30. Family businesses: the most successful, long-lasting and impactful businesses in the world

Rob and Josh are each co-founders of BanyanGlobal Family Business Advisors which advises family owners on business, finance, ownership, philanthropy, and a wide range of other issues.  They are each leaders in the field of family-owned business.  They recently co-authored the Harvard Business School publication: “Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise.”

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Links

Why the 21st Century Will Belong To Family Businesses

Build a Family Business that Lasts

Click here to order the HBR Family Handbook

Quotes

Family Business Myths/Facts

Myth: Family businesses don’t really matter.

Fact: “About 90% of all businesses in the United States are family owned and they account for about 50% of all employment.”

Myth: Family businesses don’t last, after three generations, they’re doomed to fail.

 

Fact: “Family businesses last longer on average than other forms of ownership. Some of the longest lasting and most successful businesses in the world are family businesses. Why don’t Americans know that?”

Joe: Josh, why do you think that the myth that family businesses are less successful, that they never get beyond the third generation, why does that persist?

Josh: It’s a great scare tactic, I think you keep hearing it is because people want to tell you, “You’re doomed to fail and therefore you need my help to be able to overcome it.”

Myth: Family businesses are rife with conflicts – family members are fighting and suing each other and just can’t possibly get along

Fact:  “Most family businesses struggle not from having too much conflict, but from too little conflict, because it’s really hard to raise some of these issues about fairness and compensation and all the things that come in as being part of a family business.”

Rob: It’s strange, but the celebrity or the business celebrities, when I went to business school, Jack Welch, and he was making a brand for himself. Now, it’s Bill Gates or Mark Zuckerberg at Facebook or Elon Musk at Tesla. They seek the publicity. I would say most all of the family business that we know the owners, they shy away from publicity. They don’t want to be the face of their family business. They actually know the downside that can come with that.

Josh: Most family businesses are private companies and the word “private” is there for a reason, that they don’t want to be public. They see advantages in being below the radar. I was visiting a family business recently in a state out west and I drive up to the headquarters and I was like, “That can’t be it. We must have the address wrong. That can’t possibly be the headquarters of a billion dollar company.” And of course, it was.

“One of the amazing things about family businesses is that they can break the rules in a way and practice business in a way that is fundamentally different than other companies.”

“Family business owners can, if they choose, own it for their whole lifetime and maybe set it up for their next generation. It’s the difference between maybe renting an apartment or even being in an Airbnb overnight – you’re day trading versus owning a home that you’re hoping to bequeath to your children.”

Unlike other companies,  family businesses actually talk about longevity. How often do you hear companies outside of the world of family businesses talking about how many generations do you last? Do we put like a second or third generation as if that’s just a low number, but then you have to multiply it by 20 or 30 years and you realize that a third-generation family business has probably been around for a hundred years.

Josh:  People say: “Oh, most family businesses don’t make it for a hundred years and therefore they’re doomed to fail.” I’m like, “No, no, most businesses last for under a year, maybe five years.”

Joe: Their success is actually used as a way of talking about their failure when it’s not really a failure at all.

What we find in family businesses is that core decisions are really made at the owner level in family businesses, not like publicly-traded companies. If you don’t like what’s going on at GM, you sell GM and you’re out and it wasn’t really hard to sell. With a family business you’re in. So, you’re going to work really hard to make the owner decisions the right decisions.

The rights that come with that ownership are profound, the ability to influence the company in ways that are positive and negative are fundamental and learning how to effectively step into that role as owners is essence of the work that we do and the essence of the book that we set out to write.

If you’re working in a family business or if you’re on the board of a family business and you don’t understand the owner strategy, like what trade-offs they’re making, you’re going to be very surprised by the decisions that are coming your way.

Leadership Transition

If you’ve been in this position of leading a family business for decades, maybe your entire adult life, you’re not just going to quit that and play golf. In most cases, you need some place to land, some place to go to…. to give that up, it’s super scary.  It’s psychologically very challenging for some people.

Joe: One of the things we talked about earlier … for the person that’s been running the family business it is not just a job. It is his or her identity because they’re really living their job. I think that provides a perspective of why it’s so hard to let go.

Rob: That’s a great point.  It is their narrative and maybe it’s been their narrative since they were five years old, is that they wanted to be the controlling owner or CEO of their family business, and their narrative probably never got to that final few chapters about how they’re going to relinquish control over time.

Some do it, and some do it with such aplomb, it’s really quite amazing. We’re trying to learn from those people about what it is that gets them to the other side of that transition.

Getting to the next generation, the hardest thing often is the current generation! It’s like letting go of the reins and really talking. We have some clients who it’s fairly easy for, but they’re the exception.

“One of the hardest things to get right in a family business is family employment. One of the things that causes the most conflict in a family businesses is who gets a job, who gets paid how much, who gets promoted, who gets the CEO spot. And it’s really hard to navigate those issues.”

“Once your (family) business gets to a certain size, the value you get from the right independent directors is almost always going to be worth the time and investment that you make into them.”

Big Ideas/Thoughts

The kinds of things that family businesses are able to do in terms of investing in their employees, investing in their communities that they believe and see paying off in their company, they would never be able to do them if they had to focus on quarterly earnings.

It’s so interesting, when CFOs come into family businesses from public companies or from private equity, they have to be retrained, just retrained about what the priorities of the family owners are.

Managing Expectations

Another one of the things that people say about family businesses is that families grow faster than businesses, so therefore a family business is doomed to fail because at some point the size of the family will outstrip the ability of the business to support it. That’s where expectations come into play because that’s a choice.  Should family members actually expect to live off the business or do you expect them to find other ways and treat the dividends they get as a nice bonus to buy something, to buy a new car, or maybe if it’s a great year, to get a new house, but not to treat it as sort of like the foundation of the family living on.

The Wall Street Journal is a great example of expectation driving decisions. The family (that owned the WSJ) lived off of a very profitable business, a growing family over time. And then as the digital age came in and disrupted newspapers, it was no longer as profitable anymore. And so the family was in a position where they either had to drastically cut their lifestyle or drastically cut the reinvestment in the business, putting them almost in a no-win position that Rupert Murdoch took advantage of and made an offer that they really felt like they didn’t have a choice, but to accept.

Dividend policy and debt are two of the things that families have to grapple with, and that often leads to their demise.

Regarding debt: You go to business school, and they’d say, “Oh, look at all of the great benefits of leverage. You can get a much higher return on equity. Interest payments are tax deductible.” So,  you come out of business school saying, “Lever up, baby.” and there are also these LBOs going on.

You go into the world of family business, and it’s so, so different. Many of our large clients effectively have zero debt. And in fact, we had one client, it was in the agricultural business, and they had zero debt and they had two full years of operating expenses on their balance sheet. And we’re like, “This is not what we learned at business school.”

 

Family Business Goals

From an ownership perspective, there are three main things you might want. You could want to grow the value of the business – let’s go from a million to ten million to a billion and so on. You might want to do that just because you want to be richer, or maybe you want to influence the world and you see your business as a platform to do that.

The second thing you might want as an owner is liquidity, and here we mean taking money out of the business. So, you might want to do that because you want to lead a nice lifestyle, or you want to give it away to charity. Or you want to have something that is yours and not belonging to your entire family.

And the third thing you might want is control, and control is sort of like you have it until you give it up. So, if you take on an equity partner, you are giving up some level of control. If you take on outside debt, you’re giving up control because now someone else is in the room with you and has some influence over your decisions.

The most common path to building a successful family business is the mixture of growth and control. If you look at the largest family businesses in the world, most of them have been built in exactly the same way, which is that they make a dollar, and they reinvest 99 cents. They give themselves enough money to pay the bills and they put 99 cents right back into the business. They do that over and over and over again until they’ve built something very significant.

The growth and control is at the expense of liquidity.

Owners Room/Importance of Owner Decisions

In family businesses on top of the boardroom sits the “owner room” and here there are very few decisions, but this is about the longevity of the firm.  What’s being traded in this room isn’t the competency that’s traded in a management room or the wisdom in a boardroom. It’s actually power and influence. It’s the power that if 51% of the voting shareholders do it this way, that’s where it’s going to go. But it’s also the influence that if you stick it to your sister and she goes to her dad, oh, it may come back to haunt you somewhere else.

So what part of what we say is the owner room needs to have both the vote, the 51% we talked about, but really important to have the voice. Sometimes it’s okay to be out voted if you had a voice in the matter and people have taken seriously what you have to say.

Transcript

Joe: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success.

Hi, I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization: its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: Our guests today are Rob Lachenauer and Josh Baron. [00:01:00] Rob is co-founder and managing partner of BanyanGlobal Family Business Advisors, which advises family owners on business, finance, ownership, philanthropy, and a wide range of other issues. Rob has been a business leader and writer throughout his career, focused on leadership and governance for family businesses.

While at the Boston Consulting Group, he coauthored Hardball: Are You Playing to Play or Playing to Win?, a book that has been translated into ten languages. He’s also made frequent contributions to the Harvard Business Review. Most recently, he and Josh coauthored The Family Business Handbook: How to Build and Sustain a Successful Enduring Enterprise published by the Harvard Business Review.

Raza: Josh is also a co-founder and partner at Banyan. Prior to Banyan, Josh worked at Bain & Company and Bridgespan Group. He [00:02:00] teaches courses on family business at Columbia Business School, publishes and speaks frequently on family enterprises, and is a regular contributor to the Harvard Business Review, including his recent article, Why the 21st Century Will Belong to the Family Businesses.

Joe: Welcome, Rob and Josh. Thanks so much for joining us today on On Boards.

Rob:   Great to be here.

Josh: Thank you so much for having us.

Joe: So, we’ve talked a little bit in the past about the fact that there are many myths about family businesses in the United States. What are the myths, and why do they persist?

Rob: Actually, there are a lot of myths. Maybe I’ll say a couple, and then Josh will too. One myth is the family businesses just don’t even matter. You’d think, “Oh, a family business, that’s the local pizza shop.” When in fact, about 90% of all businesses in the United States are family owned [00:03:00] and they account for about 50% of all employment.

So, getting family businesses right matters a whole lot. An awful myth that Josh and I just wrote about an HBR is that family businesses don’t last, that after three generations, they’re doomed to fail, and it’s not true. If you look deep at the data, it shows that family businesses last longer on average than other forms of ownership. And don’t believe that myth is what we say. Josh, you want to add a few?

Josh: I think one of the other ones is the perception that we have about family businesses is that they’re just rife with conflicts, that family members are fighting and suing each other and just can’t possibly get along. And look, when family businesses go wrong, they make for great dramatic stories, and those are both the fictional kind with succession and dynasty; Dallas, Yellowstone, and there’s a whole tradition of dramatic shows based upon family businesses.

But even in the press, when most of the stories about family businesses are [00:04:00] about when they implode. And because of that, people tend to apply and say, “Well, all family businesses must be like that,” when in fact that’s just such a small slice.

In fact, most family businesses struggle not from having too much conflict, but from too little conflict, because it’s really hard to raise some of these issues about fairness and compensation and all the things that come in as being part of a family business. That’s much more like a common thread than family members fighting each other through lawsuits.

Joe: Yeah, that’s a great point. Raising conflict or confronting conflict is very difficult to do. We know that some of the longest lasting and most successful businesses in the world are family businesses. Why don’t Americans know that?

Rob: It’s strange, but the celebrity or the business celebrities, when I went to business school, Jack Welch, and he was making a brand for himself. Now, it’s Bill Gates or[00:05:00] Mark Zuckerberg at Facebook or Elon Musk at Tesla. They seek the publicity. I would say most all of the family business that we know the owners, they shy away from publicity. They don’t want to be the face of their family business. They actually know the downside that can come with that.

Partly I think it has to do with they typically own businesses together. They’re not trying to be the tall poppy. They’re one of many owners. Because if you’re a family business, it’s typically more than one owner. And if someone tries to become like the celebrity, they’ll come back to their family room and be told, Don’t do that. You know we all own it.”

And there’s also a consideration I think that many have that discretion is a good idea for if you’re quite wealthy, which the largest family business owners are quite wealthy, it can make you a real target. And who would want that target on your back?

Joe: Yeah, Josh, thoughts about that?

Josh: Well, a [00:06:00] lot of them are just below the radar. I mean, most family businesses are private companies and the word “private” is there for a reason, that they don’t want to be public. They see advantages in being below the radar.

I always find it amazing. I was visiting a family business recently in a state out west and I drive up to the headquarters and I was like, “That can’t be it. We must have the address wrong. That can’t possibly be the headquarters of a billion dollar company.”

And of course, it was, and there are these examples that we see all over the world of these companies that don’t have the palatial headquarters and sort of ping pong in the offices and stuff like that. But they are these really pillars of communities around the country.

I think one reason is that they value being private. I think especially in the business world, we don’t really study them. In business school, we don’t talk about them so much. Again, because they are private. When we talk about family businesses and statistics on family businesses, for the most part, we’re actually talking about that very small [00:07:00] subset that are publicly-traded, family-controlled where there’s data about them, and there’s examples about them, and there are stories about them.

So, unless you’re underneath the veil and sort of allowed to come in and see what’s going on, it’s just really hard to understand what’s happening in a more typical family business versus the ones that make their way into the media.

Joe: Josh, why do you think that the myth that family businesses are less successful, that they never get beyond the third generation, why does that persist?

Josh: It’s a great scare tactic. But honestly, I think the fundamental reason why you keep hearing it is because people want to tell you, “You’re doomed to fail and therefore you need my help to be able to overcome it.” And I think that’s one reason why.

The other, I think, is because unlike other companies, family businesses actually talk about longevity. I mean, how often do you hear companies outside of the world of family businesses talking about how long did you [00:08:00] last, how many generations do you last? Do we put like a second or third generation as if that’s just a low number, but then you have to multiply it by 20 or 30 years and you realize that a third-generation family business has probably been around for a hundred years.

So, I think it’s a little bit of a self-obsession with the idea of longevity, not in a bad way. I think it’s a variable that family businesses evaluate their success against that other businesses might not so much, and that’s fine. The idea of talking about difficulties and the challenges of lasting for generations is a reasonable thing to do, but it’s gone way too far where I think people are actually putting onto that, “Oh, most family businesses don’t make it for a hundred years and therefore they’re doomed to fail.” I’m like, “No, no, most businesses last for like under a year, maybe five years.” like if you think about everything it takes to make any business last for a hundred years, by the way, almost all of which are family businesses, let’s celebrate the [00:09:00] ones that last as opposed to getting ourselves into the self-fulfilling prophecy of worrying ourselves to failure and focusing on the negative rather than on the positive things that family ownership brings to the potential for longevity.

Joe: Yeah, great. Absolutely, it’s interesting. Their success is actually used as a way of talking about their failure when it’s not really a failure at all. What about some of the other differences between family businesses and other types of business? What distinguishes a family business from public or other private business?

Rob: One of the biggest things, Joe, is the form of ownership. It’s owned typically by family members. So it could be owned by three sisters who own a a hundred million dollar business, and that changes everything. First of all, they’re private owners, so they don’t have a share price that they’re chasing up. They can make [00:10:00] their own decisions about what they want to do with their business.

Also, the fact, in our case here, that they’re sisters, and I don’t know about your family, but I’ve got a brother and a sister and it would be hard to own a business with them. I love them deeply and we’re very, very different. So, these three sisters or brothers or whatever have big decisions that they need to make together, that the Lachenauer family doesn’t need to make together. So, that puts a lot of pressure on really, in some ways, the most important people in the business, which are, in our case, these three owners have to make big decisions and they have to make it in an environment of a lot of pressure that’s not necessarily a pressure that you would expect to be in a family system. So, that’s very different from a publicly-traded company where the rules are very explicit about what you’re trying to get to, which is a higher share price and maybe some other things. These three owners can set their own rules about what they want to do with running the business as long as they can get together and talk about it well.[00:11:00]

Josh: The challenge is, or in some ways, the great thing is if you can make the rules, it means you can break the rules, so it’s not like someone is imposing that structure. As Rob is talking about, one of the amazing things about family businesses is that they can break the rules in a way and practice business in a way that is fundamentally different than other companies.

One of the hardest things about family businesses is that they can break the rules in ways that make the business collapse well before its time. And that’s sort of the reality of being in this environment where the owners are able to sort of in a way that is much less constrained by sort of outside forces shape what happens inside of that company.

Rob: It’s so cool because instead of an institution like Fidelity Contrafund, owning it and selling it the next day, these people can, if they choose, own it for their whole lifetime and maybe set it up for their next generation. Can you imagine anything different?

It’s like the difference between, Joe, maybe renting an [00:12:00] apartment or even being like Airbnb overnight, you’re like day trading versus owning a home that you’re hoping to bequeath to your children, and just think of how you treat your home different than you treat your Airbnb. That’s a lot to say about how family owners treat their business and their employees and their customers, they’re quite different mindset.

Joe: Do you think that the fact that family business can plan 25 years into the future is an advantage?

Josh: I definitely do. And part of that is because, especially when we think about things like the trade off between doing the right thing for a customer and short-term profitability or doing the right thing for the environment or diversity equity inclusion or anything that is more closer to the values, we talk about that as sort of like, “Oh, we can’t do that because we have to make our numbers.”

And if you’re a family business and you decide that you actually [00:13:00] are willing to not see those as trade-offs, because they’re generally speaking only trade-offs in the short term. I think of one family business that we work with that’s in the manufacturing industry and they’re investing a huge amount of money into modernizing their facilities, and you ask them, “Are you doing that because it will make you more profitable?” Yes. “Are you doing that because it will reduce your environmental footprint? Yes.

And it’s not like a trade-off between doing the right thing and making money if you take the longer time horizon that you can through a family business, but those kinds of decisions, and we hear examples of these all the time, the kinds of things that family businesses are able to do in terms of investing in their employees, investing in their communities that they believe and see paying off in their company, they would never be able to do them if they had to answer to those investments on a quarterly earnings basis.

Rob: A really cool client we worked with in the southeast United States, we’re doing a growth strategy for the family owners, and [00:14:00] I’ll never forget the patriarch who was like in his early eighties at that time. He sat us down and he said, “Boys, let’s get this straight. Here, our priorities are to survive, profit and then grow. If we get those reversed, we may not have a family business in the next generation.”

And for a guy who was schooled in total shareholder return and so much of it’s driven by your growth, I’m like, Wow, it is fundamentally different than if your first instinct has to be and is survival instead of growth, it changes all of your investment things. It’s so interesting when CFOs come into family businesses from public companies or from private, they have to be retrained, just retrained about what the priorities of the family owners are.

Joe: So, we talked about at least one factor that contributes to whether a family business survives, and that’s the stress of actually trying to plan things with your family. Another one that you’ve mentioned is [00:15:00] mismatched expectations. Can you talk a little bit about that?

Josh: Sure. This is again another one of those things that people say about family businesses, which is that families grow faster than businesses, so therefore a family business is doomed to fail because at some point the size of the family will outstrip the ability of the business to support it. And people will have treated that as if it’s sort of like an iron law and, in reality, it reflects some choices that were made over the years because, yes, that’s true if the family lives off of the business, their lifestyle depends on the business day in, day out, and lifestyles go up rather than down across generations, which is oftentimes the case, then it’s just pure math, the families are growing at 5 to 10% a year if you kind of look at it over time. Businesses struggle to do that, so therefore you’re going to have that problem.

But, again, that’s where the expectations come into play because [00:16:00] that’s a choice. Should family members actually expect to live off the business or do you expect them to find other ways and treat the dividends they get as a nice bonus to buy something, to buy a new car, or maybe if it’s a great year, to get a new house, but not to treat it as sort of like the foundation of the family living on.

So, really, a lot of it is about getting those expectations set correctly. If you want the business to be able to invest and continue to invest for the longterm then you have to certainly be very careful about how those expectations are set about money coming out. And when you see that mismatch, that’s when family businesses get in trouble. The Wall Street Journal is a great example of that, where the family lived off of a very profitable business, a growing family over time, and then the business actually, as the digital came in and disrupted newspapers, it was no longer as profitable anymore. And so the family was in a position where they either had to drastically cut their lifestyle or [00:17:00] drastically cut the reinvestment in the business, putting them almost in a no-win position that Rupert Murdoch took advantage of and made an offer that they really felt like they didn’t have a choice, but to accept.

Joe: Yeah. Interesting. I think one of the things you talked about, or we talked about earlier was the dividend policy and debt are two of the things that families have to grapple with, and that often leads to their demise. Can you talk a little bit about that?

Rob: I’ll mention debt first. So, you go to business school. I remember business school and they they’d say, “Oh, look at all of the great benefits of leverage. You can get a much higher return on equity. Interest payments are tax deductible.” So, you come out of business school saying, “Lever up, baby.” and there are also these LBOs going on.

You go into the world of family business, and it’s so, so different. Many of our large clients effectively have zero debt. And in fact, we had one client, it was in the [00:18:00] agricultural business, and they had zero debt and they had two full years of operating expenses on their balance sheet. And we’re like, “This is not what we learned at business school.”

And they said “The reason we’re a client,” meaning the reason that we’re still in a business in this incredibly cyclical agricultural business, “is that we have this buffer. And if we had a lot of debt, we’d hit a dry spell, the business would go down and who would own it, not us, but the banks.” So, if survival is first on your list and not profit, survival is first, your whole attitude towards debt…

Now, we do work with clients who have had heavy debt levels. So, not every family business is like low debt, but I have to say, if your objectives are survival first, your debt policies are typically very  

Raza: Rob and Josh you’ve been advising families for [00:19:00] many years and you’ve now writtenthis wonderful book called Family Business Handbook. In the course of putting this book together, did you learn something from a governance standpoint that maybe surprised you?

Josh: I think it’s less of a surprise per se, and more really of a crystallization of something that we’ve been working on. When Rob and I joined the field

in family businesses, there’s a real focus on trying to manage the family and creating these sort of family councils and family constitutions, but the real goal is ultimately to make sure that the family wasn’t really disrupting the business, so to keep them over here.

That’s an important part of the puzzle is to make sure that there are some boundaries between the family and the business, but what we’ve really found is that what makes the fundamental difference between those that survive and those that don’t, this has really crystallized as we were writing the book, is ownership.

 talked about ownership a lot over the course of this podcast and it’s interesting, ownership is not something we talk [00:20:00] about that much in the business world. It’s usually left for the lawyers to sort of look at the shareholder agreement or the corporate bylaws. That’s where ownership sits.

What we found is that actually ownership can’t just sit in a document because you have the owners who are present and they’re people. They’re not just sort of investing in thousands of different companies, they’re invested in this particular company. The rights that come with that ownership are profound, the ability to influence the company in ways that are positive and negative are fundamental and learning how to effectively step into that role as owners is sort of the essence of the work that we do and the essence of the book that we set out to write.

Rob: What we learned was governance is a lot about decision-making and it’s like the model of decision-making and US capitalism, typically, the core decisions are made by the board and the CEO.

What we find in family businesses is they’re missing the fact that the core decisions are [00:21:00]really made at the owner level in family businesses, not in publicly-traded companies, if you don’t like what’s going on at GM, you sell GM and your Facebook, you’re out here. Here you’re in, and it wasn’t really hard to sell. So, you’re going to work really hard to make the owner decisions, the right decisions. And if they get those things right, you’ve got a chance. If you get the owner decisions wrong, there’s a big chance that the whole business is going to governance is a surprising thing.

Raza: Yeah. In your book, then you have come up with the concept of the five rights of the owners. Can you talk a little bit about that?

Rob: Yes, Josh, do you want to go?

Josh: Sure. Yeah. And this is what we’re saying is that what ownership ultimately when it comes down to it, what does ownership mean? Ownership is the right to do something that no one else has the right to do.

So, if you own your home, it means that you get to make decisions, like what color am I going to paint the outside? Who can come in and who’s not allowed? When am I going to sell it? There’s a series [00:22:00] of decisions that you get to make that no one else gets to make, unless you explicitly give them that choice.

So, that’s what we talk about that we find

in family business, and really in all businesses, there are these five rights that come with ownership and they are just broadly: the right to design, which is basically to say, what kind of a family business is this? What are we going to own together? Is it just an operating company? Are we going to have an investment vehicle, a foundation? Who gets to be an owner. And how do the owners share control? Do we all share it or does one person have all the control, even though we all benefit economically from it?

You have the right to decide, which is to basically make all the decisions about how things work in that company and how you want to delegate authority across the rest of the family business.

You have the right to value, which is how you define success, as Rob said, in a public company it’s all about total shareholder returns. For most private family businesses, they care about a lot of other stuff. Oftentimes even more than the returns that are going to shareholders.

You have the [00:23:00] rights you inform, so you get access to information, and so you get to control communication across the family, the business, the public. What do you want to do with that? How do you use that information to build relationships?

And then lastly, you have the right to transfer, which basically means if you own something you get to decide who gets it next. Do you want to sell the business, or do you want to pass it down to the next generation? If so, in what way?

When you kind of look across those five rights, the ability of the owners to influence everything, both the business and the family, it’s all there. It’s all in that role of the owners.

Joe: Is it fair to say that a lot of the work you do with families does focus on the rights of owners because it’s not necessarily intuitive to business people?

Rob: Yes, our work goes through the owner room at some time, I would say almost always. And as you’re suggesting, Joe, a lot of it is because these rights are thought of, as Josh said, the lawyers do that, and we say, “No, actually, they’re the essence [00:24:00] of having a business go across generations and last for a long time or getting these decisions right.”

Getting these decisions right actually has a lot to do with the conflict that you might describe as family conflict, but it’s actually most likely part family, but a lot that you’re disagreeing on some things that are implicit in the way that you’re owning. Let’s say, your dividend policy, how are we doing dividends?

So, we really try to get the owning families together, give them a framing of the decisions on how to make them and show them options. Nothing is perfect about what the decisions they’re going to make, but just show them the options that they understand the trade-offs that they’re implicitly making now and making them explicit so they can make them better.

Raza: Rob, you just referred to the owner’s room, and it looks like there’s actually four rooms or a model around thinking about the decision-making happening in those four rooms. Talk about that concept as you describe it in your book.

Rob: Yes. One of the concepts that [00:25:00] is most powerful with family businesses, we call the four room model and we developed this through our client work. They really taught us that they’re in governance. How you’re making decisions in these very complex, large family businesses.

It’s helpful to think, first, there’s a management room and we all know about that. There’s a CEO. Hundreds of decisions are made every day. There’s a hierarchy; hire, fire, all of this stuff. That room reports to typically the boardroom, and you can vote, but that shouldn’t happen very often. And there are only a few, but every decision that the board should be involved in is a make-or-break decision for the firm. It’s about hire or fire CEO. It’s about approval of strategy. It’s these things.

Then in family businesses on top of the boardroom sits the owner room, and up here, again, very few decisions, but this is about the longevity of the firm. These are the five decision rights that Josh mentioned earlier.

Here, typically, it is the owners, and [00:26:00] we think what’s being traded in this room isn’t the competency that’s traded in a management room or the wisdom in a boardroom. It’s actually power and influence. It’s the power that if 51% of the voting shareholders do it this way, that’s where it’s going to go. But it’s also the influence that if you stick it to your sister and she goes to her dad, oh, it may come back to haunt you somewhere else.

So what part of what we say is the owner room needs to have both the vote, the 51% we talked about, but really important to have the voice. Sometimes it’s okay to be over voted if you had a voice in the matter and people have taken seriously what you have to say.

And the fourth room is as important as the other rooms, which we call the family room. In the family room, all the family is invited and non-family is not invited. What’s traded in this room isn’t power and influence, it is typically emotions. It’s about the next generation, nurturing, developing them, having them build a connection with each [00:27:00] other, having them build a connection to the family, developing them to be the talent, to serve the business, or maybe the board or the owner room at some time.

When we share this framing with family businesses that we’re just meeting, frankly, many are very thankful. They’re like, “Oh gosh, we’ve been operating in this loft where I think dad’s talking to me, but he’s talking as an owner, but he’s also the CEO. I don’t know what’s coming at me.”

By saying we’re in the owner room now, and we’re going to be talking about, “Oh no, that’s actually an operational issue that you’ve brought up. We’ll table that for later,” it gets the right people talking about the right decision so they can make the kind of decisions that they face. Hopefully that’s helpful.

Raza: That’s like an excellent, very powerful concept that can sort out a lot of things. Then further, you also talk about the owner strategy triangle. What is that? And how does that help family businesses think about the long term.

Josh: Yeah. So this kind of [00:28:00] goes into when we’re talking about the five rights, and one of them is value, which is sort of what do you value? How do you define success? And in a private company, you get to define that for yourself. You get to choose your own adventure. And so this is a way of thinking about those choices that we’ve developed to really highlight the trade-offs that you have to think about as you’re choosing what adventure you want.

And so what we first say is from an ownership perspective, there are three main things you would want. You could want to grow the value of the business that Rob was kind of talking about as the sort of the shareholder returns, let’s go from a million to ten million to a billion and so on.

So, growing the value of it. That’s something you could want as an owner, and you might want to do that just because you want to be richer, or maybe you want to influence the world and you see your business as a platform to do that.

The second thing you might want as an owner is liquidity, and here we mean taking money out of the business. So, you might want to do that because you want to lead a nice lifestyle or you want to give it away to charity. Or you want to have something that is yours and not belonging to your entire family.[00:29:00]

And the third thing you might want is control, and control is sort of like you have it until you give it up. So, if you take on an equity partner, you are giving up some level of control. If you take on outside debt, you’re giving up control because now someone else is in the room with you and has some influence over your decisions.

And again, control you might want because you don’t like answering to someone else, or it might be because you have a certain way of working that you’re convinced that if someone else had influence over it, you wouldn’t be able to treat your employees a certain way or make decisions and you’d be forced to operate by a certain set of standards that you don’t want to do.

So, those are the three main types of goals that you can want as an owner, and you could want some mix of all of them, but the idea behind the triangle is you put each of those as sort of a point on a triangle and realize that actually it’s hard to get all three of those at the same time, and in fact, one way to understand those choices is to say that you can actually focus on any two of them, but at the expense of the third.

For example, [00:30:00] the most common path to building a successful family business is the mixture of growth and control. So, if you look at the largest family businesses in the world, most of them have been built in exactly the same way, which is that they make a dollar and they take 99

cents. They give themselves enough money to pay the bills and they put 99 cents right back into the business. They do that over and over and over again until they’ve built something very significant.

Well, if you want to do that, you can, but you can’t take out a bunch of money from the company to do it. So the growth and control is at the expense of liquidity. Or if you want to take the company public, that way you can continue to grow it using other people’s money and you could take your nest egg, you can take your money out, give it away to charity or do whatever you want with it, but you’ve given up control in the process, and round and round.

So, we found that this triangle is a really simple, but helpful way of thinking about the trade-offs that you have to make as the owners of a company.

Raza: Josh and [00:31:00] Rob, so these three are really powerful concepts from the five rights of owners, to the four rooms, to the owner strategy triangle. Collectively, who were your audience for this book,

 that this book would be the most helpful for? Who did you write it for?

Rob: We really wrote it for anyone who was associated with a family business. And that could be family owners. It could be in-laws, people who are married into a family business. It’s definitely for people who are on board of directors for family businesses, which we should talk about explicitly in a minute.

And then it should also be about people who’ve worked in family businesses. If you’re working in a family business or if you’re on the board of a family business and you don’t understand the owner strategy, like what trade-offs they’re making, you’re going to be so surprised by the decisions that are coming your way.

So, we were hoping that the book will help all of those types. The other thing [00:32:00] is we’re hoping that we’re finding that the book actually can have a broad reach,

and we work with certain clients at certain price point, blah, blah, blah. This book, if you own a two-person pizza shop, you and your daughter, the book is helpful. You should read it. You probably don’t need a board of directors, but how to manage conflict, how to do family employment right, that’s all in the book too. So, it really reaches more than half or it should reach more than half of the businesses in the world.

Raza: Excellent.

Joe: Let’s talk about leadership transition, in a family business. What are the biggest challenges in

a family making it leadership transition to the next generation where there is no clear next leader?

Rob: I’ll say one thing and

 then turn it to Josh. : Getting to the next generation, the hardest thing often is the current generation. It’s like letting go of

the reins and really talking. We have some clients who it’s fairly easy for, but [00:33:00] they’re almost the exception.

For many people who are inexperienced, and frankly, a very successful behavioral set of what it takes to be successful in a company environment, the centerpiece is hub and spoke. I make the decisions here, and to give that up, it’s super scary. It’s psychologically very challenging for some people.

We have this 93-year-old matriarch who owns and controls a multi-billion dollar company, and she’s not willing to give up the reins to her daughters and sons, nor even to her grandchildren. She’s still in the seat of power in the whole system. So, the first thing is helping that current generation of leaders with what do they really want. Do they really want a few more years of this in the seat, or are they really interested in helping their next generations assume leadership? And there are a lot of tools that we can talk about in there, but that’s one of the things that we’re always looking at.

Joe: Well, one of the [00:34:00] things you said when we talked earlier was it’s not just a job. The person that’s been running the family business is not just in a job. It is his or her identity because they’re really living this job. And I think that gave me, and I think would help give people a perspective of why it’s so hard to let go.

The CEOs of companies might have some trouble, non-family companies, but it’s just not the same. And if you look at it the same way, you might miss the challenges that these leaders have in finding that the next five or ten years or whatever it might be as they phase out.

Rob: That’s a great point, Joe. It is their narrative and maybe it’s been their narrative since they were five years old, is that they wanted to be the controlling owner or CEO of their family business, and their narrative probably never got to that final few chapters about how they’re going to relinquish control over time.

Some do it, [00:35:00] and some do it with such aplomb, it’s really quite amazing. We’re trying to learn from those people about what it is that gets them to the other side of that transition.

Joe: So, what is some of the things that you’ve helped leaders do to make this transition? What are some of the glide paths that they find? What combination of things will work for some of these folks?

