20. Bob Sherman on what boards should expect from the new Biden administration

Bob Sherman has served as the United States Ambassador to Portugal, is a shareholder at the law firm of Greenberg Traurig and serves on the board of Novo Banco, a US PE-backed bank based in Portugal. In this episode he shares his journey in the Obama campaign and then the Biden campaign and through that lens shares what he believes boards and companies should expect from the new Biden administration and how they may want to take advantage of the opportunities that will be available. We also talk about what governance structure for a US embassy looks like and the importance of getting it right.

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Links

Bob Sherman Bio

Business Roundtable Statement on Stakeholder Capitalism

Quotes

On What Presidential Elections are about

“When it comes to presidential races, it’s really only about two things; stay the course or change. And if it’s about change, the issue is, what kind of change?”

“The thing that I learned in that campaign starting in Iowa was the presidential campaigns are about the future. It’s not what you’ve done in the past. It’s what you’re going to do for people.”

Who Joe Biden is?

“Joe Biden embodied these values: personal integrity, a commitment to national values and a desire to restore international relations.”

“He believes in his bones that people need to be respected and that they should have a sense of dignity themselves.  This concept again of dignity and the notion, to use his words, of dealing people back into the process is going to be highly important.”

“Joe Biden, by DNA and by disposition, is a different person than Barack Obama. He’s a moderate, first and foremost. He’s a creature of the Senate.”

I believe that what we’re going to see is a new social contract. I think you’re going to see is a lot of focus on the business community and corporate America being a partner in the solutions to the problems that we face.

Governance of a US Mission

When I was preparing to be Ambassador to Portugal, Bill McRaven the four-star navy admiral, who just a couple of years previously was the architect of the raid that killed Osama bin Laden, said something that really stayed with me: “I am a four-star navy admiral.” he said, “But you have to remember, when I’m addressing you, you have a fifth star; so you’re welcome to call me Admiral, and you’re welcome to call me Bill, but I call you sir, and not the other way around.” “This is important. Chain of command is important to us. Military authority always reports to civilian authority. That’s the way our government is set up, and that’s the way we operate.”

Big Ideas/Thoughts

Based on what Joe Biden has said and based on who he is, we have clues on what boards and corporations should expect in the new administration. The notion of stakeholder capitalism, beyond just shareholder fiduciary duty, is likely to be accelerated. Diversity of boards reflecting the diversity of the population will get a big push; equitable pay and executive compensation is also likely to get emphasis; and science being basis for decision making in addressing  existential threats in areas like climate change, energy, and healthcare.

My wife and I went to Philadelphia together [during the first Obama campaign] and we were in South Philly at the time.  Again, the cornerstone of the Obama campaign was engaging voters one by one. That’s what we did, and we were walking through neighborhoods, knocking on doors, engaging with voters, when we saw three African American women sitting on a stoop, and we thought, “Aha., these are probably good people to engage and likely voters for Barack Obama over Hillary Clinton given the fact that they were African-American.

We went up to them to talk about why they should be voting for Senator Obama, and one of the women looked at us and said, “You know, my son has a learning disability. I can’t get services for him; He’s failing in school. He feels isolated, so now he’s joining gangs because he feels like he’s a part of something. I’m worried every day that I’m going to get a call that my son is dead. You tell me what Barack Obama is going to do for somebody like me.”

That was an eye-opening experience because you realize that within the country, there are so many people that don’t feel there’s any connection they have to the federal government, and there are people that feel that the American dream is out of reach.

What Joe Biden has made clear during the campaign is that he believes in predictability, that government should be predictable for the business community. So, I think we’re going to see a much more consistent approach to the issues than maybe we have seen in the past. That decisions should be science based so, I think that science is going to play a big role in how decisions get made in a Biden administration. And perhaps most importantly, there is his commitment to human dignity. He believes in his bones, that people need to be respected and that they should have a sense of dignity themselves.

I think you’re going to also see, not incidentally, non-politicized decision making. He said he wants to be a President for all the people and will work as hard for the people that voted against him as for those that did. This concept again of dignity and the notion, to use his words, of “dealing people back into the process” is going to be highly important.

The concept that boards owe fiduciary duty to all stakeholders is gaining momentum, and has been for a while, and if what you’re saying comes to pass, it will be something to really keep an eye on because leadership from the top could accelerate the momentum that’s been building and it’ll be interesting to see where it leads us.

Transcript

Joe: [00:00:00] Hello and welcome to On Boards:  a deep look at driving 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.

Raza: [00:00:25] Joe and I speak with a wide range of guests and talk about what makes great boards great or makes a board unsuccessful, what it takes to be a valuable member, and how to make your board one of the most valuable assets of your company.

Joe: [00:00:42] Our guest today is Bob Sherman, the former United States ambassador to Portugal, a shareholder at the law firm of Greenberg Traurig, and most important, a former partner of mine. As ambassador Bob focused heavily on bilateral economic development and international [00:01:00] security issues, including cybersecurity, refugees, narcoterrorism, and NATO. Among his very high-profile cases, he served as co-lead counsel for hundreds of victims in the Boston Archdiocese clergy abuse scandal.

Raza: [00:01:17] Bob also serves as a board member of a major international bank, Novo Banco, whose majority shareholder is an American private equity firm. In this role, Bob serves as chair of the compliance committee, focusing on EU bank regulatory requirements and anti-money laundering rules.

Joe: [00:01:37] In addition to all that, Bob was one of the earliest supporters of Barack Obama beginning in 2007 and has had a close relationship with Joe Biden in his Presidential campaign.  While we don’t normally discuss politics on our podcast, today our conversation will touch upon politics to the extent that changing policies, the result of a new President and his administration, [00:02:00] will have an impact on the business community.

Welcome Bob. It’s terrific to have you as a guest on On Boards.

Bob: [00:02:07] Joe, Raza, it’s my pleasure to be here. Thank you.

Joe: [00:02:11] Before we talk about what business leaders and their boards might anticipate in a Biden-Harris administration, it would be great if you would tell us a little bit about how you became involved with President Obama and what you learned from working on that campaign.

 Bob: [00:02:26] Joe,I had previously been involved in some local races like governor’s races, and what I had learned in the course of that from somebody that served as a mentor to me, was that when it comes to presidential races, it’s really only about two things; stay the course or change. And if it’s about change, the issue is, what kind of change?

When the 2008 campaign was getting underway, I asked myself, what’s this race going to be [00:03:00] about? And for me, it was about change.  The country was weary of our time in war; we were facing an economic crisis, and there was a feeling, at least in my mind,  that the country was looking for something different. And of the two major candidates on the Democratic side, Barack Obama and Hillary Clinton, Barack Obama was truly the face of change, as I saw it. He wasn’t traditional, he was something different, he promised a new approach, and that’s what got me involved in his campaign.

I was invited to meet him in November of 2006. My wife and I had lunch with him back in the days when he would just have lunch by himself. We sat actually at the UMass Club in Boston, and we talked about everything except politics. We talked about children and where children get their values. We talked about policy and [00:04:00] how we should think about our role in the world. And we talked about, of course, the Red Sox versus the White Sox, he being a White Sox fan. I was trying to show him the error of his ways with that.      .

My wife and I walked away from that meeting, convinced that this was the most impressive person that we had met. About a month later, I got a call. I was asked whether I would be willing to come to Chicago in January for a meeting.  I think that’s the first test of how committed you are–if you’re willing to go to Chicago in January. I went out there, there were 30 people in the room at the time from around the country– only two of us from Massachusetts–and this was the planning meeting for the campaign, and that’s what got us launched.

Joe: [00:04:51] Wow. I remember we were still partners then, and I remember that you were very involved in the campaign to the extent that [00:05:00] you were actually in Iowa for that first caucus in 2008. Tell us a little bit about what you learned there, and then I know there’s a subsequent moment that really had a pretty big impact on you.

Bob: [00:05:13] Yeah. We got to remember that we were really an insurgency campaign at the time. Senator Clinton, whom I had an enormous respect for, was the prohibitive favorite at the time, and so it wasn’t as though we were expected by anyone to win. So it was truly a small band of brothers and sisters that traveled to Iowa.

And for me, it was an incredible experience because Iowa is a caucus, not a primary, and it means engaging voters one on one and you go door to door. It’s interesting because the caucus was January 3rd. I was out there from about mid-December to that day. It’s freezing cold. Oftentimes, you’re [00:06:00] bundled up. It gets dark early, you’ve got a ski mask over your face.  You ring a doorbell, and the response is, “Come on in. I want to talk to you about the Senator’s position on gun control or economics or whatever.” And what I really learned was that Iowans take their role as the first in the nation’s caucus or primary, they take that role extremely seriously. They are very interested because they know they set the tone for the rest of the campaign, and being able to talk to voters one on one, you learn a tremendous amount about what’s on people’s minds.

 The thing that I learned in that campaign starting in Iowa was the presidential campaigns are about the future. It’s not what you’ve done in the past. It’s what you’re going to do for people.  The George Bush, Sr-Bill Clinton campaign is a perfect example. George Bush coming off with that [00:07:00] great victory in the Gulf War had the high popularity rating, but at the end of the day, people voted for Clinton based on the War Room slogan, “It’s the economy, stupid.” They were interested not in rewarding the past, but in looking towards the future, and that’s an important thing to keep in mind.

Joe: [00:07:19] I know that a couple of months after Iowa in March, you found yourself  in Philadelphia and had a real moment of insight. Can you tell us about that?

Bob: [00:07:28] Exactly. My wife and I went to Philadelphia together and we were in South Philly at the time.  Again, the cornerstone of the Obama campaign was engaging voters one by one. That’s what we did, and we were walking through neighborhoods, knocking on doors, engaging with voters, and we saw three African-American women sitting on a stoop, and we thought, “Aha, these are probably good [00:08:00] people to engage and likely voters for Barack Obama over Hillary Clinton given the fact that they were African-American.

 We went up to them to talk about why they should be voting for Senator Obama, and one of the women looked at us and said, “You know, my son has a learning disability. I can’t get services for him. He’s failing in school. He feels isolated, so now he’s joining gangs because he feels like he’s a part of something. I’m worried every day that I’m going to get a call that my son is dead. You tell me what Barack Obama is going to do for somebody like me.”

 That was an eye opening experience because you realize that within the country, there are so many people that don’t feel there’s any connection they have to the federal government, and there are people that feel that the American dream is out of [00:09:00] reach.

It’s also a reminder that an election is not just about the elites and the politically involved. It’s trying to help people who really don’t need a handout, but they do need a hand up, like resources for a child with learning disabilities.

Joe: [00:09:18] Tip O’Neill famously said, all politics are local, and I would add to that, all politics are personal. It’s what are you going to do for me, my family, my son, and you’re right, I think very true. It is easy to lose sight of that, but those who have run and won probably have all, in some regard, learned that same lesson. You’ve got to connect with the people on the ground and understand what it is that they want and what it is that is going to make it work for them. So, looking at the Biden campaign, how did you become in Joe Biden’s run for President.

Bob: [00:09:58] Well, really two [00:10:00] ways. I served as ambassador, so therefore, I worked in the Obama-Biden administration. I got to know Joe Biden when he was running for vice-president on the ticket and, got to know him even better when he was serving as vice-president, both on a personal level, but also on a professional level.

 When this election rolled around, I asked myself the same question that I had asked in 2007, and that was, what was this election going to be about? And again, for me, and I recognize I could be wrong about these calculations, but it’s the question to ask, and I thought that what this election was really going to be about for a lot of people, was restoring personal integrity to the White House, restoring national values, and restoring international relations– getting back to a sense of [00:11:00] normal. It really wasn’t about this notion of wholesale change, fresh faces and the like, but it was a bridge election, getting back to really what the values of the country were, and should be.

 When I looked at the candidates in the Democratic primary, I believed that Joe Biden embodied those values; personal integrity, a commitment to national values and a desire to restore international relations.

Joe: [00:11:29] And, as it turns out you are right, which has been an interesting thing to watch for the last year and a half.

Bob: [00:11:37] Joe, I didn’t look so smart around the time of the Iowa caucuses or New Hampshire primary.  I got a lot smarter after South Carolina! There was a time there when I thought that this was headed in a very different direction than I thought.

Joe: [00:11:52] Yeah, well, it’s not how you start, it’s how you finish, so how you looked  after Iowa doesn’t really matter now.

So, here we are in December [00:12:00] as we record this and one of the things we wanted to talk to you about is, what you believe boards of directors should be thinking about as they anticipate the new administration, what policies might be expected, and how might companies want to plan for what is to come?

Bob: [00:12:19] I think in some ways it’s a fool’s errand to be able to say you have a crystal ball and you’re gonna know what’s going to happen in a Biden administration.  We don’t really know definitively, but there are clues and we can look at those clues from what he has said, who he is, and then translate that into what boards of directors should anticipate.

What Joe Biden has made clear during the campaign is that he believes in predictability, that government should be predictable for the business community and [00:13:00] for all of society. So, I think we’re going to see a much more consistent approach to the issues than maybe we have seen in the past. That decisions should be science based., and again, I’m not saying anything other than what he has said before. So, I think that science is going to play a big role in how decisions get made in a Biden administration. And perhaps most importantly, is his commitment to human dignity. He believes that in his bones, that people need to be respected and that they should have a sense of dignity themselves. Again, that’s going to play out.

I think you’re going to also see, not incidentally, nonpolitical or non-politicized, I should say, decision making. He said he wants to be a President for all the people and will work as hard for the [00:14:00] people that voted against him as for those that did. But this concept again of dignity and the notion, to use his words, of “dealing people back into the process” is going to be highly important.

Joe: [00:14:15] So, let’s unpack that a little bit and let’s talk about a few areas we’ve touched upon earlier or touched upon when we talked about this podcast, one is this concept of corporate responsibility beyond shareholders, which maybe will grow in momentum, and another is about board composition, a topic that Raza and I have talked about a lot this year. Could you weigh in on those things? Because those are things that are topics that all boards are really going to be interested in and, it’d be good to think about what’s to come.

Bob: [00:14:48] Sure.  So, taking my cues from some of the statements that candidate Biden has made, he’s a big believer that the responsibility of [00:15:00] corporate boards is not simply to create value for the shareholders. He is a proponent of stakeholder capitalism -that companies have a responsibility beyond his shareholders, to their employees, to their customers, to their suppliers and to their communities at large. And I believe that what we’re going to see is a new social contract. It’s not just a contract between the people and their government, but a corporate social compact where boards should have a role to play on the big issues that our country face– issues like climate change, an existential threat to the very existence of our country. And there’s no doubt about it, in a Biden administration, climate and climate policy is going to be prioritized, and it’s reflected in his cabinet choice of a [00:16:00] climate czar in the person of former Secretary of State and Massachusetts Senator John Kerry.

Likewise, on the issue of racial justice, we can’t tackle these big issues without the business community working hand in glove on that, so I think that what you’re going to see is a lot of focus on the business community and corporate America being a partner in the solutions to the problems that we face.

  Joe: [00:16:32] That’s well put, the concept that boards owe fiduciary duty to all stakeholders is gaining momentum, and has been for a while, and I think if what you’re saying comes to pass, it will be something to really keep an eye on because leadership from the top could accelerate that momentum and it’ll be interesting to see where it leads us.

What about board composition?

Bob: [00:16:59] I think that’s just [00:17:00] another area that’s really important. You’ve seen Joe Biden not only talk about that, but lead by example in terms of his own cabinet and senior administration officials, whereby there are many more women, people of color, people that represent underrepresented communities, which is an important word or phrase these days, and I think you’re going to see that reflected in terms of what’s going to be expected from boards. We’ve already see it. We’ve seen recently that there is a proposal by NASDAQ that has to do with board composition and diversity on boards with the threat of delisting companies that don’t meet certain criteria.

Raza: [00:17:52] Bob, you told us that it would be a mistake to think of the incoming administration as Obama 3, and in fact it should be [00:18:00] thought of as Biden 1. What does that mean? And what does it specifically mean to businesses and boards in your view

Bob: [00:18:08] I think that people tend to lump Joe Biden with Barack Obama, and they should recognize that Joe Biden worked for Barack Obama. As vice president, you don’t make the decisions. You don’t make the policies. You have a voice in the policies and the decisions that are made, and in Joe Biden’s case, he had the first word and he had the last word, but he didn’t make the decision himself. Those were Barack Obama’s decisions.

Now, he’s top dog. He’s the one that makes the decisions, and Kamala Harris as vice president will be expected to play the same role, having a voice in those decisions. But Joe Biden, again,  by DNA and by disposition, is a different [00:19:00] person than Barack Obama. He’s a moderate, first and foremost. He’s a creature of the Senate.

 Regardless of how that election comes about in Georgia, the Senate is going to be razor thin in either direction, and there’s a group of moderates that exist in the Senate on both sides. We’ve seen some indications of that from people like Joe Manchin, the Democrat from West Virginia, Mitt Romney, the Republican from Utah, et cetera, et cetera, so there’s going to be a core group that he may be able to deal with to truly get, not radical change, maybe not the changes that some on the far left of his party are looking for, but to really move the needle on some of the important issues that the country faces.

So, I think that’s number one, he’s a moderate. Number two, he feels things viscerally, as I’ve indicated. He’s a people person. He’s gone [00:20:00] through tragedies in his life and he understands suffering that people go through.

I used the word “dignity” before, this is something that he saw in his own father when his father lost his job and had to come home and tell the children that they needed to move. They couldn’t keep the house, but it wasn’t just about a paycheck, it was human dignity. So, I think you’re going to see that play out in a strong way.

Raza: [00:20:28] Bob, you’re right. He is a different person with different life experiences, and human dignity would be very important for him. How does that translate into policy and what should we expect there?

Bob: [00:20:42] This goes back to the notion of stakeholder capitalism, and I think what boards should be thinking about–not just in terms of the issue of board composition and diversity on the boards, but also issues like: fair wages, are people being [00:21:00] paid in an equitable manner; dignified retirement, are they going to be able to retire with the least enough money to lead a dignified life and not have to worry about where their next meal is going to come from, or will they be able to afford the drugs they need to sustain their life as senior citizens; the notion of executive pay equity in all of that, are executives being paid proportionally to what they’re producing and proportionally to what their workers are earning.

So, we mentioned some of the issues of diversity on boards, the notion of workers participating in boards. I don’t think we’re going to see the radical kind of proposals like you see in some places, both in Congress and in some States, but I do think that there’s a notion that there needs to be more voices at the table reflecting those kinds of [00:22:00] concerns. And I think there’s going to be pressure put on boards of directors, let’s say, when it comes to executive pay again, as to determine what should go into the issue of executive pay. It’s got to be broader than just the issue of value for shareholders. What is the executive doing to lead change? To lead a direction towards stakeholder capitalism as an example. And to be rewarded for what’s done on a much broader scale. So, boards need to be thinking about all of those issues in my view.

Raza: [00:22:38] Bob, as a country, how do you take advantage of a President that wants to bring innovation in healthcare, energy, climate tech, preparing for the next pandemic?

Bob: [00:22:50] So, I think that’s a great question because it’s another hallmark of what Joe Biden has said in the campaign– funding innovation, and [00:23:00] recognizing that America’s place in the world is really determined by how innovative we can be. Innovation is what’s got us to where we are today, and if we’re going to compete with a rising China, for instance, than we’ve got to focus on innovation. So, if you take the healthcare arena as an example, NIH funding, funding of the National Institutes of Health has been lowered over the last several years. There’s going to be a recommitment to healthcare innovation. There’s been talk about establishing the equivalent of DARPA, the Defense Advanced Research Projects Agency, the innovative arm of the Defense Department–the creators of the internet– into the healthcare arena– HARPA, so the Healthcare Advanced Research Projects Agency.

