about compensation packages for directors. For example, some boards are now more open to altering the mix of pay elements so that they have the flexibility to provide more cash versus equity or vice versa as the case may require."

Companies should take this opportunity to examine their approach to compensation and be sure it is in line with the goals and needs of the business.

Looking Ahead
As businesses react to the sea change in the market, which Leopold compares in intensity to the mid-1990s explosion of the Web, boards will continue to assess and adjust as needed.

Risk management issues will likely become a greater area of focus for the board. And while the process of adding new board members may not drastically change, the characteristics of communication at the board level will likely evolve. Leopold expects a rise in assertiveness regarding board oversight of the size and timing of bonuses awarded to key executives. In severely distressed situations, such as those in which large companies are receiving government assistance, big bonuses will attract greater attention. Leopold says, "Boards are likely to face increased scrutiny around executive compensation. In many cases, compensation will be at the forefront of their responsibilities." said Leopold.

Another risk management issue that is nearly as important as compensation is the matter of CEO succession planning, according to Stoddard. "In doing research for The Right Leader, we found that fewer than 50% of boards had actively engaged in the creation of a written CEO succession plan; and of those plans that had been written, over two thirds were viewed as being of questionable value by the HR leaders who privy to them. Given the trends and costs associated with CEO turnover, boards will soon be forced to comply with succession planning guidelines voluntarily or by one of the regulatory bodies."

In short, it will not be just the compensation committees that have to become more actively involved, nominating committees will have to engage more keenly as well. For every company, being aware of the impact of changing conditions and having the right board directors in place will prove to be a critical success factor in both surviving today and building for the future.

Cook Associates, Inc., is a retained Executive Search and M&A Advisory Services firm. Our core business is creating value at the intersection where talent and opportunity connect, and we are uniquely positioned to help our clients capitalize on the brightest talent and best performing companies in the marketplace. Out client base ranges from multinational corporations to early stage entrepreneurial companies, private equity and venture capital firms. Brand name clients include American Express, The Blackstone Group, Dover Corporation, GTCR, Heinz, Juniper Networking, Levis Strauss & Co., Pitney Bowes, and Sirius Satellite Radio. For additional information, please, visit www.CookAssociates.com.

Jeff Leopold is a Managing Director with Cook Associates. For the last twenty years, Jeff's career has been focused on the technology, telecommunications, business services, and professional services industries. Jeff has built extensive expertise and developed a strong reputation for understanding the needs of clients in the high-tech community. As a result, he has helped numerous clients - ranging from early-stage to well-established companies - build and restructure teams to meet continuous competitive challenges. He has successfully recruited Board Directors, CEOs, CFOs, and COOs as well as vice presidents heading critical functions. He can be reached at 781.565.1152 or via email at jleopold@cookassociates.com.