Josh: Sure. Yeah. Well, I think you’ve got the essence, the idea there. We talk a lot about the climb path the way up to the top of the ladder. We don’t talk a lot about the way down or the way somewhere else. And I think that’s part of the essence of it is that if you’ve been in this position of leading a family business for decades, maybe your entire adult life, you’re not just going to quit that and play golf. In most cases, you need some place to land, some place to go to.

I think really trying to figure out what that is and helping that leader to find what is the next thing can be really helpful to, not just to them and finding some [00:36:00] meaning beyond the role that they’ve had for a long time, but opening up the space for other people to step in and really thinking about what does that look like. Sometimes it’s moving up to the board and playing more of a governance role and bringing their wisdom and insight there. Sometimes it’s going into something charitable and giving money away. Sometimes it’s still staying in the business, but doing the thing that they’re really passionate about.

I think of one family business that we worked with where there was a leader that was having trouble letting go, but it turned out that what he really wanted to keep a hold on was the acquisitions part of their business. He loved the deal game. He’s a deal junkie and just love buying businesses so on. He didn’t really care about running them. He never really liked that so much. He did it because he had to.

His son, by contrast, was fantastic at that, just had a real expertise in that, and so part of the transition was really putting the current leader in that position to say, “You can still do that. We’ll let you. We’re going to put a team to help you with [00:37:00] sort of working on these deals. We want you to do that as long as you’re able to. And, by the way, all that management stuff, the stuff that’s like 95% of actually running the business, let us take that on for you.”

It really helped to sort of have that person step into a role. So I think the whole notion of just stepping aside is going to be really difficult for most people. It has to be going somewhere else, finding some other way to fill that gap, to identify a new identity that they can step into as opposed to just that sense of loss that comes with leading a role that’s meant so much to them.

Joe: Right. So, let’s talk about boards of directors for families. One of the things that I observe is that a number of family businesses have boards of directors that are all family members. And what I usually say to them is that’s nice, but it’s not really a board of directors. So, what do you think about that? Is that a little too harsh or do you think it really does require, in almost every instance, independent [00:38:00] members to make that board really operate properly and effectively?

Rob: Board of directors is a complex issue as you guys know, but for purposes, it’ s one of the most important ideas, like why do you want a board of directors? And if you get family owners talking about that issue, what we find is most often, not always, but most often, they’ll get to a place that they’ll say, “What we’re looking for is oversight, thinking long-term about strategy, some competencies that we don’t have as a family right now.”

And they kind of backed themselves into, “Gosh, it might be useful to have independence, either advisors or directors,” but then they stop and they say, “Oh, wait, but that would mean we might have to give up control.” And then you can talk them through, “Well, no, you don’t need to, because owners are the ones who elect the board members and if they’re non-family board members, independents that you don’t like, then you can get them off the board by voting them off. Or you can have advisors [00:39:00] rather than directors on your board, who are really outsiders.”

So, we find that it is super useful for most family businesses to have independent advisors or directors. And if you think through purpose to capabilities to where you still have control, it can be an easier journey to take this step to those

first few board members.

Josh: And beyond the competency, the value that comes with independent members is that it changes the nature of the dialogue in the boardroom. It gets it away from being a purely family, which in the family room, you want the family, the messiness and the emotion, and all of that, but that’s what you want. You want people talking about what matters to them and all that kind of stuff in the boardroom. It really helps to have a different kind of conversation and that the independent members help to change the nature of that conversation.

They’re also really useful for one of the topics that’s the hardest to get right in a family business, which is family employment. I mean, it’s one of the things that causes the most conflict in a family businesses [00:40:00] is who gets a job, who gets paid how much, who gets

promoted, who gets the CEO spot. And it’s really hard to navigate those issues purely internally, because it’s hard for family employees to get real feedback from non-family members or family members, and having independent directors who can create kind of like a family employment committee or other kind of support structures or help in that big decision about who should get the CEO can just be super helpful.

So, when you add it all together, Rob and I don’t believe in best practices just because for almost, without exception, for every time you say, “Oh, here’s what this really great family business did on whatever topic, on dividend policy, on family employment or whatever, we can show you a family business that’s been equally successful and done the opposite.”

But this whole issue, I think, of independent directors is about as close to a best practice as I think we would feel comfortable saying. Once your business gets to a certain size, the value you get from the right [00:41:00] independent members is almost always going to be worth the time and investment that you make into them.

Joe: So, it really is a best practice.

Josh: Almost. getting there. approaching that place, but you have to do it right.

Rob: Yeah, if you don’t have your owner room in good shape, you shouldn’t be getting yet the independent directors because they’ll come in and they’ll put what they think you want to do with your family business. You need to get your own owner strategy right before you let others that are independent to maybe tell you what they think you should do with your family business.

Joe: Interesting. Yeah, Raza, you may want to talk about off boarding?

Raza: I would. So, you alluded to it a little bit, so it can come in two flavors in this case where you’re off-boarding an independent, and that might be a different scenario, but there is also a possibility of scenario where you need to off board family members off the board. [00:42:00] It’s always a hard topic. We’ve talked about it with a number of guests and all have come up with really good techniques. What have you seen? And what in your view are in each of the scenarios, the best way to handle off-boarding?

Rob: It’s always easier to get board members on your board then off

your board. Of course, I think you’re seeing the same thing. Some of the best practices I’ve seen is the owner group gets ahead of the issue with policy decisions around term and term limits. And if they’re putting on the first independent board members, typically will say, “We’re hiring you because this is

the purpose of the board, it’s these capabilities we’re looking at. And we’re assuming that it’s going to be a two-, maybe three-year term.” And they put an expectation of leaving rather than expectation of staying, and maybe they’ll re-up you up, but they pretty aggressively rotate their independents off, so what they don’t want is an independent member who has been on the board for 15 years.

I have one [00:43:00] client who loves that. I don’t think it’s that functional of a board right now, but most of the clients are looking for some sort of rotation over time, just because of the experience that they need With family members, again, it depends on the size of the family. We have some families that don’t have enough, so they actually are there for a long, long time.

But a lot of it then comes down to, with my experience, I’ll be interested to see what Josh says, is they again go on policy, which is, if we have a big family, do we have a few things? Do we have terms and term limits? Two is what are our qualifications around development for next generation coming on the board, and three, and really important is, what are the feedback systems on the board of directors?

So, if you have a good feedback system led typically by the chairman or the governance committee about what the board needs and individually how board members are contributing and how the board overall is doing, if you have some members who aren’t contributing well, it is the responsibility of a chairman to provide that [00:44:00] feedback and maybe walk the family members to the right decision for the family business.

Josh: I agree with everything Rob had said. I would just add that it’s important to create that pipeline of who’s coming in next, because that does create a little bit of pressure to have those conversations, and you can do that by having sort of associate directors, people that are not full members, but they come into attend board meetings or having that training program for board members, the next generation, the next group coming in.

So, I think developing that strong pipeline helps to create a little bit of that impetus in the family to say, “Okay, you’ve had your turn. If our goal is to make this a business to last for generations, we have to create space for the next generation to start to come in.” It’s a hard conversation, but at least you’re appealing to that sense of purpose of the “why” behind what is a really hard conversation.

Joe: Yeah, it is a hard conversation, but as you’ve both pointed out, it’s one that has to be had, whether it’s a family business or any other kind of business.[00:45:00]

Josh and Rob, it’s been great speaking with you today. Thanks so much for joining us.

Rob: Thank you for the, great conversation. I think we both really appreciated it. We went into some areas that aren’t often covered when we’re talking on podcasts and stuff, so thanks for the insightful questions and thank you for listening.

Josh: Yeah, and it’s such an important topic so we’re delighted that you’re pursuing that boards play such an important role in the success of all businesses, but especially family businesses and demystifying some of the ” how you do it well” can make a real difference in their success, so keep it up.

Joe: Thanks.

Rob: Thanks, Raza and Joe..

Joe: And thank you all for listening to On Boards with our special guests, Josh Baron and Rob Lachenauer. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: Also the easiest way is to go to our website, onboardspodcast.com. That’s [00:46:00]onboardspodcast.com. All of our episodes are available. And if you have questions, comments, or suggestions for us, please we’d love to hear from you. You can do it right on the website.

Joe: Please stay safe. Take care of yourselves, your families, and your communities as best you can. Raza, you take care, too.

Raza: You too, Joe.

Joe: Thanks.

29. Marcus Peacock on the impact of the Business Roundtable

Marcus Peacock is the Chief Operating Officer of the Business Roundtable, an association of Chief Executive Officers of America’s leading companies.  In this episode we discuss the Business Roundtable, its highly publicized Statement of Corporate Purpose (August 2019) and what it’s like to administer the BRT board of directors, composed of more than 20 CEOs of large US companies.

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

Marcus Peacock bio

Link to Statement of Corporate Purpose

Link to BRT website

Quotes

The purpose of the Business Roundtable is to promote policies that will result in a growing and thriving economy for everybody in the United States. We ar            e made up of the CEOs of large US companies. So, if you think of a large US company, their CEO is probably a member.

The CEOs are the members – not their companies – and we help them develop and formulate policies that we think will meet the mission of the organization, and then we help them advocate those policies at the federal level – with the administration or on Capitol Hill.

The BRT is an issues organization, not a partisan one.  We don’t give campaign money. We don’t have a PAC, but there are issues that our members care a lot about that, we think, if our policies are adopted, it’ll help the economy grow and people find jobs and help out the general welfare.

Big Ideas/Thoughts

The BRT Statement of Corporate Purpose (8.8.19)

See full text below and here.

Just so people know, it states that a company, and particularly the CEO of the company, has a commitment not only to the shareholders of that company, but to the customers, the employees, the suppliers, and the communities in which that company works. Of course, there’s more detail in the statement.

In 2018, some of our members were receiving criticism from both the left and the right of the political spectrum based on a stereotype of businesses where it’s all about maximizing short-term value, even if that hurt suppliers or communities or employees, and they felt “that’s not the way we do business” and “we need to do something more than just push back when we see these people making these assertions.”

The statement sets a standard that is very much about long-term value, and I think some of the criticism we received may miss that point. You’re not going to have, in the long-term, a thriving organization that doesn’t treat its customers, employers, suppliers, and communities well.  All those things are necessary.

Criticism of the Statement from the Wall Street Journal

JA: I wanted to ask about criticism that you’ve got from the Wall Street Journal and the pushback that you’ve received.

MP: They were saying, “No, this is about your shareholders. They are the people who are taking the risk. They’re putting the investment in. This isn’t about these other stakeholders who may have completely different objective functions.”

And our response to the Wall Street Journal is “well, so you’re against the long-term.  You make commitments to these other stakeholders because you’re trying to build this long-term value. If you’re not interested in long-term value, then, yeah, go ahead and screw your suppliers, you get out of them what you can today, but pretty much from now on, they may be broken down and gone. That’s a good way to get short-term value, it’s not a good way to build up a company for the long term.”

Momentum Behind Change in Corporate Perspective

JA: I believe some of the momentum is driven because institutional investors who look at the failure to focus on the long term as a risk, and as long as there’s that risk, that creates a problem for the company.

MP: It does mean that, particularly for a signatory, people should be able to go to them and go, “How are you implementing [this]? How are you living up to the words that you signed on to?” And the fact is, they are.

Impact of Statement on BRT

Some CEOs who had not been members in the past have now come to us since the statement was put out and said, “We would like to join BRT.” In some cases, I know the statement made a difference.

And some of the increased interest in BRT comes directly from actions our members took during the pandemic and also in the wake of George Floyd’s murder. Our members have taken actions which people see demonstrate that they’re living by the words that they’d signed on to.

Managing a Board of 20 Top CEOs

JA: I’d like to talk about your role as COO – one of  your jobs is to manage the BRT board. Managing a board is always a challenging job but managing a board of 20-plus CEOs of the biggest companies in the US must be, let’s say, particularly interesting. Tell us what that’s like.

MP: Well, I’ve learned more from them than they learned from me. But for me, because they know what they’re doing, in some ways it’s somewhat easy, although their expectations are high.

The biggest job for me is to make sure that every minute of their time related to the board of directors is something that is of value to them – – including allowing them time to talk to each other, in a social way, which is something they do value because they don’t often get to hang out with each other

Also, to make sure they’re not dealing with anything that’s too trivial, and that they’re given the information that they need so they can have an informed discussion and come to a decision that’s going to be right for them.

JA: Well, I think that’s the perfect confluence of all the things that you want for great governance: a group of people who are really good at what they do, who have high expectations, who want to use their time well, and from what you’re telling us, willing to work hard at the job. They’re not just showing up and show me a PowerPoint, they’re really digging in and asking tough questions.

Every board, that’s the challenge. You have high expectations for the board, but that means that whoever’s organizing it – the chair, senior management, whoever, really needs to give a lot of thought to how are we going to take best advantage of this very valuable time of our board members. 

Girl Scouts National Board of Directors

I have two daughters, they were girl scouts. My wife was their troop leader. My wife was a gold award girl scout. Her mother was there, too. I was a volunteer. It’s just a great organization. They have a great mission. Their mission is to build girls of courage, confidence, and character to make the world a better place. I mean, how can you beat that? I feel privileged to be on that board.

I think that they have done a tremendous job. I’m forgetting the exact number, but I did read that a very large percentage of the women fortune 1000 CEOs were girl scouts at one point in their lives and in fact, a significant number of the members of Congress and senators who are women were girl scouts.

Transcript:

Joe: Hello and welcome to On Boards, a deep dive at what drives business success.

Hi, I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization; its board of directors or advisors, as well as the important issues that are facing boards, company leadership, and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Marcus Peacock. Marcus is the Chief Operating Officer of the Business Roundtable, an association of Chief Executive Officers [00:01:00] of America’s leading companies. Among his duties as COO is to manage the Business Roundtable’s board of directors, which consists of more than 20 CEOs of those leading companies.

Raza: Marcus has held a number of high-level posts in the US government, including being the deputy administrator at the Environmental Protection Agency, the EPA, and the associate director for Natural Resources, Energy and Science at the Office of Management and Budget, the OMB. Marcus also served as a staff director on committees in both the US House and the Senate.

Joe: In addition, Marcus has served on a number of boards of nonprofit organizations and currently serves as the director on the board of the Girl Scouts of the USA. Welcome, Marcus, it’s great to have you here today.

Marcus: Well, Joe and Raza, thank you for letting me part of the broad range of guests that you have on your show. I look forward to it.

Raza: Marcus, please give us a [00:02:00] brief overview of the Business Roundtable, its purpose, and how it conducts its business.

Marcus: The purpose of the Business Roundtable is to promote policies that will result in a growing and thriving economy for everybody in the United States. And as you indicated, we are made up of the CEOs of large US companies. So, if you thought of a large US company, their CEO is probably a member.

We have over 230 members right now, and they are the actual members. It’s not the companies that are members, but it’s the individual CEOs, which makes us a bit different. And it’s also, of course, across industry, so we have CEOs of companies that do everything from run retail shops to making tractors, so it’s an unusual in that respect.

So, the CEOs are the members and we help them develop and formulate policies that we think will meet the mission of the organization, and then we also help them advocate those policies at the federal level, so with the administration or on Capitol Hill.

Raza: Marcus, because this [00:03:00] advocacy is for the CEOs and represents a pretty significant swath of the US economy, how do you keep it apolitical or bipartisan?

Marcus: Yeah, that’s a great question. So we are an issues organization, not a partisan one, and frankly, I’m surprised the number of CEOs who don’t necessarily have a political affiliation, they would prefer, many of them, to just stay out of Washington.

But there are particular issues that their interested in. So we’re not Republican, we’re not Democratic. We don’t give campaign money. We don’t have a PAC, but there are issues that our members care a lot about that, that we think if our policies are adopted, it’ll help the economy grow and people find jobs and help out the general welfare.

 I’ll take the Trump administration as an example. We supported many of the Trump administration policies on tax and regulation, for instance, but we were very critical of policies that they advanced on immigration or trade. And that can confuse some people in Washington because they’re used to dealing with probably more partisan organizations. But I think a lot of members of [00:04:00] Congress and eventually administrations do understand where we’re coming from, and and we find that what best serves our mission is to make sure that we don’t become partisan.

Joe: Marcus, the Business Roundtable issued a landmark statement regarding corporate purpose in August, 2019. Could you tell us a little bit about how this came about? What was the process to having it issued?

Marcus: Yeah. So the statement on the purpose of a corporation, which as you mentioned, came out in August of 2019. First of all, I encourage people to actually go read it. It’s only 300 words long. It’s gotten a lot of coverage, but some people read out of it things they don’t like, or for whatever reason, they don’t want to see, they read into it things that aren’t there, so it’s good to go back to the original document.

And just so people know, it states that a company, and particularly the CEO of company, has a commitment not only the shareholders of that company, but to the customers, the employees, the suppliers, [00:05:00] and the communities in which that company works, and there’s, of course, more detail in the statement.

But in 2018, some of our members noticed that they were receiving criticism from both the left and the right of the political spectrum, people that we respect, and that criticism was based on a stereotype of businesses where it’s all about maximizing short-term value, even if that hurt suppliers or communities or employees, and they felt that’s not the way we do business and we need to do something more than just push back when we see these individuals making these assertion.

And so, actually But in 2018, some of our members noticed that they were receiving criticism from both the left and the right of the political spectrum, people that we respect, and that criticism was based on a stereotype of businesses where it’s all about maximizing short-term value, even if that [00:06:00] hurt suppliers or communities or employees, and they felt that’s not the way we do business and we need to do something more than just push back when we see these individuals making these assertion.

it received much more coverage than I think at least I expected and. I think was effective in gathering people’s attention and better understanding at least what the CEOs of BRT felt the purpose of a corporation was and correcting the image that some people were developing out there.

Now, that said, there were definitely people on the right and people on the left, who at the time, and still criticize the statement of a purpose of a corporation, either on the right, because they consider it a statement which is from a group of woke CEOs that shouldn’t be meddling in issues that they’re getting into, and on the left, because, well, they don’t necessarily mind what it says, but they think it’s whitewashing, that they don’t really mean what they say. And all I’d say is go back to the original [00:07:00] document and compare it to what CEOs are actually doing, and I think it does stand up well.

Joe: We’ll get into that, but I will say that if you’re getting criticism from both sides of the political spectrum, that’s a good sign.

Marcus: Yeah. Well, Raza mentioned I’ve worked at EPA, that was sort of a test at EPA. If we were being criticized on both sides, we were probably around the right spot.

Joe: So, the term “stakeholder capitalism,” I don’t think appears in the statement, but a lot of people, when they refer to that statement, use that term, because it is a broad look at all stakeholders who have an interest, and so I find that interesting. But what I read when I see this is that it’s focused on long-term success of a company, and that isn’t really a shift, but the statement feels like it was a moment when US business really was prepared to say something a little different than [00:08:00] maybe most people thought was going on.

Marcus: And I think for some of our CEOs, they felt there had been an evolution which had gone unnoticed, and so you could say there was a watershed here where suddenly people said, “Oh, it has changed.” Whereas for the CEOs, that was a slower change.

But there are probably BRT CEOs, and certainly CEOs that are not members of BRT that do not necessarily behave this way, do not think about the long-term shareholder value, and I think our CEOs felt that this not only maybe express what many of them were already doing, but was a model and a standard that other CEOs could look to or be held accountable to.

So, I think that’s another beneficial aspect of other than just being descriptive. It does set a standard. And as you point out, Joe, it is very much triggered about long-term value, and I think some of the criticism we received may miss that point. I mean, you’re not going to have, in the long-term, a thriving organization that doesn’t treat its customers, employers, suppliers, and [00:09:00]communities well. All those things are necessary.

Joe: Well, it seems like part of the momentum is driven because institutional investors, for example, look at the failure to focus on the long term as a risk, and as long as that’s a risk, which makes perfect sense to me, by the way, then that creates a problem for the company. So, if you’re not doing this, the people who are investing in you may not be so interested in investing anymore, and that seems like something that really would move the needle.

Marcus: Yeah. Well, I mean, I go back to the CEOs themselves. The CEOs I know and their boards are all focused on long-term value. They understand the risk of thinking in short-termism and that’s not what they’re interested in. They’ve made a conscious choice to avoid that.

There are CEOs who have explicitly made decisions that they know may, in the short term, drop their share value, but they are betting, at least the examples I’m aware of, it has turned out that it has increased it in the long term. It’s [00:10:00] made them more resilient, or after sort of the initial reaction has taken place, shareholders and others realize, “Oh, this has strengthened the company.”

Joe: So, I suppose the statement must be of help to companies and company boards where a CEO is doing that. And maybe there might have been trepidation in the past, but having the Business Roundtable come out and say, “This is what we believe might have helped companies where that momentum needed a little push.”

Marcus: Yeah, that was not the main purpose for doing it, but I think we came to realize that was a definite benefit. We’ve been approached after it was released. We have been approached by many people who I think would like to define what it means, and many of them already had defined in their heads and sort of imposed their definition.

I mean, we’ve had one senator who essentially wrote us and said, “Well, now you must support my bill that does X, Y, Z.” So, that’s their definition. But regardless of the specifics, it does mean that, particularly for a signatory, someone should be [00:11:00] able to go to them and go, “How are you implementing? How are you living up to the words that you signed on to?”

And another thing I know of our members is they do not put their signature on anything lightly, and in this case, that is particularly true.

Raza: So, Marcus, now about almost two years into the statement, what reaction is BRT getting on the statement and from whom?

Marcus: Well, that’s a great question, Raza, because it has been different depending on who you look at? First and foremost for us is the CEOs who were not members of BRT for whatever reason and often it’s just because of time, we do have in-person meetings at least pre-COVID and now post-COVID, if we can get there, there’ll be in person again, but they are required to show up to some of those meetings. So there’s a time commitment there.

But some of those CEOs who had not been members in the past have now come to us since the statement was put out and said, “We would like to join BRT.” In some cases, I know the statement made a difference. In others, I [00:12:00] guess it did, and then probably other things.

So, I think among the cadre of CEOs, it’s been something they’ve seen as desirable and beneficial, both those CEOs within BRT, as well as those who were not members. We live in Washington, DC. I think we’ve seen, as I mentioned before, reactions on the left and right, which at first were skeptical. I’m not sure we’ve diffused all the skepticism, but I have seen a softening just among columnists who write, particularly in the print media, as well as some of the political people on the Hill who said, “Well, show me”. And some of that comes directly from actions our members took during the pandemic and also in the wake of George Floyd’s murder. Our members have taken actions, which people see demonstrate that they’re living by the words that they’d signed on to.

Joe: Maybe we should talk about a few of the things that did come out of it. You mentioned in the aftermath of George Floyd’s murder, what are some of the things that happened that really did catch your attention and help [00:13:00] create more momentum?

Marcus: BRT has developed a slate of racial equity and justice proposals. But one of the first is actually on policing and police reform, and I think immediate reaction from some to that was why does the CEOs are they getting involved in police reform? That’s got nothing to do with business, which actually is not true.

I mean, we have some members. Well, I just mentioned one member, not by name, but for instance, they have a fleet of trucks and they noted that more than half of their drivers are black and they’re driving around all the time, interacting with the police on a somewhat frequent basis for whatever reason, and so this very much mattered to the employees of that organization, as well as other corporations have a similar story to tell.

But we also felt that a lot of employees care about what their company is doing in their communities and how they’re trying to make their communities better, and police reform, in particular, is an area that can benefit the communities within the United States, as well as the [00:14:00] employees.

And so, each issue is different, but this was an area where we thought BRT’s voice could be helpful, and eventually, help in terms of bringing more more people into the workforce and helping the diversity of the workforce, which again, serves our mission.

So, we have put together police reform for principles. We’re strong advocates of a bipartisan solution, which Senator Scott and Bass in the House, I think Senator Booker are all trying to work on right now, and we’re hoping to be able to push that through, but that’s an example of some of the actions we took afterward, which people have noticed is something that perhaps BRT wouldn’t have gotten involved in the past.

Joe: I wanted to ask about criticism that you’ve got from the Wall Street Journal and that the pushback that you’ve heard is: “so you’re not in favor of the long term.”

Marcus: Well, actually, it’s the other way round, Joe. They were saying, “No, this is about you shareholders. They are the people who are taking the risk. They’re putting the investment in. This isn’t about these other stakeholders who may have completely [00:15:00] different objective functions.”

And really our response to the Wall Street Journal is well, so you’re against the long-term because you make commitments to these other stakeholders because you’re trying to build this long-term value. If you’re not interested in long-term value, then, yeah, go ahead and screw your suppliers, you get out of what you can today, but pretty much from now, they may be broken down and gone. But that’s a good way to get short-term value, it’s not a good way to build up a company for the long term.

Joe: It seems like a very compelling argument. CEOs are not usually interested in statements of principle, but it sounds like this statement of corporate purpose really caught the attention of CEOs around the country. So, one of the things I wanted to ask you about is the impact it’s had on the Business Roundtable, but you started to talk about it earlier.

What are the numbers like? What has the response been? What has it meant to the Business Roundtable since that statement was made two years ago?

Marcus: Yeah, well, like many associations in Washington, DC when the pandemic started and became obvious this was going to be [00:16:00] a serious problem, we went back to our budget and I think that we planned on something like 15% reduction in membership and since then it’s increased by more than 15%, but it went completely the other way.

And again, I think the statement on the purpose of a corporation had something to do with that. But I also think there were other changes that were brought into place around the same time, because I think the statement was an outgrowth of a number of changes, which took place at Business Roundtable.

Jamie Dimon of JPMorgan Chase came in as a new chair. In 2017, and both he and the board worked on a number of changes including taking a look at our membership, and we put in for the first time membership guidelines. We’re a small organization, still we’re under 50 people, which is small for a cross-industry association in DC, but we were less than 30 people at the time, and there was a heavy reliance on consultants, and the board said, [00:17:00] “What we’d like to see is you bring in more expertise in house.”

So, we did that, and I think that gave us the heft and the expertise to do things like put together the statement, for instance, and craft that in-house and make sure the CEOs were happy with that. I’m not sure what would have happened just relying on consultants.

And there was a lot of other work like that. We’re organized in ten different policy committees, and I think, particularly, the change in in-house expertise made all of those committees stronger and probably able to do more work and more work in depth.

I think all of those things have attracted CEOs to Business Roundtable, such that in the end, after a few years, they see us we’re on the sort of outside looking in, saw the difference, and those CEOs who joined became recruiters for us, not because we necessarily asked them to, but because they would talk to their colleagues and go, “I’ve been at BRT for a year now and they’re doing some good stuff over there.”

Joe: I like the fact that the statement of corporate [00:18:00] purpose, it doesn’t reside in a committee, it’s kind of owned by the board. And in this case, since the board is all CEOs, that means the CEOs own the statement, and that’s pretty impressive, I think.

Marcus: Yeah. And that’s the way it has to be, but the ten committees, they’re all on the issue areas you would think a CEO would be interested in, tax, trade. We have an energy and environment committee, workforce and corporate governance.

But when we put the statement together, there was a conversation among the CEOs regarding how are we going to make sure people are aware of this, how do we measure it? And they decided if we continue to behave or make it obvious we’re behaving in line with the commitments we’ve made, be demonstrative, and if we think about how CEOs’ brains work, they’re very operational and so that’s what they’ve done.

I think if anybody looks, I mean, there are literally dozens of examples on our website of this, but if you look at how they’re actually performing and how they performed within the [00:19:00] last year and a half, they feel they are demonstrating it on a daily basis. And again, their colleagues see that happening, and I think are, again, drawn to the organization as they see these people are living by the words that they’ve committed to.

Joe: Can you give us a couple of examples of some of the things that really have impressed you?

Marcus: Yeah. Well, COVID was just really impressive. I guess I’ll start with it because I was given the task of helping organize that. But almost right out of the box, I mean, people have forgotten how important personal protective equipment was, the masks and the gloves and all that, particularly for caregivers in hospitals, but also first responders. We immediately stood up a method for companies to either produce or give/donate, whether it was money or actual PPE, to hospitals, first responders, teachers, and millions of masks and other pieces of equipment were donated to communities.

And it was often the communities in which they work, which makes some sense. I mean, Salesforce, for instance was tremendous. It wasn’t [00:20:00] just Salesforce, Bank of America, Hanesbrands actually started using, I don’t know if it was their underwear lines or whatever, and making masks that met the standards and donating those or providing them at cost. But a lot of hospitals, UCSF Hospital in San Francisco leaps to mind, they were completely outfitted by Salesforce who’s right there in San Francisco, but there are many other examples of donations that took place.

In fact, in some cases, a lot of those donations also went to hotspots overseas. We’ve just finished a tremendous effort in India. As you know, India just went crazy two or three months ago now, and our members organized sending ventilators, oxygen tanks, a lot of emergency supplies, hospital tents to India to help set up and provide relief there.

So COVID is a bit of one whole step, and I can’t leave COVID without saying what the pharmaceutical companies have done in both the development, production and the distribution of the vaccine, it’s just phenomenal.

So my favorite area is education and workforce. Right now, we [00:21:00] have an effort called the “multiple pathways initiative,” and this is exciting because what we found is there are a lot of people in the United States who can’t get jobs because they don’t have a particular credential, even though they may have the skills, and corporations over time, particularly just because they tend to be bureaucratic, for instance, have over credentialed job descriptions. So it says only those with a bachelor’s degree, a four-year college may apply or you need this particular certificate.

So, we have over 80 companies now that have committed to going through a set of actions, which will base hiring decisions on skills, not credentials. So if you can demonstrate you have the skills, whether it’s welding or accounting or whatever it may be. If you’ve got the skillset, they will hire you. So they’re decredentialing, for instance, position descriptions. They’re providing a transparent pathway for how you would advance in the company or where will you go into the company, and they are also producing training [00:22:00] modules, so that if somebody reaches their level of competency and their skillset, which they can prove, then it’s like, “Okay, you take this training module and pass out of that, here’s where you can go next in the company to advance.”

I think this is really opening up a lot of hiring and advancement for people across the country. And what you see also in that respect is, our companies are making commitments to hiring particular individuals. I know AT&T set a goal, not that long ago, of hiring 10,000 new employees from low- and moderate-income communities. I think they’re halfway to that. They’ve also signed onto the initiative. Walmart, I believe achieved its goal of hiring 250,000 veterans.

You see these commitments being made by the companies and it fits right into this commitment regarding employees and communities, which they’ve made in the statement of corporate purpose. So, that the education area is great.

Climate change is another one where we’ve just seen a spate of commitments. Recently, a lot of companies are making commitments to go to net zero by [00:23:00] a particular year or a certain reduction in greenhouse gases. And beyond that, the companies are doing a lot. Amazon has a $2 billion commitment in grants in venture capital to small companies, entrepreneurial companies that are sustainable in nature so that they either are net zero or even perhaps a negative greenhouse gas emissions.

So, there’s a lot of activities across the board. Again, I encourage people to go to the website. There are just dozens examples of what our members are doing and it’s added to almost every day, I think.

Joe: Well, the commitment to doing things for climate change has caught my attention. I had not connected it with the Business Roundtable. So, one of my questions is, how are you communicating that the Business Roundtable has a role in this? How are you getting that word out as opposed to, I heard Tim Cook saying what they’re going to do?

Marcus: So, Business Roundtable, actually, I think it was 2007, we were the first business association to acknowledge that climate change was a problem and needed to be addressed by business. The policy, which I think we released, think it was [00:24:00] last January, and this is George Oliver, who’s the CEO of Johnson Controls, who leads our energy and environment committee.

So we have a climate change policy. For instance, it supports a pricing on carbon and other efforts to reduce carbon emissions in the economy. And again, you can go to our website and read that, but we have some specific principles regarding climate change and how to handle it.

Joe: But are you trying to communicate the connection between what these companies who are members or what the CEOs who are members are doing in the Roundtable?

Marcus: No, none other than collecting those examples as examples of how our members are living by the statement of corporate purpose, but we don’t necessarily connect them to any provision we have in our particular climate change policy, for instance.

We may have members who don’t agree with all the policies we put out, but our members are free to go, and, obviously, advocate for policies on their own, but as a general matter, we do represent the majority of our members.

Raza: Marcus, it sounds like the statement itself has[00:25:00] dovetailed nicely and has boosted the conversation around the ESG goals for companies. Is that how it’s been seen at the Business Roundtable as well?

Marcus: Yeah, I think very much so. In fact, many of the examples that I think we’ve already posted have come from annual ESG reports of the companies, because a lot of our members have ESG metrics that they have put out and that they track and then annually report on.

Again, we’ve encouraged companies to have metrics and to be transparent and report on them. I think our CEOs want to be held accountable for the commitments they’ve made, both in general through the statement of corporate purpose, but also specifically, commitments they’ve made themselves.

We have been approached by many organizations and by other advocates who would like us to adopt a standard set of metrics, and we’ve talked about that, but when you’re dealing with everything from Ralph Lauren to Chevron, you can’t really come up with one set of metrics that’s going to fit everybody.

We do have some of [00:26:00] our members who have worked on a universal set of metrics, and we don’t oppose that. That’s fine. And I think they’re trying to get other companies to sign onto that, but at this point, for us, each of our companies has to decide what’s right for them.

Raza: Marcus, you briefly alluded to the other committees and other work that Business Roundtable does. I want to make sure that gets covered, and the statement has been tremendous, but what are the other areas that Business Roundtable advocates, particularly focuses or does its work?

Marcus: Yeah, thank you, Raza. Because right now, our number one priority is to try and get the bipartisan infrastructure package. It’s not legislation as of today, but we are spending millions of dollars on advertising, both across social media platforms, radio, television, I think print media as well and hopefully getting that bipartisan package passed.

So, infrastructure is our number one priority right now. We have a lot of concerns about another surge of COVID, so we have what’s called the [00:27:00] #MoveTheNeedle campaign that we’ve also been putting money into the Ad Council. We’re working with the Ad Council on that.