Joe: [00:23:55] Let me ask you a little bit about your board experience. I know that you sit on the board of Novo [00:24:00] Banco, a leading bank in Portugal. Can you talk about how that came about, the composition of the board and your role on that board?

Bob: [00:24:08] When I served as the United States Ambassador, I think people think of the job in many ways as a social job; you go to a lot of cocktail parties and rub shoulders with other diplomats, but your title is really Chief of Mission, and it’s the mission of the United States government in a particular country. That can include the intelligence agencies, can include the military and law enforcement agencies, but it also includes economic diplomacy or economic statecraft, as the phrase has been coined.

What that means, in large part, is what you’re trying to do is to increase investment in the United States by foreign companies. You’re trying to make sure that US companies and US [00:25:00] businesses also have access to foreign markets. In my case, when I was there, one of the most prominent banks in Portugal failed and it failed during the economic crisis that gripped Europe in 2012/20 13. It failed right after the meltdown of the Greek economy. There was fear that a contagion was starting in Europe that would undermine the economic recovery that had been going on in the United States since the depth of our own crisis in 2008. And one of the things that we worked on as an embassy was trying to stabilize this failed bank, to try to take the lessons we learned in the United States and help the Portuguese implement those lessons.

Now, it’s not easy, you don’t just walk [00:26:00] in to the Minister of Finance and say, “We’re the United States. Let us tell you what we’re going to do or what you’re going to do.” You can’t bigfoot the problem, but you try to be invited to the conversation and provide that kind of insight, which is what happened. The Portuguese government split that bank into a good bank/bad bank, like we do here in the United States.  The bad debt was put into the bad bank. The good bank, which included the depositors, was stabilized, and eventually, the bank was put up for sale.

Well, the bidders on that bank were the Germans, the French, the Chinese, the Spanish and the Americans. I was the United States ambassador. My role at that point was to promote the interests of an American investor, and in this case, it turned out to be Lone Star Capital, a private equity firm in New York, and [00:27:00] I worked very hard and very closely with the management team of Lone Star to position them to compete for the bank.

They were eventually successful in winning the auction. They had done a tremendous amount of due diligence. They knew what they were getting. They made no promises beyond the fact that they were into it for the long-term. They weren’t interested – and the Europeans have this image of us, and particularly, US private equity firms–that all we want to do is take over a company and break it up for parts.But they were into it for the  long term, and that was important to the Portuguese.

The good bank was called Novo Banco. Lonestar became the 75% shareholder; the government, the Resolution Fund in Portugal, since it was being bought out of, essentially a resolution process, was the 25% shareholder. And eight months after I left [00:28:00] as ambassador in 2017 and returned to the United States, I got a call asking me whether I would be willing to serve on the board of the bank and chair the compliance committee. Compliance was my background. I certainly understood the Portuguese culture, and the feeling was that I could not only add value to the board on the issue of compliance, but I could be a bridge between the Americans and the Portuguese, explaining Portuguese culture to the Americans and American culture to the Portuguese.

Raza: [00:28:37] Bob, when you and I first met, it was at an NACD event, and you told a story about Bill McRaven, a four-star Admiral who served as commander of the United States Special Operations Command. Can you talk a little bit about what happened?

Bob: [00:28:54] That was an experience, Raza, that is seared in my mind [00:29:00] because it tells you a lot about governance, not in a corporate sense, but in a government and military sense. In training to become ambassador, and there’s a significant period of preparation doing consultations, one of the things that we had to learn was, what do you do if your embassy is under attack? You can’t just, dial 911 and ask for the Navy SEALs to show up.

So, what was arranged was a group of ambassadors that were preparing to go to posts to fly to MacDill Air Force Base, which is the headquarters of US Special Operations Command, It’s in Tampa and we got on a special forces plane. There were eight of us. Some were like me, new ambassadors that had never served; some had served previously and were going to a new post, but you go through the [00:30:00] training no matter whether you’re an experienced or a new ambassador. You get a real sense of the plane you’re on because the first class cabin on this plane is the mobile operating theater to be able to operate on special forces soldiers that are wounded in action on their way out of a kinetic activity or other engagement.

Anyway, we landed at MacDill Air Force Base, and at the bottom of the ramp is Bill McRaven, the four-star navy admiral, who just a couple of years previously was the architect of the raid that killed Osama bin Laden, and a larger than life figure in so many ways.  And as we get off the plane, I’m probably halfway back in the group of eight, he’s at the bottom of the ramp, he extends his hand, introduces himself to the first person off the plane and says, “Hi, I’m [00:31:00] Bill McRaven.” That person says, “Nice to meet you, sir,” and we continue, the eight of us get off the plane. And when we all deplaned, he gathered us around and he said, “We’ve got to get something straight.” He’s not being the jerk about this– he’s being a teacher– and he says, “I am a four-star navy admiral.” But you have to remember, when I’m addressing you, you have a fifth star, so you’re welcome to call me Admiral, and you’re welcome to call me Bill, but I call you sir, and not the other way around. This is important. Chain of command is important to us. Military authority always reports to civilian authority. That’s the way our government is set up, and that’s the way we operate. So, if US Special Forces were to do a training exercise in your jurisdiction, a support exercise, or [00:32:00] even a black op, you know about it in advance and you have to approve it”.

Raza: [00:32:05] Well, what a story. I’ve always told this story to many of my friends internationally where governance can be sometimes backwards, but it just highlights the broader importance of governance and who reports to w hom, in my mind. My impression, Bob, is that an ambassador, in many ways and respects, is like a CEO of a company with many divisions. Is that accurate? How did you see that?

 Bob: [00:32:34] That’s the way I approached my role as an ambassador. Again, your title is ambassador, but your operational title, as I think I’ve mentioned, is Chief of Mission and when, for instance, all the ambassadors, once a year, gather in Washington to talk about the various issues that we face across the world,  the conference is known as The Chief of Mission Conference. [00:33:00] What it means is that all the interests of the United States government as represented by agencies, and I mentioned some before: the state department, department of agriculture, defense department, law enforcement agencies, they do all report to the United States ambassador.

You’re responsible for supervising their activities. You’re responsible for setting the agenda. You’re responsible for the execution of the mission, and getting people to operate in unison. I had a motto in the embassy, which was  “One Team, One Fight. There are turf battles, and there are rivalries between the agencies. We’ve heard about them, but they exist. Like any organization, you have that. The task is to try to find ways to make sure that you’re working as a coherent unit and collaborating in order to best effect the mission of the [00:34:00] United States government and the President of the United States.

Raza: [00:34:03] Thank you, Bob. .

Joe: [00:34:04] Bob, it’s been great speaking with you. Thanks for joining us today. I hope you and your family will continue to be well and stay safe.

Bob: [00:34:11] Joe and Raza, thank you so much for having me, and let’s all hope that 2021 is a good year and certainly a lot better than 2020 has been.

Joe: [00:34:23] I think we’re all hoping for that, Bob. And thank you all for listening today to On Boards with our special guest, Bob Sherman.  Please stay safe and take care of yourselves, your families and your communities as best you can.

Raza, you take care. I hope you and your family continue to be well and stay safe.

Raza: [00:34:43] Yes, Joe, we’re all staying safe. Thank you., and I hope you and your family are as well.

Joe: [00:34:48] Thanks. Take care.

19. Paul Ayoub on board leadership, board composition – and the fundamental importance of board diversity

Paul Ayoub has served as the chair of several boards, including two significant nonprofit organizations, and is currently Vice-Chair of the board of one of one of the largest nonprofit organizations in the country, St. Jude Children’s Research Hospital. In this episode he shares his views on board composition, the relationship between the board chair and CEO and the critical importance of diversity, equity and inclusion to the effectiveness of the organization.

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Links

Paul Ayoub Bio

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Boston Business Journal Power 50

How to be a Good Board Chair

Quotes

On being chair of the Board

First, you have to remember you are not the CEO — you’re the chair. So what does that mean? It means that you’re really the coach; you’re the producer. It’s not your vision. It’s your job to bring forth the collective vision and the collective wisdom of the people who are on your board  and to help the CEO be the best he/she can be. You also have to remember that you’re really just the temporary steward of that position. I’m sure you’ve both experienced this, but sometimes people will start to own their titles and own their positions and it becomes their identity.

When I have become a board chair, my first principal is that the CEO’s success is my success and so I have no desire to be out front from a management/organization point of view.  The Chair represents the Board and there are speaking opportunities and public-facing events where the chair represents the organization on behalf of the board and the organization.  The chair may sit at the head of the table, but there can be no ego of the chair. The meaningful reward the chair receives is knowing in his/her heart that the organization is successful and the CEO is successful. 

How important is board composition and what’s the best way to approach it?

Board composition and culture are everything. I think of it much like a sports team. You can have a really talented team with a weak culture or you can have a great culture and a weak team and, in either case, you’re only going to get so far.

So, I think that the composition is critical. It’s actually not just a good thing, it’s an essential part of the fiduciary duty of a board to have the right mix of diversity of skill, talent, thought, background and, of course, critically, diversity in terms of women and people of color. It is not opinion, but proven fact, that diversity makes a board stronger and better . Also, it takes a dedicated investment in time to recruit, build, train and integrate a diverse board.

What have you found as effective strategies with respect to off-boarding board members?

Off-boarding begins with onboarding. So, when you are bringing people onto your board, it’s important to tell them what the expectations and responsibilities are in every respect such as meeting attendance, doing the reading, and serving on committees.  One of those expectations also should be being prepared to leave the board when their term is up, regardless of whether you have limits.  I think the culture of term limits is more powerful than a bylaw that sets term limits .

Serving on the board of a nonprofit organization

If you’re going to be involved in a nonprofit, you should understand why.  In my view, it’s a combination of duty, privilege and responsibility. I think we all have a responsibility to give back to our community, whether it’s our immediate neighborhood or the larger community of the country of the world, and it’s a privilege to do so.  But, upon beginning serving, understanding and fulfilling the fiduciary responsibility of being a board member is critical.

Big Ideas/Thoughts

Progress toward diversity, equity and inclusion has been slow – shamefully slow. It’s been better of late, because world circumstances have dictated that it has to be better. There’s a heightened sensitivity and deeper understanding that diversity means strength.  People understand that even if you don’t approach diversity from the moral point of view or that it’s the right thing to do, studies have shown that a diverse board is a stronger board and makes for a stronger organization.  As Justice Louis Brandeis, the founder of my firm, Nutter, said: “In the frank expression of conflicting opinions that lies the greatest promise of wisdom.”

Also, keep in mind that you can’t be a board member and support diversity, equity and inclusion unless you are willing to rotate off a board to make room for someone who is diverse.  So, in driving diversity on boards I’ve chaired, I use that approach and it’s rare to get a “no” when asking someone to rotate off of a board to make room for others.

Transcript

Joe: Hello and welcome to On Boards, a deep look at driving 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 board 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.

Raza: [00:00:32] Joe and I speak with a wide range of guests and talk about what makes great boards great, or make a board unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets of your company.

Joe: [00:00:48] Our guest today is someone I’ve known for quite a long time. In fact, he moved into our family home when he was very young and didn’t move out until he went to college. [00:01:00] It’s my brother, Paul Ayoub. Paul is a partner of the law firm of Nutter McLennan and Fish, where he serves in the firm’s Executive Committee.

He has served as a member of a number of boards, including as board chair of two significant nonprofit boards: ALSAC, which is the fundraising and awareness organization for St. Jude Children’s Research Hospital, as well as the board of the Greater Boston Chamber of Commerce.

Raza: [00:01:30] Paul is also past president of the Real Estate Finance Association board, and the co-author along with his daughter, Lizzie,of a best-selling book entitled Inspire Me! A father-daughter book of quotations to motivate, teach and inspire. He was recently appointed to serve as a member of  Mayor Walsh’s Reopening Advisory Board for the City of Boston and named to the Boston [00:02:00] Business Journal’s power 50 for 2020, in part for his leadership in increasing diversity of the Chamber board and in helping form a new nonprofit earlier this year called Small Business Strong,to help women and minority owned businesses during the pandemic.

Joe: [00:02:20] Paul, it’s terrific to have you as a guest on On Boards.

Paul: [00:02:24] Thank you. And thanks for having me be part of this program and the first part of this third series.

Joe: [00:02:30] So, as I mentioned in the introduction, you’ve chaired the boards of two extremely high-profile non-profit organizations, and you’re about to chair a third. You’re about to assume the chair of St. Jude Children’s Research Hospital’s board. It’d be great. If you could share a little bit about the journey that brought you to this point – what was your first board experience? How did it come about and what did you learn about the importance of joining the board of a nonprofit?

[00:03:00] Paul: [00:02:59] Thanks. Well, the first experience I had was with ALSAC and St. Jude, being a national committee member for a number of years before coming onto the board. So I had the real privilege, as I know did you, Joe, of sitting in a room with some brilliant, passionate visionaries, as they brought St. Jude from somewhat of a nascent stage to what is now the largest healthcare non-profit in the country. So, you know, you can go to school for an education or you can witness it and experience it with great minds and that’s what you and I were both able to do with ALSAC and St. Jude. So  having been born into a family that was involved in it, it’s almost like coming into a family, learning a second language. It’s always been part of our lives and we’ve lived and breathed it.

Joe: [00:03:49] Maybe you could briefly tell the story of how our father actually got involved with St. Jude, because I think it really is a kind of an interesting background.

Paul: [00:03:59] Sure. [00:04:00] And it’s not only a great story about St. Jude and ALSAC, but also as people listen to it, it’s a story that plays out all over in terms of both for-profit and non-profit organizations and I think many of the principles of the same.  In our case, our mom and dad had formed an organization in Boston to raise money for inner city kids in the early fifties and they arranged to have the late entertainer, Danny Thomas, do a benefit. They raised lots of money. So several years later, Danny Thomas was fulfilling a promise he had made to St. Jude, which in his religion, the Catholic religion is the Saint of hopeless causes. He wanted to build a shrine of life for St. Jude and that was to build a hospital for the sickest of kids and that point in time leukemia was essentially a death sentence for any child who was afflicted with it. And he had the idea that not only did he want to do that, but he as a first-generation Lebanese-American wanting to bring other [00:05:00] successful Syrian and Lebanese Americans together to give a gift to this country.

So combining those two passions and dreams, he invited our dad to come to a meeting in 1957 in Chicago with a number of other men and women to explain this idea and it was an artist’s rendering. And it was at that meeting that our dad wrote the bylaws of the organization that then became St. Jude with Danny Thomas and five years later, we’re standing in Memphis, Tennessee as the doors of St. Jude opened. So the dream had become a reality in that five-year period of time and again it was a dream to help the sickest of kids with catastrophic diseases. The principal is no child to die in the dawn of life and no child should ever be denied care because of an inability to pay and it’s those two principles that are alive and well under the pillars of the organization today almost 60 years later for St. Jude and [00:06:00] almost 65 years later for ALSAC, which as you said, is the fundraising and awareness organization for St. Jude.

Joe: [00:06:05] Yeah. You know, I obviously have heard this story many times, but just listening to it now, again, it’s really. It’s quite something. It’s a legacy that I am very proud of and every time I think about it, in fact, as I get older, maybe I appreciate it even more.

Raza: [00:06:22] Paul, what an inspiring story.

Paul: [00:06:24] Thank you. It inspires all of us who are involved with it every day.

Joe: [00:06:28] So tell us some of the things you’ve learned about the importance of being a board member on a nonprofit.

 Paul: [00:06:35] I think there are several lessons. The first is that if you’re going to be involved in a nonprofit, you should understand why and it’s a combination of duty and privilege and responsibility. So I think we all have a responsibility to give back to our community, whether it’s our immediate neighborhood or the larger community of the country of the world and it’s a privilege to do so.  But it’s also [00:07:00] very fulfilling if it’s something in which you believe.  I think it’s important to be involved in something that  one feels a passionate around. If you have a passion and a purpose, then the productivity and the effectiveness will follow and it needs to be authentic, especially  in the non-profit world and I think that’s true even in the profit world. I think those who succeed most in either do it because they have a passionate and a vision and a real fervor for what they’re doing.

Joe: [00:07:29] Yeah, no, I agree with that.  People would associate that with non-profit, but I think it cuts across all boards. You need to have a passion for the company, the mission, whatever it is you’re doing in order to really give it everything that it deserves.

Paul: [00:07:45] I think so. And also when you think about it and you think about when St. Jude started, for example, you need to have all that and I think, especially at the beginning stages of any enterprise, you have to have a healthy dose of naivete because if you [00:08:00] knew how many times have you interviewed successful business men and women who’ve said, if I knew now, when knew, then what I knew now I might not have done this and a little bit that I actually think has helped too much. It’s not healthy. And that’s where a good board comes in by the way.  Is having a board that has that collaborative relationship with a CEO and a founder. So you don’t go too far astray, but you can dream, but not over dream to the point of not fulfilling your dream.

Joe: [00:08:26] Yeah. Agreed . So listen tell us a little about St. Jude Children’s Research Hospital and what you’ve learned in chairing the boards you’ve chaired that you hope to bring to your role as chairman of the board at St. Jude, starting with what makes a good board chair.  

Paul: [00:08:43] St. Jude is the hospital board and ALSAC, as you mentioned, is the fundraising and awareness board and just for people who are listening it’s the same members of the board, but it’s two very different organizations. When I was chairing the [00:09:00] ALSAC board much, like when I was chairing the board for the real estate finance association, very different, one’s a trade group focused in Boston and real estate, one’s a healthcare organization that has an international focus. I think many of the principles are the same, which is as a chair first of all, you’re not the CEO, you’re the chair and so what does that mean? It means that you’re really the coach, you’re the producer. It’s not your vision. It’s your job to bring forth the collective vision and the collective wisdom of the people who are on your board.

You also have to remember that you’re really just the temporary steward of that position. I’m sure you’ve seen this, both of you, but sometimes people will start to own their titles and own their positions and it becomes their identity.  It can’t be your identity. It can be your purpose, your love, your passion but it’s not yours. It’s in the case of a nonprofit, it’s the publics and it’s you’re [00:10:00] really just  a fiduciary for those who are members of the public and are supporting the organization.

And the last thing is, I think there’s a lot to be learned from not being center stage and let others shine. One of the other lessons I learned, it’s not the output that you need to focus on it’s the input.  If you have a good process, you’re most likely to have a good result. And we’ll probably talk a little bit in detail about what that means, but processes, good committees, good onboarding, good self-assessments, if you run your board well you will have a good result. And that’s why I think what you all do in terms of these podcasts and what you’re doing in terms of good governance is so important because you need to focus on it but it’s so much of it is process and letting the process dictate the result.

 The last thing I learned is you’re at the epicenter  , you know, everything going on and presumably not [00:11:00] everything going on.  You start at “A” and you’ve probably got to Z by the time you’re speaking to some of your members of the board, but when you walk into a boardroom or you have a conversation, you have to understand, you can’t get to Z immediately. You have to bring people along. Sometimes they’re at, B or D or F and you need to have the time and the patience and the respect for every board member to understand that they’re there in good faith. They all, no matter who they are and whatever quirks or idiosyncrasies they may bring in their relationship with you and the board – they all have something to offer or they shouldn’t be there and wouldn’t want to be there, but you have to meet them where they are on their terms and not insist it’s your terms and that’s the difference between being a CEO, where you have hire and fire power presumably, and a chair where you’re there to coalesce the greater good for the greater good.

So those are some of the lessons that I learned doing it and would bring to St. Jude or any organization.

Joe: [00:11:56] Well, I was going to say, I think that cuts across all boards. It [00:12:00] doesn’t just apply to not-for-profit, it applies for all for-profit whether private or public. I think that’s really well said. One of the things that I think also cuts across all boards is trying to understand the line between governance and management and I’d like you to just talk about that. How do you recognize it? And is it always the same or different depending on the company?

 Paul: [00:12:24] For those who have been involved in boards, this is the ultimate discussion that arises perhaps at every meeting or between meetings and you hear it all the time and anyone listening to this is probably smiling.  So yes, we’ve had that conversation. And so we all know there’s no one bright line.

There are some things that are clearly governance: selecting a CEO, succession planning of the CEO, evaluation of the CEO for example, is one general oversight of the finances would be another, and there are some things that are clearly management hiring the team [00:13:00] below the CEO level, being an obvious example.

David Nadler wrote a great piece in the Harvard Business Review many years ago called Building Better Boards and he had this continuum and if you can envision it on the left-hand side, there was the passive board and then the certifying board, the engaged board the intervening board and then the operating board.

And if you imagine that in your mind, somewhere in the middle of being an engaged board is, is the right place you try to achieve, but you’re never, it’s not static because depending on circumstances and needs and boards and situations, sometimes you may be more of an intervening board. I think, in my judgment, you should try to avoid being a passive or a certifying board or rubber certified being like a rubber yeah whatever the CEO says, that’s fine. You’re not adding value. You’re adding optics. The challenge is being engaged, but not being intervening and not being an [00:14:00] operating board unless, and there are exceptions ,when it’s appropriate or necessary or in the best interests of all . And so it’s a wavering line , but the art form is to think about it, to examine it, to challenge yourself, make sure you’re at the right place at the right time.

Joe: [00:14:16] Yeah. So one of the important things of course is the relationship between the board chair and the CEO. Talk a little bit about what you think it should be, what it shouldn’t be and what makes that relationship strong and healthy.

 Paul: [00:14:31] When I have been a chair of a board and there’ve been a few, my first principal is that the CEO success is my success and so I have no desire to be out front. I mean, obviously there are speaking opportunities, you’re  at the head of the table, but there can be no ego of the chair. The pride, the trophy, the plaque you get is knowing in your heart that the organization is successful and the CEO is [00:15:00] successful.

 If you start at that place, now you have a level of trust presumably with your CEO, because he or she knows all you want is for the success of the organization and his or her success.  By the way, likewise, so if you have each other’s back and there are times when the CEO can help the chair too, right? You’re both eyes and ears for each other, presumably.  I’ve heard the phrase that it’s a collaborative tension between the CEO and the chair. It’s not a friendship, it’s a collaboration and it’s not designed to always be smooth and easy, but if there’s a mutual respect and there’s a trust, and there’s a clear communication between the two, then I think it’s destined to be very healthy.

Trust is really key and communication is key and airing out issues when there are bumps in the road, inevitably there are.  I think that’s when you build the strongest relationship, when there’s a little bump here or there, perhaps a misunderstanding. Those are some of the guiding [00:16:00] principles that I’ve seen emerge that are common.

Joe: [00:16:03] So have you served on a board where the circumstances were such that the board needed to intervene with management? And if you have just tell us a little bit about how that went, did it go well, did it not go well? And what were the lessons, if any, that you’ve learned from it?

Paul: [00:16:21] There are two examples I can think of. One is when St. Jude and ALSAC, were at their formative stages. So the chairman of the legal committee was essentially practicing law, but that’s because there was no budget, there was no lawyer and they were figuring things out. So I think often, profit or non-profit, in the early stages the board is, and I’m not saying it’s good practice in fact I’m saying it’s not good practice certainly not best practice, becomes an operating board because it’s the people you’ve brought onto the board have skillsets that for which there is a vacuum in management and that’s why it’s good to have a diverse board in many [00:17:00] ways, but also in terms of skill, but it’s also important to recognize if you’re doing that you need to fill those gaps in management. So it should be temporary and it should be by exception, not rule. That’s one example.

And the other example is when I’ve been board chair but on a board when it hasn’t been the right leadership and so you have a choice and one choice is to allow failure and the other choices to intervene and operate. And that, again, it’s the exception and not the rule, but you can’t stand by and watch failure or risk the organization. So it’s not the best thing, but it’s sometimes the necessary thing.

Personally, I believe that it’s okay if you recognize it for what it is and put boundaries on it yourselves and say, are we going to do this until we don’t, until we can not do it, not making it a habit.

Same with being an intervening board. For example, I think during COVID-19 no CEO had dealt with worldwide pandemic, no board had. I think that’s an example of when we were all in it [00:18:00] together and there wasn’t time for management to go do a study and come back to the board and say, well, this is what we’re going to do to close down our operation. We’ll meet next month. I mean, it was all real time. I actually think it’s a time when organizations showed their strength, because if there was a trust and a mutuality people came together and just said, we’ve got to figure this out together. It wasn’t ego. But that’s a time when you could argue it was intervening or cross the line, but it wasn’t really, it was, there was no line. So that’s another example of extenuating circumstances.

Joe: [00:18:30] Yeah. You know, I think the pandemic has really allowed a lot of people to understand how good their board is because a lot of boards have been really responsive to these changed circumstances. Not only as you said, in terms of how do we do this now, because we’re all in this together and we want to succeed, but also in terms of giving the right kind of support and advice to the leader of the company.  Some companies have done well, some companies have not done well, but [00:19:00] in both situations, the CEO or the President has needed help and has needed advice. And it may be just as simple as “we’re here for you now,” we’re going to be your backstop or it may be something more than that, but I think it’s been a learning time for a lot of boards and a lot of organizations really do.

Raza: [00:19:20] Paul, we touched upon it a little bit earlier, but in what respects are functions of a board of a large non-profit similar to the boards of for-profit companies?  What best practices apply to all organizations?

Paul: [00:19:36] So I think a few things that I’ve said, and I’m reiterating a few others. One is that the relationship of trust between the chair and the CEO and what the chair’s role is and isn’t in that, especially in a for-profit board, this chair is not the CEO and I think there’s more risk there than in a nonprofit for a whole bunch of reasons.

 And it’s really [00:20:00] hard because probably the person who’s chairing the board is a CEO has run organizations. And so it’s hard to play a different role, but it’s essential. And I also think that, you know, understanding how to  oversee strategic planning is critical. So it doesn’t matter what the organization is. That’s a fundamental role of the organization. So I think those are two key ones.

And then third is helping to develop, nurture and further the culture of the board. You are the steward of that as well. And you know, the phrase, culture eats strategy for lunch. It’s absolutely true, and you’ve seen that in great boards and I’ve seen, I can think of one board I once served on and over time it weakened and then the culture became somewhat dysfunctional and this board made horrific, I mean, unimaginable errors in judgment, but that’s because it lost its way. So I think, but that’s true. No matter what the organization is.

Raza: [00:20:59] We can also flip [00:21:00] it the other way where what do you think about how nonprofit boards and for-profit boards are different from one another?

 Paul: [00:21:08] By the way, as you know, nonprofits is such a broad swath. Sometimes when you say non-profit, you’re thinking of like a local dance studio, but in fact, Harvard University is also a nonprofit, Mass General is a nonprofit. So it’s really hard to generalize because you think of those as businesses but they’re in a nonprofit structure.

The difference is what the governing rules are governing body of law , but fundamentally you get to the same point, but nonprofits, for example, are not governed by Sarbanes-Oxley but the best nonprofits adhere to many or most of the principles of Sarbanes-Oxley, right. Especially as you get larger, if you’re, if you’re a small local community, not an art center, you probably shouldn’t and wouldn’t, and don’t have the capacity. So it’s hard to generalize and it [00:22:00] depends on size. You know, of course the, you know, the tax code governs in sections of the tax code, really governing nonprofits and.

To whom you’re answering especially if it’s a private for profit versus nonprofit essentially is the same, which is the public, right? I mean if it’s a public organization essentially it’s the same, which is the throughput is the, the the owners of the organization. And if it’s a nonprofit, it’s essentially the public.

And if it’s a publicly traded corporation, it’s the shareholders. But. Arguably in these days, even beyond that’s where social impact comes in. So the lines have become blurred. I think that’s actually good, not bad.

Raza: [00:22:40] For sure, but perhaps one area where the notion of revenue for a for-profit typically comes from customers. Whereas the notion of revenue for non-profit comes from fundraising and typically boards are really big part of it  for [00:23:00] non-profit organizations. Well, maybe at least one of the areas that maybe the worlds are different.

 Paul, do you see that nonprofit boards are a good place for board members to start and learn how to be a good board member?

Paul: [00:23:14] Not to sound like an attorney, but the answer to that is yes and no. So let me tell you the yes. Sometimes that’s where you start because that’sjust where you have your first passion, your first point of entry. And so I think it’s great to be in a non-profit board or a smaller non-profit organization, as I mentioned before, they’re nonprofits broad swath.

So, but if we’re talking about any size, non-profit when you’re giving back to the community, inevitably, that’s what you’re doing or a, cause I think it’s terrific. The my “no” part is that it shouldn’t be, especially in smaller organizations, it shouldn’t be a place where you’re learning. So I think whatever board you’re on, you should be a [00:24:00] contributor.

I mean, there’s this phrase that the more you give, the more you get, of course. And that’s why  one of the things that inspires and fulfills all of us, but that shouldn’t be your motivation. It should be that, you know, you’re giving a lot to the organization,

But yes, I do think so I think the more exposure to have to more people in more types of organizations, the better you are and the more exposure to different thought processes and products and I think all of that helps in the aggregate.

Raza: [00:24:28] How important is board composition and what’s the best way to approach it?

Paul: [00:24:33] Board composition, that and culture are everything and I think of it much like a sports team. So you can have a really talented team with a weak culture and they will not win, but you’re gonna have a great culture and a weak team and you know, you’re only gonna get so far.   So I think that the composition is critical and it’s actually not just a good thing it’s an essential part of the fiduciary duty of a board [00:25:00] to have the right mix of skill of diversity, of talent, of diversity, of thought of diversity, of demographics, of women, people of color, all of that. Also depending upon the organization the right skills for the right organization. It’s not one size fits all, but I think it’s essential, you know, Oprah Winfrey said, surround yourself only with people who are going to lift you higher and I think that’s one of the quotes in Inspire Me! the book that Lizzie and I put together.

 Think of that in the context of a board . Everyone who on that board should be lifting you higher and if they’re dragging you down, they shouldn’t be on the board. And the other quote I love is Einstein said everyone is a genius, but if you judge a fish by how it climbs a tree, you’ll think  it’s lived its whole life thinking it’s stupid. So it’s the diversity, right? You have different people look at things very different ways and that’s what will make you stronger.

Raza: [00:25:54] One of the topics Paul that we, Joe and I often talk with our guests [00:26:00] is both recruiting in the board, onboarding and offboarding. What are your thoughts on, on this spectrum of the life cycle of a board member?

Paul: [00:26:14] It’s one of those tense issues that no one ever gets right, but people can write articles and books about it and lecture and sounded like they’re brilliant.  First of all, offboarding is important. It can be difficult, but off-boarding begins with onboarding. So when you are bringing people onto your board, it’s important to tell them what the expectations are all around: meetings and doing the reading and whatever the responsibilities will be in serving on committees and being prepared to leave the board when the terms are up, if it’s a one or two term expectation. Regardless of whether you have limits. In fact, I think the culture of term limits is more powerful than a bylaws term limits, because that means people are understanding that they’re there. It’s not a [00:27:00] marathon, it’s a sprint, they’re going to give it their all, and then they’re going to pass it on to the next person. So I think it’s a real important piece , but it’s also difficult and we all know that because you’re not dealing with a number or a name you’re dealing with a human being with whom you sit in a room or now, you know, on a screen and you develop a relationship and inevitably their personal relationships in this, they can be hurt and it can be difficulties in it. That’s why you start at the beginning. So you can say, you know, we, when we invited you on, you may remember it was two terms they say, but how come so-and-so’s on a third term? And you have to explain why.

Joe: [00:27:37] Yeah, there’s no question, Paul. We, Raza and I have talked about this many times. It is difficult and in my view, it is the one thing that most boards find  most challenging. I think even if you start at the beginning, which I think is a great idea, the fact still comes to, at some point you have to ask someone to leave and not everyone [00:28:00] really gets it.

And the people and the boards, I would say that have got better at it that has helped their culture. It has helped their effectiveness. They are there the high performing boards, because  it doesn’t take a lot for board to become less effective. One or two members who maybe have been around too long or aren’t contributing or maybe are impacting the culture is enough to really have an impact , but I agree. It is a hard thing to do.

Raza: [00:28:29] Joe over our episodes, we’ve gathered a whole bunch of tips on this topic, I must say that starting from the end in mind and doing it at onboarding is probably a really effective tip from Paul.

Joe: [00:28:44] Yeah.

Paul: [00:28:45] You know, one other thing I know. So you both had talked about this on this podcast with others is the Meredith sport. So there are some people who serve for some period of time and probably would like to not have to come to all the meetings and do all the [00:29:00] reading and, but they don’t want to lose their connection.

It’s a social thing. It’s a spiritual thing. It’s the passion. And so the emeritus board really allows, again, it’s meeting the members of the board where they are. And so it it’s a, and I don’t even call it a soft landing. I call it a, just an evolution of the relationship. So it’s, worked very effectively in some of the organizations in which I’ve been involved, and that Joe and I have been involved in St. Jude ALSAC particularly .

Joe: [00:29:28] So Paul, over the years, you’ve really devoted a lot of time and energy to diversity, equity and inclusion, which I think is really wonderful. How do you see the progress in increasing diversity in the boards of for-profit and not-for-profit organizations. And talk about some of the situations in which you’ve been involved and have been able to see some progress.

Paul: [00:29:53] So progress has been slow.  It’s been slow and it’s been shamefully slow. It’s been [00:30:00] better of late, because  world circumstances have dictated that it’d be better. There’s a heightened sensitivity, there’s knowledge that diversity means  strength.  People understand that even if you don’t believe it from a moral point of view or it’s the right thing to do, it’s the right business thing to do.

For example, there was a study that McKinsey put out a few years ago that showed that companies who had more diversity in their executive suite were 20% more likely to outperform their competitors. So there are many other studies that have shown similar throughput.   This is science, this is not art, and it’s not opinion. So it is good business and it’s your fiduciary duty again, even if you don’t believe in it for all the other, what I would call the right reasons. The founder of my law firm, Louis Brandeis, said that “It’s in the frank expression of differing opinions that lies the greatest chance of wisdom.” And that’s simply true. And for those of us who’ve been exposed to an open to different viewpoints, [00:31:00] you see it and you see it effectively.

I think clearly with a heightened sensitivity to racial equity and justice, it’s now: words are meaningless and action is the only item that’s measured. So in my experience, so if we take, for example, the real estate finance association, before I was the vice president of that board, we had a board of 30 and we had five women and one person of color.

And there were people who were sitting at that table who probably thought that was perfectly okay, because in the real estate, commercial real estate business it’s not known as a paragon of diversity, not known for it. Between the year I was vice president of the board and the year after I was president, that last year I was chair of the nominating committee we now have a board that is  40% women and 20% people of color. And the Chamber board  [00:32:00] over the course of three years during the time I was in a leadership position, we went from almost the same lower numbers to 40% women and 20% people of color.

 So how do you do that? Well, as I said, in both organizations, we’re not going to do it by looking inside the room.  You have to do it by looking outside the room and recruiting people who may not come top of mind, but that you know, or there are organizations such as the Last Mile, I know you had Beth Boland on, she talked  about the Last Mile, which is more you have other organizations that can help provide you with great resources for board members.

So the, the idea that it’s a matter of identifying board members and you can’t find them, it’s just, it’s archaic and frankly, it’s embarrassing when you hear that- and it’s, it’s factually wrong. So, you can do it.  The first thing is commitment. And the second thing, is depending on size limits, someone coming on means someone coming off.

So you can’t be a board [00:33:00] member and support diversity equity inclusion, and not be willing to rotate off a board to make room for someone who is diverse. So it’s a holistic approach. And when you approach it that way it’s rare that you get a no from someone who may have to come off the board and it’s really good to know from someone you’re invited on a board, if they think it’s authentic and that you’re sincere about it.

Joe: [00:33:22] Yeah,  two things. Absolutely the excuse there isn’t enough diverse talent that is a non-starter. There’s plenty of people of color, of women, whenever the diversity looks like, there’s plenty of talent out there. So , that has been debunked for a while now. And I’m so glad you said that. One thing you said to me though as far as the real estate board was that someone had said, well, “The business community doesn’t look like that.”  The business community that we’re working in, isn’t half, you know gender diverse and people [00:34:00] color. And I think your comment was, we think the board should look like the business community should look not like it currently looks. And I thought that was really right on. I just thought it was perfect.  I just wanted to say that because I really respect the work you’ve done on this. I think it’s just been fantastic.

So a couple of things that I know you’re involved in one is small business strong, and the other is the EOS foundation. Do you want to just talk a little bit about those two projects?

Paul: [00:34:28] Let’s talk about the EOS foundation.  The CEO of the EOS foundation is Andrea Silbert. I’ve collaborated with her as a board chair, but she really has been the engine behind something called a women’s power gap. And what she has done is she’s put together very clinically. Presented surveys higher education, publicly traded companies, business trade groups as three examples.

And there’s a survey and is the CEO white male person of color is the chair, which of those categories? [00:35:00] What percentage of the board of women, what percentage of the board are people of color simply by putting out the facts in showing how. Much out of balance those organizations where over time it’s helped inspire people.

It’s not been shaming and blaming. It’s been inspiring and leading and more people have recognized that we need collectively and individually to do more work. So I think that’s been terrific and. There was a, there’ve been casual meetings and lunches where people get together and talk about best practices and making a commitment just to do better.

So I, I think the more people talk about it and recognize the need for it. I will also say this, that those of us who are white men of a certain age and certain positions in the community. W it’s on our shoulders. This is not women needing to advocate for women or people of color advocating for people of color.

It’s all of us [00:36:00] advocating for those issues. And I think what’s fueling the forward motion now is I think people get it and people w and we are clearly at a moment of time where I don’t think we’re going to turn back, but it’s all of us having to own this and feel an equal responsibility for it. And so that’s why helping to be part of the formation of small business.

Strong was great. And I think this is a terrific example of there are plenty of nonprofits in the community, but there’s always room for one more. That has a meaningful purpose. So Ron O’Hanley who’s the CEO of state street global had an idea at the beginning of COVID-19 to form an organization.

Initially for Massachusetts, but hopefully will expand and be replicated around the country to focus on businesses and our case of $250,000 in revenue or less, that tends to be highly high percentage of businesses owned by women and people of color [00:37:00] and the most desperate in terms of not having resources.

And so this. Group put together small business strong. It became an affiliate of the chamber of commerce. So it got his five Oh one C3 status and had a lot of infrastructure support from day one. It provides business advice and then specific specific advice like for legal or finance or marketing all without charge to help companies. You know, find their way in some cases, the way me being, not a way forward, but a way sideways or emerging with someone else. But in most cases, it’s to help them in a moment of need without bureaucracy, without judgment, without cost. And we’re working to the minute, multiple hundreds now of companies that we formed.

And, you know, it ties back to where we began with St. Jude children’s research hospital. It was a small idea. It was one person. He had this idea, he got others to buy onto it, and there was just an intense focus and [00:38:00] it’s now and stood up and it’s, it’s running. And it’s been a real con contributed to our community as have many others and many other organizations.

Raza: [00:38:09] Paul in addition to advising boards or being on boards how is your professional firm Nutter involved in helping and advising boards along with other things that that you do?