We’re looking very closely at that because the members are not happy with the progress that’s been made on vaccination, so we’re trying to look at what may be effective to get that kind of the last large group of holdouts, but how do you get them?

And that fits in the statement as well. So, for instance, many companies, AT&T as an example, they put up vaccination stations, not just in their facilities where their employees are, but in the communities in which they operate. So, they weren’t just offering it to AT&T employees, they were trying to make it as convenient as possible for their communities to get vaccinated, and there were other companies who did that.

So there’s COVID that were very concerned about. Tax, we and others, a reconciliation package being discussed, which will have changes in tax. We support a user pays for infrastructure, a user-pays approach, but there some tax proposals, which we may or may not like, or there are some things I think that the President has proposed that we don’t want, so we’re going to keep an eye on that, [00:28:00] but those are our priorities.

And then racial equity and justice, I mentioned police reform before and there are other reforms there that we’re very interested in that we think will help bring more people into the workforce.

Joe: I was going to say, I would think that the infrastructure, being bipartisan is a great fit for the board at the Roundtable because you’re non-partisan and the support from a bipartisan group of business leaders must really help create some momentum in Congress, I would think.

Marcus: Well, we like to think our voice is heard. Again, I mentioned we’re a small group, but we’d like to pick we’re small but mighty. But an important aspect of supporting bipartisanship is CEOs love more certainty than more uncertainty, and when bipartisan proposals pass and become law, they’re much less likely to be changed in the future.

Joe: Right.

Marcus: And that’s different for partisan changes in law. And so just from looking at it from a stability [00:29:00] standpoint, bipartisanship is something we very much support.

Joe: Well, I think you’ve kind of summarized why bipartisan politics is so much more effective in the long term than anything else, because you really want something that’s going to be predictable, dependable for the future, and without bipartisanship, it’s hard to know.

Marcus: Yeah. We are at risk of having policy whiplash. I think if Democrats control everything and if the Republicans control everything, then really in the long run, that’s not going to help anybody.

Joe: Not at all. So let me talk about your role as COO, and one of the jobs is to manage this board. So, managing a board is always a challenging job, but managing a board of 20-plus CEOs of the biggest companies in the United States must be, let’s say particularly interesting.

Tell us what that’s like.

Marcus: Well, I learned more from them than they learned from me. I mean, there’s more experience in any one of them that I’ve ever had on managing a board. But for me, because they know what they’re doing, in [00:30:00] some ways it’s somewhat easy. On the other hand, their expectations are high.

So, there’s a lot of things I’m not good at, but I’m a trained industrial engineer, that’s what my original training was, and I actually worked in a printing plant doing that, but they love efficiency. I mean, I think it’s just in most of their DNA, and I love efficiency as well. So ,my one job is to make those meetings as efficient and effective as possible, and attention to details is also just very important to them. So, the biggest job for me is to make sure that every minute of their time is something that is a value to them, whether it’s allowing them time to just talk to each other in a social way, which is something they do value because they don’t often get to hang out with each other.

Well, I had one new CEO approached me at one point, this was a couple of years ago, and said to me, “I never thought that there were a bunch of other people that have the same problems I have.” This was a CEO that didn’t belong to any associations, really. So, they really liked that time together.

But also when they are doing business, that the questions that they [00:31:00] need to answer, first of all, are questions they do need to answer, they’re not dealing with anything that’s too trivial. And secondly, that they’re given the information that they need to be able to have an informed discussion and come to a decision that’s going to be right for them.

Anybody who’s had to run a board, that can sound easy, but particularly, for a really smart group of people who are very well read, it can be a challenge, but it’s a challenge I really enjoy meeting.

Joe: Well, I think it’s the perfect confluence of all the things that you want for great governance, a group of people who are really good at what they do, who have high expectations, who want to use their time well, and from what you’re telling us, a willing to work hard at the job. They’re not just showing up and show me a PowerPoint, they’re really digging in and asking tough questions.

Marcus: Well, Joe, that is a great observation because A lot of boards are, particularly nonprofits or nonprofit, don’t have a small executive committee. We don’t have that. Ours is a working [00:32:00]board because CEOs, if they’re going to get engaged in something, they’re going to get engaged in it. They don’t join something just to have a name on a list. So, we couldn’t be much larger than we are because they’re very engaged and they all want to be part of the discussion, the decision, which is a terrific problem to have.

I’ll just also say, my boss, Josh Bolton, who is best known as the chief of staff to President George W. Bush. I worked with Josh on the White House Campus, and I think I’ve never thought about it this way, but a lot of people that work in the White House, their job is to make sure the time of the President is used in the most efficient way possible, and that skill set is exactly kind of what I tap into when I’m managing this board.

Joe: Yeah. Well, you know what, I bet your board really appreciates that.

No,

Marcus: so.

Joe: Every board, that’s the struggle. You have high expectations for the board, but that means that whoever’s organizing, the chair, senior management, whoever, really needs to give a [00:33:00] lot of thought to how are we going to take best advantage of this very valuable time of our board members? And so I totally get it.

Marcus: Thinking about it, we have quarterly board meetings. We start thinking about the next board meeting the day after the previous board meeting, because that’s really what you have to do.

Joe: That’s not surprising. With the group you have, that makes perfect sense to me.

Marcus: Yeah. And I got to say, another thing that surprises people is how nice this group of people is. Yeah. There’s always some folks who may be grumpy or whatever, but I think part of why they are, where are they are, is because how they treat people, and there is a humility there and an openness that you can have a conversation with them and change their minds if you can bring them better information.

So.

Joe: that is great to hear.

Raza: I guess you’re also on the board of the Girl Scouts of the USA organization. What got you to join that board? And can you talk about the experience with that organization and what are the [00:34:00] key issues facing that board?

Marcus: Yeah, Yeah, that’s good, Raza.

Given my day job, I have my finger on like one other board, one board, and the Girl Scouts came along. I have two daughters, they were girl scouts. My wife was their troop leader. My wife was a gold award girl scout. Her mother was there, too. I was a volunteer. It’s just a great organization. They have a great mission. Their mission is to build girls of courage, confidence, and character to make the world a better place. I mean, how can you beat that?

I feel privileged to be on that board.

They, like other nonprofit organizations, have been hit by COVID, like a lot of other organizations grappling with that, but also a board is a great place to be If you’re interested in constantly improving an organization. Because really the purpose to me of a board is to be thinking about how to make that organization thrive, how to make sure it’s meeting its mission, not just tomorrow, but next year and the year after that and the year after that. And if you’re standing [00:35:00] still, you will get run over.

So, to think about how do we keep achieving that mission of serving girls In the long term, because things are evolving out there. It’s a fascinating challenge, and with a great organization, that I think we’ll be able to meet that challenge, but it’s going to have to keep changing.

Raza: I think that they have done a tremendous job. I’m forgetting the exact number, but I did read that a very large percentage of the women fortune 1000 CEOs were girl scouts at one point in their lives.

Marcus: Yes, that’s right. And in fact, I should have the numbers off the top of my head, a significant number of the members of Congress and senators who are women were girl scouts. One of the great assets of the Girl Scouts is the alumni network, and so if there’s questions about how you tap into that and use that, but you also have to keep thinking, what do girls of today, what do they care about? What do they want? What’s going to motivate them. And it’s not necessarily what the girls of tomorrow are motivated by. So, [00:36:00] that gets back to keeping it fresh and keeping changing.

Raza: And whenever I read about Girl Scouts, what comes to my mind is the Girl Scout cookies and the tremendous amount of fundraising that it does. How does that work out for the Girl Scout organization?

Marcus: Well, it is an iconic aspect of the Girl Scouts. I’m a similar person, by the way. Most people love coconut. But again, I think the the purpose of being on a board is to constantly be thinking about the strategy

of the organization and how it can be made better. And cookie sales is another thing I think we always have to think about as an iconic aspect of the girl Scouts. It is the major way in which councils are funded. But cookies are not necessarily the healthiest thing. So, we’ve started to produce gluten-free cookies and other types of cookies, but are there other ways to raise funding that doesn’t necessarily involve selling cookies door to door? So, it’s worth thinking about.

Joe: Yeah, there is a risk management aspect to [00:37:00] that because people might stop eating cookies, but I hope you don’t stop selling them.

Marcus: I don’t think that’ll ever happen. How do we diversify our revenue? How about that?

Joe: Exactly. If you think about any organization, that’s the key. You don’t want to be reliant on any one product, obviously.

Marcus: Yeah. And that to me is a sign of a good board that’s constantly kind of pushing the edge and asking questions to stay ahead of the curve rather than being reactive to changes.

Joe: Marcus. It’s been great speaking with you today. Thanks for joining us.

Marcus: pleasure. It was good to talk to you, Joe, and to Raza.

Joe: And thank you all for listening to On Boards with our special guest, Marcus Peacock. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: The easiest way also is to go to our website, OnBoardsPodcast.com. All the episodes are available there. And if you have questions [00:38:00] or comments or suggestions for us, we would love to hear from you.

Joe: Please stay safe. Take care of yourselves, your families, and your communities as best you can. Raza, you take care too.

Raza: You too, Joe.

28. Maria Moats on diversity and inclusion as an essential component of board effectiveness

Maria Castañón Moats is the leader of PwC’s Governance Insights Center and previously served as the firm’s Chief Diversity officer.  In this episode she discusses the critical importance of incorporating diversity – and a clear understanding by board members of the board’s role – to achieve board effectiveness.

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links:

Maria Castañón Moats Bio

PwC’s 2021 Annual Corporate Directors Survey

Board Effectiveness: A survey of the C-suite new!

ESG oversight Corporate Directors Guide

Quotes:

“I am a woman, a Mexican-American woman, and admittedly, I did not know much about diversity and inclusion before taking the role [as Chief Diversity Officer at PwC]. I grew up in a small town in West Texas – El Paso – where everybody looked like me, so my diversity journey really started when I graduated from UT El Paso and started moving East all the way to New York. I like to share that because I don’t want people to assume that I was an expert coming into that role.”

“When I was leading diversity, we would often say that feedback is a gift because if people aren’t giving you good feedback, they probably don’t care about you very much.”

“’Why would boards really lean into this [diversity] and really give great advice to management?’ Because that’s what boards do, they give advice to management, they provide that oversight.”

Big Ideas/Thoughts:

One of my goals was getting the board of directors leadership to be more diverse.  Our CEO was very open to not only diversifying the leadership team, but also thinking about how you get a more diverse board.

A question to be asked about board effectiveness is: how diverse is that board?  How diverse are their experiences? And is that diversity and those experiences appropriate given the times we live in today with all the social changes, with climate, everything we talk about on ESG. How does that fit for the purpose of today and the future and not necessarily yesterday?

Board effectiveness really means “what’s the value of the board to an organization.” And in particular, what’s the value of the board to that management team and to that CEO?  Are they really giving the CEO the right advice on strategy and the risks associated with that strategy? Are they really those trusted advisors, and then are they exercising this fiduciary responsibility to shareholders and stakeholders at large?

As you know, Joe, what investors want today is to see the numbers.  I tell people when I meet with directors, it’s not that they just want to kind of understand your demographics and get a baseline, but they really want to understand the goals and where you’re going as an organization, then as a board, how you hold management accountable to those goals based on what metrics and data.That’s what investors are looking for.

Offboarding.  We need to critically say to ourselves, “The feedback is telling me I probably have given all the best I could to this board, and I should now move on, and, oh, by the way, maybe I can sponsor someone to come onto this board. Maybe that’s the last big thing I can do here, and maybe it’s someone that’s not from the familiar network, someone I’ve been mentoring to get onto a board.”

What I think that’s different when you think about climate versus diversity is we’ve been talking about diversifying boardrooms and management teams for decades, and that pace has been, let’s just say, unacceptable, until recently.  There’s a need to accelerate that pace of change. With climate, it’s going to accelerate much faster, people want to see change much faster. We’re not going to get a ten-year timeframe to act on climate change and related risks.

Transcript:

Joe: Hello and welcome to On Boards, a deep dive at what drives business success.

Hi, I’m Joe Ayoub, and I’m here with my cohost, Raza. Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization: its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board unsuccessful or successful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Maria Castañón Moats. Maria is the leader of PricewaterhouseCoopers’ Governance [00:01:00] Insights Center. PwC is one of the largest professional services network in the world, and its Governance Insights Center mission is to strengthen the connection between directors, executive teams and investors by helping them navigate the evolving world of governance landscape.

Raza: Maria is also a PwC audit partner and has previously held several important PwC leadership roles, including serving as its chief diversity officer from 2011 to 2016. She has held several board roles, including with the March of Dimes, and is on the advisory board of the University of Texas at El Paso’s College of Business Administration.

Joe: Welcome, Maria. Thanks so much for joining us today on On Boards.

Maria: Thanks, Joe and Raza. It’s good to be with you.

Joe: So, I know you’re currently the leader of PwC’s Governance Insights Center, [00:02:00] but before we discuss your work in that role, I’d like to talk about your previous role as chief diversity officer at PwC, starting with how did it come about that you were offered and accepted that role?

Maria: Sure, thanks, Joe. So, took that role in 2011. My heart warms every time I remember that because that’s the year that my daughter was born and she’s 10 now, and our senior partner at the time, Bob Moritz, who’s now our global senior partner from PwC, called me and asked if I would be interested in the role.

He actually looked at the role and developmental in many ways. He came onto the leadership team of the firm. He then reported directly to him, to our CEO, and he drove a very important initiative for the firm, right?

So, he had to do a little bit of convincing, because I was a new mom for the second time, I had a 5-year-old and a baby, I was leading a large audit client in the New York Metro [00:03:00] area, and there was a lot going on, but he told me that I would learn how to lead in a different way and I would have options career-wise that I never would have envisioned coming out of that role.

We saw that role as rotational, Joe. It was to be undefined, two, three, and it ended up being five years on the leadership team, and that’s how I was selected.

And last thing I’ll tell you is while I am a woman, a Mexican-American, I did not know much about diversity and inclusion, so I learned in the role, and the reason is because I grew up in a small town in West Texas, in El Paso, Texas, where everybody literally looked like me, I think, till today, and my diversity journey started when I graduated from UT El Paso and started moving east all the way to New York. I like to share that because I don’t want people to assume that I was an expert coming into that role.

Joe: So, what is it that from a [00:04:00] subject matter point of view attracted you? What was important to you, or why did you think that diversity and inclusion mattered before you took the job?

Maria: So, while I had been serving clients and leading teams in what I knew for it, I really had not really been on the leadership team nor had I worked on strategy. I mean it didn’t take much to see that the future of the firm had a lot to do with not only the talent we brought in, but making sure that that talent was diverse. Our clients were demanding that more and more, so I knew it was an important strategic role.

Frankly, as a woman and Latina, there’s a lot of responsibility, and I knew that I would be a role model, and often you have to be able to see it to believe that you can be enrolled. So, I’d like to think that I had something to do with making people see that if I could be a leader on the leadership team, then somebody that was a staff at the [00:05:00] time, a manager, also could dream big, and so that’s why I took the role, and it was fantastic.

Joe: That’s pretty powerful, but a lot on your shoulders. One of the things we talked about when we first met was that one of the goals was getting the board of director leadership to be more diverse. So, you looked around at the board itself and saw not as much diversity maybe as might be hoped for. Talk about what it looked like and how did you have that conversation with the board and with management at PwC?

Maria: So, we’re talking ten years ago, and my comment was the leadership team needed to be more diverse. I obviously brought that diversity in terms of gender and ethnicity. Our CEO was very open to not only diversifying the leadership team, but also thinking about how do you get a more diverse board.

Now, PwC’s board is different than other corporate boards. We’re a private partnership, and so the board members get elected by the other partners. [00:06:00] So, we knew it was important that as more of our partners, hopefully more women and underrepresented minorities, move to leadership positions in the firm and were better known, then they would have a better likelihood of getting voted onto our board. So, that was the journey that we were on. By the way, the firm had already done a lot around gender when I came in, but we knew we needed to do more around blacks and Hispanics.

Joe: So, great that leadership had a very positive attitude about it. Interesting approach that it’s almost from a ground up, so you’re not telling them what to do, but you’re creating a culture where voting directors that look more diverse or are more diverse, would be something that they would do because of the changing culture. Is that fair?

Maria: That’s exactly right. When I talk about everything I learned when I was leading diversity and inclusion for the firm, I knew that we needed to get to the masses. We needed [00:07:00] to get people to believe that the right thing to do for our strategy, for our firm, our strategy to grow, to bring in more talent, to grow from a client-based perspective, what we needed to do was diversify the talent, and so the masses, the people coming into the firm, the people in manager positions, the partners needed to believe that and act on it. So, we very much met people where they were on their diversity journey and asked them to play a role.

What do I mean by that? I asked my fellow partners, many of whom were white males, to sponsor people coming up in their careers and to pick a person that does not look like them, did not go to their same school, maybe didn’t live in their same neighborhood. That’s how you start diversifying.

I say that now when that’s kind of like our normal way of speaking at PwC, but ten years ago, as you can appreciate, people were like, “Do you want us to do what? How do you [00:08:00] want me to help on this journey, Maria?”

Now, the good thing, Joe, is I’ll tell you to a person, people would come up to me and tell me that they wanted to do something. Lots of partners said, “Tell me what to do. I want us to be successful in this effort.”

Joe: That’s fantastic. So, to put things in context, when you refer to the “masses” at PwC, over 250,000 employees?

Maria: Globally. And then for the US firm, we’re a network of firms, at around 50,000.

Joe: So, a large group of people that you’re talking about when you refer to the masses, not like most companies, obviously, so a big task. How did you get engagement from the board, and how did you let them know what you wanted them to do?

Maria: Sure. So, I reported to our CEO and then the management team would meet with the board and report out to the board, and so I met often with them. One of the things we started doing is really being transparent with our [00:09:00] board on our data, and it was important that we share kind of like, “Okay, where were we when you think about number of partners and the representation of women and minorities in the partnership?” And then go to the next level, people that were a few years from partner so on and so forth. From entry-level all the way up to the leadership of the firm, which was the partnership, what did that look like? And therefore, how did we want to progress? What were the goals? What were the programs we would put in place? So we were very transparent with our board around our journey on data.

We knew that at some point we would have to basically disclose our numbers outside the firm, and we did so for the first time in 2020, last year, we’ll be putting out our second report on transparency this fall. But you see, that was ten years ago, so you start kind of as a management team reporting to the board what the numbers look [00:10:00] like and why it takes time to start to change representation and diversity, literally years. And then at some point, you get to the point where you’re actually disclosing that publicly.

As you know, Joe, that’s what investors want today. They want to see the numbers, and I tell people when I meet with directors, it’s not that they just want to kind of understand your demographics and get a baseline, but they really want to understand the goals and where you’re going as an organization, then as a board, how you will hold management accountable to those goals based on what metrics and data. That’s what investors are really looking for.

Joe: How did you get the board to be more than just passive observers for a process that they approved, to be more involved in this dynamic process? .

Maria: So, I would say that, obviously, our board is composed of partners, so it’s in all of our best interests to execute well on a strategy, any strategy. So, they had a vested interest in that, but if [00:11:00] I step away from that and just say, “How would boards really lean into this and really give great advice to management?” Because that’s what boards do, they give advice to management, they provide that oversight. I think that the first thing you have to insist on as a director on a board is the data and the numbers, and I’ve even put out there on our website a diversity dashboard with numbers and demographics and all kinds of things, and then you’re going to get really smart about the types of questions that you’re going to ask.

Joe: It must have felt good when the board did start asking those questions. They were engaged enough to really

Maria: As an example, it’s one thing to see how people are progressing within an organization, but it’s another one to get so smart, that you start asking, tell me why for this group, they progress slower than the others. How are you focusing on that? And how are you trying to reverse that trend? And by asking those questions, management will have to really think [00:12:00] about, “do we have the right strategy?”

Joe: Ask the kind of questions boards ask about important strategic initiatives.

Maria: Right. And then this is an area where you need to be bold because if you go back to external pressures on organizations, clearly people want this type of data and they want progress yesterday. We don’t have time to tippytoe around these questions, like we all need to lean in hard. So, when I was leading diversity, one thing you need to know is I did not take any of it personal in that I didn’t get offended by questions. I just said, “Okay. That is an excellent question, let’s address it.”

Joe: Well, good for you. I’m sure there are times that that was challenging, but it’s a process, as you said, and not an easy process necessarily, although it sounds like between leadership and the partners, there was a lot of support to move this forward and to be successful with it, which is great to hear.

Maria: Yes. Yes.

Joe: So, you became leader of [00:13:00] PwC’s Governance Insights Center. How did that come about? And tell me a little bit more about what the center does and how it does it.

Maria: So in 2016, I became the audit leader, so I led one of the largest business units, the audit practice from ’16 to ’19. So I got to practice everything I had been talking about from a strategic perspective and driving change across the firm on my own business unit, the audit practice. It’s not easy to do a large practice.

So, I was able to do that. I was able to put partners in leadership roles that stood for diversity and people saw them that way. They were white males, but when I appointed them to position, people knew that it’s because they had done something around sponsoring people into the partnership that were diverse and so on and so forth.

I came out of the role as the assurance leader in 2019 or so. I continued to work on clients, et cetera. But then last year, like in 2020, I was [00:14:00] asked to come into the governance role to be the leader of the Governance Insights Center this spring, and it is a position, Joe, that I’d like to tell people that I said I really wanted. I talked to our senior partner, Tim Ryan, about it. I saw great opportunity to work with terrific leaders. I mean, people that are on boards are accomplished in their own right or they wouldn’t be on a board.

I saw that in many ways I would be able to interact with the leaders about very important issues that are confronting companies and boards. So, I came in at a time where I couldn’t have asked for a better role at a better time.

Joe: So, give us an example of board effectiveness. It’s something that you mentioned in the materials and it’s in the survey as well. How do you approach that with a client company?

Maria: So, when you think about board effectiveness, it really means what’s the value of the board to an organization. And in particular, what’s the value of the board to that management team and to that CEO? [00:15:00] Are they really giving the CEO the right advice on strategy and the risks associated with the strategy? Are they really those trusted advisors, and then are they exercising this fiduciary responsibility to shareholders and stakeholders at large?

When you think about effectiveness, you do look at things like governance and effectiveness of the different committees and how transparent they are in their proxy around not only what risks do they oversee, but how they oversee those risks. That’s super important.

The other thing, frankly, and it’s been covered a lot and I think it’s true is, how diverse is that board? How diverse are their experiences? And is that diversity and those experiences appropriate given the times we live in today with all the social changes, with climate, everything we talk about on ESG. How does that fit for the purpose of today and the future and not necessarily [00:16:00] yesterday?

Joe: When you say diversity in that context, you’re talking not just about racial and ethnic diversity, but by a diversity of perspective, is that fair?

Maria: As well. I mean, so when we talk about, “Go back to board effectiveness,” and you say, “Okay, so who’s on the board, why on the board, what value do they bring? How are their experiences, prior roles and the like still relevant, and how are they relevant relative to the strategy that this company is going to execute over the next five and ten years?”

So, that board, their goal, needs to be diverse from a gender perspective, you would think, from an experience perspective. It just can’t be race for the sake of race is what I tell them.

Joe: The clients that you work with, do you find that their own board assessments are effective?

Maria: And typically you get there, but boards do board assessments and then those board assessments, they should be able to look at sincerely and say, “What are we missing here? What kind of [00:17:00] director can we bring on that will help us be even more effective?”

Joe: Because we run into, in some of the conversations we’ve had, the notion that many boards, public and private, struggle with board turnover, people are in the seat too long or their skills are no longer the right skills or a whole variety of things that leads to less effective than one would hope boards. What have you seen on that and how do you approach it?

Maria: Yeah. So, clearly, the pace of turnover, which is slow on board, and for good reason, boards need to make sure that they’re not turning over people, because if you turn people too quickly, you lose critical experience. You want to be able to bring on new board members at a good pace.

So, when you think about that, you look at assessment, you’ll say, “Okay. Let’s think about assessments in the context of how is the board really [00:18:00] thinking about critical skills that are needed and bringing them on. And how is the board doing the assessments? They’re probably doing surveys. They’re doing one-on-one interviews, a host of data, and then they talk to individual directors and then they provide feedback to the group.”

All that is to say at the end of the day, the key thing to me is, are they providing feedback to individual directors about their performance? And then whether how they’re performing really is what the board needs and what they need for the future as well?

When I was leading diversity, we would often say that feedback is a gift because if people aren’t giving you good feedback, they probably don’t care about you as much. We really said that. So, you have to be willing to take the feedback and the criticism around how you say things, how you look, how do you put, whatever, present yourself and have a thick skin.

And I think one of the things we could think about more on boards is giving [00:19:00] each other that feedback and acting on that feedback. So, if I’m a director that’s getting feedback that keeps telling me that for reasons related to the strategy of the company, et cetera, et cetera, I probably do not need to stay much longer, then I could lean in and say, “That’s fine, guys. It seems like I probably have another year or two on the board, you should start to find someone to come onto the board.”

I know that sounds like it doesn’t happen in real life, but really I think it needs to start to happen. We need to critically say to ourselves, “The feedback is telling me I probably have given all the best I could at the right time to this board and I can move on, and, oh, by the way, maybe I can sponsor someone to come onto this board. Maybe that’s the last big thing I can do here, and, oh, by the way, maybe it’s someone that’s not from the familiar network, someone I’ve been mentoring to get onto a board.”

Joe: Yeah. I think that’s [00:20:00] the highest and best hope for a board member, that when the time comes, he, or she says, “Okay, time to go. We want to make the board better.” And I love the idea of, “Boy I’ve been mentoring someone that I think is going to fill the role and has the skills and experience that’s going to really make the board better.”

I think that’s a great perspective, although I suspect that it’s still challenging.

Maria: It is, although I will tell you that more and more when I talk to directors, many of whom are white males, they actually want to sponsor more folks because they get all the calls, people call them all the time. They can’t take them to the board because they already have two or three, and so they tell me how they actively try to place somebody else and give a name, “I can’t take it, but why don’t you call Susie, or why don’t you call Jose?” I mean, whatever, so that’s how I see they’re thinking about it.

Joe: Yeah, that’s a great way to think about it. Raza, do you want to pick up?

Raza: Sure. Maria, PwC does a comprehensive annual corporate [00:21:00] director survey. From the most recent one compared to the last years, can you talk about what the things jumped out, maybe around the ESG or diversity and inclusion areas as we’ve been talking about it or any other things that kind of really are the highlights of how the governance scene is changing and evolving?

Maria: Sure. So, we’ve been doing this survey over ten years and these surveys have 800 directors, it’s been around for a long time, and we are in the field in the spring/summer, and then it comes out in the fall. So, we’re actually about to release later this fall, probably in the September timeframe the ones for 2021.

But I’ll tell you when I look at ’20 versus ’19, I mean, a lot was happening in the world with the pandemic, and so what we saw is topics like ESG, there is no question that you keep seeing directors saying that more needs to be done as it relates to their oversight of ESG year on year.[00:22:00]

I’ll give you the preview that for ’21, we continue to see that, but when you get underneath those topics and go, “Okay, that sounds right. Clearly we all lived through a pandemic and oh, by the way, there were social unrest and natural disasters and it looked like the role was ending, so you would expect these results.”

When you get underneath those and you go to each one of them, take diversity, which we’ve been talking about, while there is a clear understanding that more should be done to diversify boards themselves and leadership team, that does not exactly correlate with the pace of change of diverse people getting on board. So, what I tell directors is we’re all aligned in what needs to be done, but how hard are we all working to get it done?

Now, we go to climate, which is, I would say, the thing to talk about also in 2020 as we go into ’21 and then ’22. Clearly, investors and others are very interested in what[00:23:00] any company is doing around climate, not just those that are in industries you would think of that should be interested in climate.

So, what I think that’s different when you think about climate versus diversity is we’ve been talking about diversifying boardrooms and management teams for decades, and that pace has been, let’s just say, acceptable, until recently, there’s a need to accelerate that pace of change.

I think with climate, it’s going to accelerate much faster, like we’re talking about it and people want to see change much faster. Said another way, we’re not going to get a ten-year timeframe act on climate change and related risks.

Raza: Now, on governance, PwC also has, I’ll call it, a global perspective; what have you observed a US versus European board for this conversation of ESG and diversity and inclusion? Are they a little ahead? Is there more talk here than [00:24:00] actual progress? What have you seen from that comparative perspective of governance?

Maria: Sure. So, we’ve seen that for years. When you think about companies based in the European union to pick one in the EU that they have been years ahead when it comes to all to do with ESG, primarily because of regulation, quite frankly. So that was fine. It was happening in Europe, right?

More, more regulation, more disclosure, more transparency around climate and diversity and all the topics. And in the US, I would say we were watching from afar. What I have observed now is that people are trying to learn from the journey that companies took in Europe, because you can anticipate that there’ll be more regulation here in the US, clearly.

And you can anticipate that there is a need for more transparency and disclosure around climate risk and how the board oversees that climate risk and disclosures and the proxy, and it’s by industry. So, a [00:25:00] board of directors that are looking within an industry to Europe and say, “Let’s think about what those disclosures look like and let’s think about that journey,” are probably doing the right thing, because you can’t wait anymore and you can’t wait to see if it goes away, so to learn from that journey makes a lot of sense.

Joe: I want to go back to this one thing that jumped out. So, the surveys said that four out of five directors agree that companies should be doing more to promote gender and racial diversity in the workplace, but then it says only 34% of directors say that it was very important to have racial diversity on their board.

And that kind of strikes me as more than just catching up. It sounds a lot more like, “I hope it happens, but we’re okay where we are. We don’t really want to rush into this.” Actually, that really just surprised me a great deal. Can you comment on that? What am I missing here?

Maria: Right. No, Joe, [00:26:00] it’s a good question. I think there is a belief. It doesn’t mean it’s truth. There is a belief that racial diversity will come in time, and that there may not be a sufficiently large pool of qualified racially-diverse candidates. And I said very publicly that that’s fine to have that belief because if you look around and you don’t see anyone in your own circles that is racially diverse, then you believe that, and that’s fine. But the reality is that there are dozens, dozens, dozens and hundreds of qualified people that are racially diverse.

Now, you have to go beyond the CEO and the CFO in organizations of public companies, and people are starting to do that. So, if you’re seeing that a lot of first time directors going into Fortune 500, and this would hold to the Fortune 1000 as well, that are racially diverse, it’s their first board, and many of them are not necessarily CFOs, and of course, not CEOs, since there’s very few CEOs that are [00:27:00] racially diverse, but they have operations backgrounds; they’ve dealt with strategy, and they can learn from other board members. So, I think it’s this whole 34% only in terms of like the lack of action, it’s simply because there’s a lack of understanding that there is a pool out there of qualified candidates that also happen to be racially diverse.

Raza: In a similar manner, Maria, 38% also said that they don’t think that ESG issues actually have financial impact on their company. On the one hand, the BlackRocks of the world and the State Streets are telling organizations that this has real financial impact and their investors are not willing to fund companies that are not making progress on these issues. How do you reconcile this gap as well?

Maria: Sure. So, Raza, I would say when you think about climate or let’s say with climate, there will have to be investments in new technologies. There are [00:28:00] funds that will be used; the investment is going to happen, so you’d think about what’s that return, which is a very logical question if you’re on the board.

So, you’d then go, “Wow, when is the return coming on this investment from new technologies, different ways of operating the company if we’re going to be greener in many ways, better on water usage, all this kind of stuff?” So, what I would tell you is that one way to also look at with the financial return is to look at lenders now. Lenders are now looking at their own portfolio saying, “If we’re going to lend to companies, might get a better rate, so on and so forth, that are leaning into climate and the climate-related risks” because the reality is that will have an impact on the company, so the lenders are looking at that. So, while I think that that’s what we found in our 2020 survey, you’ll start to see that people are really now seeing that there is a financial impact if you don’t act now on all to do with ESG.

Raza: Well, we’ll look forward to the 2021 [00:29:00] survey. It looks like great work in incrementally documenting what’s important for boards.

Maria: Yes.

Joe: One of the things that I saw in the survey of effectiveness was that executives are confident in the board’s overall understanding of the company’s business, but give lower marks in areas such as IT, ESG and crisis management. We’ve talked about ESG, but just to look at crisis management, it would seem to me that getting low marks on risk management is really concerning. I’m trying to square how a board member can be really engaged and understand a company and its company’s needs and its strategic issues, but not be understanding of the risks and risk identification, ultimately, risk management- maybe you could talk a little bit about that.

Maria: Yeah. So, the survey you’re referring to is for the first time in 2020, and we’re going to do it again in ’21. We actually kind of took [00:30:00] our annual corporate directors survey and related questions and we did a 180 on those and we actually asked the executives their view on those questions to see kind of what their thoughts were on the effectiveness of their boards.

So, you shouldn’t be surprised in that they kind of didn’t see that they were doing as well in these areas, like ESG, IT and cyber for a few reasons. Number one, on the IT and cyber, boards are only as effective as the quality of the reporting from management to the board. And so, one of the things the executives need to understand that is if you go and give an update on cyber and IT risks, et cetera, to the board once or twice a year, and, by the way, each time their great presentations, but their different from one another, your board probably because they’re not in it every day, probably didn’t quite understand what you were trying to convey.

So, what I tell people is this is an area where there should be more frequent reporting. The reporting should look similar instead of like wondering, “What did [00:31:00] I look at last time? What was important then? What are the key risks? What are the crown jewels? What should really matter? Where should I really get my understanding? What are the trends? If you’re always looking for Waldo in these presentations, you’re just not getting it. So, I tell the executives they need to do better reporting in these areas to the board so that the board could be effective in their readout.

Now, on crisis management. Joe, I just want to address that. The thing is not many boards had been through a crisis, and now we all have with the pandemic where our world was turned upside down, supply chain, revenue streams dried out, everything happened. So, one of the things that’s important there is, what did we learn? How can we now be better prepared for the next pick-your crisis?