Paul: [00:38:25] We have a nonprofit and social impact practice group. I think it’s the second largest practice group of all the law firms in greater Boston, we represent a broad range of nonprofits. You know, we’ve referenced this before in terms of some of the largest in the city and some of the smallest. And we also do a lot of foundation work, so we represent a lot of donors to nonprofits as well. And we advise people in donor advise funds in addition to that. We see a broad swath and there are some [00:39:00] common themes though. And that is that the regulatory scheme the regulatory over lay for all of these nonprofits is becoming stricter. People have to be much more careful.

The it’s important not to be casual if you are. An employee or a board, especially a board member of a nonprofit and the heightened sensitivity to fiduciary duty is increasing. those are some of the issues we’re seeing from the legal point of view. But I will say this one of the great things of having such a large practice in this area. Especially in this community is seeing how many people are so given. And when they come to us, especially, you know, high-end donors who want to make a sizable contribution or board members who want to make sure they’re doing right by their organization, the authenticity and the giving and the passion and the purity [00:40:00] has really.

Been inspiring just to see it from a professional context as well. And we it’s one of the areas that I’m a member of that group, as well as the real estate finance group, which is my primary focus in the practice of law. But it’s an area that inspires us every day when we speak to our clients

Raza: [00:40:17] Well, that is great, Paul.

Joe: [00:40:20] Great. Thank you, Paul. It’s been great having you as a guest today. Thanks for joining us. I hope you, Jane and Lizzie will continue to be well and stay safe. I’m sorry, we won’t be together this year for the holidays, but hopefully, hopefully that will happen soon.

And thank you all for listening today to On Boards with our most special guest, Paul Ayoub. Please stay safe and take care of yourselves, your families and your communities as best you can.

And Raza you take care too. I hope you and your family continue to be well and are staying safe.

Raza: [00:40:55] Yes, Joe, we’re all staying safe. Thank you. And I hope you and your family are well.

[00:41:00] Joe: [00:41:01] Thank you.

And thank you for letting me be part of this series. Thanks very much.

18. Didier Cossin on why governance is the key driver of organizational performance

Didier Cossin is the founder and director of IMD Global Board Center based in Switzerland, where he works with owners, boards, and senior leaders to maximize organizational performance using strategy, best-in-class decision-making and enhancing board culture and governance best practices. In this episode he talks about creating a high performance board thru enhancing board culture, fostering constructive dissent and focusing on governance best practices.

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Links

High Performance Boards – Amazon Link to Didier’s Book

Didier Cossin’s Bio

Didier Cossin’s LinkedIn Page

Quotes

Governance has been the key driver of performance in the markets and for organizations and the way I define governance, which I think is all encompassing, is the art of decision-making at the top of organizations.

Constructive dissent is pivotal in the high functioning board. Dialectic is the meeting of well-informed great minds that through a dialogue, builds up towards a better decision and thus constructive dissent. Yes, dissent, having a different view, but in a constructive way for the organization, bringing the decision to a higher level and whatever we do in governance, it’s about fostering that constructive dissent towards decisions.

When a board is looking for a new member, what should it be looking for to determine that this new member will fit into this structure that it, that he or she will add to the constructive dissent, will add not just to the diversity of opinion, but will be – and I’ll use the term “cultural fit” – with the board.

I like the way you asked your question, because is it the cultural fit or is it enough of a cultural tension? My observation is that competency has less impact on decisions than personality.  Real diversity is going to be painful and you’ve got to figure out the level of pain that somehow is acceptable to drive effective governance. So the dialogue has to remain, but you need enough tension in that dialogue somehow.

I’m a strong believer in meritocracy. We do not have enough meritocracy in boardrooms. And we have many boards that get comfortable with board member, And somehow it’s not very well socially accepted to remove board members.

Is it possible that you have a high performing board, but the company’s not performing well or vice versa?

It’s very hard for me to see a well-organized and highly performing board in an underperforming organization. I haven’t seen that.

Risk work is essential to good board work

Big Ideas/Thoughts

What makes a great board?

Several items. Skills and competencies, dedication from the board members, the level of caring for the organization, the level of passion, the level of commitment because we are human beings and part of our human quality is that level of commitment.

The second one is what do people pay attention to? Do you have a board that focuses on what matters to the organization?

And diversity, but in a deep way: diversity of perspectives, which of course is fostered by gender diversity and by ethnic diversity and by culture diversity, but truly should lead to a diversity of perspectives in order to foster that constructive dissent that is at the heart at the very heart of the governance principle.

I was quoted in a famous financial newspaper for saying that 90% of boards are failing. I think it’s improving a bit because people have more awareness now and in general I see better boards. But the state of health of boards is still not great, but it is improving.  When I say failing, I mean they are not fulfilling their fiduciary responsibility to the organization.

Transcript

[00:00:00]Joe: [00:00:00]  Hello and welcome to On Board: A deep look at driving 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 board 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.

Raza: [00:00:32] Joe and I speak with a wide range of guests and talk about what makes great boards great or makes a board unsuccessful. What it takes to be a valuable member and how to make your board one of the most valuable assets of your company.

Joe: [00:00:51] Our guest today is Didier Cossin, the founder and director of IMD Global Board Center based in Switzerland, where he works with [00:01:00] owners, boards, and senior leaders to enhance organizational performance using strategy, best-in-class decision-making and enhancing board culture and governance best practices. Among other clients, he has worked with sovereign wealth funds, central banks, supernational organizations, financial institutions, and funds throughout Europe, Asia, the Americas, Africa, and the Middle East.

Raza: [00:01:33] Professor Cossin is the author of several books, including his most recent, which is “High Performance Boards: Improving and Energizing your Governance”. It is a comprehensive manual for attaining best-in-class governance.

Joe: [00:01:49] Welcome Didier. It’s great to have you as our guest today

Didier: [00:01:52] Hey, it’s a real pleasure to be with you.

Joe: [00:01:54] And you’re joining from Switzerland so we appreciate you staying up for this and being with [00:02:00] us at this hour. Maybe skipping dinner or making dinner later today.

 I know that you believe that governance is a big driver of performance as do both Raza and I, so let’s look at that and  I’ll pose two questions. The first is what is governance? And the second is how do you measure performance?

Didier: [00:02:20] Yeah. Fantastic. yeah, so, very true. Joe. Governance has been the key driver of performance in the markets and for organizations and the way I define governance, which I think is all encompassing, is the art of decision-making at the top of organizations. And this is truly what the board, in the sense of strategy decision, or picking the CEO or, or, you know, looking at the risks, it’s really, you know, this art of making the right decisions.

And when I look at [00:03:00] performance, of course, there is a, you know, is a classical view, right? Looking at financial performance, financial markets, stock price, and here, since the beginning of the year, the 20% better governed of the S&P 500 have added 17% today, 17% of performance to the S&P 500. And so you can see immediately the alpha, as we say, the performance such driven there, but I work with very different types of organizations as well. I work with the Red Cross, I work with UNICEF, or I work with central banks where clearly, you know, the performance is not the same thing and it pertains to what I would call organizational health and the ability of the organization to fulfill its mission and governance throughout our system is the key driver of performance [00:04:00] in that sense as well.

Joe: [00:04:01] So, that’s a pretty significant alpha for those companies that are publicly traded. That is a significant difference if it’s driven primarily or even exclusively by good governance. I mean, that is  it’s pretty significant. What are the things that you look at that determine what a great board is? What are the attributes you would identify in trying to determine which companies have those boards and where we would expect that better performance.

Didier: [00:04:30] And you see in my view of governance and so on the, I should tell you our listeners, right? Most of my work is being in a one-on-one situation with a board.  I’m like a board doctor, right. I’m coming with a board and, I’m looking at where there is pain, whereas is health and how to foster that health further.

From that angle,  I’m not going to define governance like the financial guys do by number of independent [00:05:00] directors, size of the board CEO-Chair separation, gender diversity of this kind of mechanics. These mechanics are driven by what drives fundamentally governance and maybe we could start with values. A sense of accountability and responsibility of the individuals involved, the long term view, right? Thinking about the next generation, the agility, but all of these become quickly too complex to observe, to foster and so I’ve come to my own process of clinically looking at governance. When I work with the board, how can I assess in 10, 15 minutes? Right? What works well, what doesn’t work well, and I use a model which I described in extenso in the book you’ve mentioned before. Four pillars of governance house, which I found is, [00:06:00] quite systematic across culture, works well in the United States. I’ve used it quite a bit in the US, but it does work in Singapore. It even works for state-owned organizations in China. So I tell you, it goes all ranges.

Joe: [00:06:17] Cuts across all cultures. So, what about the people, obviously in putting together the culture that you’re describing, it, there must be things you’re looking for, or you would advise your clients to look for when it’s thinking about board composition. It’s not just skills, it’s not just experience there, there are other attributes that you must be obviously weighing pretty heavily. What are they?

Didier: [00:06:46] Yeah. So, I mean, at first you’re right. We still need to have the skills and the competencies. Right. We should not discount that, because from time to time, you see boards without the competencies and that’s of course basket cases. Right? So first, you know, [00:07:00] the basics, so the, the skills and the skill mapping.

Joe: [00:07:03] Yeah. It’s a given, right.

Didier: [00:07:04] That’s right. That’s right. But then I figured out there are three other dimensions that I pay a lot of attention to.

One is simply the dedication from the board members. You know,  the level of caring for the organization, the level of passion, the level of commitment because we are human beings and part of our human quality is that level of commitment. The second one is what do people pay attention to? I see great boards that somehow are being drifted into looking only at the past, for example, only looking at regulatory issues. So I call it focused. Do you have a board that focuses on what matters to the organization? And the third is really  diversity, but  in a deep way, diversity of [00:08:00] perspectives, which of course is fostered by gender diversity and by ethnic diversity and by culture diversity, but truly should lead to a diversity of perspectives in order to foster that constructive dissent that is at the heart at the very heart of the governance principle.

Joe: [00:08:25] Talk to us a little bit about constructive dissent. I know that you think that that is pivotal in the high functioning board.

Didier: [00:08:33] Yeah. You see when t when you’re you’re tackling the most complex decisions in life – it can be a larger acquisition. It can be, simply, you know, an employee policy, when you’re tackling these decisions that have real impact, there are three ways to access the truth. One is, one individual that [00:09:00] knows it, right. and goes through rhetoric to express it. This is rare and arguably does not happen anymore with the complexity of the world. You know, technology complexity, social complexity, that we are living with these days. The second way to access the truth is scientific. Having a proof, right, which, in most business cases, even in acquisitions does not happen, right. Because you may have your discounted cash flow . But it’s still war to make, you know, the culture of the combined entity.  So you’re, you’re also stuck there.

And so we are left with the third one, right? Which is dialectic. Dialectic is the meeting of great minds of well-informed great minds that through a dialogue, build up towards a better decision and thus [00:10:00] constructive dissent. Yes, dissent, having a different view, but in a constructive way for the organization, bringing the decision to a higher level and whatever we do in governance, it’s about fostering that constructive dissent towards decisions.

Joe: [00:10:18] So When a board is looking for a new member, what should it be looking for to determine that this new member will fit into this structure that it, that he or she will add to the constructive dissent, will add not just to the diversity of opinion, but will be a, and I’ll use the term “cultural fit” with the board.

Didier: [00:10:42] Yeah, it’s very a great way to ask this question, right? Because typically we start from the skills and we start our, we need to tech guy, right. Or we need a finance guy. Right. And we start from the competencies and I tell you, my observation is that competency has less [00:11:00] impact on decisions than personality, huh? You take a, you take a conservative tech guy, right. And that tech guy will not drive innovation. You get to nothing to experience type of finance guy and he may actually, or she may actually lead towards innovation even in tech. And so personality of the board members I even do now mapping, I use a tool called Neo, the big five personality traits, plenty of psychometrics alternatives. I like Neo because it’s scientific, it’s not a consultant type of thing, but, you know, and the best Chairs do that naturally, right? Because they understand the personalities even better than whatever psychometric is going to give to you. Right. They figure out and I like the way you asked your question, because is it the cultural fit or is it enough of a cultural [00:12:00] tension? That you actually create a new culture that’s a bit more open than a bit wider, right? Hence the role of true diversity because true diversity is painful. You know, whoever say he or she is comfortable with diversity. Right. It’s misreading it. That’s not true. Diversity. Right? Go and talk to a Taliban in Afghanistan and you won’t be comfortable, right. That’s basically all right. That’s real diversity, but maybe you don’t want that one on the board. Right? You have to pick your diversity, but you see what I’m saying? Real diversity is going to be painful and you’ve got to figure out the level of pain that somehow it’s acceptable to drive an effective governance with it. So the dialogue has to remain, right, but you need enough tension in that dialogue somehow.

Joe: [00:12:53] How often should boards be off-boarding and finding new board members to add to the dynamic [00:13:00] of the group?

Didier: [00:13:00] Yeah, it’s an intriguing question as well. First I’m a strong believer in meritocracy. We do not have enough meritocracy in boardrooms. And we have many boards that get comfortable with a board members that get comfortable. And somehow it’s not very well socially accepted to remove board members. I was discussing that with a Chair of a $250 Billion pharma company was telling me that he has figured out, his most important for is to be able to let board members go elegantly, right. To find the way right. For them to go.

Joe: [00:13:46] That’s not easy.

Didier: [00:13:48] It’s not easy. I have a chair, a smart man who’s at the beginning has announced that one board member would leave every year. And that’s, you know, eight board [00:14:00] members. It’s still a tenure of eight years. Right. But Hey, it’s based on meritocracy, but we know one of us leaves every year and that’s a renewal.

Fundamentally. Right? Fundamentally, we need renewal. We need renewal because the world is transforming, right? Because the new generations are seeing the world differently as well. and, and gender diversity has been a way to perform renewal, a bit of age diversity as well.  And then how you figure it out, depends a bit on the social system your organization is in, but yes, constant renewal is a good thing, you need, of course, a bit of stability, you, you need the historical knowledge of the organization as well. Right? to be fair, I have an organization, an international organization where board members had maximum tenure of two years and that’s terrible as well.

Joe: [00:14:56] Oh, thats crazy.

Didier: [00:14:56] Uh, in the corp… it is crazy, [00:15:00] buthtwo years, and this was that was very unhealthy. But in the corporate world, we tend to hang on for too long. I even had a lady that the chair of one of the largest Swedish companies, Swedish lady, who has decided that if after five years, she’s not made a difference, it means that she won’t make a difference and she leaves. And typically she doesn’t stay on her boards more than six years. And she says six years is plenty of time. If you haven’t made the change in five years, right. It’s not in the next five years.

Joe: [00:15:33] Yeah. Not many people will do that. That’s

Didier: [00:15:36] That’s right. That’s right.

Raza: [00:15:37] Didier to our original question of tying companies performances to board’s performance. would that be true that, always an effective board means an effective performance or higher performance of the company. Is it possible that you have a high performing board, but the company’s not performing well or vice versa?

[00:16:00] Didier: [00:16:01] It’s hard for me to envision. I can certainly see a company for which the purpose is not to maximize financial performance, where a service to customer, I think of a Wikipedia or something like that, right. A service to customer. And that, that I can envision. I can also envision a board that would be disrupted by owners and I’ve seen that case. So high quality board, but the shareholders are in fights and are disrupting, but it still creates a board that doesn’t work that well. Right. Because of that disruption. It’s very hard for me to see a well organized and highly performing board in an underperforming organization. I I’m, I haven’t seen that. But then the definition of performance may of course vary across organizations.

Raza: [00:16:57] Didier, you have seen a [00:17:00] lot of boards. What is your assessment of the general state of global health of governance across the world? Is the world of getting better at running boards? And then,  what have you seen in comparison with US boards and the rest of the world and non US boards? What have been the differences in practices and what is the state of our affairs for governance across the globe?

Didier: [00:17:28] I was quoted for saying in a famous  financial newspaper that 90% of boards are failing. I think it’s improving a bit because people have more awareness now and I see in general better boards, but you know, the state of health, it’s still not great. And I would say if I’m looking at board improvement as a generational thing, which I think it is, governance has become the [00:18:00] foremost topic these days, but it’s the 25 years type of progress.

I would say we’re about midway. So we’ve improved our practices a lot in many areas, contribution to strategy, stakeholder engagement, shareholder, engagement. and, and so, performance reviews, even board evaluations, I think we are starting to be quite serious there, so it’s a bit late, right. But people are, you know, the well-minded people know how to play the game better and better. And I think that’s what matters, right? Those that want to achieve have the tools to achieve. I’m a rather a meritocratic type of person. Right. I think if it’s a boards that are willing can do a good job, right. We’re home free. And I think we’re getting there. I think we’re getting there.

Raza: [00:18:53] All right. So we, we have hope and we are improving in general.

Didier: [00:18:57] The USA used to [00:19:00] be the lighthouse, right. It used to be, you know what the world would follow.  And then you’ve had several events and I’m not talking about a current or last administration. It’s much longer term than that. Hey, it’s a seminal events that have occurred that primacy of all the shareholder above or, the, the, the social difficulties I would say is that, the world has seen,  and the rise of private markets with, what I would call the exclusion of, for a good part of what should be well-governed from, from the transparency and the views of the world.

And so these different trends have needed that competing systems, not substitute. So that competing systems have come at right. The, what I would call the Scandinavian stakeholders system, [00:20:00] with, you know, often employees on boards and, under, rather I wouldn’t call it socialist, but closer to socialism, perspective is advantages and disadvantages. I’ve seen very effective governance promoted by large soverign wealth funds that are very directive with strong views.

I’ve seen the Singaporean model, where people are aligned to culture and not constraints, but culture and somehow can still foster good governance.  As long as you own these values that are there. And so I’ve seen, I’ve seen alternative to tell you, the reality I’m working with a Pan-African company, an African company that has excellent governance where, you know, the whistle blowers are there on there, and they’re moving the game. And, I’m seeing, some European companies [00:21:00] that are transforming at speed. and we’re still taking lessons from the U S. Because, you know, the US is still, you know, that, that fantastic carrier of innovation, et cetera, right. Governance. And how do you think tech governance? And so, what I find is that the world has just grown richer and the large cap US model is not the model anymore. And, it’s how do we think what’s right for organization? Whether it’s a family business, a private equity business, a publicly traded business, even a state owned business what’s right for us. And how do we emulate the best?

Joe: [00:21:41] Excellent. Yeah. You know, I want to go back to something you said, though, you were quoted as saying that 90% of all boards are failing. Is that an accurate quote?

Didier: [00:21:52] Yeah. You know, it’s not scientific. Right. But it came from my practice and I have to tell you, I don’t see healthy boards. Let’s be very clear. [00:22:00] Right.

Joe: [00:22:00] But overwhelming majority of overwhelming majority are failing?

Didier: [00:22:05] Yeah, yes. At least five years ago. And I would say now it is a majority by far. Maybe it’s more 70%, but it is a majority. Maybe I have high standards, but…

Joe: [00:22:18] That’s okay. That’s

Didier: [00:22:19] good…

But when I say failing, I mean, In my view, they are not fulfilling their fiduciary responsibility to the organization. So the organization may still be resilient. Right. But in my view, they are not fulfilling their fiduciary responsibility and it may be because of their own choice. That the worst case, it may be because of limitations. They don’t have the courage to address, which is, I would say more common. And then I also have to say, we have [00:23:00] integrity failures in the world, and we have transfers of wealth in all countries. Right. And that’s also a reality, where people get comfortable, they know what’s going on, they’re aware of it and they don’t want to be bothered. And so all, all these cases cumulated still make to me. the majority of boards, unfortunately,

Raza: [00:23:26] I would also say that in some ways, because the longevity of organizations, the average age that they now die off has been coming lower and lower is also an indication of that governance failure.

Didier: [00:23:42] Right. As long as this is so true. Right. And, but to me, it’s, this is healthy, no systems. This is of course a wealth of the capitalistic system, right? It’s a natural selection process and this is what I love. Right. It’s organic. It works. And it’s [00:24:00] not capitalism as an ideology, right. It’s a system of natural selection where, you know, the strongest, the health iestl, will do well and will organize themselves to do well. And that’s a good sign of natural selection of on governance, which, which exists and is there. And the US is of course doing that perfectly well with the different systems and by the way, diversity in all the structures shows the quality of system governance, private equity in competition with publicly traded, traded, widely held publicly traded with a family anchor with privately held by a family with, you know, agencies, even with nonprofits, right. That whole organic system works great.

Joe: [00:24:53] What are the issues that lead to board failure? The primary issue, the primary issues.

Didier: [00:24:58] So first, you know, [00:25:00] I’ve had my four areas of failures where I see where boards killed their organization. And the first one is technical risks. Right. And, you’d think for example, of a BP with a Macondo Field explosion. Who has the board didn’t even have on their risk map, that specific risk or think Boeing, right? That’s also a technical risk issue.

The second one is a strategy and strategy involvement. Classic is, you know, digital photography and Kodak. Of course, the third which I pay a lot of attention to and very sensitive and people don’t think enough about that is the quality of the relationship between the executives and the non-executives – is this a trusted relationship, right? Is there a free flow of information? is that psychological safety? In that relationship and the fourth are simply integrity issues because I see, I see major corruption, [00:26:00] conflict of interest, and more than what people admit. Right. And, and sometimes it’s soft, right? It’s soft conflict of interest, but it’s still there. And somehow that disturbs the role of the board in a very fundamental way. And so for me, these are the four key drivers, but then in today’s world, you have all, you know, all the elements to, to integrate in that, right? The technological transformation, the shareholding activism, and you know, all, all the different drivers that are engaging the extraordinary dynamics that we have in today’s world.

Joe: [00:26:38] It sounds like a lot of that comes down to the failure to identify and manage risk.

Didier: [00:26:46] Yeah. I tend to agree with you. I tend to agree with you, but risk in a deep way. Right, and, and typically by the way, a good risk practice to me just dealing with the [00:27:00] larger organization on that, and I don’t think they’re doing a good job on risk and they have fantastic risk processes and they have a very elaborated ERM and they do all their risk maps, they’re subsidiary, et cetera. Right.

But the good board work on risk is for the board itself. To elaborate its own view of risk as differentiated from management, right? Because again, we are back to dialectic, right? You need to have all these different views and different angles. And so, you know, the, the CEO is not going to put himself as a risk on the risk map. But if you, as a board, think your CEO is a risk, you need to be able to integrate that right. Or culture as a risk.  And typically you need, you need that perspective on the board.

So I would say is that risk work is essential to good board work. Now, Joe, I’m a little careful because maybe a lot of people [00:28:00] see risk as a process. Right. And they just follow the process and then think they have completed their risk duties. And objectively if that’s what we’re thinking about risk, then no, the board work goes much beyond that. Right. But if you’re thinking risk in a deep way, I fully agree with

Raza: [00:28:18] you.

I love the quote from, one of the venture capitalists that says failure comes from failure to imagine failure.

Didier: [00:28:25] Very good. Yeah, I like that. That’s a good one. Yeah.

Raza: [00:28:27] Didier. I want to talk about your most recent book, “High Performance Boards”, a practical guide that is envisioned for improving and energizing your governance. What was your goal for writing that book? Who’s your intended audience? How is it intended to be used?  Tell us about your book.

Didier: [00:28:45] Well, you know, I have 20 years of practice helping boards, get better, right. Improve themselves. And, and so I’ve developed so many tools, so many exercises, so many ways to improve so many ways to [00:29:00] think about where you need to improve that I thought, it would be nice to have that. And I didn’t see a book that did that. And so I decided why don’t I compile everything I’ve done here for boards, make it, you know, a bit consistent and rational so that people have a bit of a guide.

If they are join a board or is they are on the board on how to help that board improve or to help themselves improve as board members, and, and very fundamental to that, and you hear it and I think we’re all in agreement here, is governance is a fundamental driver, not on your organizational health. But of social well-being for the future. It is, you know, it is the best gift that you can do to an organization to dedicate yourself to the governance quality of that organization. Whatever is the purpose of the organization and all [00:30:00] purposes valid in my view. So it’s really commercial, non-commercial all of that adds to the world.  And fulfilling it with integrity with the right quality is, is what I’m trying to foster. And I believe, you know, I have a few tricks of the trade let’s say, right that help actually, get there faster for those people that are motivated.

Raza: [00:30:24] I see a very, rich tool set that’s, available to, as you said, like even to an individual board member or a board on the whole. Or consultants and advisors to boards who help, make boards, more effective. I think it’s a, it’s a wonderful compilation of, your distilled knowledge across many different areas.

Joe: [00:30:47] Do you spend time training board members?

Didier: [00:30:50] Yeah, quite a bit . Training is not quite the right word, right? I prefer educating because I don’t do training. For example, I wouldn’t do a [00:31:00] training on, on risk techniques or a training on fraud detection. But, I tend to try and elevate them. Right. Educate them around the key should sometimes very, very senior individuals.  And I do one-on-ones with chairs of large organizations and the, and I do find, and by the way, I get educated at the same time. Right. It’s it goes both ways. It goes both ways. I find, you know, I think I’m a true educator at heart. I, I discovered that in the US actually in Boston, Cambridge, and, and to me, this is, you know, it’s so beautiful, right.

To figure out how to be better. Right. And, and somehow we all have that capacity and organizations have that capacity. And so I’d like to foster that, and I do that one-on-one with board members.

Joe: [00:31:54] That is a terrific thing to, to be, striving for that’s for sure. [00:32:00]

Raza: [00:32:00] Didier, we have a bunch of rapid fire questions for you. What have been the two best boards in your board career and why?

Didier: [00:32:09] Nestor in Finland, the oil and gas company decided to move into biofuel managers that transformation multiplied its market cap by a factor of five while the oil wells of majors divided theirs by a factor of three. And, I think that’s a transformation I want to see. And then, I would say one, Italian organization I work with, and has completely transformed the game and I have to be discreet about it, but, I’m really glad about that. That’s a good force for the world.

Raza: [00:32:42] Wonderful.

Joe: [00:32:43] What board practice do you recommend that most boards should follow?

Didier: [00:32:47] Well I think constructive dissent, right? The dialogue and ensuring the dialogue. I think whenever you think you see someone not participating, whenever you see that, you know, somehow it’s not [00:33:00] free flowing that there are groups that are forming, you know, you’re losing it. Right. So pay attention when you lose it. Awareness of constructive dissent.

Raza: [00:33:09] Well said. Number one rule you would implement for conducting board meetings if you served as a board chair?

Didier: [00:33:17] Equal participation and, the, continuous board evaluation. Awareness for performance. Right? How good are we? Huh? Awareness,awareness with equal participation.

Joe: [00:33:32] Boy, I couldn’t agree more on both of those points. Favorite book or books that you’ve read in the last year? Anything in particular?

Didier: [00:33:41] Ah, yeah, I just, read, Rene Girard, Stanford professor on, you know, sociology, anthropology on mimetism. It made me think a lot about group think and how we, we need to preserve even the individuality of organizations. You [00:34:00] know, we are all here to talk about what are the best boards, but truly the best board is the one you’ll invent. Right. And how you’re going to create it and how we are all individuals, organizations that have their own personality and truly it’s figuring out what’s right for your organization.

Raza: [00:34:19] And Didier, lastly, non-profit cause or mission that matters the most to you?

Didier: [00:34:25] So I help in my governance work for free. It’s my donation, the Red Cross, which, tries to alleviate, you know, the horrors of Wars, and also UNICEF that takes care of children around the world, but… but where I care the most somehow, for some reason, close to my heart, I suppose, is nature. And I so, I, you know, I help Conservancy, organizations, but I also give money to a Nature Conservancy. So I’m close to nature.

Joe: [00:34:58] It’s been great [00:35:00] speaking with you today. Thanks for joining us. I hope you and your family are well and will continue to be well and stay safe.

Didier: [00:35:07] Thank you so much for the great pleasure.

Joe: [00:35:10] And thank you all for listening today, to On Boards with our special guests, Didier Cossin, please stay safe and take care of yourselves, your families, and your communities as best you can Raza you take here. I hope you and your family continue to be well, and you’re staying safe also.

Raza: [00:35:27] Yes, Joe, we’re all staying safe. Thank you. And I hope the same for you and your family as well.

Joe: [00:35:32] Thanks. Take care.

17. James Lam on the new world of risk management and oversight for companies and boards

James Lam is a globally recognized risk expert, an early advocate of Enterprise Risk Management and the first-ever Chief Risk Officer.  He has served as a director and chair of the risk oversight and audit committees of both publicly and private companies. James was a commissioner for the NACD Blue Ribbon Commission on board oversight of disruptive risk.  In this episode he shares his most current thinking on the evolving state of risk management and the challenges and opportunities ahead.. 

Thanks for listening!

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Links

https://en.wikipedia.org/wiki/James_Lam

https://jameslam.com

NACD Cover Story: Animal Kingdom of Disruptive Risks

NACD Directorship: The View of ERM from E*Trade’s Risk Chair

Quotes

I think taking a proactive approach to risk management is one of the key responsibilities for the CRO. So, think about yourself in the first line of defense. You’re running a business. You’re running the IT function. You’re really focused on the day-to-day, and you might be responding to risk incidents or minor crises, but a Chief Risk Officer is much more forward-looking, much more proactive, looking at things outside in, looking at things much more long term….the Chief Risk Officer really provides the expertise, the time, the attention and focus on the most critical things that are going to drive performance in the future. So being proactive, being forward looking at key trends outside in, are really important things.

I think it is important that the board provides input in terms of the kind of risk management reporting that they want to see, the kind of metrics, and also guidance on the risk appetite statement and the integration between risk and strategy.

The Risk Committee and the Audit Committee wear different hats. They have very different scopes and mandates. The Audit Committee is paid to think inside the box: SEC requirements, financial disclosure, Sarbanes Oxley, FASB, etc. You don’t want to be creative in your accounting. You really want to make sure you’re in compliance of all the laws, regulations and standards.

Whereas the risk committee is paid to think outside the box. What are the uncertainties, what are the external drivers that could impact our earnings, our cash flows, our value? How do we expect the unexpected? How do we think around corners? So, you’re really paid to think outside the box, and I think that is a very compelling way of contrasting the scope and mandate of the Audit versus the Risk Committee.

Big Ideas/Thoughts

Even companies with risk committees might say appropriately that strategic risk, and reputational risk ought to be a full board agenda item. There are different ways of doing it, but I think the most important thing is to make sure that the risk agenda is well represented in terms of board and committee time.

What are the things that we should look at in determining whether, and to what extent, a board bears the responsibility for the catastrophic problem that might derail a company?

I think your listeners could benefit from looking at the Blue Bell Ice Cream case (Blue Bell case commentary) and the Clovis Oncology case (Clovis case commentary), both of which I think have really elevated the standards for duties of care and duties of loyalty in terms of risk management and compliance, and that it is important for the Board of Directors in exercising those two standards to make sure that there is a risk management and compliance system in place, and that system is working effectively and that the board is getting the right metrics, the right reporting and red flags in terms of risks, and that they hold management accountable.

Chief Risk Officer

The Chief Risk Officer is really tasked with making sure that there’s a robust and effective ERM program, that risk management policies, risk assessment and analytics, risk management strategies, and executive and board reporting are appropriate.

I would say the CRO is responsible to help the board and senior management to imagine the unimaginable. To expect the unexpected and be able to prepare for any scenario.  I worked with one Board of Directors and the company had a very strong ERM program.  In 2018, the board approved a pandemic management plan. Last year they stress test that plan and then when the pandemic hit early this year, they had a playbook.  The playbook didn’t anticipate everything, but it had a curve with different stages of a pandemic, it had social distancing, PPE, you know, working remotely and so forth. We probably had 70 to 80% of the eventualities and that really helped the company be prepared for this scenario. I would say that company probably wouldn’t have this plan in place if they hadn’t already addressed some of their core risks in their ERM program.

A lot of companies get stuck in risk identification, So the way many companies do risk assessments and heat maps, they generally get people in the room, they say, what are the risks facing the company?  They might come up with 20, 30 different risks and they would assess the probability one to five and then severity one to five and they’ll multiply the two scores to get an overall risk rating.

I believe this approach is fundamentally flawed.  Let me give you a very specific example. What’s the probability and severity of a Cyber Security attack that’s happening to the company right now? Your firewall and your controls are able to protect against it. Probability is high. One to five, it has to be at five it’s happening. Hundreds and thousands of times. What’s the severity? It’s low. The lowest you can be. It’s a one. So, five times one is a five. What’s the probability and severity of a major data breach. The probability is low. It’s a one. Severity is high. It’s a five, one times five, it’s five. So, you end up with the same score for two very different situations.  The math behind probability times severity gives you expected loss, but your risk is not driven by expected loss, it’s driven by stress loss or unexpected loss.

In determining how to assess risk, I like to start with the key strategic, business, and operational objectives of the company. What’s your strategy? What are the KPIs – Key Performance Indicators – that would indicate whether you’re achieving that strategy? Then you say, what are the risks that could drive variability in those KPIs. What are the key risk indicators and risk tolerances for those risks?  So, start with the business objectives of the company and let that drive your risk assessment and quantification.

Transcript

Joe: [00:00:00]  Hello and welcome to On Boards – a deep look at driving 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 board 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.

Raza: [00:00:32] Joe and I speak with a wide range of guests and we talk about what makes great boards great, what makes a board unsuccessful, what it takes to be a valuable member, and how to make your board one of the most valuable assets of your company.

Joe: [00:00:50] Our guest today is James Lam. James is a globally recognized risk expert, an early advocate of Enterprise Risk Management, and the [00:01:00] first ever company Chief Risk Officer. He is the President of James Lam and Associates; a highly regarded risk management consulting firm. He has served as the director of both public and private companies and served as commissioner for the National Association of Corporate Directors, Blue Ribbon Commission on Board Oversight of Disruptive Risks.

Raza: [00:01:24] His bestselling books on Enterprise Risk Management have been translated into many languages and have been adopted by top college degree and professional certification programs. James has been published and quoted in over 200 articles, including the Wall Street Journal, Harvard Business Review, The Economist, NACD Directorship, Forbes, Financial Times, and CFO Magazine.

Joe: [00:01:50] Welcome James. It’s great to have you today as our guest on On Boards.

James: [00:01:54] Thank you. It’s great to be here with you, Joe and Raza.

[00:02:00] Joe: [00:01:59] So James, you are one of the most widely-recognized risk experts in the world, and as I mentioned in my introduction, the first ever Chief Risk Officer for a company. How did assessment and management of risk become your professional passion?

James: [00:02:16] Well, if I go back to the beginning, I got my undergraduate degree in finance, and so I was always very interested in financial management and statistics. Risk management is my passion and I’m very fortunate to find a career where I could practice something that I truly believe in; something that leverage off my finance degree and learnings so that’s quite good, and I’ve had the opportunity to practice risk management in three different ways.

 One as a practitioner working inside a company, two, as a consultant [00:03:00] working with different companies and different industries and different stages of risk management and thirdly, as a director, providing risk governance and oversight, in terms of risk management and leadership.

Joe: [00:03:16]  Can you talk a little about what you do for the companies with which you work, to help improve the effectiveness of their Enterprise Risk Management programs.

James: [00:03:27] So I’ve worked with over 75 ERM or Enterprise Risk Management engagements, different companies, different industries, and typically, I would go into a company and assess their current risk management processes and then come up with a set of recommendations in terms of how they could enhance those processes. But what’s really important is to understand: What are their [00:04:00] business needs? What’s the size, complexity, business model and strategy for the company? So you could customize the Enterprise Risk Management program for their needs, and one thing that’s distinguished about what I do, given that I’ve been a practitioner when I do work with companies, I help them with implementation. You know the classic joke where the consultants tell you what to do, but they don’t help you do it? Well, I try to overcome that. So I do help my clients with implementation. I have templates, examples, case studies, so they could implement much more efficiently.

Joe: [00:04:41] Do you typically work with management, with the board, with both? How does that interaction take place?

James: [00:04:47] Yeah, usually both, and what I found to be a critical success factor is the commitment and engagement of the CEO. So if I could have one thing in each [00:05:00] engagement and I could tell you of the engagements that were highly successful, there’s a hundred percent correlation to how engaged and committed the CEO is, and then having board involvement, board input, I think is critical. If there’s a Chief Risk Officer, having a capable Chief Risk Officer and the alignment with other senior executives, I think all of those are critical things. So it’s not about getting the data model or even the analytics; it’s really about getting management buy-in and shaping the culture of the company.

Joe: [00:05:40] So I’ve always been intrigued by the fact that you were the very first Chief Risk Officer for a company. How did that come about and what did that role mean exactly?

James: [00:05:52] Well, this was in 1993. I joined GE Capital Market Services and I [00:06:00] had the responsibility for the middle and back office. So in the middle office, I had market risk and credit risk and back in ’93, there was no such thing as Operational Risk Management – it was just Operations. So, one day I walked in to my boss’s office, the President of the company. I said, ‘Hey, Rick I’m ordering some business cards. What’s my title?’ And he goes ‘Well, I didn’t come up with one for you. Why don’t you come up with one that fits your responsibilities?’ And at that point, the title of CIO – Chief Information Officer, was becoming very popular of having a senior level executive, a C-suite executive that’s going to integrate your mainframe, your client server, your PC and internet technologies, in support of the company’s strategy. And so why not risk? Why not have a C-level [00:07:00] executive, that’s going to integrate financial risk, operational risk and strategic risks and elevate it to a C-level agenda item, and so I thought, well, Chief Risk Officer sounds pretty good to me.

Joe: [00:07:14] That is good. So you kinda just made it up, put it on your card and it was born right there and then.

James: [00:07:21] Yeah. And over time, now I think there are thousands and thousands of Chief Risk Officers across many industries in the world, and I think it’s a good movement. I think companies have benefited from that role.

Joe: [00:07:37] So in the past, companies have had people called Chief Security Officers, or they’ve had Chief Information Security Officers. What is it that brings a company to kind of adopt the idea of having a Chief Risk Officer? What gets them there and what is the advantage that that brings to a company?

[00:08:00] James: [00:08:00] Yeah. So for most companies, the role of the Chief Risk Officer or Chief Compliance Officer is considered the second line of defense. Right? So the first line of defense are the business units, the operational units, so your business leaders, your CIO and your CTO are considered your first line of defense. They own the risk.

The Chief Risk Officer is the second line of defense. They provide policy, they provide oversight and best practices in support of the CEO and the executive team.To oversee risk management within the whole company, and the third line of defense, I would say is the Board of Directors with the support of the internal audit function.

Joe: [00:08:51] So, you’re posing it as a line of defense, but I’ve read some of your articles, and I really got the impression [00:09:00] that it’s more almost of a proactive position that a Chief Risk Officer is taking, rather than when you think of a line of defense, you almost think of a defensive position. So is it fair to say that a Chief Risk Officer and we’ll talk a bit also about a Risk Committee, makes it more proactive in addressing risk and thinking about risk. Is that a fair way to look at it?