Some organizations, because they had been through something before, whether it’s natural disasters in part of the country got hit by a hurricane, so that happens a lot, particularly where I sit right now in [00:32:00] Dallas, and when you think about with hurricanes coming up into Houston, natural disasters are a great way to kind of know what happens when revenue streams dry out, supply chain, all that kind of stuff, this pandemic basically happened to all of us.

So, that’s where that was going. Like the boards do understand strategy and related risks, but it’s this crisis management and what did we learn that was the finer point that we were trying to put on it in the 2020 survey.

Joe: Yeah, that’s great to hear. I’m so glad you touched on that because I was going to ask whether this pandemic did accelerate the recognition of how important it is to up your game on crisis management, let’s say, and you have been seeing that.

Raza: And for Cyber and IT, does it also sounds the reason that not only it’s just a matter of increased or effective reporting back from management to the board, but also partly is the board skill issue, because a lot of the times it’s more about financial and other [00:33:00] operating experience skills, and every company is a tech company and software eats the world so maybe that skill is not getting refreshed as well as it should be.

Maria: Yes. Well, so this is one area where there was this debate that I would say in the last few years to whether there should be a separate committee to deal with IT and cyber risk and now throw in their data privacy, and in that committee, you would put experts in.

 That’s just not really what’s happening because it’s not reality. You can’t just have a separate committee and find the experts. So, I think directors are learning that everybody has to get their acumen up in this space, whether they do it by better reporting by management and supplement that with third parties coming in and talking to management and the board and getting that outside perspective, your own education by attending courses.

But we all, if we’re going to sit on the board, have to be better because of the world we live in now. I’m better at IT risks, with data privacy risks, cyber [00:34:00] breaches, ransomware, it’s all happening, so these are just risks, they’re not kind of special risks that you can put a special committee on.

Joe: What about the idea of a separate Risk Committee in boards? I know that often that has been in the audit committee, but there’s been a lot of talk. We had a guest, David Koenig, last season who talked a lot about this and started the DCRO. I don’t know if you’re familiar with them, but they are now giving certifications to people for risk identification and risk management.

What about that idea? Have you seen that? Have you seen it be effective? What are your thoughts about that?

Maria: So, you see Risk Committees in financial institutions It’s regulated industries, so you’ll see it there, and you get the question as to whether you should see it in other places as well, kind of a non-financial institutions.

The question is really can be answered by you looking at your business and saying, “When you look at what are the responsibilities of the Audit Committee, including risk oversight, which involves now cyber, which we just talked about and that’s really, is it [00:35:00] too much? And should we have a separate risk committee like financial institutions do?

And then the risk there is that how do you make sure that the risk committee is appropriately staffed so that maybe members are on the risk committee and the audit committee and there’s overlap.

I would say the same about ESG. So, they’re probably, if you think of pharma, Joe, pharma is going that way as well, because they’re heavily regulated of having a separate Risk Committee, but making sure that it’s clear what are the responsibilities of the different Risk Committees. I would tell you that they’re set still in a minority in the non-financial institutions. But it’s definitely back to skills needed on the board. Risk oversight is very, very important and really understanding the enterprise risk management process of an organization and how the management team oversees the risk is super important.

So, I always tell board members before you answer the question of whether you need a separate risk committee, how is the company organized? Do they have a separate risk [00:36:00] officer? What does the risk officer do? Like really get into that and then you can help you answer the question.

Joe: Yeah, that’s great.

Maria. It’s been great speaking with you today. Thanks for joining us on On Boards and thank you all for listening to On Boards with our special guest, Maria Castañón Moats. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: Also, the easiest way is to go to our website, onboardspodcast.com. Again, onboardspodcast.com. All the episodes are available. And if you have questions, comments, or suggestions, we would love to hear from you and you can do it right on the website.

Joe: Please take care of yourselves, your families, and your communities as best you can. And Raza, you take care, too.

Raza: You too, Joe.

27. Michael Muldowney on the job of being a board member

Michael is the CEO of Foxford Capital a strategic financial advisory and investment firm. He is also a General Partner at Eastward Capital Access Fund, a late-stage venture debt fund, serves on several Boards including the board of Veritiv Corporation, a public company where he is the chair of the Audit Committee, iAnthus Capital Holdings, Epicenter Experience, and he serves as a member of the board of advisors to Dubai-based Botho Emerging Markets Group. Michael has also been a guest lecturer at Harvard Business School since 2011.  

In this episode he discusses different roles boards and board members play and the importance of treating being a board member as a job.

Links:

Michael Muldowney Bio

Quotes:

Relationship between Board and Management

“I think fundamentally having an open channels of communication where the board is free to express their perspective and opinions and advice is ideal, and this is beyond just a pure governance role.”

Big Ideas/Thoughts:

I want to just get back to the amount of time you’re spending as chair of the audit committee. We talk a lot on some of these podcasts about the fact that being a board member is a job.  When boards are seeking new members, they often write job descriptions, and that’s an appropriate thing to do. This job, chair of a public company audit committee, takes ten percent of your available time, which is something like twenty days a year. So not only is it a job a job – but it definitely not a nine-to-five job!

Risk assessment

I think boards tend to be risk averse in the sense that their role is to safeguard the assets of the enterprise, a role, it’s not necessarily the only role. 

The general approach is to look at enterprise risk, financial risk, operational risk, anything that could impair an asset or create liabilities for the company.  In general, what that often entails is looking at a heat map, which would identify all the various vulnerabilities a company could face and then trying to assess the likelihood of that occurrence taking place as well as the severity. So, depending on where the high risk, high severity initiatives come into play, the focus would be on trying to mitigate those risks from a risk management perspective.

Yes, but the job of a really effective board is to consider how aggressive a company should be in taking risk – not just avoiding risk.  How much risk is a company willing to accept, how much should it accept, in creating value for its stakeholders.

Relationship between Board and Management

It’s important that the management team and the CEO are comfortable reaching out to an individual board member or multiple board members to bounce ideas off of them or discuss thorny issues that they’re facing to try to get perspective on whether that board member has encountered the particular issue or what advice they may have outside of a formal board setting.

Transcript:

Joe:  [00:00:00]Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization its – board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Michael Muldowney. Michael is the Chief Executive [00:01:00] Officer of Foxford Capital, a strategic financial advisory and investment firm. Previously, Michael served as CFO of Gordon Brothers, a global advisory, restructuring and investment firm, as well as the CFO of Houghton Mifflin, Harcourt Company, a global educational publishing company.

Raza: Previously Michael served in various capacities, including COO CFO president and director at NexterraEnterprises and has held various positions with Marsh McLennan companies. He’s also a General Partner at Eastward Capital Access Fund, a late stage venture debt fund. Michael has been a guest lecturer at the Harvard business school since 2011 in a course entitled “Adding Value through Restructuring”. 

Joe: He serves on several Boards of Directors, including the board of Veritiv Corporation, a public company where he is the chair of [00:02:00] the Audit Committee,. iAnthus Capital Holdings, Epicenter Experience, and he serves as a member of the board of advisors to Dubai-based Botho Emerging Markets Group.

Michael, welcome. Thanks for joining us today on On Boards.

Michael: Well, good morning. It’s my pleasure.

Joe: One of the most important roles in a board of directors is as Chair of its Audit Committee, especially a public company. You serve as the chair of the audit committee of Veritiv. Tell us a little bit about it. How long have you been on the committee? How long have you been chair, and how has your role changed since you took the chair of audit?

Michael: So, I’ve been on the board since its inception and Veritiv was the product of two companies merging in a Reverse Morris Trust triangular merger, and that was a spinoff of Xpedx, which is part of International Paper and Unisource, which [00:03:00] was held by Bain Capital and Georgia -Pacific.

I was part of a new board that was being formed when that company went public, and I have been on the audit committee since its inception which is six plus years now, and I’ve shared this is the third year I’ll be chairing the audit committee.

In terms of the role from a member of the audit committee to chairing the audit committee, it’s quite expansive and probably twice the time commitment. So, essentially, the role would be to work with the management of the company, setting the agenda for upcoming audit committee meetings, going through the presentations on a dry run with the management team ahead of the audit committee meetings, liaising with the internal audit function, as well as the external auditors, determining if there’s anything that needs to be discussed in executive session.

Of the various committees of the board. I think the audit committee is probably one of the most [00:04:00] time-consuming roles, particularly, the chairman. And in terms of how it’s evolved. I would say the regulatory environment hasn’t changed dramatically. What has changed is the risk management scope of audit committees in general, and in particular as it relates to technology, cybersecurity in particular, and whether that’s best within the scope of an audit committee or whether it warrants a discreet committee focused on technology and cybersecurity. In the boards I’m involved with, it’s part of the audit committee ‘s scope.

Joe: Okay. So, let me go back a little bit. I want to just get back to the amount of time you’re spending as audit chair. We talk a lot on some of these podcasts about the fact that being a board member is a job. When boards are seeking new members, they often write job descriptions, and that’s an appropriate thing to do. So, this job, I think when we spoke [00:05:00] prior to today, you had said that it takes ten percent of your available time, which is something like twenty days a year. Is that about right?

Michael: It is. So, there are roughly two hundred sixty business days over the course of the year, and much of the board work actually happens on weekends, and the way I think about a board role is half of the time, it’s generally in-person meetings. The other half is preparatory work, reading board materials ahead of the board meetings, and those are generally available over a weekend prior to the following week’s board meeting. So, typically, it would be one or perhaps up to two days on the weekend, preparing for a board meeting.

 In my mind, there are really two profiles of board members. There are professional board members whose principal activity is serving on boards, and then there are executives who also serve on boards or have full time positions outside of [00:06:00] board work, and the concept of overboarding is generally four boards, and if you divide four, obviously, by the calendar days in the year, it would be twenty five percent commitment each board relative to a full-time job.

So, I do have a role outside of my board work and that’s where I’ve kind of limited my public company board roles to two, and while much of the board commitment is predetermined with schedules that go out three years in advance because multiple board members sit on multiple boards and scheduling tends to be concentrated around quarterly events. So, that has a pretty high line of sight in terms of what the time commitment there is.

It’s the things that would come up outside of the ordinary course. These could be strategic alternatives. It could be M&A transactions. It could be a capital market share issuances, [00:07:00] and those can be all times of the morning, evenings and weekends. And that’s where flexibility is important as a board member to be able to be available as things come up. I’ve been on a board that had a variety of unique circumstances come up which required almost half a time commitment. If not, a full time commitment for very concentrated time periods; three, four months at a time where there’d be daily board interaction.

Joe: I was going to say, so it’s a job, but it’s not a nine-to-five job. It is a job that you got to do whatever you need to do when the role requires it. And that goes for public companies, that goes for private companies. It can go for non-profit organizations. It really doesn’t change.

 I do think your comment about what’s a saturation point for the number of boards, I think four is actually a lot, unless you’re very focused and really have that kind of time. [00:08:00] But I think what is important is that people kind of understand it’s a big job, and if you don’t have the bandwidth, it’s not fair to the company or organization to take the role of being on the board because boards need to put in the time when it is required.

 Michael: That’s right, and particularly given the diversity of challenges that companies face, the board members tend to need to reflect that diversity of experience, and while boards could have depth in financial experts, and I’m fortunate the boards I serve, each of the audit committee members is a financial expert, but there are going to be subject matter experts on the board that will need to kind of weigh in disproportionately to other board members given their domain expertise.

Joe: Right. So, one of the things you mentioned about audit committees is their role in risk [00:09:00] identification and management, which is, I would say, an increasingly important role. So, let’s talk about how your audit committee now addresses that role for the company that you’re serving.

Michael: So, the general approach is to look at enterprise risk, and that’s financial risk but operational risk, anything that could impair an asset or create liabilities for the company. In general, what that entails is looking at a heat map, which would identify all the various vulnerabilities a company could face and then trying to assess the likelihood of that occurrence taking place as well as the severity. So, depending on where the high risk, high severity initiatives come into play, the focus would be on trying to mitigate those risks from a risk management perspective.

Joe: So, one of the things we had [00:10:00] talked about earlier is that in the past many companies have managed the financial implications of risk through insurance; business interruption, D&O, et cetera. But as you pointed out, that doesn’t prevent risk from occurring in the first place, and it also, I would suggest, really characterizes a narrow view of what risk is.

Because part of the job of a really effective board, and I would say, the audit committee, of course, since it often resides there, is to think about how aggressive a company wants to be in taking risk, not just avoiding risk, how much risk is a company willing to accept in building its plan and creating value for its stakeholders. And I’m wondering how that has evolved since you’ve been on the audit committee of Veritiv.

[00:11:00] Michael: Well, you’re right that the traditional approach to control environment is thinking about things in two dimensions; one is preventative controls and then detective controls. So, as they each sound, preventative controls are those controls put in place to prevent the issue from occurring in the first place, and in the second instance, it’s if that line of defense was not successful, are there detective controls in place to recognize that and then take remedial action?

 So, those tend to be, in broad sense, how financial, operational and technology controls have been structured traditionally. What you’re raising is a very interesting concept, which is broadening that to strategic risk that a company may proactively assume by investments, mergers and acquisitions, and in that instance, it largely falls within the strategic planning process, but not [00:12:00] narrowly focused on the spectrum of the degree of risk that’s been incurred by pursuing the plan that ultimately gets enacted.

One instance, historically, the way we tried to address that was a kind of a red and a green team where one team is preparing an initiative as to why the company should proceed down a certain course, and the alternative team, the red team, is pursuing a strategy that says, “Here are all the things why we shouldn’t do that,” and then making an informed decision with management’s recommendation and the board understanding the risks and opportunities. 

Candidly, one of the difficulties, while that is a kind of a duty of care, which is one of the principal roles of board has, it could create an uncomfortable situation for a board if they green lit the [00:13:00] proactive strategy recognizing all of the inherent risks that the red team outlined.

Joe: Right.

Michael: So, again, litigation risks shouldn’t dictate a company’s approach, but that is one factor of a public company that could lead to not having a fully healthy discussion on the appropriate level of risk, and inherently, I think boards tend to be risk averse in the sense that their role is to safeguard the assets of the enterprise, a role, it’s not necessarily the only role.

So, where a company fits on the risk spectrum of their strategic plan, it is an interesting question. In the boards I’ve been involved in, that tends to be a full board discussion as opposed to any subcommittee taking on a principal  role of looking through the lens of, is it too much risk or not enough risk relative to shareholder value that would be created?

Joe: Yeah, I think at the end of the day, whether it resides in the audit committee or a separate risk [00:14:00] committee, it ultimately is a board responsibility. We’ve had a guest, David Koenig, a good friend of our show, and also the founder of the DCRO, where they’re now giving certification for risk management. One of the things that he advocates is that businesses exist to take risk, and that maybe the question that boards should be asking is, are we taking sufficient risk to add appropriate shareholder value?

So, just minimizing exposure to litigation, and as a former trial attorney, I very much appreciate being aware of that and I’m sure that the board of directors of Boeing wished they had maybe paid more attention to that at one point, but it’s not the only thing that a board of directors needs to be doing. Part of their job is to add enterprise value to create value for the shareholders. And I would suggest that not taking enough risk [00:15:00] might mean that the board is not actually fulfilling its full job to the shareholders and other stakeholders to whom they’re responsible. What do you think about that?

Michael: I would agree with the concept, and I’ve seen that calculus applied is trying to assess a probability-based outcome, which would be what is the upside of the actions we’re taking in terms of shareholder value, what’s the base case that we think will happen, and then what’s the downside scenario, and then effectively trying to run an analysis that would yield what the economic outcome of each of those three scenarios are, and then taking a profitability, assessing it, and then taking a weighted average coming out of that and saying, “Okay, is the basket of risks on a probability-adjusted basis and outcomes sufficient to [00:16:00] justify the initiative being undertaken?

All of those are variables that nobody has a crystal ball, but that is one way I have seen where managements and boards have tried to approach the problem that you’re raising, which is, are we taking enough risk or are we taking too much risk?

And partly, I think, it’s the facts of the circumstances. It could be a function of the shareholder base, what type of company is it? Is it a utility where people are investing to get the dividend and not looking for a huge equity return necessarily? Or is it a high tech, high flyer company?

So, I think in part it would be a function of the profile of the company, the industry, and candidly, the shareholder base on how much risk are they expecting that their investment will yield.

Joe: Yeah, I think there’s no question that it does depend on the company. It depends on a lot of factors, but I would say that both David [00:17:00] Koenig and James Lam, another risk expert that we’ve had on the podcast, that their notion that the more narrow view of risk really needs to be expanded really does make sense.

There’s no one size fits all, of course, but the notion that you can insure against risk is a comforting thought, but it may be missing the boat to some degree.

Michael: Yeah. I mean, one example is acquisitions, and there’s a traditional rule of thumb in the capital markets, don’t do a dilutive acquisition, but that might not be the right answer. Ultimately, companies are doing acquisitions because they think it’s going to create long-term shareholder value and it could be dilutive in year one and year two, and non-dilutive in year three and accretive in year four, and that could make perfect sense for the company, but oftentimes companies get punished in the short term if they have a dilutive transformative acquisition [00:18:00] that changes the profile of the landscape of the company.

Raza: Michael, between the board of directors and management, what would you characterize as the relationship? What type of relationship should it be and what are the characteristics of a good, healthy relationship between boards and management?

Michael: I think fundamentally it’s having open channels of communication where the board is free to express their perspective and opinions and advice, and this is outside of just a pure governance role. It’s more on the advisory aspect of a board member, and vice versa, having the management team and the CEO feeling comfortable that they could reach out to an individual board member or multiple board members to bounce ideas off of them or thorny issues that they’re facing to try to, again, get perspective on whether that board member has encountered the particular issue or [00:19:00] what advice they may have outside of a formal board setting.

I think the second aspect of that would be to be able to be comfortable having a free dialogue on alternatives to what may be a management’s recommendation, not necessarily second guessing it, but more of an inquisitive approach of how have you thought about this particular issue or this particular risk or why did the management team conclude that this was the recommended approach versus the alternative.

I think that is an area where it can be a little bit difficult to do it in a constructive way without appearing as though management is being second guessed and, ultimately, a board is only going to be so knowledgeable about the business and the industry and ultimately the management team is going to be far more familiar with all the [00:20:00] intricacies that may be involved in implementing a particular strategy or approach.

So, I would say relative to your question, open channels of communication, leveraging the board and their expertise in an informal manner when, and if needed, and then a free exchange of ideas in open debate, and the last piece I would say is that the board needs to support management until it’s clear that isn’t the ultimate best approach in the sense that it’s appropriate for there to be a change in management.

So, whenever that time were to come, then that’s where looking at succession planning or things of that nature, but I think in the ordinary course, boards are looking to be supportive of management and helping them get to the right decision.

Raza: I think that’s a really good approach. Although in the real world, there is an air gap between management and the board, so [00:21:00] sometimes it’s harder done than said and sometime bad news does not travel as easily upwards, or maybe even downwards from the board.

In the same manner, what will be your view or how would you feel between the splitting of the role of the CEO and the board chair in companies?

Michael: Obviously, that’s a hot topic and the Glass Lewis and ISS have their perspectives on that and other proxy advisory firms. I think it really depends on the profile of the CEO and their experience as a CEO  and then determining what would be in the best interest taking that into account.

Having been a CEO, it is lonely at the top, and there aren’t a lot of avenues to pursue [00:22:00] outside of a good working relationship with several board members to help get to the right answer, and so I’ve been involved in a board where the CEO and the chairman role were split. And in part, it was based on the profile of the CEO and the chair had industry experience, had been a prior CEO of public company and the decision was made to split the role.

It’s not a one size fits all in my mind. It’s really looking at the CEO, their credentials, their profile, and determining whether it makes sense to bifurcate the role into a chair and a CEO or to combine it.

Raza: Sometimes I think the regulators have to step in as in the case of Tesla where they had to then ask the chair to be different than the CEO. 

Joe: I want to ask one question to go back. In talking about splitting the CEO and chair roles, you mentioned the influence of Glass [00:23:00] Lewis and ISS and I’m curious, it seems like proxy advisory firms are having an increasingly significant impact on governance of public companies.

Do you think that’s a positive development?

Michael: I think it is a positive development because they’re representing shareholders’ interest and more and more investors are taking into account the recommendations of the proxy advisory firms when it comes to shareholder vote. So, it is an important constituent and it is a representative of a large base of the investors who are more and more taking those proxy advisory positions into account when they’re voting for shareholders in proxy matters.

Joe: Michael. It’s been great speaking with you. Thanks for joining us today. 

Michael: My pleasure, Raza. Thank you very much for inviting me.

Joe: And thank you all for listening to On Boards with our special guest, [00:24:00] Michael Muldowney. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on the Apple Podcast app. It really helps others find and discover our podcast.

Raza: You can go to the Apple Podcast app, but all of our episodes are also available on our website, www.onboardspodcast.com. That’s onboardspodcast.com. All of our episodes are available there and you can even contact us with your questions, comments, and suggestions on the website as well. We’d love to hear from you,

Joe: Please stay safe and take care of yourselves, your families and your communities as best you can.  Raza, you take care, too,

Raza: You too, as well, Joe.

Joe: Thanks.

26. Annalisa Gigante on Innovation and ESG: A view from Europe

Annalisa Gigante has been an award-winning innovator for 30 years. She serves as a board member of the Henry Royce Institute for Advanced Materials Research and Innovation and Cambridge Enterprise, Cambridge University’s seed funding and entrepreneurship hub. Annalisa is a thought-leader in innovation, leadership and corporate governance. She is Chair of Foundations for Learning, the Co-Chair of Women Corporate Directors in Switzerland.  In this episode she provides a European perspective of ESG, talks about the governance of innovation and bringing innovation to the real world.

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

Annalisa Gigante Bio

ILI.Digital – The Goldilocks Zone

Quotes

How Risk identification and management is driving ESG because its seen as a competitive advantage

Well, it’s the definition of risk that is so important, kind of trying to understand it’s both in a positive and in a negative way.  You can really mitigate your risks by understanding what kind of problems you want to solve as a corporation and what kind of things are important for the company.

The fact that you can understand this as a competitive advantage is incredible in so many different things, not just in terms of what kind of products or services you put out in the market, but also in terms of employer branding or in terms of attracting the kind of investors you want. So, that’s why it’s an important thing to discuss really on the board level, because it has so many implications around the various stakeholders that allow your company permission to operate.

How attitudes toward ESG have changed

So, I’ll just take one example in health and safety. I come from chemical industries, large manufacturing sites. It’s a huge area of discussion and activity, and we used to think of these things as “what do you need to do in order to meet regulations in the various geographies in which you work?”  Today we are discussing health and safety about people who’ve been stuck at home working on Zoom and being tired, how can we make their life easier?  This is a completely different way of looking at this, and it’s so important because it has a huge value add.

Tax Morality

I know that in Europe, we have a little bit of a different view about this. I’ve worked for American companies before, and it’s not that they didn’t do anything for their local community.  They did a great many projects, but it was done individually, separately, each company at a time, and it is that idea of being in direct control of what it is that you choose to do as opposed to going through the tax system in order to help society.  I think it’s fundamentally a product of different history that we have (in Europe).

Impact of Innovation

Cambridge Enterprise was created to help researchers impact the real world as much as possible, to try to bring up the volume and translate fundamental research into products, services, normally, technically-based things that can have an impact in real life. This is the very particular focus of the board  – having impact rather than just monetary impact.  Generating royalties or seed funding is a consequence of doing the right thing as opposed to the reason why it exists, and that makes the discussion on the board so much richer.

Big Ideas/Thoughts

On the US coming a little late to the party on ESG, but accelerating action on the part of business:

What I love about things in the US is once they get talked about, they happen quite fast, whereas in Europe, we’d be talking about it for a while and then over time we improve gradually.  I think the US starting to embrace these things is going to help us create much more critical mass and then implement these things so much faster.

On funding environment in Europe compared with US at the seed stage:

In Europe, in general, we have a very different environment around VCs.  When I look at equivalent research universities in the US, they mostly look after patents and royalties because the ecosystem is there to jump in to provide seed funding.  This doesn’t happen so much in Europe. One part of the role that I want to highlight is that whereas VCs normally look at what is the return on this idea, the job of Cambridge Enterprise is to look after the researcher, so things they do don’t get completely diluted.

Transcript:

Joe: Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization: its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.
Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.
Joe: Our guest today is Annalisa Gigante. Annalisa has been an [00:01:00] award-winning innovator for thirty years, with a track record of commercial success, launching and building multi-billion new businesses across different industries; from life sciences and chemicals to services and digital technologies. She serves as a board member of the Henry Royce Institute for advanced materials, research and innovation and Cambridge Enterprise, Cambridge University’s seed funding and entrepreneurship hub.
Raza: Annalisa is also an advisor and thought leader in innovation, leadership, and corporate governance. Among other things, she is chair of Foundations for Learning, the co-chair of Women Corporate Directors in Switzerland and RemCo member at Jagex, the Cambridge-based game studio.
Joe: Annalisa, welcome. Thanks for joining us today from Switzerland.
Annalisa: Such a pleasure to be here.
Joe: We’ve talked a bit about ESG, but I wanted to start with [00:02:00] a headline from a recent article that you sent me from Bain that starts with the following statement: “A wide gap exists between Europe and the Americas when it comes to embracing global standards for responsible and sustainable investment.”
I’m not surprised to hear that, but I’d love it if you’d talk a little bit about that,
Annalisa: It was so interesting to see that analysis because that one was in particular on private equity funds and it showed that eighty percent of funds based in Europe have signed up to some sort of ESG tracking, but in the US or in the Americas, actually it was so much lower. We were at forty five percent, which is less than Asia, at fifty five percent.
I thought this kind of told that story so well, the discussion around ESG in Europe has been there for quite a while, perhaps not under this particular umbrella, which is now what everything is coalescing around, but it’s [00:03:00] been part of how we think about what a corporation should do, what kind of things should be highlighted, and it’s really important to see investors stepping up their pressure in these areas.
Joe: I agree. It did strike me that the percentage of companies that had signed up for something under the ESG umbrella was so different in the US. Because there’s so much discussion about it, it’s getting so much headline, so it’s kind of sound and fury, but it’s not signifying quite as much as it is in Europe. Maybe it’s not typically American, but I found that to be kind of a sobering reminder that while we have had good discussion about it, there is a long way to go here.
Annalisa: Right. But one thing is signing up to these things and another thing is then implementing it. So, the next part of that analysis showed that within these private equity firms, actually their investments in [00:04:00] businesses that do something in ESG, in particular, is getting there, that part of it. So, on average, they were in the fifty to sixty percent in European companies and around the forty mark in the US companies.
Joe: Yeah, that’s still great. I mean, it still shows significant progress. Do you think that combining all this, as you said, under the ESG umbrella has helped push this forward?
Annalisa: For sure. It gives us a hook, and actually it helps that we’re now all talking under the same umbrella. We might mean different things. So I think there’s still a level of development there, but it’s important, for example, I know that EU is working on a taxonomy that they want to get in place by January next year, so that the definitions are the same as people try and work on porting standards. So, there’s still a lot of variety in there, but the fact that it’s all under one roof helps us talk about it [00:05:00] and then explain what kind of things companies are doing.
Joe: I think one of the things we had discussed earlier was the fact that the US is talking so much about it and trying to catch up has really kind of accelerated this whole momentum throughout the world actually. Is that fair?
Annalisa: Yes, but also what I love about things in the US is once they get talked about, they happen quite fast, whereas in Europe, we’d be talking about it for a while and then being exchanged over time and we improve gradually. I think the US starting to embrace these things is going to help us create much more critical mass and then implement these things so much faster.
Joe: I hope you’re right. I hope it’s not just that we’re better at marketing what we say and publicizing our good intentions, but hopefully, you’re right, it will actually lead to real change.
Annalisa: Opportunity is there. It’s up to us to take it.
Joe: The opportunity is there. But as you have said, it’s not what you say, it’s what you do, and that’s a standard that really has changed. [00:06:00] Good intentions is no longer sufficient at the top of a company. It really is. “Show me the money,” so to speak, “Put your money where your intentions are.”
Annalisa: Well, and isn’t that wonderful? Because it is about outputs.
Joe: Exactly. So, it feels like a lot of the momentum that’s being created is on the investor side. Serious investors, BlackRock, state Street have said to companies, “If you’re not taking ESG seriously, we consider that to be a potential risk, and it’s a risk that in many instances, we’re not willing to subject our investors to.” And that has had, in my view, a tremendous impact on how companies are viewing their role and how boards are viewing what they need to do to make their companies continue to be attractive.
Annalisa: Well, it’s the definition of risk that is so important, kind of trying to understand it’s both in a positive and [00:07:00] in a negative way. You can really mitigate your risks by understanding what kind of problems you want to solve as a corporation and what kind of things are important for the company.
So, environmental areas take a lot of space right now, and I’m so happy that there’s momentum building around carbon zero technologies. I’m really deeply into that. But it’s also interesting to see on the “S” side, so the Social side. In the UK recently, there have been some huge debates around the Deliveroo IPO or around Uber, what happens if most of the people that work in your sector are independent contractors? Should they still be independent contractors or should they be regarded as employees? It has huge impact on the “S” side of ESG, and it was so interesting to see how much engagement there was around those kinds of issues.
Joe: Well, I think the fact that that issue is now under ESG also gives it a lot more [00:08:00] credibility. You sent me a great PowerPoint that you did showing how it started, how it’s going on each of the ESG components, and under Social, it says, “Don’t break the rules. That’s how it started in public. Don’t break the rules in public.” Now, it’s something like surpassing regulatory minimum as a competitive advantage. What a different mindset that is.
Annalisa: And to me that is so important. The fact that you can understand this as a competitive advantage is incredible in so many different things, not just in terms of what kind of products or services you put out in the market, but also in terms of employer branding or in terms of attracting the kind of investors you want. So, that’s why it’s an important thing to discuss really on the board level, because it has so many implications around the various stakeholders that allow your company permission to operate.
Joe: I totally agree. I think the fact that it is viewed as a competitive advantage is the [00:09:00] driver because boards and management can not ignore it. If it’s a competitive advantage, you’ve got to think about it. I agree with you, looking at it as another risk that companies are trying to manage changes the whole conversation. It really does.
Annalisa: So, I’ll just take one example in health and safety. So, I come from chemical industries, large manufacturing sites. It’s a huge area of discussion of activity, and we used to think of these things as what do you need to do in order to meet regulations in the various geographies in which you work?
Today we are discussing health and safety about people who’ve been stuck at home working on Zoom and being tired, how can we make their life easier? This is a completely different way of looking at this, and it’s so important because it has a huge value add, if you think about it in these terms,
Joe: Absolutely, one of the things you brought up in this context was that multinationals [00:10:00] and the EU might think about this term that, I can’t tell you how foreign this term is, tax morality, I think was the term. Maybe shame on me that I wasn’t familiar with it, but the notion is that it’s not what you can get away with, it’s what you should be doing to be a good corporate citizen and a good part of society.
I have to say. I think, that is not an American notion. I think here, if you want to be generous and want to have an impact on society, for most people, the last thing you want to do is give it to the federal government. People rather have control over where that money is going and how it’s being used. But in Europe it is really a different perspective, it seems.
Annalisa: So, we meet among our team with Women Corporate Directors. We discuss things that are kind of posing these existential questions for board members. And for me, it was so interesting to find out from the [00:11:00] guys working in accounting and audit committees so that they were starting to get pressure around reporting where corporations were paying what kind of tax rate.
It came under this umbrella of tax morality, and I was fascinated by the subject. It’s not something that you would immediately think this is so interesting, but actually it has huge implications. It is again, for me, part of ESG today, because it is a way that you look at your company’s purpose of how you interact with your stakeholders and how you see your role in helping local communities.
Now, having said that, I know that in Europe, we have a little bit of a different view about this. I’ve worked for American companies before, and it’s not that they didn’t do anything for their local community. They did a great many projects, but it was done individually, separately, each company at a time, and it is that idea of kind of being in direct control of what it is that you choose to [00:12:00] do as opposed to going through the tax system in order to help society. I think that’s kind of a fundamentally different history that we have.
Joe: I think that’s right. I think the one place that what we’re calling tax morality might actually have an impact here is actually getting some of the largest corporations in the United States to pay tax. Right now, as you know, many US corporations do not pay any tax, and there is, I would say, larger conversation going on now that there should be some tax paid no matter how much good they’re doing and no matter what the tax code said, and that we should make changes in the tax code to reflect that, that multi-billion profits should not be generated without some kind of tax liability.
Annalisa: I mean, it is a burden for the regulators to get through, but on the whole, I think it’s quite good to have a level of competition among countries. I [00:13:00] live in Switzerland, which each canton has competition around tax. So, it’s not about fixing a level, it’s about deciding what your positioning is in that system on how you want to regulate it.
Joe: Wow, interesting.
Raza: Annalisa, you are on the board of Cambridge Enterprise. Can you talk about how Cambridge Enterprise helps focus the acceleration and impact of the University’s research in real life?
Annalisa: Well, so Cambridge Enterprise was created to help researchers impact the real world as much as possible, to try to kind of bring up the volume and translate fundamental research into products, services, normally, technically-based things that can have an impact in real life. So, that’s what Cambridge Enterprise does, it looks after patents and then tries to get royalties from them and then helps seed companies based on that.
Raza: Well, innovation drives all the [00:14:00] improvements in the economy. How does the board work in that respect for that translation of innovation getting into real life?
Annalisa: Well, so this is a very particular focus of the board of having impact rather than just monetary impact. So, having royalties or seed funding that goes well is a consequence of doing the right thing as opposed to the reason why it exists, and that makes the discussion on the board so much richer.
For that reason, the board composition is also different from usual. So, you have some non-executive board members that you have everywhere. You also have representation from the university, many academics, and then people from other technology transfer organizations. So, it’s a very, very rich set of discussion.
Raza: How large is the board and how does it function?
Annalisa: It’s fifteen to sixteen members. We meet four or five times a year. There’s the usual statutory things that you [00:15:00] have to do; approving sales of companies that have done well and certain things like that, but more and more kind of an interesting discussion about which areas do we want to see succeed.
It’s been fascinating that there’s been some analysis done in the UK over the last seven years, so pre-pandemic, but the VC funding that has gone into the UK system is quite interesting the way it goes. So, about nine billion over this time has gone into IT, and those are the areas where you get a very quick return, very high returns.
Then about four and a half to five billion has gone into life sciences, so medical diagnostics technology, and only about 1.5 billion on everything else, and those are the things that I want to see more of, anything to do with energy, carbon zero materials, chemistry and then also anything to do with history, social [00:16:00] systems. It’s so interesting, all these parts of research that happened in the university and that don’t necessarily get the outlet yet..
Raza: I think you’re right though. Even here in the US, a lot of funding goes to, what I would call, not deep tech or not hard tech. The joke would be that we wanted flying cars, but we got a hundred forty characters on Twitter. If revenue generation is not the goal for the early stage of innovation that’s being rolled out of the universities, is there then a little bit of lack of seed funding in areas, or is there a lack of funding for areas that need it?
Annalisa: Well, so in Europe, in general, we have a very different environment around VCs. So, when I look at equivalent research universities in the US, they mostly just look after patents and royalties because the ecosystem is there to jump in to give seed funding, [00:17:00] a funding to a lot of different things.
This doesn’t happen so much. So that’s why it’s part of what Cambridge Enterprise does, and I see that needle all over Europe along the work that we do with the research universities. But the other part of the role that I wanted to really highlight is that whereas VCs would normally look at what is the return on this idea, the job of Cambridge Enterprise is to look after the researcher, so things they do don’t get completely diluted
Raza: Because at the early stage of research and development, you have to fund things. The only people who are going to fund those things are the ones that are not necessarily looking for a short-term ROI on their investment. It is for the long term.
Annalisa, bringing this whole innovation thinking to a more general level, you have led innovation and R&D for large global companies, but these companies do struggle in innovating, if you will, [00:18:00] and then talk about the board’s role in fostering innovation in larger companies and what have you seen on what works and how can boards really effectuate that innovation?
Annalisa: So, I think every company he has this headache, how much of your time and resources do you put on making sure that what is successful today works, as well as it possibly can; more efficiency, more investment in that, and then how much energy do you put in what is needed in the future and pulling that trigger?
So, all the kind of discussions about what do you do with your excess cash, do you invest it in innovation programs, in R&D, or do you do share buybacks. It is so interesting. You can tell a lot about how a company is thinking by looking at where those investments go.
Joe: You used the term called “avoiding a Kodak moment” for your company, and I thought that was so well put, and I think Americans would understand what [00:19:00] that means. Could you talk about that, and specifically, how does a board avoid that?
Annalisa: Right. So, it’s stolen from what it used to mean. Kodak had it as one of their ads. For me, I work in innovation, Kodak is kind of the poster child of not pulling that trigger. So, historically, they had all the patents for digital photography, and the company just chose not to make that transition from film to photography, and this has been pored over by, I think, everybody who is an innovation nerd, like any professor in this area.
I think, fundamentally, it’s because the companies saw themselves more as a chemical company, and in fact, Eastman still exists, than a photography company, because then they would have transitioned, and it really does hurt, especially if you wait until it’s too late because transitioning from Business A to Business B, because these are people who have worked with you forever who have built great things, and when is it that [00:20:00] you decide to divest from there and then invest in the next new thing?
Joe: So, I know that hindsight is always 20/20, but what might have made a difference, and the thing that comes to mind is maybe a more diverse board, or I would put it differently, maybe a board with more diverse perspectives might have understood that thinking of themselves as only a chemical company was limiting what they can do.
Annalisa: So, diverse thinking, absolutely, we need to kind of up it in I think almost everything that we do, including the team on supervisory boards, and it is that level of discussion but also that ability on the board to have these important strategic discussions; what happens if we don’t invest in the new technology:? What happens if we don’t have anybody in our team who knows about AI and how an AI application can have an impact on [00:21:00] what we do every day? These are critical discussions and risk-based discussions, as we discussed earlier.
Raza: On the other hand, Annalisa, you also talk about this term called “innovation theater” where companies are pretending to innovate or posing a lot of lip service to that. How can boards not make it so that you end up in innovation theater in a company?
Annalisa: Right. So, innovation theater is our version of greenwashing, and I think it comes from all these wonderful startups that go up on stage and tell a story to an audience of people who they think they might be investors, but actually, maybe they’re just there for the theater. So, that’s how we picked that word.
It’s so easy when you’re on a board to take activity for output. You see the executive team coming up and saying, “These are the kinds of things we do. We invest in corporate venture team or in an incubator,” all these [00:22:00] activities, but actually innovation is all about outputs, and for me, this is something so important to share because I think sometimes we don’t make the distinction quite correctly between what is research and what is innovation.
Research is understanding what something is and it’s often measured in things like how many papers have you written, and then you apply it and that is called development, and then that is all about how many patents you have. Innovation is about either sales or the valuation of your company, if you’re a startup, so it is very output focused and it’s important for boards to be aware of that.
Joe: So, I would say that both for the type of strategic conversation we’re talking about when we’re talking about the Kodak moment and for this innovation theater issue, where is the reality of it? Is this just theater or is this something we’re really doing?
The issue in part is making time during the board [00:23:00] meeting for real conversation that is not having so much time taken about presentation and discussion about the presentation, but actually setting a time for real deep conversation, because, ultimately, I feel that is maybe the single most important thing a board does. If the board is properly composed and if it has the opportunity to really have these conversations, this kind of thing will actually be less of a concern. I think risk identification would be a lot more likely because there’s time to do it rather than, “Hey, let’s get through the report and talk about the next big thing.”
Annalisa: It’s so important. So, spacing the agenda is so important and how the chair operates on a board just gives you that ability to have that open discussion as opposed to being forced to going through all the statutory elements of your job; you have to approve accounts, you have to look at various things, but it’s also that ability to [00:24:00] say, “Well, now we’re going to have this amount of time for an open conversation.” The chair will not give their opinion until after everybody else had. It’s those kinds of small things that make a huge difference in the quality of the conversation and the decisions that come after.
Raza: And Annalisa, you alluded earlier a little bit, when the pandemic would hit, there is cash in the bank and you can do share buybacks, or you can spend it on R&D or innovation, or you can spend it in other ways when times are tight. What do you say to boards in terms of thinking about that allocation of innovation and R&D versus share buybacks?
Annalisa: Well, so I’m biased. So, I think that if a company doesn’t have the right choices to invest in innovation, R&D or M&A, they should go back and think, ” What more can we do? What kind of problems do we want to solve?” Because that is so much more interesting than, “Oh, let’s do a share [00:25:00] buyback and this is how we kind of improve our financials.”
I think it’s a question of having those options that are more interesting and give you a higher return than something safe that you can get.
Joe: But it’s more complicated.
Raza: Yeah, I think data would show that companies in tougher times when they had made the right choices that still continue fund innovation and research development have fared out much better at the other end of those tighter times.
Annalisa: Right. And for me, it’s so interesting. There was some interesting research done by McKinsey at this time on the last recession, so what happened between ’07-’08 and now? And it’s very clear that the companies that only worked on cutting costs came out of it in a really tough way, whereas the companies who are able to, yes, cut costs because sometimes you have to do that and adapt, but also [00:26:00] still invest, also have a view of what is going to be needed now and in the future and invest in that fared so much better both during the crisis and then especially when the economy accelerated out of the crisis, and I think the delta there is something like thirty percent or something like that.
Joe: So, let me ask you about gender diversity on European boards. Again, not surprisingly, Europe is I’m sure ahead of the US on this. What I understand from our conversation is that in large part, that is due to legislation. And I’d like to just hear a little bit about that because I think folks would like to know why that is.
Annalisa: Right. So, Norway was the first country in Europe to legislate on a quota for different genders on boards, and what was so interesting about that legislation is that it was quite hard. So, the country had tried for the previous twenty to thirty years to go through soft measures or training or this or that, and then [00:27:00] saw nothing happening, and then one minister for the economy decided to make a change and say, “Here’s the output, so you need to have at least thirty or forty percent of women on supervisory boards. Otherwise, we will kick the companies out of the stock exchange.”
Then things started to happen. So, some companies decided that they didn’t agree and they came out of the stock exchange, but many companies went with it, and then since then every European country has tried, whether it’s with targets or one way or another, but actually the only significant changes happened when countries decided to then go for the legislative approach.
Joe: Not exactly surprising though, because when there are consequences to acting and not acting, people are far more likely to pay attention.
Annalisa: Right. So, it’s mandated, and then you kind of try and hit your targets, [00:28:00] but in a way it’s sad that that had to happen, but that’s reality. We now know that quotas move the needle faster than the otherwise glacial half of the percentage rise a year that happens.
Joe: So, maybe you’re right. It is sad in a way, but I think the good news is that now that we know, we know there are ways that we can kind of jumpstart this up or accelerate the effort and not just relying on effective advocacy, which is obviously important, but not enough.
Annalisa: But also what moved the needle in Norway was the fact that companies would be kicked out of the stock exchange. And we’ve seen in other countries like the Netherlands, they’ve had soft quota system for awhile with a comply or explain clause. So, if you didn’t manage to get to the system, then in the annual report, a company would have to write the standard paragraph saying, “Oh, we tried really hard. We really couldn’t find anybody. That’s just too bad.”
Now, they’ve gone to a much tougher approach [00:29:00] because that really didn’t change, and it’s interesting to see Germany being the first country to look at quotas for executive boards, so not just non-executive boards. They’re the first country to say, “There should be women on executive committees and we’re going to start measuring that.”
Joe: Wow. How revolutionary. I mean, I think the fact that it’s wonderful that it’s happening, it’s unbelievable that we’re in the twenty first century and this is considered a breakthrough.
Annalisa: Well, I’m sad that we still have to explain why, because we’ve been discussing all along how important it is to have different points of view, different skills. I think the whole point of a board is to bring people together who have different skills and who care for the company and want to see it advance.
So, the fact that for gender specifically, we had to go through all these analyses, these correlations and these discussions of why it’s important to have our [00:30:00] view when eighty percent of purchasing decisions are made by women. I think that’s kind of sad that we had to go through that and that somehow that’s still not landed.
Joe: Well, and it is the reason that I think that suggestions or proposals like NASDAQ floated last year that there would be some standard for gender diversity on boards or else they would be delisted. That is what we need to head towards, because….
Annalisa: With a female CEO.
Joe: Well, yeah, exactly. And I just think that if you don’t do that, the pace of change is going to continue to be glacial. It has picked up. There’s a lot more talk about it. I agree with you, the fact that we’ve had data, just reams of data about this, and yet we’re still talking about it and it’s not really happened. It’s happening, but not happened. I think the lesson is you’ve got to make it happen. You can’t just keep talking about it.
Annalisa: And that’s the red thread in everything we discussed today, whether it’s [00:31:00] ESG or innovation or diversity, it’s about output.
Joe: Yeah,
Annalisa: And you have to show the results, and once you have the results, then you see the benefits that all of these things bring.
Joe: Yeah, exactly. Annalisa, what a great conversation. Thanks for joining us today.
Annalisa: It’s been such a pleasure. I really enjoyed it. And thank you for the wonderful questions.
Joe: And thank you all for listening to On Boards with our special guest, Annalisa Gigante. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review it and rate it on the Apple Podcast app. It really helps others find and discover our podcast.
Raza: You can go to the Apple Podcast app, but all of our podcast episodes are also available on our website, www.onboardspodcast.com. That’s onboardspodcast.com. All of our episodes are available there, and you can even contact us with [00:32:00] your questions, comments, and suggestions on the website as well. We’d love to hear from you.
Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. Raza, you take care, too.
Raza: You too, Joe.
Joe: Thanks.

25. Guy Primus: Accelerate Board Diversification Now!

Guy Primus is a technology executive with over 20 years of experience operating at the intersection of media and innovation,.  He is currently the CEO of Valence Enterprises, which creates new paths to success for Black professions, and is launching the BONDS executive development community this summer.  Guy is also Co-Founder of The Board Challenge, whose mission is to improve the representation of Black directors in the boardrooms of U.S. companies.  In this episode he talks about ongoing efforts to accelerate the diversification of boards of directors in U.S. companies. 

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

https://valence.community

https://theboardchallenge.org

Quotes

“For too long Black professionals have been marching to the beat of someone else’s drummer. So, what we want to do at Valence is create new paths where people can recognize their contributions, their excellence, bring that to the table and have that be recognized by the organizations that they’re a part of.”

“The idea for the Board Challenge came from my friend, Brad Gerstner, his thought was:  “Hey, how do I affect change on a macro level so that there are more black representatives on boards.” We’re starting with black board members, but the ultimate goal is to have more diverse boards in general.”

Big Ideas/Thoughts

There are two ways to take The Board Challenge pledge. One is if you don’t have a black board member you are pledging to add a black board member within 12 months of taking the pledge. So, that is how we are going to get more black board members on companies, recognizing, “Hey, I don’t have one. This is a good chance for me to add one. I’m going to take the Pledge. I’m going to make a public pronouncement of my desire and I’m going to be held accountable.”

If your board already has a Black board member, then you can take the Pledge to support our movement because you know it’s important for society, it’s important for the boards that we sit on to actually make sure that they are representative, and it’s good for the country, for the economy and for corporate America in general.

There are still a hundred S&P 500 companies that don’t have a single black board member, so that’s a good place to start, but our goal ultimately is fully representative boards in all public and private companies, that’s where we want to get to. But if you tell people that,” Hey, we want a representative board” the inaction probably will dwarf the level of action, so right now we’re focused on adding black board members.

Valence is also helping to solve the perceived issue of a lack of qualified board talent by introducing board service as an aspiration to the members of our BONDS executive development community. Black professionals need to start thinking about serving on boards early, and not wait until they are ready to retire to begin preparing themselves for board service.

Transcript

Joe:  [00:00:00]Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors, and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization, its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how are they assessing those challenges and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Guy Primus. [00:01:00] Guy is a technology executive with over 20 years of experience operating at the intersection of media and innovation. He is currently the CEO of Valence, whose mission is to create new paths of success for black professionals.

Raza: Guy is also the co-founder of The Board Challenge, whose mission is to improve the representation of Black directors in the boardroom of US companies. He is an experienced board member currently serving on boards of several companies, including The Virtual Reality Company and the Southern California Public Radio.

Joe: Welcome, Guy. It’s great to have you today with us on On Boards.

Guy: It’s great to be here. Thank you for the invitation.

Raza: The description of Valence is a company whose mission is to “create new paths to success for Black professionals.” What does that mean?

Guy: Well, I’m going to make a slight correction there because I think it’s important. It’s a two-letter word, but the kind [00:02:00] of “to success,” I would say “of success,” because we really want to consider success as a journey, not just a destination, right? So, we want people to celebrate every moment along their career journey, but I think really the important part of that mission is that for too long black professionals have been kind of marching to the beat of someone else’s drummer. So, what we want to do is create those new paths where people can recognize their contributions, their excellence, bring that to the table and have that be recognized by the organizations that they’re a part of.

So, we look at that as a kind of a two-sided equation. One is that we want the black professionals themselves to be excellent in every way. We want them to be supported. We want them to have an incredible community. We want them to kind of not suffer from low aim. We want them to aim high.

Then from the corporate side, really understand that there is an artistic element of your black culture that can be brought to bear. There is a lived experience that is atypical of many organizations, [00:03:00] and all of that benefits the organization if it’s managed properly. So, when we talk about the new paths of success, it is about, yes, the individual and kind of finding where he, she, or they are in their career and where they aspire to be, but it’s also a recognition by the organization that the path less traveled might be the right one for the company and for the individual.

Raza: Great. Great mission, Guy. In essence, would you say that the Valence is a community or database of black professionals?

Guy: Yeah, I would definitely not say database. We want to maintain the humanity, honestly, right? And that’s coming from an engineer, but yeah, we want to make sure that, yes, it is, we do use a database, and it is 15,000 professionals brought together by technology, but we want to make sure that we maintain, again, the humanity, the connective tissue, the mutual respect for each other, the shared progress, right? So, all that happens. Yes, it can happen algorithmically, but it’s better when it happens in person and with heart. And so, yeah, we definitely use the word “community.”

[00:04:00] Raza: And when you bring this community together, do you have a process of vetting before you add them to the community?

Guy: Yeah. I mean, honestly, we want people to be who they say they are. That’s the most important thing, just stand up and be who you say you are. And really beyond that, we want people to share in this belief that success for black professionals is long overdue, right? We could go into the details, but a lot of success has been had by select individuals. The problem is that you can enumerate and you can name those individuals. So, all we ask is that people want the best for kind of some of the members of the community that have been under appreciated for kind of 401 years.

Raza: What type of career opportunities are available through Valence?

Guy: Honestly, everything from entry-level engineering, kind of imagined, kind of front end, kind of dev work products. We’re actually kind of searching for a head of community personally at Valence and a head of product, and so it’s everything from that. We have private equity firms looking for associates and partners, [00:05:00] and we have people looking for board members and C-suite executives, so it really runs the gamut.

We just really focus on mostly, and again, I would use this analogy, national, right? And again, assuming that engineers are in that category, but even though the community is open, what our sweet spot is, it’s kind of that where there’s career progression, even if it’s an innovation economy company or a Fortune 100 behemoth that’s been around for time eternal, we just focus on that where there’s a career progression that is well understood and well-defined.

Raza: That is tremendous. On the company and organization side, how do you enlist them to provide opportunities? And what are you looking for in those organizations that are able to absorb members of the Valence community?

Guy: Yeah, I think really, for the most part, people are aware that diversity breeds excellence, right? It breeds a different way of thinking, different approaches, different solutions, different considerations and framing of problems, and so the companies that come to us [00:06:00] generally have an awareness that, “Hey, we’re not doing a good enough job.”

We have 12 to 14% of the population that’s African-American or black depending on how you kind of categorize it. And especially in Silicon Valley, some of the biggest companies have a workforce that’s just 3% or less, right? When you look at Fortune 500 CEOs, again, those numbers start to get lower and lower, and the average starts to get thinner and thinner, and so generally, the companies that are coming to us are saying, “Hey, we know that this is an opportunity, right? Not necessarily a problem, but we realize this is an opportunity. And we’d like to avail ourselves of the opportunity of the excellence that we have not tapped into. We don’t like groupthink. We would love the diversity of opinion. We would love to kind of make sure that the people who are our customers, that are our partners are represented in our employee base. So, they’re coming to us with opportunities and they’re just saying, “Hey, we want to consider the members of your community that we may not have considered before, and that we don’t know.”

The reason why Valence was started was because people would come to Kobie [00:07:00] Fuller who’s kind of my board member and kind of founder of Valence and just saying, “Hey, I don’t know where to find black talent. Can you help me?  I would love to have a black product manager because we’re dealing in a realm that kind of where black consumers are predominant. Can you help me find a black product manager? Can you help me find someone, who as I’m developing algorithms and artificial intelligence, that will help us eliminate some of the bias that is implicit kind of in our coding?”

So, that’s where it started. That goes back to your question about the database. There is absolutely a database and we avail ourselves of data to make those connections, but the companies really just want to connect with and consider excellence, and they just want to come to us because they’re not sure where to find it as relates to black talent.

Raza: And Guy, we’ve spoken about this many times on this podcast that the excuse of the pipeline or people not being available or not being able to find them is long gone, and I think Valence itself is a testament of that, that if you are looking, you should be able to find good folks to [00:08:00] bring for your company.

Joe: If you’re really looking, you can find.  

Guy: And again, I would like to lower that bar because you really shouldn’t have to look that hard. I’m saying, if you come to Valence, you don’t have to look hard at all. We can help you kind of find those individuals, but also I want to kind of talk about one of the things that you brought up, which is the word “pipeline.”

As an engineer, it bugs me. It really bothers me, because to me, a pipeline has a point A and a point Z and has a homogeneous product flowing through it, and that’s not what we’re talking about here. We’re talking about people. We’re talking about people with different backgrounds. We’re talking about people with different strengths and weaknesses. We’re talking about different approaches to solving a similar problem. So, I try to think of this, again, wearing my industrial engineering hat, as a system.

There is a challenge with the system. Some people don’t know where to look.  There definitely is a problem with the system of people kind of making their way through the system. You have a really incredible raw material that doesn’t come out on the CEO kind of in the C-suite at the end, right. That not necessarily a problem with the [00:09:00] individual. That’s a problem with the system.

So, that’s what we look to kind of solve with Valence, too. It’s not just about finding the black talent, but ensuring, but again, this goes to this paths to success or paths of success that we want to be with them every step along the way to help facilitate the journey to excellence.

Raza: And to improve that system, Guy, does valence also offer programs to help develop further members of the community?

Guy: It’s funny that you should ask. We didn’t send that question to you ahead of time, did we?

Raza: No.

Guy: The reason why I say that is actually we’re launching an executive development program in May. So, in just a few weeks, we are launching an executive development program that really speaks to your question, that it’s not just about kind of getting people into this system. It’s about shepherding them through, just like you would, I use the analogy of a carbon, right?

Carbon has two naturally occurring forms. There’s graphite and, and there’s diamonds, and when you find a diamond, a lot of time it’s a diamond in the rough, and you don’t just kind of send that through the pipeline and hope it turns out on the other end. You hire a [00:10:00] master diamond cutter to make sure that it has the brilliance and resiliency and polish that you want it to have.

So, we think of this the same way, and that’s what our kind of forthcoming Valence Bonds program does. It’s to take those individuals who have been brought into our system and who ordinarily or otherwise might be left to wander in the wilderness, and we’re giving them kind of an incredible path of success and connecting them with like-minded individuals.

 We have a lot of other programs, too. We have something called the Valence funding network where we have 256 entrepreneurs in our program that we connect with investors and we connect with each other, and we connect with opportunities. We have another program that we call Boosts that really are one-on-one micro mentorships. So, if you put up your hand and say, “Hey, I need help with blank,” and we let you fill in that blank, and then we kind of connect with people who have volunteered and consider themselves experts in that area.

Again, we’re not just focused on the recruiting piece, it’s the retention, the promotion and the engagement piece that really is going to [00:11:00] make the difference in this system that we talk about.

Raza: I love the name Valence Bonds.

 Guy: So, you get the reference, right?

Joe: It’s a great add to what you already have. I think it’s terrific that you’re adding that on and it’s next month you said that you hope to do this.

Guy: Yeah. We’re announcing it and launching it in May, and the program will start this summer.

Joe: Fantastic.

So, I want to ask you about The Board Challenge, which I think is a phenomenal mission-driven organization. You co-founded The Board Challenge in September of 2020 to help accelerate the diversification of corporate boards in the United States. How did you become involved and what was your motivation to do it?

Guy: How did I become involved? Because people assume that because I was a co-founder, it was my idea, and it wasn’t. I’m the one black co-founder of The Board Challenge, but the idea actually came from my friend, Brad Gerstner, and Brad is an incredible individual. He’s enjoyed incredible success, but last summer Brad attended an event with his son who said, “Hey Dad, this is incredible. I understand [00:12:00] the challenges that black people face in America,” and Brad obviously being a really successful professional, he heard that and then his son asked him a really profound question, “This is great, but what are you going to do about it?”

So, Brad took that to heart. When your son, when your kids ask you something that profound, you can’t just ignore it, right? There’s no way to ignore it, and so Brad thought about it, and Brad was on the board of a number of companies and he considered doing what Alexis Ohanian did and stepping down from one of those positions.

We, actually, in the course of The Board Challenge, talked to him last week, and he was affected profoundly by the fact that his action really spurred The Board Challenge, but that’s what Brad was looking to do, was step down. He really had to ask himself, “Well, what is it that I can do?” And he considered stepping down from one of the board positions that he was on, but he realized that because he had so much influence as he talked to people, they gave them the idea of, “Well, why don’t you start a movement. Not just kind of open up one board seat, but start a movement that can shine a spotlight on where there’s opportunity for others to [00:13:00] add members of the board. There are a lot of companies that still today don’t have a single black board member.”

 So, that’s what Brad did, it’s to kind of step back and say, “Hey, how do I affect change on a macro level so that there are more black representatives on boards, and we’re starting with black board members, but the ultimate goal is to have more diverse boards in general.”

So, I was one of the early calls that Brad made, because we were a business school classmates and because of my work at Valence, we connected, and it was really kind of just us working through some of the opportunities and really defining how we want it to go to market. So, it was almost a typical business school case of like, “Hey, if you want to really affect change, how do you do it and not looking at it as let’s write a check thing or kind of let’s act as an individual, but kind of let’s really catalyze a movement to really increase representation on boards.

Joe: I want to go back to how it happened. I love the fact that our kids sometimes are the ones that hold us accountable for what we say. Who else is going to do that? If you think [00:14:00] about it, I think it’s great.

Guy: That’s a really good point. They’re not afraid of not getting in the next deal or not being promoted or any of that stuff. They have no fear. So, I believe the children are the future, so we have to listen to them.

Joe: I’m with you on that for sure. Did you talk to other organizations that are involved in trying to work on board diversification before you launched The Board Challenge?

Guy: Yeah, I think it was necessary, and one of the things I told Brad is that, “Hey, we’re treading on grounds where other people have walked. So, this is not a new problem. It’s not a new  kind of opportunity. This is something that people have been talking about for many, many years, and so we have to educate ourselves, but more importantly, we want to be part of the solution and not just kind of a distraction and really looking at this as, again, an ecosystem.”

So, understanding what others are doing and really doing our due diligence to find how we. And to the greater benefit of society, and that’s the way that we approached it. It wasn’t  kind of, “Hey, let’s just go off [00:15:00] and do this.” We called, I would say, 20 or 30 kind of black board members, those who are on boards, and kind of told them what we’re doing, and some of them came on board and kind of gave us their immediate stamp of approval. Some said, “Hey, well, I’m doing this over here, but I’m fully supportive, so you can count on me.”

Everyone is approaching this with the same mentality, which is a collaborative spirit, and there was no other way, honestly. We weren’t just going to set up another tent in the wilderness and hope that people will kind of follow our lead.

Joe: Yeah. Good. So, how have you developed a network of the companies to ask them to take the pledge?

Guy: Yeah, that’s actually the key to success here because, again, each of us comes to the table, so myself and Brad Gerstner and Sukhinder Singh Cassidy, who brought her CEO, Shannon Gordon, from the board list. Each of us came with a network. A lot of times those networks overlapped. It was great when it did, because kind of hearing three voices or four voices was much more impactful than hearing one. Each of us came with the network and we all picked up the phone and just dialed. We dialed for support [00:16:00] from the individuals that we knew that were serving on boards and that were head of nom and gov committees and that were CEOs.

Then a miraculous thing happened, which was people started saying, “Hey, let me call for you.” So, one of the recent successes that we had is Michael Milken, who met Brad and was really impressed with the mission, and Michael and his team, Ronnie Wiessbrod, over there have been making calls for us and, and kind of setting up meetings, and so those go fantastically well, because, again, Michael has an incredible track record of decades of success and he brought that to the table. 

Again, we’re talking about this ecosystem, Ken Frazier at Merck and Les Brun, it really is those companies. Shellye Archambault, Rodney Adkins, all of those guys are picking up the phone and calling for us and making introductions and lending their support, and that’s really when this movement starts to catalyze and it starts to become more than just the collection of individual forces, but an irresistible force.

 Joe: Now, what does it mean when you ask them to take the pledge? What are they pledging to do and how [00:17:00] do you follow up on the commitment they’re making to you?

Guy: Yeah, so that’s actually a really great question and we get asked that all the time, so thanks for that. There are two ways to take the pledge. One is that you don’t have a black board member and you are pledging to add a black board member within 12 months of taking the pledge. So, that is how we are actually going to get more black board members on companies. Again, recognizing, “Hey, I don’t have one. This is a good chance for me to add one. I’m going to take the pledge. I’m going to make a public pronouncement of my desire and I’m going to be held accountable.” So, we follow up.

We actually have an executive director that we hired recently, Sheryl Hilliard Tucker, who had come in, and she has an incredible kind of background in this area, black enterprise and others. So, she is kind of running the organization now that’s holding those in individuals accountable, but again, it’s made with good faith, and so we’re helping wherever we can to make sure that those companies find the right board members. So, that’s the first flavor.

The second flavor is, [00:18:00] “Hey, I already have a black board member, but I am pledging my support to your movement because I know it’s important. I know it’s important for society, and I know it’s important for the boards that we, kind of as a board members and CEOs, sit on to actually make sure that our boards are representative, and so we think that’s good for the country. We think it’s good for the economy. We think it’s good for corporate America in general.” So, that flavor is, “Hey, I just support you and I lend my name and my voice to this movement.”

So, that those individuals that are looking for board members, if there’s an open seat, they consider a black board member, if those organizations that don’t yet have a black board member, they see me, they hear me, they know me, that my voice resonates, and they’re going to now consider adding a black board member, because again, this movement that has been catalyzed is it’s not a one size fits all. It’s not a  prescriptive kind of pronouncement. It is kind of, “Here’s the challenge. Here’s an opportunity. Let’s work together to solve.”

Joe: How did you develop the list of eligible board members to [00:19:00] place on these boards?

Guy: Yeah. So, I’ll say we don’t have a list. There are dozens of lists that exist. There are dozens of companies who are not-for-profit and for-profit organizations, that are kind of dedicated to helping companies find board members, and so all we’re doing is saying, “Hey, take the pledge. We will make your pronouncement public. We’ll hold you accountable, and then we’ll introduce you to a litany  of organizations that can help you find the right board member for you. Everything from warm introductions, and you kind of saying, “Hey, I’m targeting this individual. You know him or her.  I’ve already identified someone and I’d love to kind of get to meet them” to “I have no clue, but here’s what we generally look for.”

We started off with the Boardlist, obviously, because of Sukhinder and Shannon being on board early, but we have major search firms and we have companies that do a fractional CEO placement and every flavor that you can imagine, we’re in the business of helping solve this problem, so it’s not our list because our list is, by definition, the moment you [00:20:00] release it, even if it were comprehensive, it would be incomplete, because there’s always a new qualified person. So, we leave that to the ecosystem and we just make the connections.

Joe: So, a question that I know you’ve been asked is, have you got pushback because The Board Challenge is focused exclusively on black board members? As important as that is, there are some that might say, “Well, why not diversification in general?”

Guy: Yeah, I would say, yes, we absolutely have, and I think that’s not uncommon and not unexpected.  So, the answer that we have is this, there was a moment in time that this makes sense and that this is right now where companies are waking up and understanding what their history has meant, and their lack of kind of representation has kind of birth in a variety of fashion.

I think people want to do something, and the challenge is if you make it so broad and so general, nothing happens, and so  the commitment that we have at The Board Challenge is this, [00:21:00] we’re spending our first year dedicated to adding black board members, because, again, it’s very tangible. It’s something, again, if you can go back to 1619 and think about kind of how we arrived on the shores of America and the challenges that we’ve gone through. Again, you can look at the numbers. I’m an engineer. Gap analysis is my friend. You look at the numbers about  how were disproportionately underrepresented in all shapes, forms and fashions of America, but especially in the board ranks, so you go there.

There are still a hundred S&P 500 companies that don’t have a single black board member, so that’s a good place to start, but our goal ultimately is representative boards. That’s really where we want to get to. But, again, if you just kind of tell people that,” Hey, we want a representative board.” The inaction probably will dwarf the level of action.

So, again, the other thing is that you can go through every company’s website or their annual report, their 10-K, and you can look up the names. In some, again, it might be a lot of work, but you can look up the names [00:22:00] in those reports that are of the board members, and you can, for the most part, identify who the black candidates are.

We would love to have more Latinx candidates on boards as well. That’s something that’s really, really important. It’s a little harder to do, just to be frank. Women, it’s a little easier. LGBTQ, it’s almost impossible from the picture or a name, you can’t do it.

So, again, this being a public pronouncement of the desire to have a diverse board, and we know that once you have a much more diverse board, those board members feel free to speak up and they can affect change from the inside. So, that’s what this is about.  This is a stepwise process to get more representative boards, and we’re just starting with the zeitgeist and with the ability to kind of have a public pronouncement of this state.

Joe: What has been the biggest challenge or challenges that you’ve encountered so far?

Guy: Well, I think that one of the big challenges is that most boards are somewhat, especially at the very beginning, it started off very homogeneous. So, [00:23:00] you know that you can add someone who you trust and you look to your inner circle, and that inner circle is generally homogeneous. So, the network effect of adding to a board is challenging because a lot of people don’t have a deep bench of black candidates or women candidates that they kind of were in fraternity with or members of their country club or what have you. Or even the private schools, so that’s where a lot of people meet their board members at those places that they frequent, the houses of worship, and if we’re not there, we don’t show up on their short shortlist. So, that’s been the biggest challenge, it’s just kind of making people aware that, “Hey, even if you recognize this as a challenge and an opportunity, you don’t necessarily know how to solve the problem.” So, that’s been one of the challenges.

The other challenge has been that a lot of companies want public board service already. So, they’re shooting really, really high, and they’re saying, “Hey, I want someone who served on a Fortune 500 board.” And again, when you start doing that list, you can enumerate [00:24:00] and that the same kind of 20 or 30 board candidates serve on multiple boards, and so there’s there’s been not an expansion of the circle.

Now, very recently that’s changed. So, I can tell you that my friends, people that I’ve talked to, people that I kind of go to the playground with, they’re starting to serve on many more boards and they’re getting many more opportunities, and now the same thing is happening to them. So, the circle is slowly expanding.

So, I look at someone like Salaam Coleman Smith, who’s a friend, who last year joined Pinterest board and this year joined the board of the Gap. I can tell you that three people have reached out to me and said, “Do you know Salaam? Would you mind introducingher to me?” She didn’t have any boards last year. Now, she has board opportunities being thrown at her feet. So, we need to expand the kind of the circle from which people or the kind of pond from which people fish.

Raza: This is along the lines where our friend, Matt Blumberg of Bolster.com, mentions this as board experience problem [00:25:00] versus board readiness. Any thoughts on how basically, just like in the Valence community, part of it is polishing the diamond in the rough, that aspiring board members can do to become board ready?

Guy: Yeah, absolutely. I talk about this a lot. So, Matt is also a friend of mine. I’m a big fan of Matt. He’s helping me kind of guide my own board path. So, Matt is a great wealth of information. And one of the things that I did was I joined a Black Corporate Board Readiness Program that is at Santa Clara University and the Silicon Valley Executive Center.

It was tremendous. I have to say it. I’ve been on this journey for seven years to join, not necessarily a public board, but a big board. This is something I’ve been working on for seven years, and going through this kind of BCBR program at Santa Clara University, it was very, very eye opening because not only did they have a curriculum that they put together, which was fantastic, but they have had mentors and sponsors that were [00:26:00] parts of the program who were those people that I talked about, so Shellye Archambault and Barry Lawson Williams. It was Ken and Caretha Coleman who are kind of the godmother and godfather of black Silicon Valley with really, really incredible wealth of public and private company directors that came and gave their opinions and their perspectives and their recommendations of how to develop this.

But the other thing is understanding that we need to start. This is where Valence kind of plays, right? We need to start seeding the idea of board leadership at a very early stage in their career, because by the time you get to 40, you haven’t done the work that requires where you could have been working on that all along. You could have been serving on not-for-profit boards in your neighborhood. You could have been serving on, you mentioned Southern California Public Radio.

It’s something I’m very passionate about. I’m in media, they needed board members and they wanted to make sure that they had a diverse and representative Los Angeles to talk to, and so it was very easy for me to say yes to that, but if I’m not thinking about what my path is, [00:27:00] then I don’t know that I should be doing this earlier than later, and by the time you get to 50 or where I am now, it’s kind of like there’s a mad scramble for the best boards and  that track record helps you stand out.

 I think the training piece and then the awareness piece and then kind of just jumping in and doing it, find something you’re passionate about and serve that organization because it will lead to connections. It will lead to understanding. It will lead to expertise that then benefits you when you are going for those public boards later.

Raza: Yeah. So it is training. It is nonprofit or smaller boards. And it is also that have you been in the presence of boards, you’re presenting to the boards, you’re often in the boardroom for other reasons, and that makes you ultimately ready. A diverse board is almost always a stronger board, we truly believe, if it recruits the board member beyond the usual suspects. Has that been part of the effort for you at Valence?

Guy: Yeah, absolutely, it really is important. Again, the evolution [00:28:00] of technology and kind of the demographics of America, all of this, it’s constantly changing, and so if you’re not looking for ways to find a competitive advantage or a competitive response at a very minimum, you’re doing yourselves and your shareholders a disservice. So, as you kind of think about that, you have to skate to where the puck is going to be, not where the puck kind of is or has been, That’s how you win. That’s why Gretzky is the greatest hockey player in the history of the world is because he’d skate where the is going to be.

Joe:  Whoa, wait a minute here. What about Bobby Orr?  I’ve agreed on everything you said so far, and now, we’re getting into very, very troubling territory.

Guy: I’m from Pittsburgh, so I feel that my fellow Pittsburghers are not going to feel kindly that I didn’t say it was Mario Lemieux, but I recognize greatness, and again, if I could be the Gretzky of board members, I would be really, really happy.

So, again, all the boards that are looking to kind of nominate new board members, it necessitates a different approach. So, I’m not [00:29:00] suggesting that you have to have an entirely new board  to represent what the future, because there is an incredible value in having the experience of someone who’s served on those public boards, but there also should be, again to your point about diversity, not just diversity of experience or diversity of skin color or culture, it’s diversity of age, it’s diversity of kind of expertise. It’s diversity of experience, and so all of those things play into understanding kind of what your board looks like.

I would say that since I took over as CEO of Valence in June of last year, I knew probably three of the people that are at the company. Again, we’re a relatively small company, so we’re fewer than 20 employees, and I knew three of the people that are working for me right now and most of the people, I didn’t know. Of the people that I did know, I’ve only met two of them face to face. So, imagine what that world looks like versus you going in in kind of one of my former organizations, EDS, and when I was at AT Kearney going into EDS and you’re wearing your white shirt and your wingtips and [00:30:00] having kind of the blue suit or the gray suit and that world looks a lot different, and yes, you need that person because they’ve been there and done that, and they’ve seen this movie before, but again, we need people that can also predict the future.

Joe: Diversity of perspective. That is what we need. Anyway, Guy, it’s been great speaking with you today. Thanks for joining us on On Boards.

Guy: My pleasure.

Joe: And thank you all for listening to On Boards with our special guest, Guy Primus. To our listeners, we have a special request. If you enjoy our podcast, please take a moment to review it and rate it on the Apple podcast app. It really helps others find and discover our podcast.

 Raza: And to our listeners all of the episodes of the podcasts are also available right on our website. OnBoardsPodcast.com. That’s www.onboardspodcast.com. And you can also contact us with your comments, suggestions right there on the website as well. We hope to hear [00:31:00] from you.

Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. Raza, you take care.

Raza: You, too, Joe.

Joe: Thanks.

24. Ralph Ward: The Rules of the Game Have Changed: Beware the Naked Boardroom

Our guest today is Ralph Ward. Ralph is an internationally recognized speaker, writer and advisor on the role of boards of directors, how benchmark boards excel, and the future of governance worldwide. He publishes the online newsletter, Boardroom Insider, and he editor of the Corporate Board, the nation’s leading corporate governance magazine as well as six acclaimed books about boards and governance.  In this episode Ralph talks about how increased transparency into a board’s actions are accelerating changes in behavior in the boardroom and in how boards are composed. 

Thanks for listening!

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Links

Boardroom Insider

Quotes

The Boeing Shareholder Case

Boards of directors need to understand that there is a lot more transparency on all their communications. There’s a lot more that a good plaintiff lawyer can reasonably look at to determine just exactly how a board of directors acted – personal and work emails and texts for example.  

Is the transparency, the additional transparency, the extraordinary transparency that is now available to plaintiff lawyers, is that a bad thing?

I think it’s a good thing if it’s a whip to better board operations and oversight.  It’s forcing Boards to up their game.   

As you said, good lawyers have scrubbed the meeting minutes to the point that you really don’t know exactly went on at the meeting. It’s really a record created for other people to read rather than necessarily a look at what transpired. So, isn’t it holding the board of directors to the fiduciary duty that they’re responsible for?

“The reality is that how the sausage is made is not always really a thing that you want everyone to see, but what’s important is the balance.”

Do you think the heightened level of transparency might, in some way, stifle open and honest conversation or deter people from becoming board members?

I have an issue of Forbes that has a discussion of director liability issues in it, and the author raised a very good point, “Are we going to make it so dangerous to serve on a board of directors that no one wants to anymore?” And it sounds like a valid point – it was from a Forbes article in 1968. If there has been any overall frightening away from serving on boards of directors, I haven’t noticed it.”  but what they will do is take a closer look before they go onto a board of directors, do some more digging; what’s in the background, what legal issues have come up here, who are the leaders here, what’s the current climate in this boardroom, why am I joining the board? Well, because someone left. Well, why did they leave? What was the story behind that? And that’s I think all to the good.

“I think if you ask the question, is it a good idea to avoid “groupthink?” Everyone would give you the right answer. Of course, we don’t want “groupthink” in our board or in any kind of group of people that are making decisions. And yet, the diversity of perspective in a boardroom is something that’s only really coming in to its own now.”

“Serving on a board is not something you do in your spare time and make a few extra bucks. Whatever the size of the company, no matter how small or whether it’s a Fortune 50 company, the job is really important to the company and to the stakeholders of that company.”

Big Ideas/Thoughts

The sabbatical in the boardroom (during Covid) I think, really refreshed our governance in ways we never anticipated.

Why do we need to get all these folks together every three months in a room for a day or two to make decisions? Why can’t we do it as a sort of a bite-sized chunk information. Have this section of the board meet for fifteen minutes online tomorrow, have this committee meet little bitty meetings all over the place, giving them the information, they need on a drip feed basis instead of a 50-pound board book just before the meeting. Why not try that? What could we do? 

The reality is that what we’ve learned from virtual meetings, along with the heightened scrutiny, has brought us back to focus on the fact that being on a board is a job and it’s a difficult job and a serious job and a time-consuming job.  The reality is that to get the best people with the expertise and the experience and the other attributes you’re looking for, you have to go beyond that limited network that you or other board members may have, or people that were former CEOs and have served on boards, and that I think is a positive as well.

Transcript:

Joe:  Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors, and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization, its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Ralph Ward. [00:01:00] Ralph is an internationally-recognized speaker, writer and advisor on the role of boards of directors, how benchmark boards excel, and the future of governance worldwide. He publishes the online newsletter, Boardroom Insider, a source for practical, firsthand advice on better boards and directors, and he edits the Corporate Board, the nation’s leading corporate governance magazine.

Raza: He is the author of six acclaimed books about boards and governance, Board-Seeker Guide Book, Boardroom Q&A, The New Boardroom Leaders, Saving the Corporate Board,  Improving Corporate Boards: The Boardroom Insider Guidebook, and 21st Century Corporate Boardroom.

 Joe: In addition, he’s made numerous media appearances, including CNBC, TheStreet.com, CNNfn, C-SPAN, Voice of [00:02:00] America, Bloomberg, National Public Radio, and Marketplace, and he writes and comments for the New York Times, The Wall Street Journal, USA Today, Across The Board, and many others. Welcome Ralph. Thanks for joining us today on On Boards.

Ralph: Welcome. I’ve been looking forward to it.

Joe: Great. So, something that you and I have talked about and that you’ve written about is the recent Boeing shareholder civil action against members of the board of directors. As a former trial lawyer, this really caught my attention, and I think one of the things you said was that maybe the rules of the game have changed. Let’s talk about that.

Ralph: Yeah, I call it the coming naked boardroom, just because that sounds like a good catchy title, but as you’re aware as an attorney looking into the case and also some of the recent media coverage on it, one thing [00:03:00] that’s amazing is how much depth the plaintiffs were able to dig out from the board work of the Boeing board here, and we’re not just talking about the standard minutes of the meeting or looking at the agendas, looking at text messages, looking at emails, being able to dig into the servers of the board members to find out what sort of things they were sending back and forth and look at all of this material, and it was kind of scary the depth that that revealed of the company of various things like a board that was more interested in the optics of having their planes crash than perhaps the safety record and probably being a little bit too lax in responding to the 737 crashes and being too willing to listen to the CEO’s assurances on it.

Now, these are all of the sorts of things that obviously plaintiff attorneys are [00:04:00] going to be trying to prove in court, but when you can dig to that deep of a level of everything that the board has been communicating among itself with management; offhand notes, quick text messages, everything, it’s very easy to make any board of directors look lax, look completely inept, and it’s something I think could happen to all of us if we were being monitored that closely. 

Boards of directors need to get that idea now there is a lot more transparency on all of their communication. Is that going to make you look good or bad when you have a director sitting in the docket? And most of the time, most of us are going to look pretty bad.

Joe: Well, there’s a lot to unpack there, Ralph, so let’s start with this. 

First of all, you’re absolutely right. There’s a lot more that a good plaintiff lawyer can look at and reasonably look at in determining just exactly how a board of directors acted. So, [00:05:00] in this case, the board says that it publicly deliberated over whether to ground the entire fleet of 737 MAX jets after the crash in Indonesia, but the information that the plaintiffs has seen thus far contain no evidence the board ever discussed grounding the airplanes in the months between the incident and the crash in Ethiopia. So, I guess  the question I have is, is the transparency, the additional transparency, the extraordinary transparency that is now available to plaintiff lawyers, is that a bad thing?

Ralph: I think it’s a good thing if it’s a whip to better board operations and oversight, because as you mentioned here, if you look at board minutes of most meetings of corporate secretaries and council have long gotten smart to say as little as possible about the content of what went [00:06:00] on, the board discussed this duly at length and decided to vote X or Y. Maybe what actually happened was someone mentioned it, everyone said, “Yeah, that’s a good idea,” and then they went on talking for a few more minutes about something else. 

But the minutes told a good story. If you start having a lot of other messages coming in, texts, issues, things like that saying the opposite or even worse, saying that there wasn’t anything done, you’ve got a lot of back-up material now that shows, “No, you weren’t doing the job.” So, that’s going to definitely crack a whip over boards. They have to say, “Not only this is what we did, but how was it going to look? How are the optics going to be?”

Joe: So, a board of directors has a fiduciary duty, not just to the shareholders, which in this case is obviously front and center, but all of the stakeholders, so isn’t that level of transparency a good thing? As you said, good lawyers, and some of my best friends are lawyers, but good lawyers have [00:07:00] scrubbed the minutes. You really can’t tell what’s going on. It’s really a record created for other people to read rather than necessarily a look at what actually transpired. So, isn’t it holding the board of directors to the fiduciary duty that they’re responsible for?

Ralph: It is, and it’s forcing them to up their game. Remember that all of these tend to be retrospective sort of issues. If you do not have a disaster strike, if your planes don’t crash, if there’s not a major accounting issue, if one of your factories doesn’t suddenly explode, if your ship doesn’t get stuck in the Suez Canal, none of these issues are going to arise. No one is going to be looking at how the board did its job. So, you have to ask yourself, “What can we do to prevent a problem happening, because if that problem happens in the boardroom, then suddenly everyone is going to be looking at us?” 

 One thing I’d mentioned over the last [00:08:00] year that has made this even more problematic with video of virtual online board meetings, if someone at the company secretary’s office or at the information people in the company decide, “Oh, well, I’ll take a video, record everything that would happen in the board meeting,” well, then you’ve got another huge barrel of worms that could be opened there because you’re going to suddenly be able to see board members checking their text messages in the meeting, you’re going to see that someone’s an empty chair there for five minutes when an important vote happened. All of these things are going to be ten times more transparent, which is why as any good lawyer will say, “No, don’t videotape your online Zoom board meeting,” but whether everyone gets that message, I don’t know.

Joe: Yeah, I think it’s a little different. I think it’s okay to tape it. I know boards that do it for purposes of creating the minutes. I think what’s important is to not keep it in the archives [00:09:00] because it’s not necessary and it’s not a good idea. Every little thing that happens in the board meeting actually shouldn’t be part of the permanent record, and I would say if you have in-house counsel or your outside counsel, every board that is recording Zoom has been hopefully advised of this. 

But there’s still, even without that, a level of transparency now, as you said, text messages that are being exchanged. We all know that there’s chatter behind the conversation. Now, you can actually get a look at that chatter, and it isn’t always going to be flattering, as you said. The reality is that how the sausage is made is not always really a thing that you want everyone to see, but what’s important is the balance. 

The transparency about what a board like Boeing did is a great lesson in what boards should be doing. We [00:10:00] need to be doing the job that we’re supposed to be doing, and knowing in the back of your mind that if something goes wrong, someone can take a look at actually what was happening during that period of time. It keeps people on their toes.

Ralph: It does, and it tells a lot more than we tend to give a credit for here. Suppose you were to sit in and know everything that’s going on on a meeting of the Tesla board of directors. Well, wouldn’t it be interesting to know exactly how much Elon Musk is telling people to jump and having them say, how high? Minutes of the meeting probably won’t show that, but if you had some more real-time insight on it, then you might not like what you’re seeing, and that would apply to just about any company with its board of directors.

Joe: Yeah, I can guarantee you the minutes don’t show that no matter what is happening at the board meeting. So, one of the things we talked about was whether this heightened level of transparency might, in some way, stifle open and [00:11:00] honest conversation. What do you think about that?

Ralph: I think it won’t because you have more actually of an obligation to be the hand raising in the room now, because in the back in your mind, aside from thinking how is this going to look, you’re also thinking, “I want to be the one who ask the question, was this a good idea when the lawyers come looking at our transcript four or five or ten years down the road here?” It will be a prod for individual board members.

Having said that, then you start getting into the question of, how much do you prod members of a board before they decide, “The game isn’t worth the candle. I don’t want to serve on boards?” And that’s one thing that I’d like to address because it always fascinates me. I have an issue of Forbes that had a discussion of director liability issues in it, and an author raised a very good point, “Are we going to make it so dangerous to serve on a board of directors that [00:12:00] no one wants to anymore?” And it sounds like a valid point, and then I dropped the trap on it, “Okay. Well, that was from a Forbes article in 1968. If there has been any overall frightening away from serving on boards of directors, I haven’t noticed it.”

So, that’s kind of a bogeyman. I think, that directors will be too scared to go on boards because of their own liability, but what they will do is take a closer look before they go onto a board of directors, do some more digging; what’s in the background, what legal issues have come up here, who are the leaders here, what’s the current climate in this boardroom, why am I joining the board? Well, because someone left. Well, why did they leave? What was the story behind that? And that’s I think all to the good.

Joe: Agreed.

Raza: Ralph, you’ve been writing about and lecturing about corporate governance since the nineties, so now let’s broaden this context of this conversation, has governance level improved since then [00:13:00] in your observation? Are boards getting better selected, better equipped, and better trained to do the job that they’re supposed to do, which is to hold management accountable, drive strategies, and help to identify and manage risk. What do you say, is the state of governance improving?

Ralph: It has improved, and I think as much as directors have gotten the message worldwide, they need to do better. I think just the infrastructure of making boards more effective has improved and it’s forced them to up their game. That comes from two ways. One is from global regulation, stock market listing requirements, improving and seeing more independent directors, stronger committee structures, more disclosure, ” Why are we paying the CEO? We have to put that in our filings.  What is the rationale behind that? Here are the [00:14:00] goals. Here is what we’ve done. Here is more bio background on the members of the board that everyone can see.” And I think that’s one aspect. 

The other aspect, and this is something that I’ve been pushing at Boardroom Insider and I think the message is getting through, is that the nuts and bolts of governance is improving. Better committee structures, because your listeners who serve on boards know that a lot more of the actual hard lifting of governance nowadays isn’t happening in the full boardroom, it’s happening at the committee level because you have audit committees that have taken on huge new responsibilities. Compensation committees, particularly at the Fortune 1000 level, CEO employment pay contracts have become monstrously complex. Nominations and governance committee that used to be a sleepy backwater, now they’re doing regular evaluations of the board and their members, better minuting better information package, better use of [00:15:00] digital portal tools to get more backstopping for the board’s work.

I think it’s somewhat of a broken windows effect here. By putting in all of these backstops building in, you have to have better government just to meet all of these standards, it has pushed up the work that the individual directors are doing. 

 Raza: Our guest, Didier Cossin, in an earlier episode, also affirmed that in his view, the state of governance is getting better, but I put this counter or a question more like that on the other hand, the longevity of a publicly-traded company or the number of years that they survive is actually going down. So, on one end, we think we’re getting better at governance and risk management, yet on the other hand, we are seeing more blowups. How do you reconcile the two?

Ralph: I don’t know if the two are directly related because we’ve had so much more [00:16:00] frangibility over the last half century in buying and acquiring companies, companies being spun off things like that, and I don’t know if governance is a direct relationship to that or not. It might actually be a sign of better governance.

If you go back a couple hundred, three hundred years to the beginning of joint stock companies and chartering, all of the charters were for a limited amount of time. The idea that a corporation or however it was structured could go on for decades, for centuries outliving the founders two hundred years ago, that would have seen as bizarre as a hundred-year-old fruit fly. 

No, we don’t do that. We set out this up to do this particular task to build a turnpike or do a voyage, then all of us cash out and reinvest in some new operations. So maybe we’re actually seeing a return to form for corporations.

Raza: I think it’s also a testament that the cycle and the [00:17:00] speed of the cycle for everything has just increased. That’s how it is with products and services, new of them come and that replaced previous ones at a faster pace, and that’s what the corporations are also facing.

Ralph: I agree. And also I think eventually we’re going to realize that the last year of prying boards out of the boardroom, putting them in front of their computers, on Zoom screens for meetings, using their portals more for information was not a bad thing. It was a good thing because it allows us to literally tear apart the whole idea of how a board works and what it does and rethink it all. Why do we need to get all of these folks together every three months in a room for a day or two to make decisions? Why can’t we do it as a sort of a bite-sized chunk information. Have this section of the board meet for fifteen minutes online tomorrow, have this committee meet little bitty meetings [00:18:00] all over the place, giving them the information they need on a drip feed basis instead of a 50-pound board book just before the meeting. Why not try that? What could we do? 

Because suddenly, board meetings go sort of through a Moore’s law change here instead of a board meeting being one big, expensive thing, suddenly it costs next to nothing, and you can break it down into these little chunks. Well, what could we do differently on governance? How could we do it better?

Joe: Well, it also opens it to the concept that being a member of a board of directors is a job, and most jobs we have don’t require that every three months you pay attention. They require that you’re actually paying attention kind of all the time, not every day, but you don’t just pick up as has been the custom for a long time a big fat board book and catch up and figure out your questions, and then you go on. That actually [00:19:00] may not be the best model. The reality is that this, along with the heightened scrutiny, has brought us back to focus on the fact that being on a board is a job and it’s a difficult job and a serious job and actually a time-consuming job.

I think that realization is good for a number of reasons. One of which is people need to understand that and take it seriously. Another of which, which you alluded to earlier, is that the people on  nom/gov committees are looking differently or should be looking maybe more carefully at who they bring on to the board, and the other aspect is – I think it’s having the effect of widening the net. We’ve talked about the fact that for years it’s been somewhat, not everywhere, an old boys network or a family network or the people you know, and not out of [00:20:00] any sense of trying to exclude people, but just because it’s more comfortable. You know the guys you know, and they were guys for a long time, and that made it easier.

The reality is that to get the best people with the expertise and the experience and the other attributes you’re looking for, you have to go beyond that limited network that you or other board members may have, or people that were former CEOs and have served on boards, and that I think is a positive as well.

Ralph: I agree. I think you’ve raised some really terrific points there, and that’s another advantage, I think, of sort of taking a boardroom sabbatical for the last year for the board, getting out, because from experience, no matter how good or effective a board wants to be on diversifying, adding new talent, when Joe, a member of the board who’s been around for a while, says, “I’m retiring, so over the [00:21:00] next year, we’ll need to look for adding something,” the first thing most boards do is look around the room and say, “Who knows someone who would be good here?” 

Not bad. It’s good networking, but if you’re not sitting around the room when that happens, then suddenly you’ve expanded the universe a little bit. We can look around outside of who knows who at the table. We can look at some younger people. We can look at more women who are rising in the organization. We can look at more people of color. We’re more likely to go out and tap some of the great resources out there in the various organizations that are putting together lists of good director candidates that are more diverse, more women, people of color and all of that. We can go to recruiting headhunting firms that we’d talked to to hire our top talent, “Hey, do you know anyone who could be on the board?” “Yeah, we know some great people.” So, it’s good. The sabbatical in the boardroom. I think, we’re going to end up finding out to really refreshed our [00:22:00] governance in ways we never anticipated.

Joe: Interesting. I think if you ask the question, is it a good idea to avoid “groupthink?” Everyone would kind of give you the right answer. Of course, we don’t want “groupthink” in our board or in any kind of group of people that are making decisions. And yet, the diversity of perspective in a boardroom is something that’s only really coming in to its own now.

So, I think everyone would agree that a diversity of perspective probably makes a board stronger in almost every instance, but that wasn’t the case for a long time, and now, if someone doesn’t have board experience, but might be “board ready” for other reasons, those people are going to be considered, and in many instances, will make great board members. It just going to take a more robust process. 

I’ve said to clients of mine, “If you are hiring a new CEO, you wouldn’t go around the room and say, ‘Anyone know [00:23:00] someone that could be the next leader of this company.'” You’d have a process and you’d have a job description and you’d have interviews and you’d have a series of interviews and you might have a search firm. You would take it very seriously, and the reality is, that boards need to take bringing on new board members as seriously as that.

Ralph: Yet another great point here, because you have mentioned all of the things about hiring. Yeah. Yeah. Kudos to you. If you hire a CFO for the company, you don’t ask the current CFO, “Do you know somebody?” You look at job descriptions, you look at experience, you look at education, you do a whole lot of vetting. 

Who goes on the board of directors of most enterprises? It’s because someone knows someone and you like their title. You don’t do that much background vetting. There certainly isn’t any training or education to do it. And particularly, there isn’t any for leading a board or being a board chair, which I think is one of the most amazing scandals of corporate governance. The real, [00:24:00] very pinnacle of the corporation, the chair of the board of directors is there because they’ve been around a while, they’re the founder, they’re family, they made a proper investment. Do they actually have to have any training in running effectively a board of directors? No.

Joe: Well… 

Ralph: No one seems bothered by that, which I think is amazing.

Joe: Yeah, I’m going to push back on that a little. I there’s a lot of training for board members. There’s all sorts of good training out there. I mean, in the NACD, we’ve had the President of the local NACD on our podcast a couple of times, but there are many sources for good board education out there. Now, is everyone availing themselves of those opportunities? No, but I think that’s changing. 

I do take your point about board chairs. I think more emphasis on training those people to do the job is really something that would make a lot of sense. I do know that some of the best and most effective boards have [00:25:00] coaching for their future CEO. So, if someone’s a vice chair, they start the coaching in that year or two before they assume the chair.

Or if there’s someone that’s in the pipeline to become chair or like they would a CEO, they get training, they get coaching. Now, I think that is starting to happen, so I think it would be a mistake to say there’s none of it, but I think paying more attention to it, as again, you would with the future leader of your company, is something that we all need to pay attention to because it’s not a hobby. This isn’t something you do in your spare time and make a few extra bucks. Whatever the size of the company, no matter how small or whether it’s a Fortune 50 company, the job is really important to the company and to the stakeholders of that company.

Ralph: I have to kind of disagree with you on board training. I’m sorry, but my experience has been from the various MBA business school programs, the major national organizations [00:26:00] on governance, they do a pretty good job of covering the basics, things that people probably learned in their business school training on what is a corporation, what is a board of directors, what does it do, and then you come out of it with a certificate saying, “I know how to be a director.” 

From what I’ve seen, it’s kind of like the wizard of Oz giving Tin Man a certificate saying that he has a heart. Well, he had a heart to begin with, but now he’s got a fancy thing that says that he does and that’ll get attention when it comes board time. I definitely encourage people to network through these groups and to get education, how much real world value it does to make them better in a board, I’m not sold.

 Raza: Ralph, I actually want to go back to what we were talking, this pandemic year pushed the boards five years ahead or ten years ahead where it would have been in terms of all boards went into virtual meetings, and we talked about it a little bit. Do you see that that is there to [00:27:00] stay post pandemic or in the future, something hybrid?

I think you talked a little bit about the drip version or the more continuous work on a board. What do you see as the future is, is it still going to be Zoom meetings or are people going to miss the board room?

Ralph: Every director I talk to says some equivalent to “I miss the boardroom and I want to get back into their meetings there.” I am not sure how well that will shake out in the long term, because we all remember a year ago we were told that we were going to have to shelter in place for a few weeks until we got a handle on COVID. Well, we’re going into the second year here now, and most of us are still having to shelter. 

In-place board meetings, I’ve done some writing here recently on, “Well, how do we know we’re ready?” And there are a few steps and checklists you can go on to say, “Okay, it’s practical to look at this. But I don’t [00:28:00] think we’ll ever get back to where we were a few years ago with in-person board meetings being the primary default and having a few Zoom and teleconference meetings just to fill in and to handle some quick committee work because people are going to realize, “I had to fly god knows where. I had to knock out two days out of my incredibly busy executive schedule to deal with this here and now I’m going to have the added travel hassles and lodging and all the other hassles here. But on the other hand, I like the conversation with people. So, I’ve got that on one hand. On the other hand, I’ve got, you know, I can zip into my Zoom meeting. We can handle this in half an hour and then I can go off for lunch. I like the conversation. I also like being able to zip out for lunch and not do all that.” So, it’s going to be more of a case-by-case thing, but the benefits have been great.

Raza:  I do think the future is hybrid,  and especially new relationship [00:29:00] forming tends to work better in person. Once you have the relationship, other meetings or incremental meetings can go on virtual as effectively or even more effective because of the reduced cost of travel and other things.

Ralph: I have found board members tend to talk a big game a lot, and one of the most common things is whenever there’s a corporate scandal where the board was asleep, every director I talked to says, “Well, that wouldn’t happen on my watch. By God, we ask tough questions and blah, blah, blah, blah, blah,” and they’re probably the company that’s going to have the next scandal, and they’re saying, “You know, I really want to get together and network with everybody and talk with them.” They probably do, but how hard they’re going to push that long term, I don’t know. 

But one thing I would say is that if we’re just looking at this at meetings of the board going to the virtual world, we’re missing one aspect. The last year has really pushed boards to make better use of their board portals for online information [00:30:00] sharing and updating, and it’s really made a big difference because you can do a sort of a drip feed process. Instead of having to get together this massive book a week before the board meeting, you can send out bits and bits of pieces. You can update your information regularly. You can have more links for the director. They can actually spend more time preparing for the board face to face than they actually do in the board meeting itself. And they’ve discovered, “Wow, there’s this great world of tools out there that can make getting ready and knowing what’s happening a lot easier.

Raza: And it’s a single place for all secure communication and everything related to the board is in one place.

Joe: Yeah, given the incredible emphasis on cyber security, the increased use of board portals is critical. It really covers a couple of things. It’s a far more secure way to communicate, but it also kind of eliminates this notion that we put together, as you say, [00:31:00] this big board book. It really is a regular source of being able to inform your board members, and I think that’s all for the better. I agree with what you said earlier, Raza, we’ve jumped five or ten years ahead in one year. That’s happened in some good ways or some bad ways but in many ways. But in terms of boards, I think what Ralph was saying is true, and I think the term of the phrase you said, that the future is hybrid, I think it’s absolutely right. 

Ralph: Probably, if you have your board meeting remotely, and even in a hybrid situation, the ideal would be if the company gave every member of the board their own iPad loaded with the software they needed with every bit of patch for security, and then told them, “Use this for all business related to our board. If you want to send messages, use this, use our internal messaging system. If you want to ask a question, do it through this system. Don’t use your phone. Don’t [00:32:00] use your own personal text messaging. Anything having to do with the business, do it through this media because it’s being captured. We’ve got it. We’ve got it secured. It’s all in one place. If someday we get sued, we’re not going to have someone going and subpoenaing your company’s internal servers to chase down text messages and things you sent us. That’s the ideal. I don’t know how well they’re meeting up to that yet, but that would make everyone’s life much easier.

Joe: It’s a small price to pay to secure the communications in advance.

 Raza: On the other hand, it provides hackers as one place to go and hack the whole thing, and it provides the subpoena one place to get the whole thing as well. 

Ralph: It is, but then you’ve got a good gatekeeper managing everything. Whatever destruction schedule they have for information is being well kept up to there. And boy, if I had my board members sending text messages through the portal system on their own dedicated [00:33:00] iPad versus sending something through whatever they’re doing on their iPhone or sending a Gmail, I know which side I would worry about hacking a lot more on.

Joe: I totally agree, Ralph, and I’ll just say this, Raza, it won’t make it any easier for people that are issuing subpoenas. It’s easy to issue subpoenas for everything. So, text messages, work computers, et cetera, are all fair game. = Knowing that you have a disciplined board, who’s putting it all through an iPad and through a portal, I think it should make people rest a little easier and it’s going to be a lot easier to protect the information as well. Cybersecurity, it’s not just transparency that we’re worried about, but it is also security.

Raza: Ralph, I want to switch topics. You may have worked or observed family businesses, and is that worse than working as a marriage counselor, or what’s your experience? 

Ralph: Marriage counseling [00:34:00] is a pretty good thing here. That’s one reason why I don’t do a lot of hands-on advisory with the family business. You’ve got to do a lot more sensitivity on who knows who, what the issues are, what their relationships are. This gets into what I mentioned earlier here is building in the infrastructure of governance though, because these are things that benefit a small family business. They will benefit Joe’s Tool & Die Incorporated, They will benefit Exxon. All of them can do well by putting in all of these fundamental nuts and bolts things; better minutes, better board information packages, better agendas, smarter thinking through of the whole thing, being able to do more board work in less time. Everyone can benefit from that. 

It gets back to the broken windows thing. If you have all of this infrastructure building you to just do a good business, like maybe bureaucratic, but in the positive sense, job of [00:35:00] governance that lifts the level of everyone in the boardroom, and I think in family businesses, that helps too, because it imposes a layer of formality that some family board situations could probably use instead of having an agenda, being something the owner jotted on the back of the envelope five minutes before the board meeting.

Joe: Okay. Well, two things, first, I do a lot of work with family-owned and operated businesses, and I think your perception of them is pretty one-sided. Yes, there are families that operate like that. There are a lot of family businesses that don’t. There are massive family businesses that run better than other private companies, that run better than some public companies, so I think it’s not fair to kind of stereotype family businesses that way. 

I would also say that family businesses, in my view, are the backbone of the American economy. We know from statistics that there are fewer [00:36:00] public companies now than there were ten years ago and more private companies.

 Ralph: They’re the backbone of every economy around the world, and especially if you start getting into Asia, the Middle East, Europe a lot, then you’re talking even more concentration of family-owned businesses, as you mentioned, really are run well. So, I don’t want to put them down here, but any tools I can give them to help them, so much the better.

Joe: Well,  I absolutely agree that it’s a worldwide phenomenon, but the other point you made, I agree wholeheartedly with, which is that the tools that we’re talking about, including, but not limited to the type of board members you’re looking for and how you go and find them, will help every company. It doesn’t matter if you have a board of five or you have a board of twenty five, who you pick and how you put that group together and how people think about that job is changing, and I think that’s a good thing.