James: [00:09:23] That’s exactly right, Joe. I think taking a proactive approach to risk management is one of the key responsibilities for the COO. So, think about yourself in the first line of defense. You’re running a business. You’re running the IT function. You’re really focused on the day-to-day, and you might be responding to risk incidents or minor crises, but a Chief Risk Officer is much more forward-looking, much more proactive, looking at things outside in, looking at things much more long [00:10:00] term. Defining policy, defining risk appetite, thinking about risk in a much broader context and how it may impact the company. These are not things that you would expect from the first line of defense, and it’s probably not something that executive management team spends a lot of its energy and time on, so having that role of a Chief Risk Officer really provides the expertise, the time, the attention and focus on the most critical things that’s going to drive performance in the future. So being proactive, being forward, looking at key trends outside in, are really important things.

Joe: [00:10:47] So in kind of following that, I know that you’ve recommended that the companies have Risk Committees on their boards and a number of companies have in fact adopted that practice, but many have [00:11:00] not. Why do you recommend a separate Risk Committee? Why can’t, for example, the audit committee, which typically is tasked with that function, why can’t they handle it, and doesn’t it to some degree depend on the level of risk that a company faces? So maybe a company that sells groceries, has a different kind of risk than a high-tech company, for example.

James: [00:11:25] I think the business models, complexity are important factors. But let me talk about why a company should at least consider setting up a Risk Committee from two dimensions. One is in terms of scope and mandate, and the other is just in terms of function. So in terms of scope and mandate, I’ll relate to you a conversation that I had with a board member, from a large energy firm. So I want to give credit to where it’s due, and she was a member of the Risk Committee [00:12:00] and the Audit Committee and that company was considering combining two, and she was a strong advocate of keeping both the risk and audit committee. And she said to me, ‘James, the risk committee and the audit committee wear different hats. We have very different scope in mandates. The Audit Committee is paid to think inside the box. Your SEC requirements, your financial disclosure, Sarbanes Oxley, FASB, et cetera. You don’t want to be creative in your accounting.

Joe: [00:12:40] Right.

James: [00:12:40] You really want to check the box, make sure you’re in compliance of all these laws, regulations and standards, whereas the risk committee is paid to think outside the box. What are the uncertainties, what are the external drivers that could impact [00:13:00] our earnings, our cash flows, our value? How do we expect the unexpected? How do we think around corners? So you’re really paid to think outside the box’, and I thought that was a very compelling way of contrasting the scope and mandate of the audit versus the risk committee, and I’ve chaired both. I’ve chaired a risk committee for E*Trade, I chaired an audit committee for RiskLens, and I would say the functioning of those two committees are very different. You look at the agenda items, you look at the reporting and you look at the oversight and decision making. They’re very distinct. Now, I’m not going to say that every company needs a risk committee. If you’re going to have it as part of the audit committee, you just have to make sure you have the right directors, the right skills, and that you spend enough time in that committee [00:14:00] on risk management issues, or it could be a part of the full board. Even companies with risk committees might say appropriately that strategic risk, and reputational risk ought to be a full board agenda item. So there are different ways of doing it, but I think the most important thing is to make sure that the risk agenda is well represented in terms of board and committee time.

Joe: [00:14:29] So, if you were populating a risk committee versus an audit committee, what are the skills and expertise you’d be looking for on the risk committee that might be different from the folks you would be appointing to the audit committee?

James: [00:14:45] Yeah. So for for the audit committee, you want financial experts, right? People come from a CFO auditing regulatory type of background, right? [00:15:00] For risk committee, you want risk experts. You want Cybersecurity professionals. You want business people who could translate risk in terms of strategy and operations, you know operational people would be very good. So I think the skill sets are very different, because the work is different.

Joe: [00:15:23] Okay.

James: [00:15:23] There’s some overlap, right? So I think it’s important for example, that the audit committee sits on the risk committee, and the audit chair sits on the risk committee and the risk chair sits on the audit committee when you have those two committees.

Joe: [00:15:40] That makes a lot of sense.

When you serve as a board member, what role have you typically filled and how have you worked with management in that role?

James: [00:15:52] Yeah. So I think we’ve all heard of the principle of “nose in and fingers out.”

Joe: [00:15:59] Right. [00:16:00] Yep.

James: [00:16:00] And I respect that principle. I also think that there’s a middle ground. So if a company is in a situation where they really need to up their game in risk management, and if there’s a director who has no deep risk management or Cybersecurity expertise, I think the middle ground with the providing a guiding hand. So it’s not ‘nose in and fingers out’, but you could provide some guidance in terms of your expectations and your standards.

So I think it is important that the board provides some input in terms of the kind of reporting that they want to see, the kind of metrics, that they provide input and guidance on the risk appetite statement and the integration between risk and strategy, and I’ve also found at a [00:17:00] practical level that having informal working groups, management and board members, could be very helpful. So you’re sitting outside of a formal board meeting, bause during a board meeting, if you provide critique or guidance, management might take it as being defensive, in terms of you criticizing the work that they’ve done, but if you do it in an informal working group, then you could bounce around ideas, brainstorming, draft things, and do it in a very constructive and non-threatening manner.

Joe: [00:17:38] Yeah, that’s a great idea. That really makes a lot of sense to me, especially with something like risk where it seems like you really need a more open conversation than you might in some other areas. So let me ask you this. So when something really bad happens at the corporate level, from whether it was Enron to [00:18:00] WeWork to Wirecard, the question is asked, “where was the board?” Why did this happen on their watch?

What are the things that we should look at in determining whether, and to what extent, a board bears the responsibility for the catastrophic problem that might derail a company?

James: [00:18:22] Yeah, I think boards need to go back to the basics in terms of fiduciary responsibilities, in our duties of care, duties of loyalty, but put that in the context of risk management and oversight. Besides the corporate scandals that you’ve just mentioned, I think your listeners could benefit from looking at the Blue Bell Ice Cream case and the Clovis Oncology cases, both of which I think have really [00:19:00] elevated the standards for duties of care and duties of loyalty in terms of risk management and compliance, and that it is important for the Board of Directors in exercising those two standards to make sure that there is a risk management and compliance system in place, and that system is working effectively and that the board is getting the right metrics, the reporting and red flags, in terms of risks and that they hold management accountable. So for anyboard, I think those are standards that we need to consider and make sure that we fulfill those, duties of care and loyalty.

Joe: [00:19:52] That’s great. That’s helpful.

Raza: [00:19:53] James. You know, you alluded to multiple levels of [00:20:00] managing risk or looking at risk. Some people would argue that at the end of the day, the CEO of the company is really the real Chief Risk Officer. How does the Chief Risk Officer in a company have a real impact if the risk that they are tasked at managing blow up? This is like asking is risk management job even real without skin in the game.

James: [00:20:26] Yeah, I think that’s a great question. In terms of the CEO, You could always argue the CEO is also ultimately the CFO, the CMO, and ‘C’ anything else – because ultimately that person is responsible for the performance of the company, and the reason why the CEO needs a C-suite of specialists is really to support him in managing the company, operating the company, executing against the [00:21:00] strategy.

I think the Chief Risk Officer is really tasked with making sure that there’s a robust and effective ERM program that the policies and the risk assessment analytics, the risk management strategies, the reporting are appropriate. If the CEO wants to do that, great! It should be explicit that the CEO is also the Chief Risk Officer. It should be explicit, not implicit. For example, if you look at Steve Jobs at Apple, he was the CEO, but you would argue he was also the Chief Product Officer, because that’s his expertise. So if you have a CEO, that’s also very risk-skilled, then that would be fine, but I don’t think you find that in too many organizations.

Raza: [00:21:56] We’ve heard about use of heat maps [00:22:00] and other quantification methods that look at risk at a glance. Can you give us an overview of what risk quantification solutions have evolved and how companies like RiskLens provide such tools? Are they suitable for boards or mostly for management?

James: [00:22:19] Yeah. Thank you for asking that. So I’m on the board of RiskLens and RiskLens is a Cyber Risk quantification company, and I chair our audit committee. But beyond Cyber Risk, if you go back to financial risks, so market risk in the nineties was a real challenge believe it or not, but if you go back, people will say ‘oh, it’s really hard to measure value, whereas it’s hard to measure mortgage prepayment and getting a lot of data and models together. We solved that, right? We do market risk monitoring real time, [00:23:00] 24/7 now, and then it was credit risk. Oh, it’s really hard to aggregate all of our lending and counterparty exposures across an organization. Well we solved that. Then it was Operational Risk, now Cyber. So if you go back to the nineties, even eighties, the past 30 plus years, we had challenges in risk quantification measurement, but we’ve overcome that, and I think we will overcome that with Cyber and any other types of risks. We manage what we measure and for us to get to good risk management, I think we need to get to good risk quantification. Many companies I see use risk assessments that are qualitative and heat maps that lays out these risk types in terms of probability range and the severity [00:24:00] range. And the directors and senior executives I talk to, don’t find these processes or reports useful or actionable.

Raza: [00:24:13] It may become white noise.

James: [00:24:16] It is, and I think a lot of companies get stuck in risk identification, as opposed to true risk assessments and reporting. I’ll give you an example of that.

So the way companies do risk assessments and heat maps, they generally get people in the room. They say, what are the risks facing the company?  They might come up with 20, 30 different risks and they would assess the probability one to five and then severity one to five and they’ll multiply the two scores to get an overall risk rating, [00:25:00] and let me tell you that I think we all strive in our business life and also our personal life, in terms of achieving some simplicity. Simplicity -it’s a great thing, but I would also distinguish something that’s simplistic and superficial versus something that’s really robust and analytical that you simplify. So I love simplification. I don’t love simplicity. I don’t love things that are superficial, and going back to that one to five rating,

Raza: [00:25:39] Yeah.

James: [00:25:40] I’ll give you a very specific example. What’s the probability and severity of a Cyber Security attack that’s happening to the company right now? Your firewall and your protections are able to protect it. Probability’s high. One to five, it [00:26:00] has to be at five it’s happening.

Raza: [00:26:01] Yeah.

James: [00:26:02] Hundreds and thousands of times. What’s the severity? It’s low. The lowest you can be. It’s a one. So five times one is a five. What’s the probability and severity of a major data breach, but probability is low. It’s a one. Severity is high. It’s a five, one times five, it’s five. So you end up with the same score for two very different…

Raza: [00:26:30] I think my example would be averages. So you may have heard, would you ever cross a river that’s told to be four feet deep on the average?  Like the average loses a lot of information in the guise of simplicity, but oversimplification and just doesn’t remain useful. So if somebody said the river is on the average [00:27:00] four feet deep, would you cross it?

James: [00:27:02] Yeah. And that’s exactly right. And the math behind probability times severity gives you your expected loss.

Raza: [00:27:11] Yes.

James: [00:27:13] Your risk is not driven by expected loss. It’s driven by stress loss or unexpected loss.

Joe: [00:27:21] Right. Great.

Raza: [00:27:22] Reversing that, the broader question James would be like, so what is a better or best practice way that management should be reporting risk to boards? What is a good way of seeing it? What is a good way of talking about it, from a reporting perspective to the board?

James: [00:27:42] Well, you’ll be surprised, and my clients are surprised with my answer to that, and that is don’t start with the risk. So a lot of times companies say, they start with, what are our risks?

Raza: [00:27:56] What are our risks.

James: [00:27:57] Yeah. That’s the first question, and I like to [00:28:00] start with the key strategic business and operational objectives of the company, so start with your strategy. What’s your strategy? What are the KPIs – Key Performance Indicators – that would indicate whether you’re achieving that strategy? Then you say, what are the risks I could drive variability in those KPIs. And then you could say, what are the key risk indicators and risk tolerances for those risks? All right. So in terms of metrics and KOIs and risk appetite, but don’t start with the risks. Start with the business objectives of the company and let that drive your risk assessment and quantification, and also what are the most important outcomes for the company in terms of earnings, market value, cash flows, [00:29:00] and even for non-profit organizations and government entities, what’s our mandate, how do we measure the achievement of that mandate in terms of metrics, and start with that, and design the risk management program and reporting around those…

Raza: [00:29:18] James, you talk about the risk zoo I’ll call. Tell us about black swans, white elephants, and gray rhinos.

James: [00:29:27] Well, this is some of the work that I did with the NACD in the 2018 Blue Ribbon Commission report on what oversight of disruptive risk. So one of the recommendations of that Blue Ribbon Commission Report is that you should make sure robust ERM program’s in place, in terms of your strategic, financial, operational, regulatory, reputational risk. And once you have that [00:30:00] core foundation, then you really need to think about doing scenario analysis, and think about these disruptive risks, things like AI, Cyber Security, climate change, pandemics, and I group them into three animal categories. It was the black swans and gray rhinos – two books written by other authors that I think very highly of – and black swans are improbable, but very severe events like September 11th, like the invention of the internet. Gray rhinos, or macro events that are charging at you, that you really see coming, like artificial intelligence. Now it’s like changing a lot of things and changing the world [00:31:00] in the business that we see, but Artificial Intelligence was invented in the 1990s, just North of here in Dartmouth, right? Where computer scientists taught computers how to play chess better than the average human, and now it’s becoming much more important. I would also say climate change, Cyber Security, are also gray rhinos, and white elephants is like the combination of a risk event and the elephant in the room. Things that, it’s here, right. It could be a dysfunctional CEO. It could be a money-losing business that a senior business executive is really invested in. We can’t get out of it. It could be an adverse culture of the company that we [00:32:00] all know is here. We should do something about it, that we don’t talk about it, and we try to avoid the topic. All of these disruptive risks, black swans, gray rhinos, and white elephants could have a severe impact on an organization, but for various reasons, cognitive biases, loyalties, emotional issues, we have a hard time dealing with them, and so the BRC report and my article really says that in addition to the risk that we traditionally look at, if you look at the world we live in today in 2020, it’s just an amazing example of that. We need to think about disruptive trends in this as well.

Joe: [00:32:47] So if a company had a Chief Risk Officer, that person would be charged with making sure the company and the board was looking at black swans and facing the white [00:33:00] elephant in the room, ect. I mean, that would be a compelling argument for “why have a Chief Risk Officer.”

James: [00:33:06] Yeah. And I would say, that person is responsible to help the board and senior management to imagine the unimaginable. To expect the unexpected and be able to prepare for any scenario. I think being prepared is really important. So I worked with one Board of Directors and the company had a very strong ERM program. And two years ago, the board approved a pandemic management plan. In 2018, the board approved a pandemic management plan. Last year they stress test that plan, and then when the pandemic hit early this year, they had a playbook. The playbook didn’t anticipate everything, but it had a [00:34:00] curve and it had different stages, it had social distancing, PPE. You know, working remotely and so forth. We probably had 70 to 80% of the eventualities and that really helped the company be prepared for this scenario. But I would also say that company probably wouldn’t have this plan in place if they didn’t already address some of their core risks in their ERM program.

Joe: [00:34:27] Great example. Thank you.

Raza: [00:34:28] James, so to use Donald Rumsfeld’s analogy of the unknown unknowns. Some of these things, as you mentioned, like imagine the unimaginable, what is the best way for boards or whoever is tasked at the board for, governing on risk, what are some of the best things and best ways for the boards to deal with that?

James: [00:34:56] Yeah. The key challenge to black swans or [00:35:00] unknown unknowns is you can’t predict it. So some people would argue that the pandemic was a gray rhino cause we’ve had pandemics before, we will have them in the future, but it’s really hard to predict when it’s going to happen, how severe it’s going to be. And there are going to be unknown unknowns that we would face in the future. What I think is really important for any company to have, is a system and the feedback loop that they could identify and isolate unexpected variance in performance. So when there are things happening in the company or in its marketplace that is driving unexpected performance variance, where there’s earnings and stock price value, you pick it up and you pick it up really quickly and say, okay, are there things happening without customers or [00:36:00] technologies, and markets that we were not aware of? And if you pick it up more quickly, then you could see the black swans coming, while they’re still gray swans. So things don’t happen all at once. These things happen over time. And so I think having those kind of early warning indicators, and be able to have those feedback loops are very important.

Joe: [00:36:28] That’s great. James, your book, Enterprise Risk Management from Incentives to Controls, came out in the early 2000s and then was fully revised and published in 2015. What had you observed and learned since the book was first published and the 2015 edition, and what have you learned since then that would [00:37:00] colour the advice that you would give to a company?

James: [00:37:04] Yeah. So I just want to say that my latest book came out in 2017 and it was about implementation. So the first book and the second edition was on: What are the best practices in risk management? What are some of the industry requirements? The second book or the most recent book in 2017 is on implementation, and it’s really on how. How do you implement, how do you create value? But even since those two books, I I’ve learned, especially with the pandemic that, health and safety is going to be a critical element of everyone’s risk management program,   going forward. I’ve learned that, we really need to be much more forward looking, in looking at macro trends. [00:38:00] It was a McKinsey study that shows 70% of board time and reporting is backward looking. And since that time I participated in the Blue Ribbon Commission panel and reinforced my belief that you need to have a robust ERM program that goes beyond risk assessments and heat maps, and you need to leverage that to look at some of the disruptive risks that we face, but I think ultimately this pandemic and the economic crisis that we’re going through, it really puts risk management in the front burner in terms of management and board attention, and I look forward to the lessons learned and the ways we need to, adjust our risk management programs, going forward.

Joe: [00:38:56] Great. James. It’s been great speaking with you today. [00:39:00] Thanks for joining us. I hope you and your family will continue to be well and stay safe.

James: [00:39:05] Thank you. Same to you, Joe. And thank you, Raza. It’s been a pleasure speaking with you.

Joe: [00:39:12] And thank you all for listening today, to On Boards with our special guest James Lam. Please take care of yourselves, your families, and your communities, as best you can. Raza you take care. I hope you and your family continue to be well and are staying safe.

Raza: [00:39:28] Yes, Joe, we’re staying safe and well. Hope same for your family as well.

Joe: [00:39:33] Thanks so much.

James: [00:39:34] All the best.

16. Mohamad Ali, the CEO of IDG, Inc., on learning to be a good board member and the importance of giving back

Mohamad Ali is the CEO of International Data Group (IDG, Inc.), a private technology media, events and research company. He has also served as CEO of a publicly traded company and has served on many public, private, and nonprofit boards. In this episode, Mohamad shares what he has learned about being a good board member as well as the intricacies of boards through his wide range of experience on both the board and company leadership sides. He also integrates the importance of giving back and the support he received after moving to the United States as a child.

Thanks for listening!

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Links

https://www.idg.com/

https://twitter.com/mhsali

https://www.linkedin.com/in/alimohamad/

Biography

His bio is available here: https://www.idg.com/about-idg-inc/

Mohamad Ali was appointed Chief Executive Officer at International Data Group, Inc., the world’s leading technology media, events and research company, in July 2019.

Prior to this role, Mohamad was CEO of Carbonite, a publicly traded data-protection and security firm, where he grew the company’s revenue four-fold, to more than a half-billion dollars in four years. Before that, Mohamad served as Chief Strategy Officer at Hewlett-Packard where he played a pivotal role in the company’s turnaround and led the decision process to split HP into two companies. At IBM, Mohamad acquired and integrated various companies to create the firm’s $8 billion analytics software unit. At Avaya, he oversaw the $2 billion services group and served as head of the company’s research labs.

Mohamad holds a B.S. in Computer Engineering, a B.A. in History and a master’s degree in Electrical Engineering, all from Stanford University. He serves on the board of iRobot (NASDAQ: IRBT) and was previously on the board of Carbonite (NASDAQ: CARB) and City National Bank (NYSE: CYN).