Ralph: I think it’s the things like committee structures on the board, because in some smaller companies, it can be more [00:37:00] informal. I say, “No, put in committees, put a committee charter together, take the time to do this because you’ll be happy you did. It raises the level of your governance.”  You can focus on audit and finance issues. You can focus on compensation. You can focus on risk. 

Risk is a big problem now. Most companies tend to shovel risk oversight and management into the audit committee. The audit committee is kind of the kitchen junk drawer of the board, “Well, this needs to be done. I don’t know who does it. Well, let’s shove it off into the audit committee. They can do it here and.” And that’s wrong, that weakens their role and it makes the oversight less effective.

 Raza: We’ve had great conversations with both our guests, James Lam and David Koenig, about separate risk committees and why they’re important. And Joe, to your point, maybe then the marriage counseling goes to the family council part and not the board for a family-owned business.

Joe: I would say that the work done [00:38:00] in every company has its challenges. Family businesses have some challenges that others don’t, but they also have some strengths that others don’t, and the kind of culture and loyalty that a good family business can generate is something that makes some of these family companies just incredible businesses.

It’s hard for a non-family to do it. I see companies that are founder-owned and led that really aspire to be like family-owned businesses in terms of the loyalty that they can generate from their employees, which is something that family businesses have been traditionally better at for reasons that I think we all probably understand,   but they get a bad rap sometimes.

 Ralph, it’s been great speaking with you today. Thanks for joining us.

Ralph: Thank you. I look forward to meeting again someday here. 

Joe: So, do I, and thank you all for listening to On Boards with our special guest, Ralph Ward. To our [00:39:00] listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: Our website is www.onboardspodcast.com. That’s onboardspodcast.com. All episodes are available right on the website, and you can even contact us with comments and suggestions. 

Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. Raza, you take care.

Raza: You, too, Joe.

Joe: Thanks.

23. Micho Spring: Corporate Culture as a Risk

Micho Spring has been a highly respected political and business leader for many years, beginning as a young Chief of Staff to Mayor Kevin White and now as an advisor to companies around the world as the leader of Weber Shandwick’s Global Corporate practice and the Chair of the Board of the Greater Boston Chamber of Commerce.  She talks about the critical importance of corporate culture, and for companies and company leaders to deliver on the values they claim to hold.  “It used to be enough to have a conscience, but now you’ve got to have a plan – and you have to deliver on it!”

Thanks for listening!

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Links

Micho Spring Bio

Weber Shandwick

Quotes

“The role of corporate culture has evolved dramatically.  When I started working, it was the Jack Welch days when culture was Six Sigma, and it was all about military discipline to deliver shareholder results. Now comes this generational change, where we see a generation of employees who come to work expecting their values reflected and expecting that their companies are working towards solving  societal problems.”  

“It used to be enough to have a conscience, but now you’ve got to have a plan – and you have to deliver on it!”

“The delta between what you say and what you do has become the greatest area for reputational risk.”

“It is not easy to lead in a divided society and we have had really have seen with a lot of our clients they have to make decisions that are not 80/20 favorable, but are 55/45 favorable, and no matter which way you go you’re going to get an undertow of complaints.  But, if you can stick to values as opposed to issues that you stand for, then you can sort out specific situations with a little more of a compass.”

“Now talk about a change, employees (at Coinbase the digital currency exchange) challenging the CEO who is trying to define what could and could not happen in the work culture (discussing politics and activism at work). That is something that we haven’t seen before.”

“We (at the Greater Boston Chamber of Commerce) want to lead and our (diversity) goals are based not on the Boston we are, but on the Boston we want to become.”

Big Ideas/Thoughts

Cultural Audit

I remember very well in one crisis where we saw the incredible difference when we went in and surveyed between employees who were able to work from home and employees who had to experience the culture at work – that was the dividing line.  It wasn’t that the company wasn’t principled and welcoming across gender and race, it was that the office culture was toxic.

When you referred to a culture competency analysis, what is that, and what is the information you’re trying to elicit that will help your clients?

Well, you’re trying to elicit what are their values and are they clearly understood throughout the organization and are employees seeing that the behaviors of the company are consistent with those values.

We’re talking about an era of diversity; a generational diversity, it’s certainly racial, ethnic, gender, and it’s important that the culture becomes something that can bring all that together. That’s very different than the old simplistic, “Here are the three things.  Let’s put them on the wall and have people know that we believe in something.”

When Twitter kicked the former President off, the reason they said they did it was because of their employees and how they felt about it.  Clearly, whatever values they have articulated were not consistent with enabling this kind of civil discourse, and so it was interesting to me that The New York Times story I read was actually the number one reason they made the decision was ‘our employees didn’t feel comfortable with this.’

No high-performing jerks” is a phrase was really coined by Arianna Huffington in the Uber situation, Think about it, right, because that’s the tension. You’ve got people who are delivering results, but boy, they’re corrosive in terms of the culture.  Now,  I don’t know about you guys, but we would put up with a lot of high-performing jerks in my time, right?  It turns out that the balance, the risk reward balance, of having people who are corrosive to your environment, but delivering results has gone the other way. Now, in a lot of places, there’s no second chance because it’s just too visible and it shows that you’re not committed to your values if you’re going to make an exception, just because this person makes enormous amounts of revenue for the company.

How can boards hold senior management accountable for sticking to their values without getting into the weeds?

I think it’s really the same way we’ve always held CEOs accountable, which is really how we measure performance, how we reward them.  This has become important enough that, however it’s framed, it’s important that they know that company’s reputation, as Warren buffet has famously said, it takes a long time to build, but boy, it can go quickly. Right?  It’s holding them accountable at the performance level. I don’t think boards can get into the weeds because we don’t know enough about the company’s day-to-day hiring and firing decisions to really make good judgments. 

The model is really to hire CEOs who have societal acumen as well as business acumen. And that means that they understand the 360 impact on people of their actions, whether it’s people internally or externally, and that are sensitive to it, are taking it into account. That is a new mark of leadership. It requires EQ for sure – and much more EQ than it has in the past.

Taking a leadership role in Boston  – Becoming the Chair of the Board of the Greater Boston Chamber of Commerce

I do think it’s a pivotal time for the city and there’s no question when I arrived at City Hall we had just been through a civil war with busing and not only was the economy questionable, but really the threads that united us were so torn apart, it really was a civil war.  So, to weave that fabric back together and lift the city into a world-class city it became, was very much Kevin White’s vision and I was lucky to have a front row seat and play a role in really that pivotal time. 

Now I think if that (past time in Boston) was after a civil war, I think now the city is coming out of a world war.  You go and walk through downtown and we’ve a lot of rebuilding to do. And I think it’s a time again, hopefully the bright side is so much of the solutions for this pandemic have come right from Boston.  Our life sciences ecosystem has led in addressing the pandemic.

What goals have you set for diversity on the Board of the Chamber?

Our goal is to lead in this regard and to set standards for the business community. So not only have we set five-year goals of 50% women, 37% people of color and then goals beneath that. We intend to ask our members, not only ask our members to follow suit, set goals and make them public but we’re gonna help them get there through partnerships that we have formed and helping them find candidates for their boards.

Under the leadership of Jim Rooney, who’s got both political and societal acumen for sure, we have been able to be very proactive and weigh-in throughout this last year and I think we can play a role in being a very good partner and leader that can get the Greater Boston economy to really deliver on its full potential.

Transcript

Joe:  [00:00:00]Hello and welcome to On Boards: a deep dive at what drives business success. I’m Joe Ayoub and I’m here with my co-host Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization: its board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about: what makes a board successful or unsuccessful what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges and how to make your board one of the most valuable assets for your organization.

Joe: Our guest today is Micho Spring. Micho [00:01:00] leads the global corporate practice of Weber Shandwick, one of the largest and most influential public relations firms in the world. She focuses on advising corporate clients how to use communications to support their business strategies, enhance and protect their reputation and respond to public policy challenges.

Raza: Micho is Chair of the Board of the Greater Boston Chamber of Commerce and also holds numerous board memberships, including National Bank Holdings Corporation (NBHC), the John F. Kennedy Library Foundation, the Caribbean Educational and Baseball Foundation, and Massachusetts Conference for Women, of which she is treasurer. Born in Havana,  Micho is actively involved in efforts to improve US-Cuba relations and is founding Chair of Friends of Caritas Cubana, a non-profit providing humanitarian services in Cuba.

Joe: As a government, civic and business leader [00:02:00] Micho has helped shape public debate on numerous issues in Boston and beyond for many years. She has managed many political and advocacy campaigns and is a frequent independent media commentator. Last year, she was appointed by Mayor Marty Walsh to Boston’s Reopening Advisory Board for reopening the city of Boston during COVID-19. 

Welcome, Micho. Thanks for taking the time to be with us today on On Boards.

Micho: Delighted to be here.

Joe: So, let’s start with the proposition that we discussed not that long ago, that company and organizational culture is now a board-level risk. What does that mean? And why is it happening now?

Micho: Well, it’s interesting because I think the role of corporate culture has evolved dramatically. When I started working, it was the Jack Welch days when culture was Six Sigma and it was all about military discipline to deliver shareholder results. That was the focus and it was an [00:03:00] internal mechanism for coherence and purpose, and we’ve gone from there first, because I think of the first wave was really the advent of the digital era, and the fact that employees on social media could actually, influence their company’s reputation. 

I remembered Weber Shandwick, where we have done an enormous amount of research on this topic and have been tracking it for over 15 years, when we saw that employees were not only talking about their brands and their companies and their jobs on their social media assets, but they were actually pretty positive about their companies, and of course, your social identity, you don’t want to be just defined by the restaurants you attend and the purchases you make, you want to talk about your job.

So, I think that was the first wave. Then comes this generational change, where we see a generation of employees who come to work expecting their values reflected and expecting that their companies are working towards solving  societal [00:04:00] problems. And that was a second change. I mean, we, again, in an earlier generation, you did your whatever purpose work you wanted to do after five and you were at work to work. This generation, kind of, partly because of social media, but partly of who they are, have really brought a certain accountability to the workforce, which we certainly have seen and manifested that, particularly in this last year.

So, now, instead of thinking about employees as brand ambassadors, you have to think of CEOs as ambassadors of their employees’ values and their views. So, that has totally changed the role of culture. And then last but not least is the talent war. In order to attract and retain employees, you’ve got to have a culture that’s values-driven, that’s well-defined, that’s well understood and that’s actionable, because employees now are going to hold you accountable. 

So, I’m fond of saying that it used to be enough to have a conscience, but now you’ve got to have a plan and you have to deliver on it, right? [00:05:00] Employees are watching. And so all of this, I think raises the risk of cultural rifts causing crisis, affecting reputation, et cetera, et cetera, and that becomes a board function. HR is not a board function, but cultural risk is.

We talk about cultural vigilance. We talk about really making sure we understand that we’re aligned, that what we’re saying we stand for in companies aligns with their actions, and that delta between what you say and what you do has become the greatest area for reputational risk.

Joe: Do you think that social media is the catalyst for accelerating this trend? Is that fair to say, or is it just too many things to really point to just social media?

Micho: I think it’s a lot of things, but I think social media has enabled it for sure. I’m not sure that without social media, it would have been, yes, we remember the days when an employee [00:06:00] could go rogue and leak a story that would appear on the front page of the New York Times, and that wasn’t social media, but that took a little more courage and intention than just posting on Twitter or or posting on Facebook.

Joe: Yeah, I think  it’s easier.

Micho: The transparency that it’s demanded, it’s just the many layers, right?

Joe: Right. So, you’ve mentioned that the work you do at Weber Shandwick with your company clients and their boards, that based on that you believe that cultural risk is a key driver of reputation and at the root of many crises. What have you encountered in your work that has led you to come to that conclusion?

Micho: Well, certainly, I’ve done crisis work throughout my career, both in government and in the private sector. It used to be that the way you approach a crisis was to come in and bracket the negative event. So, you were looking for, “That was then, this is now, and this is why it’s never going to happen again.”

It was in and out. The value of a crisis communications [00:07:00] firm was all about the external view that could help you clean this up. Now, we go in and the analysis leads us usually to a rift in the culture, that you’ve got to really be intentional about addressing, and that takes time.

Actually, Weber Shandwick, a couple of years ago lifted our employee engagement and cultural transformation expertise into a separate consultancy that can come in and attracts people with very different skills other than communications that come from all sorts of consulting backgrounds to go in with our crisis teams and be able to diagnose and stay in afterwards, helping companies cure these risks. 

If you think about it, it’s logical, we have much more diverse workforces. We certainly saw this emerge when the Me Too movement, not that the Me Too movement is over, but when it was at its peak before the pandemic, so many of the crises we were called into, it was whether they had happened or whether companies were worried they were going to happen. [00:08:00] So, a lot of companies started doing culture audits to understand where this rift occurred.

We’ve seen it so all over the place, but I remember very well in one crisis where we saw the incredible difference when we went in and surveyed between employees who were able to work from home and employees who have to experience the culture at work, that was the dividing line. So, clearly, there was a problem at work. It wasn’t that the company wasn’t principled and welcoming across gender and race, it was that the office culture was toxic.

There’s been a lot of companies taking that very seriously and trying to get ahead of it by articulating their values, particularly, how they are welcoming to diversity, not only for people to get there and be different, but to influence what happens because they’re different. 

Joe: How can boards help make company culture more inclusive? What can they do?

Micho: I think it’s ideally part of two places where it belongs. Certainly, [00:09:00] part of the risk committee function. I think cultural risk has been elevated and should be elevated as serious as misfeasance  or other issues that the board worries about, so I think that that’s certainly at the risk level. And then wherever in the board you’re monitoring ESG, the fact is that all three, but particularly, the S in ESG is societal, how you’re really dealing with the issues that go on on that bucket, our board level issues, and it’s a dance. You don’t want to micromanage any CEO, but you also want to raise the importance of these issues so you command their attention. 

Joe: When you referred to a culture competency analysis, what is that, and what is the information you’re trying to elicit that will help your clients?

Micho: Well, you’re trying to elicit what are their values and are they clearly understood throughout the organization and are employees seeing that the behaviors of the company are consistent with those [00:10:00] values. Again, you’re trying to really map out, and a lot of the times, we walk in and the values that have been articulated for a long time have been internal and not externally facing. They’re not issues that deal with society, and the other thing we’ve seen is that often they reflect their products., This needs to be elevated. Values need to be now the core, the North Star that unifies all the diverse cultures you have and the global cultures you have.

 We’re talking about an era of diversity; a generational diversity, it’s certainly racial, ethnic, gender, and it’s important that the culture becomes something that can bring all that together. That’s very different than the old simplistic, “Here are the three things. Let’s put them on the wall and have people know that we believe in something.” 

Now, they can hold you accountable, and we’ve seen this, and we’re going to see more of it this year in terms of racial and racial equity. When all these anniversaries come this year of when companies were so great in [00:11:00] making commitments, employees can now hold you accountable, and they will.

Raza: I think it goes like, as they say, that culture is what you do, but really it comes from identifying the company’s cultural values. How do companies go about doing that exercise, and how do, if at all, boards get involved in that?

Micho: Well, there’s certainly the whole exercise, and different companies do it differently, but around mission, values and purpose, and I think that that’s more than ever not just an exercise for the C-Suite, but that there’s a lot of conversation and serving of employees to really understand what are those threads that bind them together, and that both bind them to their business, obviously, but also link it, not only to the benefits they bring their business, but to the benefits they bring to society. 

 We’ve seen that, and we’ve seen employee activism direct that when it doesn’t happen naturally. I was amazed, and they’re not a client, but when Twitter kicked their [00:12:00] former president off, the reason they said they did it was because of their employees and how they felt about it. Clearly, whatever values they have articulated were not consistent with enabling this kind of civil discourse, and so it was interesting to me that The New York Times story I read was actually the number one reason was our employees didn’t feel comfortable with this. That would have been unheard of five years ago.

Joe:  Great example. Great example. 

Raza: You alluded earlier a little bit to this notion of cultural audit. What is that? And how is that exercise conducted?

Micho: It’s conducted by speaking to different levels of the organization and testing whether or not there’s alignment between their mission, their values and their behaviors. And again, it’s trying to really diagnose where those deltas are, where most reputational risk happens.

Raza: We talked about it earlier. You mentioned this phrase, “societal acumen.” How does that play about with the business world now? What do [00:13:00] you feel that the role of the leadership, the board and the company having societal acumen play in today’s world?

Micho: Well, it all connects. ESG is the way they’re measuring it for shareholders, et cetera, but the role of business has changed, and I think permanently. I don’t think it’s because government has been particularly ineffective in many places, but it’s because business has become a platform for change.

That has been driven by whether it’s generational, but again, we used to talk about private public partnerships, and it’s essential to have a government as a partner to solve any of these big problems, but business is taking a much more expansive role in leading, talking about commitments and innovative solutions, and we’ve seen it in this pandemic right and left. 

We’re very research-driven, as you can tell, from the way I go back to data, but it was fascinating to us to see at the beginning of the pandemic, when all of a sudden companies realized that there was going to be [00:14:00] no unified government response, and oh my god, they had to make up their own policy.

That actually gave them an opportunity, and we saw the numbers shoot up in terms of confidence in employers to put their employees ahead of profits very early on in the pandemic when business after business on their own were closing down and sending people home. 

Now, it’s much harder to bring people back in and much more fraught with risk, because employees now throughout the pandemic had enormous trust and confidence that their employers were doing the right thing by them, and that has held steady for a year, although we have seen institutional confidence drop across the board.

So, that’s an asset for employers to carry forward, and I think that they’re doing it by this societal acumen, that they’re not only concerned about their employees showing up at work, but they’re concerned about what’s happening at home for their employees, the issues that are affecting them, the fact that this affected all of us, [00:15:00] as both professionals and people and the human side of this. I think they’ve really evolved to a place that’s going to put them at the center of continuing to address a lot of societal issues.

Raza: Yeah. So, employers have really stepped up. Also, we used to hear this “no brilliant jerks” or “no asshole rule.” Is it the case that employers are now looking at those type of issues a little more seriously?

Micho: Yeah, I mean, the phrase was really coined by Arianna Huffington in the Uber, and it was interesting. It was “no high-performing jerks.” So, think about it, right? Because that’s the tension. You’ve got people who are delivering results, but boy, they’re corrosive in terms of the culture. Now,  I don’t know about you guys, but we would put up with a lot of high-performing jerks in my time, right? It turns out that the balance, the risk reward balance, of having people who are corrosive to your environment, but delivering results has gone the other way. Now, in a lot of places, there’s no second chance [00:16:00] because it’s just too visible, and it shows that you’re not committed to your values if you’re going to make an exception, just because this person makes enormous amounts of revenue for the company. 

Joe: But that fits completely with what you said when we first started, that cultural risk is right up there with everything else and the risk of this “high-performing jerk” doing something that will be far more impactful in a negative sense than anything he or she can do because they’re high-performing. People recognize it ,and it makes perfect sense.

Oh my gosh.

Micho: Yeah.

Joe: Oh my God. What a huge change? A sea change. That is almost, I would almost say most people did not see it coming.

Micho: Yup. No, I agree. I agree. And it was yes, the Me Too movement that finally brought it and yes, it’s the fact that we now have such a diverse workplace that these things are clearly not tolerated. I mean, clearly we’re emerging from a single gender workforce model to a [00:17:00] much more diverse.

It’s really interesting to see how quickly it’s happened.

Joe: The pace is breathtaking and not a moment too soon.

Micho: Yeah.

Joe: So how can boards hold senior management accountable for sticking to their values without getting into the weeds?

Micho: I think it’s really the same way we’ve always held CEOs accountable, which is really how we measure performance, how we reward them and I think that this has become important enough that however it’s framed it’s important that they know that company’s reputation, certainly, as Warren buffet has famously said, it takes a long time to build, but boy, it can go quickly. Right?  It’s holding them accountable at the performance level. I don’t think boards can get into the weeds because we don’t know enough about the company’s day-to-day hiring and firing decisions to really make good judgments. And that’s not the model. 

The model is really to hire CEO’s who have, and you asked me before, who have societal acumen as well as business [00:18:00] acumen. And that means that they understand the 360 impact on people of their actions, whether it’s people internally and externally, and that are sensitive to it, are taking it into account and that again is a new mark of leadership. We know that a lot of CEOs are excellent at what they do because they have financial backgrounds and now this requires EQ for sure and much more EQ than it has in the past.

Joe: I think that’s true.  We talked about Coinbase the digital currency exchange, the CEO announced that they were clamping down and discussing politics and activism at work and there was a huge backlash, especially from employees when he did that.

Now talk about a change, employees challenging a CEO who is trying to define what could and could not happen in the work culture. That is something that we haven’t seen before.

Micho: Probably he did that because in the midst of the election, the political [00:19:00] discussion was toxic and very divisive. Not that it’s totally it’s improved for sure, but not that division has gone away. I kind of get what he was trying to do but a little tone deaf because you can’t silence people.

It is not easy to lead in a divided society and we have had really have seen that with a lot of our clients, how uncomfortable they are to making decisions that are not 80, 20 favorable, but are 55, 45 favorable and no matter which way you go, you’re going to get an undertow of complaints. Learning both how to govern in that environment, nevermind how to lead a company in that environment, is a newly important skill for leadership. That’s why we tell clients not to take positions on specific legislation or maybe political issues per se, but to only to tie them to whether or not they’re consistent with their values.

If you’ve got strong values, then you can certainly sort [00:20:00] out what issues are going to matter to you on what issues are not. Obviously some societal issues, you know, the peaceful transfer of power. We saw all the major companies weigh in on that. There’s certain issues that are of course important and transcend this, but usually if you can stick to values as opposed to issues that you stand for, then you can sort out specific situations with a little more of a compass.

Joe: That seems like a great guideline for both management and for boards, actually to think about what are our values and where does that take us in terms of issues on which we take a stand or articulate a position, because if you can do that, you’re probably gonna be okay. You can defend it, that’s for sure.

Micho: Well, you can defend it. That’s the point. You’re not gonna make everybody happy.  We’ve gone beyond the era where, you know and, and I certainly, again, this is why its so much fun to have been around so long is that I’ve seen this evolution. I mean no CEO wanted to take a position. unless it was going to be 80, 20.

Right. I mean, you didn’t want to do anything that was [00:21:00] going to cause a backlash because you didn’t have time to deal with the backlash. That wasn’t your job. Now, think about it, not only with employees with consumers,  it’s huge. 

Joe: So you’re now the Chair of the Board of Directors of the Greater Boston Chamber of Commerce. Why did you decide to take on this leadership role at the Chamber?

Micho: When they approached me to take it, I thought what an interesting time for business. There’s so much change and the role we play is so much more at the center of trying to address societal issues as we’ve been talking about. I thought what a great time for me to lean back into Boston and try and help the business community, bringing my experience  in business media and politics to relevance and I’m really enjoying it. I think chambers were created historically from what I’ve read to really raise the norms of behavior for the business community, and this is such a great time and Boston has such great leadership in the business community to kind of organize and raise the norms of behavior and [00:22:00] try and carve out a more proactive role in particularly now leading the city back to a very competitive economy. But doing it in a way that is more sustainable, that’s more equitable that is going to hold us better for the future. 

So I’m excited about it and I’ve got to say that part of the incredible opportunity is there’s so much business leadership in Boston to work with. And so many global business leaders are based in Boston. So it’s an exciting time.

Joe: It seems almost symmetrical to me that you’re coming into leadership of the Boston business community at a time that so much is going on and you started your at least political career here in Boston as a very young Chief of Staff for Kevin White, who maybe was the most transformational Mayor the city has had in the last, I don’t know, 50, 75 years.

So you’re coming in at a time that, like you did then, when the things that [00:23:00] leaders will do will really shape our future for years to come.

Micho: I do think it’s a pivotal time for the city and there’s no question when I arrived at City Hall it’s interesting -I was thinking about it the other day -we had just been through a civil war with busing and the not only was the economy questionable, but really the threads that united us were so torn apart, it really was a civil war.

So to weave that fabric back together and lift the city into a world-class city it became, was very much Kevin White’s vision and I was lucky to have a front row seat, and play a role in really that pivotal time. 

Now I think if that was after a civil war, I think now the city is coming out of a world war. I feel like , you go through every city, but you go and walk through downtown and we’ve a lot of rebuilding to do. And I think it’s a time again, hopefully the bright side is so much of the solutions for this [00:24:00] pandemic have come right from Boston. Our life sciences ecosystem has led in addressing the pandemic.

And so we have great sectors that are doing incredibly well. But the city’s gotta be reknit together and particularly at a time when there’s a leadership vacuum, because the mayor’s leaving and we have a mayoral race, it’s an interesting time for the business community to step into that vaccum and help shape our future.

Joe: So have you now set goals for diversity on the Board of the Chamber?

Micho: We have, our goal is to lead in this regard and to set standards for the business community. So not only have we set five-year goals of, you know 50% women, 37% people of color and then goals beneath that. We intend to ask our members, not only ask our members to follow suit, set goals and make them public but we’re gonna help them get there through partnerships that we have formed and helping them find candidates [00:25:00] for their boards. One of the roles of the Chamber is really membership benefits, and we want to key benefit of the Chamber to be that we help you get to not only the company you are, but the company you want to be in terms of diversity.

We think, and it’s really unanimous among our board, that this is essential for our economy going forward, that we’ve got to be able to attract and retain the best talent anywhere in order to retain our competitive edge. And that we’re not going to do that if we’re not welcoming to a diverse pool of men and women and diversity across the board.

Going back to my comment that we want to raise the norms of behavior, we certainly want to lead and our goals are based not on the Boston we are, but on the Boston we want to become.

Joe: Well, that sounds like the operating definition of leadership, setting goals to what you want to become, not who you are. What do you hope the Chamber will do to play an important role [00:26:00] in rebuilding the Boston economy?

Micho: I think we are conveners and we do provide a unified voice for the disparate. The great thing about now, we already have a very diverse board of directors and executive committee and the great benefit of that is really that our conversations are so rich in terms of perspective on what to do about all these issues.

 Under the leadership of Jim Rooney, who’s got both political and societal acumen for sure, we have been able to be very proactive and weigh-in throughout this last year and I think we can play a role in being a very good partner and leader that can get the Greater Boston economy to really deliver on its full potential. We’re very focused in not only working with the leadership of companies, but with bringing value to their workforces and the kinds of training programs and the kind of programming we have brought has really been particularly helpful in this last year across the board and [00:27:00] we’re hoping to continue to play a role in that.

Joe: Just amen on Jim Rooney. I think the perfect person at the right time. It must be great to be Chairman of the Board and have essentially the Chief Executive to be someone who does, as you said, have both societal and political acumen.  Must be a good partnership.

Micho: Oh, it’s a great partnership and I’m not sure I would have done it if Jim Rooney hadn’t been there. He is a great partner and a great leader, I should say.

Joe:  Micho. It’s been great speaking with you today. Thanks for joining us.

Micho: Terrific.

Joe: And thank you all for listening to On Boards with our special guest, Micho Spring. 

To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: The easiest way also is to go to onboardspodcast.com, our website, all of the episodes are available there, and you can even put in your comments and [00:28:00] suggestions if you’d like,

Micho: Thank you both. I really enjoyed this.

Joe: Micho. It’s been great and everyone please take care of yourselves, your families and your communities, as best as you can and Raza you take care.

Raza: You too, Joe.

Joe: Thanks. 

22. Matt Blumberg on building and leading a world class board for a startup company

Leading a world class board is the single most important thing startup CEOs can do to help their businesses thrive and become industry leaders.
Matt Blumberg is the author of Startup CEO: A Field Guide to Scaling Up Your Business, and Startup CXO: A Field Guide to Scaling Up Your Company’s Critical Teams, coming out in May, and he is also the co-author of the second edition of Startup Boards scheduled to be published in the fall. In this episode he talks about the importance of creating a great board for startup companies. 

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

Matt Blumberg Bio

Bolster.com

Matt’s Books on Amazon (including pre-orders of the Start-up CXO)

Quotes

A great board can be your secret weapon for world-class strategic and operational advice, for access to capital, for critical introductions, and quite frankly, for learning how to be a great CEO. 

A so-so board is just a waste of time – and a bad board can kill a great company.

 

 

Big Ideas/Thoughts

I think that what really separates startup boards from boards of larger organizations, other than their size, is what the board does.

I always say there’s kind of a sliding scale. If you take a raw startup  on one end of the spectrum and a huge public company on the other side of the spectrum, GE or Apple or such, there’s a sliding scale where at the very early stage, your board is probably spending less than 5% of its time on governance and oversight and financials and 95% of its time on strategy and product market fit, and then at the other end of the spectrum, the board probably spends almost all of its time on governance and oversight, and it certainly engages in strategy, but not minute by minute.

Why is it important to have truly independent members on these boards?

Independent directors may have some stock options to be compensated if the business does well, but they don’t have a material stake in the business and they’re not management. They typically either current or retired operating executives from the industry or from an adjacent industry. They provide a  third leg of the stool that can bring an independent point of view to the table. They know what it’s like to be an operator, but they’re not operating this business and they’re not heavily invested in it. They can truly look out for sort of the interests of all shareholders.

Bolster

Bolster, is a B2B marketplace that is seeking to connect venture-backed startups, venture-backed CEOs, or heads of HR with executive-level talent – vetted and vouched executive-level talent for board, advisory, and freelance or on-demand executive roles.

We find when we are going through the needs assessment with a client doing a board search, the first two questions we ask: number one, is it important to you that we find someone who’s an experienced board member, and number two, is it important to you that we find you underrepresented talent?

Most frequently, the answer is yes and yes, and that gives us an opportunity to sort of take a step back and talk about the fact that the talent pool, if you really limit it to people who’ve been corporate directors or, and in many cases, CEOs, is not going to be a particularly diverse talent set.

What we do at Bolster is we try to define and help our clients think through what it means to be “board ready” as opposed to board experience, and there are handful of things that that make you qualified as board ready. One is you’ve been on a board.  Two is you’ve been on a board that’s not a corporate board. Maybe you’ve been on a nonprofit board, maybe you’ve been on a board of a community organization, like the town soccer club or the Girl Scouts or the PTA or the school board, that’s a pretty significant experience as well. Or, have you been on an advisory board, or have you been an advisor to a CEO or to a senior executive? And then finally, the last thing is, if you haven’t done any of those things, have you spent a lot of time in a board room, so have you been a senior executive reporting to a founder or a CEO and found yourself four times a year face to face with the firing squad of a venture-backed board? And if you have, if you’ve done that for a number of years, that’s as good an experience as you can get.

if you’re a venture-backed CEO, you’re running a startup, I think one of your best calling cards in life is, “Hi, would you be interested in being on my board,” and it gives you access to people and time with people that you wouldn’t otherwise get, and not in a disingenuous way at all, but you will end up face to face, or whatever the digital equivalent is, with industry leaders and with people who’ve had incredible success, incredible success in lots of different walks of life that even if all you do is a one hour screening discussion and it doesn’t go anywhere,  you’ve learned something, you’ve added someone to your network.

I really designed Startup CEO, which I wrote it after fifteen years of being a CEO, to be the thing that I wish someone had given me when I started my company, and I didn’t really know how to be a CEO.

Transcript

Joe: [00:00:00]Hello and welcome to On Boards, a deep dive at what drives business success. Hi, I’m Joe Ayoub, and I’m here with my co-host Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization, it’s board of directors or advisors as -well as the important issues that are facing boards, company leadership and stakeholders.

Raza: [00:00:36] Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: [00:00:55] Our guest today is Matt Blumberg. Matt is the founder and CEO of [00:01:00] Bolster, a talent marketplace for CEOs of venture-backed companies launched in 2020. Previously, Matt founded Return Path where he served as chairman and CEO until its sale in 2019.

Raza: [00:01:14] Matt was also a co-founder and serves as a board co-chair of Path Forward, a nonprofit that was spun out of Return Path in 2016, whose mission is to empower people to restart their careers after time spent focused on caregiving.

Joe: [00:01:32] He’s the author of Startup CEO: A Field Guide to Scaling Up Your Business, the second edition of which was published last year, and Startup CXO, the sequel to Startup CEO, coming out in May, and also the co-author of the second edition of Startup Boards scheduled to be published in the fall. Welcome Matt, it’s great to have you today with us on On Boards.

Matt: [00:01:57] Thanks so much for inviting me.

[00:02:00] Joe: [00:02:00] So, there’s a quote that I saw from you that I thought was a great way to start off because it’s so much what Raza and I talk about all the time, and it is “leading a world-class board is one of the single most important things startup CEOs can do to help their business thrive and become industry leaders.” So, what is a world-class board for a startup, what does that look like, and how is it different from other boards?

Matt: [00:02:28] Well, one of the things that is kind of unique to startups is most of them are run by first time entrepreneurs, first time CEOs, and there’s no real school to go to for how to be a startup CEO, and one of those things, you can learn a lot in your business career that you can apply as a CEO, but one thing that’s a little tricky to learn  how to build a board and what to do with the board, and I always tell startup CEOs that a great board can be your secret weapon for world-class strategic and operational advice, for access to capital, for critical [00:03:00] introductions, and quite frankly, for learning how to be a great CEO, and the difference between that and a so-so board or a bad board is like night and day, right? A so-so board is just a waste of time and a bad board can kill a great company.

Joe: [00:03:14] Well, I wanted to say, I could not agree more that a bad board is a waste of time. It’s just, what is the point? Anyway, go ahead, I’m sorry, you’re singing my song here, Matt.

Matt: [00:03:25] Yeah. So, look, startup boards and boards in the venture ecosystem, I think, are a little bit different than larger corporate boards, public boards or non-profit boards or academic boards or community boards or association boards, and I’ve been on almost all of those, but the thing I think that really separates startup boards from boards of larger organizations, I mean, other than their size, which I think we’ll talk at some point today about sort of the construction of a board at a startup, is it’s sort of what the board does.