Mohamad was honored as 2018 CEO of the Year by the Massachusetts Technology Leadership Council, was a member of the 2018 Public Board of the Year by The National Association of Corporate Directors New England, was named a 2011 All-Star by Massachusetts High Tech magazine, was named a 2008 40 Under 40 honoree by Boston Business Journal, and was a finalist in America’s prestigious 1988 National Science Talent Search.

Article: “I am Living proof of the American Dream”

Quotes

Onboarding

I think one of the most important aspects of onboarding isn’t actually the content that you learn, but the personal dynamics of the board and the board. It could be 8 people, it could be 18 people but it’s a small number of people of often very high caliber people with very strong opinions…how you onboard someone culturally onto the board is a very important thing.  That’s something I’ve seen done poorly and it’s something I’ve seen done well.  We spend so much time and money with recruiters getting the right skills, doing the skills matrix and so forth and then, once the person’s here, that’s kind of when the hard work starts.

What’s the best thing a board can do when a CEO has a major challenge, or the company is in a crisis?

Great question, because in some ways we’ve all been there in the last six or nine months.  I would say that if you have a good CEO and the CEO has a good management team, probably one of the most important things is be supportive of that team, be available, be engaged, but be supportive… if you have a good CEO and there’s a crisis, you hunker down together.

Big Ideas/Thoughts

What was impactful in the path leading to your success as you were growing up

I’m one of the lucky ones to have gotten all the opportunities that I have gotten and to where I am today.  It wasn’t just my mom and my dad that encouraged me because they were new to this country.  they didn’t know how to navigate it.   There were people who went out of their way to help me for really no gain to them.  There were two school teachers in particular, in the public school system that showed me the way and guided me and eventually I ended up at one of these elite public schools where you have to take a test to get in and that launched me on my way to Stanford and my career.  Without these two people, who out of the goodness of their heart just decided to help me, I don’t think I would be here today.  I always try to keep that in mind when I look at where I am and I think all of us are wherever we are, whatever success we’ve had, it’s because other people have helped. I think it’s really critical for us to all give back.

First Board Experience

My first board experience, I would have to say that I really didn’t know anything about boards, so it was very much a learning process for me.  One of the things that I did was just first assume that I didn’t know anything about how boards work and that they had brought me on board for a specific reason. That’s where I focused my time, helping them determine how to sell the company.  Then the other thing that I did was I observed, I watched what the other board members did.  I asked and I learned – there were several really great people on the board who were willing to teach me.

Learning what works for Boards by observing what doesn’t work

I’ve seen a lot of things work.  I’ve also seen a lot of things, not work and that’s really important.  We all talk about how failure is a really important component of education and learning and it really is.

How serving as a CEO has helped him as a board member

It’s tremendously helpful actually.  In some ways, it allows you to relate with a lot more credibility to the CEO. It’s not that other board members who haven’t been a CEO aren’t credible, but in the eyes of the CEO of the company, I think knowing that a board member has been CEO and has been through the pains of being CEO, been in the trenches, has had to navigate the landmines that CEO deals with, it goes again beyond the technical aspects of the role and more to the emotional connection, and understanding that is shared with CEO

Board Composition and offboarding

One of the things that I’ve seen done at multiple companies where I’ve been on the board is the use of a skills matrix and the skills needed to the company changes periodically, the use of the skills matrix has been very helpful.  For example, at iRobot, we do a skills matrix every year and we publish it as part of our SEC filings and it gives the board an opportunity to discuss what we might want to change, in short term, medium term, long term and all the board members are part of that discussion. It’s not just transparent to our board members, but to all of our investors.

Diversity on boards

I see progress, but not enough.  One example is that a few years ago there was a target of getting 20% women on boards.  We’ve met that target, but if you think about it, it’s only 20%, it’s not 50%.

M&A

Most M&As, or a significant number of M&A transactions, ultimately don’t meet the goals or produce the value expected. So where is the disconnect in this if two parties are really trying to do the right thing?

There is a three-letter answer to that and it’s ego, right? So, 75% of all transactions fail to meet their business cases. The good companies, the companies that know how to do M&A well obviously perform much better than that, because they do it for the right reasons.

Transcript

Joe: [00:00:00] Hello and welcome to On Boards: a Deep Look at Driving 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 board 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.

Raza: [00:00:25] Joe and I speak with a wide range of guests and talk about what makes great boards great or makes boards unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets of your company.

Joe: [00:00:42] Our guest today is Mohamad Ali, Chief Executive Officer at International Data Group, the world’s leading technology, media events and research company.  Prior to this role, Mohamad was CEO of Carbonite, a publicly traded data protection and security firm, [00:01:00] where he grew the company’s revenue fourfold to more than a half a billion dollars in four years.

 Raza: [00:01:05] Mohamad has also served as Chief Strategy Officer at Hewlett Packard . In 2018 he was honored as CEO of the year by the Massachusetts Technology Leadership Council and he was named member of the 2018 public Board of the Year by the National Association of Corporate Directors, New England.

Joe: [00:01:26] Welcome Mohamad, it’s terrific to have you today with us as our guest.

Mohamad: [00:01:30] Thank you, Joe. Thank you, Raza.

Raza: [00:01:32] Before we talk about your work as a board member and CEO Mohamad, we wanted to briefly talk about the article in Medium that appeared in 2018 entitled “I’m Living Proof of the American Dream.” Can you talk a little bit about your journey with your family from Guyana to American citizenship, to your successful career?

Mohamad: [00:01:54] Sure. Sure. So that came out of a [00:02:00] speech I gave at the John F. Kennedy Library at a naturalization event for several hundred new citizens and so I thought it was appropriate to talk about the American Dream at such an event, that became the the article that you mentioned.

This was in 2017 and I think it was important to talk about the American Dream then, but the context for the American dream today, I think is different in that over the last few years, I think we’ve seen more and more threats to those pursuing the American Dream. And I think it’s really important for us all to realize that with the exception of the native Americans here, we’re all immigrants and this is a country that is built on immigrants and immigration. And, we’ve really always been [00:03:00] welcoming to immigrants who want to come here and pursue the American Dream. It’s great that you, bring up the article, but, but I feel like the context is different and I want to underscore that

 To your point I did grow up in, I was born in Guyana, which is a little country near Venezuela in South America.  A lot of people don’t know where it is, that’s one to add to your list of things. I moved here when I was 11 and I have to say that, I’m one of the lucky ones to have gotten all the opportunities that I have gotten and to where I am today.

Raza: [00:03:35] Mohamad what were the factors that were impactful in your path to the success that you’ve had?

Mohamad: [00:03:45] Yeah. I would say that there were multiple, but there are two in particular that I’ll underscore. Think my mom who was a school teacher in Guyana, always felt that the path to a better life was education [00:04:00] and my mom really believe this because she grew up very poor.  She was very young, a kid, she worked in the rice fields. She couldn’t afford shoes and she worked very hard to become a school teacher and felt that education was really important. That’s one of the things that now that I’m a CEO and I have means I try to support others to come through the education path. 

The other thing that I feel was important for me is that it wasn’t just my mom and my dad that encouraged me because they were new to this country, they didn’t know how to navigate it.  I would say that there were people who went out of their way to help me for really no gain to them necessarily and there were two school teachers in particular, in the public school system, that sort of showed me the way and guided me and eventually I ended up at one of these elite public schools where you have to take a test to get in and that [00:05:00] sort of launched me on my way to Stanford and my career.  But without these two people, who out of the goodness of their heart just decided to help me, I don’t think I would be here today.  I always try to keep that in mind when I look at where I am and I think all of us are wherever we are, whatever success we’ve had, it’s because other people have helped. I think it’s really critical for us to all give back as a result.

Raza: [00:05:27] What a great story Mohamad. I can also be a testament to that, myself being an immigrant and I know that there have been so many people that have helped me on this journey.

Mohamad: [00:05:39] Yeah. So true.

Joe: [00:05:40] It’s great that you acknowledge the mentors and the importance of mentorship, because I think we all have an opportunity to serve that function at times and it’s just great to keep in mind how incredibly important it can be to the people that you help.

So let’s go back. I’d like to hear about your first board experience. How did it [00:06:00] come about and what did you learn about being a board member from that first experience?

Mohamad: [00:06:05] Sure. Yeah, that’s right. This podcast is about boards, so we should at least talk about them right.

Joe: [00:06:10] We should.

Mohamad: [00:06:11] My first board experience was at a very small company called Ember and Ember was a Silicon company. They made a wireless technology, a chip and the chip a standard called ZigBee. It was used in things like power meters and so forth, things that like where you needed the battery to last years, because you just don’t want to replace them and the bandwidth was low. So this was the perfect application for this new technology called ZigBee.

I think it was in some ways it was quite accidental. At the time I was working at IBM in the semiconductor division and so I had developed sort of a deep knowledge of this space and at the time they were looking and I [00:07:00] done a lot of M&A in semiconductors. So they were looking for someone to join the board to help guide the exit process for this company and so, I was in the right place, at the right time. And, I joined the board and, I would have to say that I really didn’t know anything about boards, so it was very much a learning process for me.

Joe: [00:07:22] Was there an onboarding process where people helped you ?  How did you learn from that first experience?

Mohamad: [00:07:31] A lot of companies have very robust onboarding processes , especially public companies like iRobot and Carmen and so forth but this was a startup, it was a small company.  And I think at the time it was about $30 million, but it was still,a VC backed company and the onboarding process, wasn’t that robust, understandably, but there were really great people on the board.

I think one of the things that I did was just first assume that I didn’t know anything [00:08:00] about how boards work and that they had brought me on board for a specific reason. That’s where I focus my time, helping them determine how to sell the company.  Then the other thing that I did was I observed, I watched what the other board members did. I asked and I learned. I’ve seen cases where first time board member has come on board and try to dominate the conversation, presumptively assume they knew how boards work and those situations are just not good situations. And part of it was maybe I was very young at the time and, it was, like I knew that I didn’t really know anything. So I didn’t, I wasn’t disruptive.  I sat there and I learned, but there were several really great people on the board who were willing to teach me.

Joe: [00:08:44] Yeah, really great point about when you’re first on a board kind of getting a feel for how it’s working and, what the culture of the board is before you dive all the way in. I think that’s important.  Since that experience, what experiences have [00:09:00] had that you think have made you a better board member?

Mohamad: [00:09:04] Now I’ve been on multiple boards. I’ve been on three public boards, several private boards, various size of the companies and when I worked at HP, I spent a lot of time with the HP board.  I would say experience in time. I’ve seen a lot of things work. I’ve also seen a lot of things, not work and that’s really important. We all talk about how failure is a really important component of education and learning and it really is. I would say just being on those boards, I’ve also gotten a chance to get formal board education participating in NACD events and other types of training and learning from other experienced directors.

Joe: [00:09:41] So I’m glad you acknowledged that actually mistakes are a great learning experience. Not everyone will, not everyone does.

Mohamad: [00:09:48] And I’ve made plenty!

Joe: [00:09:52] What are some of the things that you think you’ve learned from the mistakes that you observed over time?

Mohamad: [00:09:57] We talked a little earlier about onboarding [00:10:00] and I’ve seen that onboarding done well and I’ve seen it done poorly.  iRobot, I think the onboarding has really been excellent.  When I joined the board of the bank, the onboarding was excellent.  In some ways it had to be excellent because I didn’t know anything about banking.  They brought me in as sort of the technology guy.  I think I spent many hours and days and weeks being onboarded, but I think one of the most important aspects of onboarding isn’t actually the content that you learn, but the personal dynamics of the board and the board could be, it could be eight people, it could be, 18 people but it’s a small number of people and it’s also a small number of, often, very high caliber people with very strong opinions. Even after the formal onboarding process, I have seen, successful boards appoint a buddy to a new board member to bring them into the culture of the board.

[00:11:00] And oftentimes that’s the chairman or the lead independent director or the head of nom and gov or just someone else who offers to do that, but how you onboard someone culturally onto the board. I think is a very important thing and that’s something I’ve seen done poorly and it’s something I’ve seen done well.

Joe: [00:11:22] Well,  it’s a great point because companies spend a lot of time identifying and recruiting the right people onto their boards and to the extent that they fail to really put them in the best position to succeed by really onboarding them properly, I think it’s a great observation because it’s a waste of time and talent when you don’t do that but it’s not always easy to do.

Mohamad: [00:11:46] It’s very hard to do actually we spent so much time and money, with recruiters getting the right skills, doing the skills matrix and so forth. and then, once the person’s here, that’s kind of when the hard work starts.

[00:12:00] Joe: [00:11:59] Exactly right. You also have had the advantage if you will, of being a CEO of two companies. How has that perspective helped you as a board member?

Mohamad: [00:12:10] It’s tremendously helpful actually. In some ways, it allows you to relate with a lot more credibility to the CEO. It’s not that other board members who haven’t been a CEO aren’t credible but in the eyes of the CEO of the company, I think knowing that a board member has been CEO and has been through the pains of being CEO, been in the trenches, have had to navigate the landmines, that CEO deals with, it goes again beyond the technical aspects of the role and more to the emotional connection, and understanding that is shared with CEO. At least for me, when I’m sitting in that boardroom and I’m asking questions, [00:13:00] I also know that, the next day I’ll be on the other side and how would I, what kinds of questions what I want or how would I want to frame?

I think that helps me in my effectiveness. Having said that there are board members who have never been CEO, they’ve been CFO’s and CIO’s and other roles, and they are tremendously effective as well.

Joe: [00:13:22] Sure there are many paths to it, but I think probably one of the constants over time is that former CEOs successful CEOs can be phenomenal board members for that very reason you’ve stated. 

What’s the best thing a board can do when a CEO has a major challenge, or the company is in a crisis?

Mohamad: [00:13:43] Great question, because in some ways we’ve all been there in the last six or nine months. There’ve been, crises compounded in the last nine months.  I would say that if you have a good CEO and the CEO has a good management team, [00:14:00] probably one of the most important things of working do is be supportive of that team, be available, be engaged, but be supportive. I think if you don’t have a good CEO, then it’s going to be very different and the board may have to take some fairly radical actions, including potentially removing the CEO, maybe that’s something they should have known a long time ago, and this is the trigger you’re doing that.

I’ve been lucky in that I’ve gotten to work with some just tremendous CEOs. Russell at the bank was amazing.  Collin is just a great CEO.  Meg Whitman was a wonderful CEO.  I worked for her, but I supported her in the interactions with the board.

Yeah, I think if you have a good CEO and there’s a crisis, you hunker down together and that CEO at that time, really what they’re looking for is good ideas, good discussion, good engagement, and good support once you agree on what to do.

Raza: [00:14:56] But it’s still kind of in the way of not grabbing the [00:15:00] drivers wheel but fingers-out-nose-in kind of support that the board should provide at that time.

Mohamad: [00:15:09] Yeah, that’s right. I think we all know, the folks listen to this call have experienced being on boards and that our role is not management. We are not running the company,  we’re setting strategy. We ensure governance is there. We hire and fire the CEO and their responsibilities exclude actually running the company. Like I said, if we have a good CEO, you let the CEO run the company and you provide those governance, strategy, oversight type of input and if you don’t have a CEO and the board’s job is to go and get a good CEO.

Joe: [00:15:50] By background, you’re an engineer and I’m curious how much of that has had an impact on the kind of board member you have been.

[00:16:00] Mohamad: [00:16:00] Well, being an engineer has its pros and cons.  I love having been an engineer and unfortunately I try to play engineer well beyond my time horizon here.  I would say that it is helpful in that, when management brings forward a proposal, having some level of technical skills gives you, at least it gives me, a better ability to gauge the feasibility of some of these projects. Having not only been an engineer, but managing engineering teams and managing engineering projects at various levels, it gives me a sense of how to gauge the risk. Ultimately, in some ways the board is about assessing risk and what level of risk to take for what types of initiatives.

In that sense it’s good. What’s not good is when board members try to engineer the products you [00:17:00] see that often board members who used to be, it’s like myself, we have to pull ourselves back.

Joe: [00:17:06] No, I think you don’t have to be an engineer to a now and then realize you’re getting too far into the weeds, but on the risk side, it’s such an incredibly important aspect of what a board does assessing risk and determining how much risk the company should be taking. So, it sounds like that it’s more of a strength than anything else.

Mohamad: [00:17:26] I think it’s a strength, not everyone does.

Joe: [00:17:30] So one of the things that Raza and I have had many conversations about is offboarding, which seems to be one of the most challenging things for every board.  Even the best boards, even the best leaders. And I remember you sharing your experience with one company about how you did the off-boarding and I’d really be great if you would share that again with us because I thought it was really just a great approach.

Mohamad: [00:17:56] One of the things that I’ve seen done at multiple [00:18:00] companies I’ve been on boards at is the use of a skills matrix and the skills needed to the company changes periodically. When the company is smaller and younger it may need more visionaries or more technical skills or more something and as it gets larger and it becomes public it needs people with governance skills, it needs people with a public company experience and needs people with understanding of the SEC, of organizations like ISS and Glass Lewis. There’s a different set of skill as it becomes a global organization it needs people who have global experience.

Even for a large company, like an HP or a company of that size, these companies are changing as well and technology and the world’s changing around us. The use of the skills matrix is actually been very helpful because, for example, at iRobot, we do a skills [00:19:00] matrix every year and we publish it as part of our SEC filings and it gives the board an opportunity to discuss what we might want to change, in short term, medium term, long term and all the board members are part of that discussion.  I’ve found that has been one of the most constructive ways to do it and if you look at the iRobot board, we have actually had some very successful transitions over the years.

Joe: [00:19:26] I think it’s a phenomenal strategy.  I particularly like the fact that you do it every year, companies refresh their strategic plans every year. Why shouldn’t a board do the same thing because that in effect is what you’re doing. So I think that’s great. Thanks for sharing that.

Raza: [00:19:43] And publicly then filing it with your SEC filing. So it’s a bigger level of transparency.

Mohamad: [00:19:49] Exactly. it’s out there. It’s transparent. It’s not just transparent to our board members, but to all of our investors.

Raza: [00:19:55] Mohamad, in the current climate how do you see the progress in [00:20:00] increasing diversity, equity and inclusion at all levels of business, but in particular for company boards, how has that been coming along?

 Mohamad: [00:20:08] Yeah, no, that’s a great question and yeah, of course, very timely. so I mean, I. I see progress. but not enough. And, one example is that, a few years ago there was a target of getting 20% women on boards. And, we’ve met that target, but if you think about it, it’s only 20%. It’s not 50%.

With the recent heightened recognition of racial injustice we’ve seen boards move more aggressively to bring on blacks and Latinex onto their boards, but again, its highly underrepresented. I do see a positive trend, but you know I think we have a long way to go with respect to getting, true diversity on boards.

Raza: [00:20:55] We’ve been told like the pipeline is the problem, is that real or [00:21:00] yeah. Is that an acceptable excuse anymore?

Mohamad: [00:21:03] No, I don’t think it’s an acceptable excuse. I would say even maybe a couple of years ago, people felt it was a perfectly acceptable excuse that, hey, they’re just not enough diverse board members out there. There aren’t enough black men and women who can serve on boards and not just boards, like in any role and I think, people are coming to the recognition that, that there are qualified people out there. We just have to try harder to find them. And in some ways you hire who you know and for many people who don’t come from a diverse background, they don’t know a lot of people who aren’t diverse.

You come to this conclusion that there must not be out there. I’m on the board of Oxfam, which is a large charity and, I led the search process for the new CEO. The prior CEO retired after 20 years. [00:22:00] We hired Russell Reynolds. They did a really great job.