I always say there’s kind of a sliding scale. If you take a raw startup  on one end of the spectrum and like a huge [00:04:00] public company on the other side of the spectrum, GE or Apple or such, there’s a sliding scale where at the very early stage, your board is probably spending less than 5% of its time on governance and oversight and financials and 95% of its time on strategy and product market fit, and then I think you get to the other end of the spectrum and you’re a director of one of the largest public companies in the world, the board probably spends almost all of its time on governance and oversight, and it certainly engages in strategy, but not minute by minute.

Joe: [00:04:33] Right. The one thing though that is common to all of these boards is what you said about the importance of a truly world-class board. That cuts across every kind of private company, public company and non-for-profit organization, don’t you think?

Matt: [00:04:49] Absolutely, yeah.

Joe: [00:04:51] So, in the context of a VC-backed board, what does “independent” mean as applied to independent board member? [00:05:00]

Matt: [00:05:00] Yeah. In the venture ecosystem, you think of boards as having three kinds of directors. First is management, second is investor, and third is independent.  Management is fairly obvious, right? It’s usually the CEO. Sometimes it can be multiple people from management, if they’re multiple founders of a business, and I’ll come back to that topic in a minute.

Second is investors, and those are typically partners at venture capital firms where the firm has made a significant equity investment in the company. They own. 10, 20, 30% of the business, and as part of that investment, they negotiate the right to have one or more board seats. And then the third type of a board member is an independent, and all that means is neither A nor B, so it’s someone who’s not on the management team, not a founder and also someone who’s not a representative of an investor, and in a startup board or in a private venture-backed board, you might have three directors in the really early stages, maybe five as the company gets a little bigger, and seven by the end, and you usually don’t [00:06:00] see fewer than three and usually don’t see more than seven unless the company is literally on the cusp of going public, although even then, seven is a fairly good number, and getting the mix right of the three types of directors is really important.

Joe: [00:06:13] So, if the VCs are the investors who bring in the so-called independents because they know them, they’ve worked with them. Is that an independent board member?

Matt: [00:06:22] No, that’s not necessarily the way it works. I’ve certainly seen that in some cases, but typically in sort of the company’s charter or bylaws, the governing documents of the company, the venture investors will negotiate the right to a board seat or two board seats,, and they’ll specify the size of the board. And I think the most typical language is that the board will appoint independent directors that are mutually agreeable  to both parties.

I’ve certainly seen plenty of times where VCs suggest people or propose people. They may have the right to designate them, but a strong CEO or a CEO who’s thinking carefully about it would rather do a real search and find the [00:07:00] best person for the board who’s not necessarily his or her best friend, and also not necessarily the investor’s best friends, but someone who’s there in the best interest of the business.

Joe: [00:07:08] Why is it important to have truly independent members on these boards?

Matt: [00:07:14] Yeah, if you think about the three types of directors, you have management who are heads down living in the business day to day, right? They are eating and breathing and sleeping the substance of the business. You have investors who typically have preferred stock and who, while they might also be great directors and a number of them are, they are on the board to represent their limited partners and their stake in the business.

Independent directors are neither. Independent directors may have some stock options to be compensated if the business does well, but they don’t have a material stake in the business and they’re not management, they’re not sitting there in the business all day long. They typically are operating executives, either current or retired operating [00:08:00] executives from the industry or from an adjacent industry. They sort of provide a  third leg of the stool that can bring an independent point of view to the table. They know what it’s like to be an operator, but they’re not operating this business. They’re not heavily invested in it. They can truly look out for sort of the interests of common shareholders and all shareholders.

Joe: [00:08:19] Right. Isn’t there fair amount of research on this that really shows that when you have truly independent board members, it makes a difference in the success of the company?

 Matt: [00:08:29] There is a lot of research on that, and some interesting research that shows not just that, that more independence equals better outcome, but that there’s fairly good correlation between the number of investor directors in VC-backed companies with success, and that the correlation is not linearly up into the right.

And again, I would say this is correlation, it’s not causation, but somewhere around two or maybe three sort of venture directors on a board is correlated with the highest exit [00:09:00] multiple of the business, and actually, as you add more venture directors, that exit multiple tends to come down, and like I said, it’s correlation, there are lots of reasons why those two things go together, but it is kind of an interesting thing to note.

Joe: [00:09:11] Yeah, and I don’t find that, and I doubt anyone finds that, particularly surprising. And I mean no disrespect to my venture friends, but you know, too many is  – I could see why that would become counterproductive, productive at some point for sure.

 Raza: [00:09:25] Matt, talk with us about Bolster and what is Bolster hoping to accomplish, especially as it relates to board and board recruiting?

Matt: [00:09:34] Yeah, absolutely, Bolster, which is a new company, we’re just about a year old. Maybe by the time the podcast is live, we’ll have had our first anniversary. We are a B2B marketplace that is seeking to connect venture-backed startups, venture-backed CEOs, or heads of HR with executive-level talent, so it’s’sort of confirmed and vetted and vouched executive-level talent.

The types of things that we’re [00:10:00] matching talent companies for really fall into three categories. One is independent board members, and I’ll come back to that in a second, but the other two are either sort of mentor-coach advisor-type relationships, or  freelance executive or on-demand executive relationships, and those would be things like interim CXO or fractional or part-time CXO, or even just a project-based consultant.

We’re sort of taking advantage of a few really important macro trends. One is the sort of the gig economy, moving up market into the C-suite. We are taking advantage of the rising trend in sort of coaches and mentors as being meaningful to everybody in a business. We are taking advantage of the trend of diversity, and certainly, the trend of agility in business as well. We sort of describe ourselves as the new way to scale your team, yourself and your board.

As it relates to boards, we have a very significant practice, a very good percentage of our business is actually in running board searches for venture-backed companies. We spend [00:11:00] a lot of time with our clients, the CEOs, helping them think through requirements; what is it that they’re actually looking for in a board member? Sometimes they don’t even quite know, or sometimes they’ll start by saying they want one thing, and as we talk through it ,they’ll evolve their point of view. They may come in with something very simple like, “I have an open independent slot I need help filling it.” They may say, “I have an open independent slot and I’m interested in making my board more diverse,” but they haven’t really thought through sort of what it is that they actually want other than someone filling an independent seat or a person from an underrepresented group filling that seat.

We spend some time sort of lightly coaching the CEO about their requirements. The Bolster network is over 3,000 senior executives at this point from all across the country, from every race and ethnicity, men and women, representing every function, so we have a few hundred CEOs and former CEOs, but we also have hundreds of heads of marketing, of sales, of product, of technology, of HR, CFOs, et cetera. So, depending on what it is that the CEO is [00:12:00] looking for to sort of round out the board, we are likely to have dozens and dozens of candidates who are potentially good fits.

Raza: [00:12:07] That sounds like a great service, Matt, for both sides. How does the experience work for one side of that marketplace and the other side? And are you essentially playing the matchmaker in between?

Matt: [00:12:20] We are. Yeah. I mean, ultimately the Bolster business is designed to be a very low touch marketplace. Think of other marketplaces that you’re used to using like Airbnb where you probably don’t talk to anyone, or maybe you talk to someone after you’ve confirmed the rentals to find out how to get in, or like Uber or other talent marketplaces out there like Upwork or Fiverr.

There are some things we do that we’ll probably never be completely no touch or low touch, and I think helping a CEO hire an independent board member is probably at the top of that list. I think we are doing it in a very light touch way because we have thousands of executives who are deeply profiled, we can actually sort of come up with the slate very, very quickly, [00:13:00] but at the end of the day, any CEO who’s hiring an independent board member is going to interview many candidates many times before they get to the end of that process, so it’s never going to be like tap, tap, and, “Oh, there’s the Uber,” but we’re certainly taking a lot of the time and a lot of the mystery, we think, out of the process and helping to make very precise matches for the company’s needs.

Raza: [00:13:20] Matt, one of the things we talked earlier was that part of the challenges that if you want diversity and inclusion in all this fractional and part-time help that you need, you also need to kind of open it up a little bit more. There may be a chicken and egg problem of if you’ve never been a board member, how can I become a board member? Talk about that, how you’re hoping to make that more enabling for folks.

Matt: [00:13:48] Yeah, absolutely. I mean, just the math is what it is, the number of experienced corporate directors in this country.  Even if you just limit it to people who’ve served on startup or private or venture-backed boards, that group is [00:14:00] overwhelmingly male and overwhelmingly white, and there’s nothing wrong with those people, they make fantastic board members, but they’re not the only people out there that can make fantastic board members.

We find when we are going through the needs assessment with a client doing a board search, the first two questions we ask, and we ask them in sequence intentionally is, number one, is it important to you that we find someone who’s an experienced board member, and number two, is it important to you that we find you underrepresented talent?

Most frequently, the answer is yes and yes, and that gives us an opportunity to sort of take a step back and talk about the fact that the talent pool, if you really limit it to people who’ve been corporate directors or, and in many cases, CEOs, is not going to be a particularly diverse talent set, and that the way that all of us in the startup world can do our part for the long haul to make boards more diverse in this country is to widen that funnel, the top of the funnel, so you’re not  limiting yourself to people who have experience as corporate board members.

I have a friend who [00:15:00] is a black executive, black CEO, and he served on a bunch of boards, and he said to me, tongue in cheek, once, he said, “I think there are twenty-five of us,” meaning black executives, “who serve on all of the boards, and we just keep adding boards as opposed to adding new people to the mix.”

What we do at Bolster is we try to define and help our clients think through what it means to be board ready as opposed to board experience, and there are handful of things that that make you qualified as board ready. One is you’ve been on a board, fine. Two is you’ve been on a board that’s not a corporate board. Maybe you’ve been on a nonprofit board, maybe you’ve been on a board of a community organization, like the town soccer club or the Girl Scouts or the PTA or the school board. Those things are real. They’re different kinds of boards, but that’s a pretty significant experience as well.

Raza: [00:15:46] Helps you with readiness.

Matt: [00:15:47] Absolutely, because not everyone does that either, right? One of the other things we ask is, have you been on an advisory board, or have you just been an advisor to a CEO or to a senior executive? And then finally, the last thing is, if [00:16:00] you haven’t done any of those things, have you at least spent a lot of time in a board room, so have you been a senior executive reporting to a founder or a CEO and found yourself four times a year face to face with the firing squad of a venture-backed board? And if you have, if you’ve done that for a number of years, that’s as good an experience as you can get.

Joe: [00:16:20] I really think the way you’ve widened the net is terrific. It makes so much sense, this differentiation between having been on a board and being board ready. It’s a great way to look at it.

Raza: [00:16:31] I want to back to our original question of how startup boards are different, how they’re constructed, and what are other dynamics that come into play. Would you add a few more things to that? For example, would you imagine that startup boards actually have a fairly regular rotation of board members because new investors come in and they need the board seats, and other such characteristic that are a little [00:17:00] unique to startup boards.

Matt: [00:17:01] Your first point is a good one. There’s a lot more sort of turnover and evolution of early stage boards. Some of it is that investors come and investors go and they tend to sort of come with board seats. Sometimes in early stage, venture-backed companies we’ll have multiple founders and one of them is the CEO and then that person is not the CEO anymore, so there can be some rotation there.

But the other thing, and this is something that I’ve done in my past and we certainly advise our clients at Bolster as well, is when you’re starting a company and adding your first independent or your first couple of independent board members, to think really carefully about the term that you give them. Unlike public companies where they actually sits for three years and there’s an election and a rotation, private companies are a lot less formal than that, but typically, the term of a board member is sort of noted by the vesting on their stock options, and most venture-backed companies have this kind of standard in their head for employees of doing a four-year option grant and sort of do that same reflexively for independent directors.

One of the things that we sort of advise is, if you’re in your first few [00:18:00] years in the business, if you’re a seed company or pre-revenue or Series A company and you’re hiring a board member, give them a one-year vest, give them a two-year vest. You can give them fewer options, so they end up with the same amount sort of per year of service, but you should do that for a couple of reasons. One is you want to make sure that that they’re a good fit for the board, and two is you want to make sure they’re what the organization needs now.

Again, in that sliding scale that we talked about earlier on between product market fit strategy and critical introductions and it’s not so much governance, what you need at the beginning of a startup can be very different than what you need two years in.

For example, when we just started Bolster, we decided to have a five-person board kind of right out of the gate, with myself. two representatives of two of our investors, and we had two independent seats to play with, and we had a very experienced team building Bolster in terms of our knowledge of how to build a software company, a SaaS company, how to run and scale the business.

The business of Bolster is a talent marketplace, and actually, our team had never before done a marketplace business [00:19:00] and had never done a business that was in the talent space, so we said, “All right, we have two independent slots to fill. Let’s find someone who’s a marketplace expert and let’s find someone who’s in the talent business in one way or another, and they don’t have to be CEOs. They don’t have to have prior board experience. They just need to be experts in those two things that no one else around the table is an expert in.”

We filled one of our independent board seats last year with a woman named Cristina Miller who has a deep, deep background in online marketplaces. She’s now the COO of Goldbelly, and before that, she was one of the senior executives at 1stDibs, and before that she was at Gilt Groupe, so she knows marketplaces. She knows the questions to ask about marketplaces, so she knows the metrics to look at. She knows, even though those were different kinds of marketplaces, sort of how to pattern match for us in that space.

We’re still in the search right now for our second independent director, someone who’s coming out of the talent space. We’re interviewing some amazing people and I expect we’ll have that person appointed shortly, but that’s sort of the type of thing we’re doing, and we’re giving these people two-year terms because I don’t [00:20:00] know what we’re going to need in two years.

Raza: [00:20:01] I’ll lastly add just one other thing. You briefly alluded to the compensation. I would also say for startup boards for a pretty long time, there’s just no convention of like cash compensation for board member. It usually just comes in the form of stock or options or restricted grants and so on, but no real cash compensation.

Matt: [00:20:22] Yeah, that’s right.  I’m not sure I can even think of anyone that gets cash compensation for serving on a venture-backed board. The one exception. I think I’ve heard of once of someone who was really doing some consulting in the business, as well as being a director and sort of blended together, but that’s really not a standard practice. Standard practice is in equity grant. It’s typically either a non-qualified stock option or restricted stock or restricted stock unit, and there’s some sort of terms around the margin that you might negotiate or it might vary from company to company, but within a pretty narrow band. Early exercise or acceleration [00:21:00] provisions or post termination exercise period are all things that are kind of up for grabs, but there’s not a lot  of variables there.

In terms of the amount of equity that’s given, this is actually something Bolster is doing an industry survey on right now, which we’re not quite done with yet, so I can’t give you specifics, but as we’ve surveyed hundreds of companies across different sort of stages of growth and financing, the sort of clear trend is that the earlier the company, the more basis points you’re likely to get as an independent director but the lower the sort of gross and net value is of that grant. It’s sort of what you would expect, you’re an early stage company. It’s like being an employee at an early stage company. You’re going to get more shares with a completely uncertain outcome to them at a low 409A value to them, and as the company gets closer and closer and closer to being sold or it’s going public, there’s going to be a smaller grant with a more certain higher value.

 Joe: [00:21:48] Some of the things you’ve talked about, about board composition, I just think, are so right on. One of the things you’ve said earlier was when CEOs, your clients essentially, are [00:22:00] interviewing board members, they’ll want to interview them several times or many times, and I think one thing that I run into when I do this for private companies, is sometimes there’s a  view of, “Let’s get this done. Let’s find the board members and get them on. When they finally have made a decision to build a board, then let’s get this done fast.” And what I say is, “get it done right, don’t get it done fast.” When the CEOs are doing the interviews, how many times do they talk to board members and how many board members per seat, if you know that?

Matt: [00:22:35] Yeah. I mean, look, it will certainly vary case by case, company by company, even within the same company, but I would say the sort of the minimum is that the CEO would talk to several candidates once to sort of screen them, then sort of pick one or two favorites. The one or two favorites I would expect the CEO would really do a deep dive interview with ideally in person, even in today’s landscape.

The director that we [00:23:00] appointed last year, Cristina, she and I got together in person on her back porch last fall. We sat 10 feet away from each other, but for three hours, and had a very in-depth conversation, and then typically, again, with your one or maybe two finalists, I think best practices, they should be interviewed by every single other board member. Fundamentally, a board is a team, and you’re talking about adding someone to the team, so the rest of the team should be comfortable with the person.

The final thing, that I always do and I recommend to our clients as a best practice, is when you get down to your final one, and it’s hard to do it too but not impossible, but certainly with your sort of preferred candidate, have them do an audition. What I mean by that is, have them come to a board meeting, not as an observer, but as a participant, so you haven’t put them on the board yet, but you want to see how they do in a board meeting.

It’s a little extra work, right? You have to not just get them the materials like you do all your other directors, but you have to commit an hour or two with them before the meeting to really make sure they understand some of the details, the jargon and the [00:24:00] acronyms, the quirks of your income statement or balance sheet, the issues that you care about. Make sure they’re really prepared to be a participant in the board meeting, and you have to be willing to do that, but I’ve found, at least twice running my prior company ,that I had finalists who I was convinced were just the perfect person to join our board, who actually bombed out of the audition, and they both did it in the same way.

I think there are a lot of ways you could bond that audition,, and again, the board is a team and has its own culture; someone could come in and be a bull in a China shop, for example, but actually I had the opposite problem with both of these directors, which is, they knew it was an audition, they were fully prepared. I told them I wanted to make sure that their voice was heard, their point of view was heard in the meeting, and they came in and they didn’t say for hours.

Joe: [00:24:42] Mm, really?

Matt: [00:24:43] Even if I called on them to give their point of view about something, they would respond, but they would respond in sort of this shorter sentences as possible, and I just knew that that wasn’t what I wanted out of a board member. I wanted someone who wasn’t afraid to speak his or her mind, and that particular board had [00:25:00] some kind of larger than life personalities on it, and whoever was going to join the board had to be able to be heard in that room.

Joe: [00:25:07] That sounds like a great idea, and it sounds like it’s worked for you. One thing that Raza and I have observed over the last couple of seasons is that one of the most difficult things that boards do or CEOs do is off-board people.

Now, this isn’t exactly that, and that’s why I liked your idea of bringing someone on for one or two years, that way you really have time and you have an opportunity to really turn the board over if you need to, but isn’t it a little awkward to invite someone to a meeting and then tell them, “Well, you didn’t pass the interview, but thanks.”

Matt: [00:25:41] It’s horrible.

Joe: [00:25:42] Yeah.

Matt: [00:25:42] Yeah. I mean, it’s horrible. It’s the same or worse as you have two finalists for a role on your executive team and you’re going to tell someone now after they’d been through the whole process. It’s not materially different than that. Other than that, in a lot of cases, you’re talking to people to join your board who are more senior than you and more experienced than you, [00:26:00] and that’s not fun, but that’s part of the game.

Joe: [00:26:02] When it happens with your clients, do you do the telling or does the CEO do the telling?

Matt: [00:26:08] I would do it if the CEO made me. But what I say to them, we actually wrote an e-book for our clients about how to build your board that has a specific section about this. I think interviewing, if you’re a venture-backed CEO, you’re running a startup, I think one of your best calling cards in life is, “Hi, would you be interested in being on my board,” and it gives you access to people and time with people that you wouldn’t otherwise get, and not in a disingenuous way at all, but you will end up face to face, or whatever the digital equivalent is, with industry leaders and with people who’ve had incredible success, incredible success in lots of different walks of life that even if all you do is a one hour screening discussion and it doesn’t go anywhere,  you’ve learned something, you’ve added someone to your network.

What I encourage our CEOs to do when they go through a board search process [00:27:00] is everyone who they interview should hear from them personally. If all they did is a 30-minute screen or a 45-minute screen, maybe you can do an email, but it should be a personal email. If you’ve gone to the end with somebody, if you have two or three finalists and you’ve done the deep dive multi-hour interview, you’ve had a meal with them, they have auditioned for you and come to the board meeting and you’re going to ding them after that, that better be the most gracious ding of your life, and you should think of it as, “Hey, how do I keep this person as an advocate for my business out there in the world, even if I’m not going to put them on the board? You don’t have to go crazy with it, but for me, if I get to that point with somebody, they’re getting a handwritten note from me and they’re probably getting a really nice bottle of wine, and that’s not everybody’s preferred gift. There are lots of ways you can do that, but it should be the kind of thing that when the person gets, they say, “Wow, that is really a stand-up thing to do. That company is a class act.  I want to maintain this relationship, even though it didn’t work for me to end up on the board.”

Joe: [00:27:57] Yeah. I think if you can leave that kind of [00:28:00] situation with the person that does not join your board, thinking you’re a class act, that is a big win. I think that’s a great way to look at it.

Matt: [00:28:08] And that your company is one that the world should pay attention to.

Joe: [00:28:12] Absolutely.  When you’re helping or when you’re coaching the CEOs about what they might need on their board, now, if it’s only one, maybe you don’t do this, but do you create a grid of the skills that you want? Do you put one of those groups? Because I know that a lot of boards do this, I do it.  Do you do it in the startup field as well?

Matt: [00:28:31] Yeah, that’s exactly how we do it, and we always encourage CEOs to sort of think about the construction of their board, pick your metaphor like it’s a jigsaw puzzle and you’re looking for just the right fit, or in the world of sports analogies, sometimes you’re best served if your team isa basketball team and everyone can run down the court together and pass and shoot, but sometimes you want your team to be a baseball team where everyone is playing the same sport, but a pitcher is really different from the catcher, which is really different from a shortstop.

I would say more often than not with startup [00:29:00] boards, they start as basketball teams and then turn into baseball teams. At the super early stage, it’s just everyone doing everything to help the company thrive and survive, but when the company gets a little bit bigger, it’s helpful for them to have people that are a little bit more position players, even if they’re all professional athletes in the same sport.

The typical grid experience, greater requirements grid that our clients will go through will have really four main things that we’re looking for, although the fifth would be sort of demographic representation, and that may actually be the first, in many cases, but sort of the four other things that we look at, our functional experience, so do you want someone who’s been a CEO? Do you want someone who comes from a go-to market function like sales or marketing or business development? Do you want a CFO, because you’re trying to staff an audit committee? Do you want a product or technology person? So, that’s functional.

The second is going to be industry, so do you want someone that can open doors for you in a particular industry? Do you want someone who’s been a buyer in a particular industry, et cetera, who knows the competitive landscape?

 The third, after [00:30:00] functional and industry, would be customer type. Do you want someone whose career has been aimed at products and services for large enterprises? For consumers? For small businesses? Or any variant in between?

Then finally, how do you think about stage type? And this may be one that’s a little more unique to startups, but do you want to put someone on your board who is really just like a whiz at the early days of a startup? Do you want someone who has scaled a business to a hundred million dollars or more? Do you want someone who’s led multiple stage transitions over time?

It’s sort of those four things; ,functional industry, customer type, stage type, along with demographics tend to be the grid that you fill out. Whether you’re looking for one board member or two or three, and we were doing one search right now for two board members for a company and one search for three board members for a company, and those are more just, “Hey, across all three of these people. I want this experience, that experience, this industry, that industry, but it doesn’t all have to come in one person.”

Joe: [00:30:54] Right, right. I think that is a great approach to board composition. How often [00:31:00] do you advise your clients, your CEOs, to look at this grid? I mean, is it every year? Is it every couple of years?

Matt: [00:31:07] Well, we’ve been in business for eleven months. It’s typically the needs assessment for a board search. I suspect once we have long-term relationships with clients and we’re sort of second lap around the track or third lap around the track with them, that it is something we encourage them to revisit, reevaluate periodically.

Joe: [00:31:23] Yeah, I asked that because I look at it, and we’ve talked to a couple of guests that do this on boards. It’s almost like a strategic plan for your board, and like strategic plans, I think some of the most effective boards look at it every year.  It may be a short look, but you actually touch base to say, “Okay.” As you said, the board that was fabulous last year may not be the board you need for three years from now and you have to be thinking about that all the time. If you’re doing the right job here for your company.

Matt: [00:31:54] That’s right. I mean, I think with venture-backed companies, one of the things that happens is that it ends up being a forcing [00:32:00] function for that, so you don’t have to like set a calendar reminder for every January 1st is financing, right? Because every time you do a financing, there’s going to be a conversation about who’s on the board, who’s putting money in, are people ready to roll off?  That tends to be the flashpoint for sort of thinking about the overall composition of that team, but certainly a good practice to think about it periodically.

Now, one of the things we haven’t talked about is how to evaluate a board, and there’s a whole process that we developed years ago with the legendary Bill Campbell in Silicon Valley around doing effectively a 360 on a board itself for startups that we are building into our platform at Bolster and it will be something we encourage our companies to do. Probably not every year, that’s a little bit heavy, but at least like every other year to just make sure that the board is holding itself accountable and maybe even has input from some people on the management team or potentially outside shareholders as well.

Joe: [00:32:50] Yeah, great practice.

Raza: [00:32:52] Matt. I want to now touch upon the books that you have written and are writing, and give us a little bit on the [00:33:00] Startup CEO, what that was about and the preview of your Startup CXO book coming up.

Matt: [00:33:06] Yeah, for sure. Startup CEO, and the subtitle is A Field Guide to Scaling Up Your Business, is designed as a field guide. You can read it front to back, but you certainly don’t have to. It’s got sixty to seventy very small chapters, and each one is a “how to” do something, but they’re organized into sections.

The first one is around strategy. There’s one around execution. There’s one around people. There’s one around boards. There’s one around self-management, and there’s one around exits. Each one of those sections probably has ten chapters, and it’s literally how to hire someone, how to fire someone, how to run a board meeting, how to do a pitch deck for a VC, how to work with an executive assistant, et cetera. It’s sixty to seventy of these very kind of short lessons.

 I really designed the book, and again, wrote it after fifteen years of being a CEO. I designed it to be the thing that I wish someone had given me when I started my company and I didn’t really know how to be a CEO, so that’s [00:34:00] Startup CEO.

I’m very excited about Startup CXO, which is the sequel that is coming out this May of 2021, and the book has my name as an author, but it was a collaboration with eight or nine people who are senior executives that I worked with either at Return Path or Bolster or both.  The way to think about Startup CXO is it’s a book of books.  It is also structured as a field guide, how to do this, how to do that, but the different sections are written by different functional executives about their function.

Section one is how to be a startup CFO written by Jack Sinclair, who was my co-founder in both businesses, both Return Path and Bolster, and a career CFO., He’s got twenty-two chapters about how to do each different functional competency of being a chief financial officer, how to think about strategic finance, how to think about operational accountancy, how to run legal and facilities and IT when you’ve never done those things before, how to do M&A due diligence, et cetera, so a whole bunch of chapters about CFO.

Then it’s got a section about how to be a chief people [00:35:00] officer written by Cathy Hawley, my co-founder at Bolster and a career chief people officer, fifteen or twenty chapters about the different ins and outs of being a chief people officer, and it’s got a section for every C-suite member, so how to be a CMO, how to be a head of product, how to be a head of technology, how to be a head of sales, and the like, so I think it’s all in nine sections. It’s very long, but again, it’s not necessarily designed to be read after five, and it’s not like it’s the story Return Path or the story of Bolster. All these people have are twenty to thirty years into their career, and they’ve done this job at multiple companies in multiple spaces and are really kind of distilling the experience down, although there are certainly some common threads through the whole book, so that’s Startup CXO.

Raza: [00:35:41] Oh, that sounds like such a great resource for folks

Matt, also, please talk about your second edition of the Startup Boards book that’s coming out in the fall. What is that about?

Matt: [00:35:53] So startup boards was a book published in 2012 or 13 by two  venture capitalists, Brad [00:36:00] Feld,  from the Foundry group who, was on my board for 18 or 19 years at Return Path, and Mahindra Ramsinghani, and Brad and Mahindra wrote a very good book about startup boards that they have added me to as a third co-author to do the second edition coming out this fall.

 We wrote two e-books at Bolster over the last few months, which we’re going to fold into the Startup Boards book. One is called How to Build Your Board, which is an e-book for CEOs, and the other is How to Succeed in Your First Board Role, which is an e-book for any senior executive that’s never been on a board and is interested on getting in one.

The second edition of Startup Boards this fall, it’ll be a refresh of the first edition. It will have some of this new content in it. It’s certainly going to talk more about diversity, which is a much hotter topic now than it was nine or ten years ago, and it’ll also have data from the study that I mentioned that Bolster is running about private company boards.

Joe: [00:36:55] It sounds fantastic.

Matt, it’s been great speaking with you. Thanks for joining us today

Matt: [00:36:59] joe, [00:37:00] Raza, it’s nice to be with you. Thanks for having me.

Joe: [00:37:01] And thank you all for listening to On Boards with our special guest, Matt Blumberg.

To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza: [00:37:17] Also, the easiest way to access our podcast is just go directly to onboardspodcast.com and all the episodes are available, and you can even contact us with your comments and suggestions right there on the website.

Joe: [00:37:30] And to our listeners, please stay safe and take care of yourselves, your families and your communities as best you can. Raza, you take care.

Raza: [00:37:38] Yeah, you too, Joe.

Joe: [00:37:39] Thanks.

21. Cathy Minehan on ESG: it’s about managing risk and long-term success – and it’s here to stay!

Cathy Minehan has been an active for profit and not for profit board member of a variety of entities over many and worked for 39 years with the Federal Reserve System, including as the President and Chief Executive of the Boston Bank Chapter.  In this episode she talks about the momentum of ESG (Environmental, Social and Governance) and, as a result, the focus by business on issues that will lead to long-term success.

Thanks for listening!

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Links

Cathy Minehan NACD New England Bio

Business Roundtable Statement on Stakeholder Capitalism

Quotes

For a long period of time there has been a discussion: should a company driven by the quarterly earnings releases and all of the interaction with the street, or should it really focus on the long run? Should it have a purpose and a commitment? Is that what the board of directors should be espousing, or should the board be right behind the CEO in terms of hitting short-term objectives?

This has been a debate for a long-time and the longer-term look is gaining ascendance.  I think that was clear in the 2019 letter from the Business Roundtable.  And now that organizations that are very important to boards of directors and to senior management – ISS, Glass Lewis, the major financial custodians who vote a lot of the shares – it needs to be very important to boards of directors.

Big Ideas/Thoughts

What is it that is motivating this movement towards stakeholder capitalism?

I think it’s a frustration with quarterly balance sheets and the quarterly demands that are made because it doesn’t really give you  the best picture that you could have of companies that are being challenged by a lot of different things.  I also think some of the current challenges have made this even more important.  When you think about racial equity issues that were highlighted in the spring of this year, when  you think about pandemic issues and how much climate change fed into the pandemic, there are longer-term issues there, that businesses, to keep themselves healthy, have to come to grips with.

Am I saying that quarterly reporting of data and progress against what you’ve told the street, your goals are for the year, is going to go away? No, I’m not saying that. That’s not going to happen. But there has to be a balance. You have to feel the short term needs of the markets, but have that longer run focus because that’s, what’s going to keep you in the running against a whole range of different challenges

Well, I think what’s driving it is exactly what we were talking about: environmental footprints; social capital, both internal and external; major governance issues, what’s the board look like? Is it diverse, and what is its focus?  These are just really important topics, and I believe they come out of this longer-term focus, this idea that companies need to be run for a purpose, that they have multiple stakeholders.

ESG is a way of reflecting the multiple stakeholders mindset. The environment, the climate, your supply chain, your customers, people who work for you, the communities you work in and how your board, the direction that your board gives you, the kind of governance principles that the board works uses.

Ron O’Hanley of State Street and Larry Fink of  BlackRock are just two of the big names that have committed to working with companies, investing in companies, holding the stocks of companies, encouraging people to vote shares in a particular direction that are  It’s all about long-term.  ESG is risk management.

And when people like (O’Hanley and Fink) are saying “we’re going to be looking at your company to see, are you managing the risk of the future in an inappropriate way, because that is an investment risk for what we do” that is really a strong motivation to move in that direction.

ESG provides a powerful lens for focusing on the long-term, and the key driver of a company’s long-term success is effective, independent board oversight

If the CEOs of companies really are talking to their boards about stakeholder issues as opposed to shareholder issues and if the boards are really focused on that concept and that idea of purpose and commitment, I think it’s going to change the lens with which the board members focus on the company.  It won’t be enough that we paid everybody a bonus. We want to know who everybody is, and we want to know what’s the gender equity, what’s the racial equity, what’s the wage equity in the company.

We’re so used to thinking of equality, i.e., equal pay for equal work. Equal pay for equal work has been the law for sixty years, but when you look at the wage gap, the raw wage gap, i.e., what do women make versus what do men make, you will see that the gaps are large and staying large and get worse  when you put women of color, men of color, when you compare them to the wages of white men

Cathy, when we spoke earlier, you said something that really stuck with me.  There is a lot of focus on skills you need to serve on a board, but one skill you mentioned that a director must develop is the ability to realize. “If I don’t have the skillset that is needed on this board at this time, I should step down.”

Well, I personally think that this ought to be something that every board member considers on at least on annual basis in some of the annual material that you are asked to provide – an analysis of your own participation and your own contributions to the board.

I went through this on the Visa board. I was on the Visa board for ten years before it went public. I had a wealth of payment system experience from the Fed, but I did not have the technological background. Visa is a technology company. It does payments, but it’s a big technology company, and the more and more they got into that, the more they wanted and needed tech CEOs’ experiences to add to the board’s perspective.

We did a grid and it was clear the kinds of skills I brought, a lot of people on the board had them, and there were definitely some openings. So, it wasn’t something that I raised my hand and said, “I’m going to step down,” but in the context of these conversations, it became obvious that this was an opportunity for Visa, and it was something that I needed to recognize, and I needed to do, and I still look upon that as a very good decision on my part and a very good way of dealing with it on their part.

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