We made it pretty clear upfront that we wanted a diverse slate including women, blacks, Latinex, et cetera. and we got that. We were very lucky in that we had over 200 candidates. It was just incredible and we were able to hire a woman, who was the number two at CARE and we have to relocate her from Zurich to Boston, but we did that and she has just been tremendous.  I think the talent is out there and if you look at what she’s done within her own management team now, she’s a very diverse management team that includes, blacks, Latinex, Asian, a very healthy, gender diversity. So it was revealed was not only possible, but she got it done. So I think that excuse is now an old excuse.

Joe: [00:22:50] Do you think some of the momentum towards diversity is a recognition that it actually is financially [00:23:00] driven as well. In other words, it’s the right thing to do, but it feels like companies are starting to recognize that it is in their financial interest to do it as well.

Mohamad: [00:23:09] Yeah, it is in their financial interests and there’s this really great McKinsey study that correlates, diversity with EBITDA which is kind of interesting, only McKinsey would do that, but, and I believe it, and in the past I have used that as an argument for a more diverse workforce, more diverse board, et cetera.  But I have to say there are a lot of people who, don’t that is not necessarily a sufficient argument. I believe it. I think the facts speak for themselves, but I think you need multiplicity of, arguments and facts to get to diversity. I think the financial benefits are certainly one, but I think, a lot of executives I know are now starting to recognize that there is an ethical and moral aspect of this as [00:24:00] well and then I think the third piece of it is dispelling this myth that the talent doesn’t exist out there. And I think those three things, as they come into positive view here, does create an opportunity for us to increase diversity.

Raza: [00:24:16] Mohamad, you now lead a great technology company and technology seems to have experienced tremendous growth even in the pandemic or despite the pandemic. What should we expect where is technology headed? Is this boom kind of a bubble or technology’s there to stay for long. What do you see?

Mohamad: [00:24:39] Yeah. So your question about a bubble, oftentimes when we talk about a bubble of they’re talking about the stock market or the financial markets. I can’t really comment as to whether these tech stocks are over valued or not, but what I can tell you is that I don’t think this is a blip on the radar screen.

I think technology is here to stay.  I think [00:25:00] that, technology has been driving humanity for millennia, from the invention of steel, the locomotive, the telephone,to the internet. If anything that’s different is that the rate of change has just has increased dramatically and will continue to increase.

We’re obviously seeing technology and technology companies, but we’re also seeing, non technology companies become technology companies.  At IDG we have multiple businesses, we have the IDC business that’s really sort of a data and technology business, but we also have a media business, we have an events business, we have a demand generation SaaS platform, which is clearly a technology business, but that media business, there was a time when it was  on paper and today it’s all digital. and there’s a very sophisticated, backend that powers, our publications, like CIO magazine across the globe and, hundreds of countries and that has become a technology company. A lot of traditional industries are becoming technology companies. [00:26:00] I think it’s here to stay.

Raza: [00:26:01] I think, it was 2005 when the “software eats the world” article came out and I would bet, McDonald’s today and FedEx today is a technology and software company, ultimately. So I think that’s where it’s headed.

Joe: [00:26:18] Great point.

Raza: [00:26:20] Mohamad, you’ve been involved in the M&A world on many sides, and have seen a lot of transactions. What in your view is the board’s role in M&A for the enterprise? What should the board of the acquiring company be looking for? And if you switch the side, what should the board of the company being acquired be looking for?

Mohamad: [00:26:40] Yeah. So, the board has a big role in M&A, it is some of the largest strategic decisions that a company will make and the board has to be involved. And so, in the  companies that I’ve been involved in, either a CEO or as an independent board member, this [00:27:00] has always been a key element, 

For the company that you’re acquiring, if you are the acquirer, obviously you want to get, you want to acquire a company that is going to support the strategy that exists.  And then you also want to make sure that not only does it support the strategy, but it translates into financial benefits. I would say that it’s not very complicated, but the actual process and act of working with management to evaluate the M&A target, can be complicated. And then on the flip side, if you’re selling your company, you want your employees to go to a good home, but you also want to, maximize your value. And especially if you’re a public company you have a fiduciary responsibility to maximize the value in the sale. So yeah, I would say that, boards have an incredibly important role in M&A.  

Raza: [00:27:57] In this context, people also hear [00:28:00] that most M&As or a significant number of M&A transactions, ultimately don’t meet the goals or produce the value. So where is the disconnect in this if two parties are really trying to do the right thing,

Mohamad: [00:28:17] Yeah. There is a three – letter answer to that and it’s ego, right? So, 75% of all transactions fail to meet their business cases. So you say, why would why would you spend any money on an M and a, The good companies, the companies that know how to do M&A well obviously perform much better than that. And so I think it’s a, when I was at IBM, we used to, I used to have this philosophy that if a business was performing well, then, we would be more likely to do M&A, because they had a good leadership, [00:29:00] good business acumen, et cetera. And if a business wasn’t doing well, we weren’t going to try to fix it with M&A because we were going to create more of a mess and you see a lot of that, where businesses aren’t doing well and the CEO or the board think that, Oh, well, we’ll just acquire this company and all it’s going to be better. And there’s a lot of failure there. Right.

So, I think that  for successful M&A there’s a set of characteristics. If you have a successful business, you have good management team. I think that’s one, but then the other is, having the culture, the knowledge, the experience, do you know what I call sort of systematic M&A. You know, you’re constantly doing it. It’s part of what you do. you’ve learned over the years how to do it well. And, and unfortunately, there are a lot of companies where, it doesn’t succeed, but, yeah, M&A’s a really important tool in a company. It just needs to be done right.

Joe: [00:29:56] Are there particular skills and experiences, [00:30:00] in the board members that are especially helpful in an M & A

Mohamad: [00:30:06] situation?

Yes, board members who have been through a meaningful number of M&A transactions in their prior roles, can be very helpful. I think CFOs can be very helpful because oftentimes they’ve seen a lot of M&A, and they bring reality to you, to what’s sometimes called strategic benefits that you put can’t quantify, right.  So they make sure you’re able to quantify them.

So yeah, I mean, I think, prior experience with the M &A financial lens, or both, I think this is one where, especially for a technology company, The being an engineer, a piece of it comes back because you have to, oftentimes you have to assess the risk of acquiring other technologies. And, I have been involved in a lot of technology acquisitions now and, there are some where everything looked good [00:31:00] except, the, the technology you’re acquiring was just not scalable and you just ran out of steam and it would have been good to know that ahead of time. Right. Or at least have the board ask those types of questions ahead of that.

Joe: [00:31:12] Great.

 Mohamad. It’s been great speaking with you. Thanks for joining us today. I hope you and your family are well and staying safe.

Mohamad: [00:31:20] Joe, Raza, thank you so much for having me on the show.

Joe: [00:31:24] Thank you all for listening today. To onboards with our special guests, Mohamad Ali. Please stay safe and take care of yourselves,your families and your communities as best you can. Raza you take care. I hope you and your family also continues to be well.

Raza: [00:31:41] Yes Joe, we’re all where we’re all staying safe. Thank you, and I hope, the same for you and your family.

Joe: [00:31:46] Thanks. Take care.

15. Dede Orraca-Cecil on what it takes to build a company board and find great company leadership

Dede Orraca-Cecil is a member of Egon Zehnder, an international executive search and leadership advisory firm, where she leads efforts in almost every aspect of what a company or organization needs in leadership and governance. She talks about identifying company leadership and board building – what it takes and how the conversation has changed.

Thanks for listening!

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

Links

https://www.linkedin.com/in/dede-orraca-cecil/

https://www.egonzehnder.com/office/boston/consultant/dede-orraca-cecil

Quotes

“How have recent events, including the death of George Floyd and everything that’s followed, impacted how diversity and inclusion is viewed on for-profit boards?”

I would say it has had a material impact. I think going into this we have had this conversation about diversity on boards over the last few years – it is not a new one.  We’ve seen slow progress with an initial focus on gender.  But what we’re seeing now is a shift where there is more comfort or directness in engaging on discussions around racial and ethnic diversity and it’s not just the boardroom.

I think what we’ve seen since May is really a more openness and in fact, more of an expectation coming from the client around running inclusive processes. People feel more comfortable or more empowered to say: “we need to do something about the representation on our board and in our organizations and we need your help and support in doing that.”

So, the client is driving a lot of these discussions asking: “How do we focus on this? What can we do differently?  How do we think about our pipeline for our board? How do we think about board readiness?  These are conversations that maybe before we might’ve been introducing or leading with and now we have a lot of clients who are beating us to the punch and asking that before we even get to it. 

Big Ideas/Thoughts

Building a High-Performing Board

You’re looking for a more colorful tapestry of experiences on a board. You want to understand not just a person’s capacity, but you really understand what is it that this board is trying to solve for and what are the certain skills that will help accomplish those goals.

We’re in a time where, when we say “culture fit” that can sometimes set people off on a path where you’re worried about creating a homogenous environment, so I want to just clarify.  We’re not trying to create a board where “culture” means we all act the same, we all speak the same.  In fact, what we’re looking for is actually different, the underlying kind of rules engagement.  How do we communicate? How do we show up? How do we create a space where you get that right level of critical thinking, creative abrasion, if you will?  You want a space where people can bring themselves fully to the board, in a way that also doesn’t create sharp elbows or knock others out from being able to contribute their voice.

Board searches and board work operate on a different cycle. In the best-case scenarios, you start looking for your directors with enough time and window to bring somebody on board. Not only just to find the right director candidates, but to actually spend enough time with the board itself, to get a feel for how they engage and interact.

Off-boarding board members

Nobody wants to be the bad cop. Nobody wants to off-board, especially in a scenario where they are preexisting relationships, where you’ve gotten to know person over time and then I think that’s fine. A little tongue in cheek, but that’s probably why we have a some of the work that we have. It’s much easier to hire an outsider to come in and help facilitate that process than to be the ones that tell your fellow director and off board someone.

If you think about it, the board is one big team, and you really want to establish a sense of how effectively they are working together as a team.  It used to be that some people would call this board assessment, the spirit of it is “how do we make sure that we’re the most high performing board that we can be.”  Often in those discussions or in those kinds of, engagements, it gives, the board chair a way to look across the team to see where new kind of capabilities could come in and, and where maybe some contributions are not as valuable.

“Why would a company pay six figures to find a board member? You know most boards believe that through their own networks, they can identify and recruit board members.  How do you answer that question? What’s the value proposition?”

We’ve seen an era where bad performance at the company level cannot just take down a company, but an entire industry, it makes you take a step back to think about the roles and responsibilities of boards. That has led to a shift in the nature and seriousness around board composition and responsibility and duties.  What competencies do we want to look for? What skill sets are we looking for? And how can we actually create more diverse and inclusive representation on the board as well?  These are areas that are complex and it’s hard to necessarily just rely on your own network.  Going to a firm like ours or the others, allows you to tackle those efforts with reinforcements.

Diversity Pipeline

“Raza and I have had conversations that for a while people used the lack of pipeline as maybe an excuse for not actually being as aggressive in diversity as they might otherwise be and in the conversations we’ve had in the last couple of months, it feels like that just isn’t going to fly anymore. That’s really, it’s really just not a valid, like no one buys that excuse anymore.”

You can’t say, well, I don’t know where they are.  Or they don’t exist, you know, we do exist. We are here and people’s willingness to rely on some of that old complacency isn’t there really anymore and the across the ecosystem.  Each of us is being challenged around norms that we used to assume or accept. One of those things being the pipeline. What does that mean and how does that shift the work?

It can shift the work in a few different ways. When some says they can’t find somebody I ask  – is it true that you can’t find anybody?  Well, it depends on what the spec is. It depends on what we’re looking for and how we’re defining a director’s experiences in each event.  If you were to say, well, we only want a sitting CEO of a Fortune 50, well, of course that pipeline going to look very different. Do you then rely on that very specific spec and say, well, we tried, but the pipeline is different? Or do you think about what’s underlying that request?  What are the true needs of the board. 

Is it important to have a Fortune 50 CEO? Or are you actually looking for something else in that executive to contribute to the board. If we go there, we can actually move the spec a bit further and give ourselves room actually build a more robust and diverse pipeline.

What are the new models of leadership that you’re exploring, what does that refer to?

If you look at how the world has changed, we’ve seen greater convergence around sectors.  Often if you’re leading a large institution, you’re thinking about your employees, you’re thinking about your consumers, but you’re also thinking about governments and you are thinking about civil society. When you’re looking at new models of leadership, it’s how do you actually engage across those things? How fluid are you as a senior executive moving from the public to the private, how facile are you in terms of engaging with heads of state and not just your consumer base.

Then there’s that other piece that we alluded to earlier, which is this notion of moving beyond thinking about shareholder value and really this concept of stakeholder capitalism. What does that require of a leader? How adaptive are you?  How are you looking at the individual?

Transcript

Joe: [00:00:00]  Hi and welcome to On Boards: a Deep Look at Driving Business Success. 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 board 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.

Raza: [00:00:31] Joe and I speak with a wide range of guests and talk about what makes great boards great or makes a board unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets for your company.

 Joe: [00:00:46] Our guest today is Dede Orraca-Cecil.  Dede is a member of Egon Zehnder, an international executive search and leadership advisory firm, where she leads efforts in almost every aspect of what a company [00:01:00] or organization needs in leadership and governance. That includes executive search and recruitment, board recruitment, board and management appraisals and effectiveness, and diversity in the boardroom and C-suite.

Raza: [00:01:15] Dede has a distinguished background and experience including as a fellow of the Aspen Institute’s First Mover fellowship program, serves as a trusted advisor to CEOs, boards, and senior executives across industry sectors for both public private, and also for nonprofits. Dede works on a wide range of leadership performance and talent projects, including talent acquisition and assessment, leadership and organizational agility.

Joe: [00:01:47] Welcome Dede. It’s great to have you as a guest today on On Boards.

Dede: [00:01:51] Thank you guys for having me. I’m excited.

Joe: [00:01:54] I met you for the first time several years ago, as you may remember, on a [00:02:00] board search for an organization and I’m just curious, how much of your time is on board search along with the other things that you do? How does your time divide these days?

Dede: [00:02:11] I would say personally I spend maybe a quarter to a third of my time on board work which can include both the recruitment piece, but also our advisory. So, it may not just be recruiting a director. We may work on succession. We work on effectiveness. So there are a host of things.  As a firm, I would say, we are quite active in the board room.  I think the number is over 3,600 or 3,700 in board consulting engagements in the last five years.

Joe: [00:02:41] So when you are working on a board recruitment, looking to fill one or more board seats, how big a factor is overall board composition in the process and how do you go about doing that assessment?

Dede: [00:02:55] I would say it board composition is a big part and so when we’re planning for recruitment, a [00:03:00] lot of times you want to both, it’s a balance between coming in with a point of view, but also spending enough time and really, understanding kind of where the board is, where we’re meeting the board today and so often what happens is when we go into a discussion, we’ve done maybe an initial analysis around the current board composition, and we’re looking at a number of factors . So, it’s not just who’s on the board, but we’re looking at a matrix of experiences, of tenure, of capacity in addition to kind of industries and functions that people have played in their executive life. We do like to come and really think about kind of the entirety of the composition before we start that conversation.

Joe: [00:03:41] How many skills, attributes or other factors are included in the board matrix when it’s fully put together?

Dede: [00:03:52] A lot. 

Joe: [00:03:53] Yeah,

Dede: [00:03:54] It’s, it’s actually over time, it’s getting wider. It used to be that perhaps you were [00:04:00] looking at a board and you were really trying to solve for their domain expertise, right. Or you were looking for kind of, years or service on other, on other boards. Or, quite frankly, maybe you were looking for kind of past CEOs or GMs, right

Over time, however that equation or that kind of matrix has become bigger and more enriched.  You’re looking for, I’d say a more colorful tapestry of experiences on a board. You want to understand not just a, person’s going to capacity to take one on, but you really understand well, I don’t understand what, what is it in particular that this board is trying to solve for and what are certain skills? Whether it’s somebody coming, let’s say with a cybersecurity background, or somebody who has operated in highly regulated environments for the bulk of it, or maybe you’re looking at somebody who’s had experiences with companies at various stages, companies that are small going public, or companies going through turnarounds. While we come first with our own set of  kind of [00:05:00] factors or make matrices, that matrix can sometimes get blown out as you have a conversation at the board around really, what are we trying to solve for here with this director.

Joe: [00:05:11] And do you talk to everyone on the board? Just the nom/gov committee? How does that usually play out?

That can often depend on the board, right? Some of that is also an early indication and reflection of the board culture as well.  While traditionally or historically a lot of our direct engagement will be with the nom/gov, you have some boards where you end up actually doing a lot of  stakeholder engagement conversations with the entire board. It’s not uncommon that we’ve had those and really what that does is well, like we, you want to empower the nom gov committee, you also want to ensure that it really is truly/in alignment around what you’re looking for and talking with the directors across the board also gives you, or gives us as the partner, a sense of also what the board [00:06:00] culture is like. What is the atmosphere that a director will be walking into and of how do they work together?  Kind of more is more, can be more sometimes when you’re having those conversations.

And part of understanding board culture, I’m guessing, is to enable you to determine fit for a board member. The fact that someone may have the right skills and expertise or whatever it is you’re looking for, isn’t the whole picture it’s gotta be: does this person fit with the team so to speak?

Dede: [00:06:28] Yeah. We’re in a time where, when we say “culture fit”or “fit”, that can sometimes set people off om a path where you’re worried about, well, if you ever really creating homogenous environment, so there’s some shyness around that phrase. I want to just clarify.  We’re not trying to have it a board where the quote, unquote culture means we all act the same, we all speak the same, you know, all have this, right. In fact, what we’re looking at is actually different. It’s almost, what are the underlying kind of rules engagement? How [00:07:00] do we communicate? How do we show up? How do we create a space where you get that right level of critical thinking, creative abrasion, if you will, you want a space where people can bring themselves fully to the board, in a way that also doesn’t create sharp elbows or kind of knock others out from being able to contribute their voice.

They’re really trying to understand how does this board communicat e?  What’s the style of communication, what works well and what will allow, additional voices to be heard.

Joe: [00:07:25] So that seems to be, probably one of the most challenging aspects of what you do. How do you, how do you get your arms around that?

Dede: [00:07:33] Yeah, you spend a lot of time.  Board searches and board work operates on a different cycle. In the best case scenarios you start looking for your directors with enough time and window to bring somebody on board. That’s not like I’m getting a call today and we need a director tomorrow or, you know, by the next meeting.  You want to give yourself enough time and space. Not only just to find the right director candidates, but to actually spend enough [00:08:00] time with the board myself, to get a feel for how they engage and interact.  It used to be that we would have a lot of time with directors in person, obviously that’s changed. It has changed in COVID, but we have still found ways to actually spend time with directors and the CEO over zooms. There’s the one on one engagement where you get to understand and get to know a director, but also , sometimes we have small group settings and conversations where we can also stand back and see how the directors are interacting with each other and you get a sense for, okay, this group has a lot of playful banter. This group is pretty much, they get right to it.

Joe: [00:08:35] Have boards been reluctant to bring on new members, whom they’ve never met in person, they’ve never actually sat down with them and looked them in the eye, so to speak?

Dede: [00:08:46] I would say the process  if I look at what have we seen?  We haven’t seen a downgrade if you will, of the work. Part of that has to do with maybe just calendar consistency and kind of processes that [00:09:00] are evergreen, regardless of what’s happening in the world around us. The opportunities to bring directors hasn’t shifted and also the ability to still engage through video conference.  Even creative ways of building relations and some of the intimate connection.  Sp whereas you might have had dinners, sometimes you find some clients or invite virtual dinners or can we have virtual coffee. Off cycle time with one another and in some ways, because you’re kind of both stumbling through this awkward and having a coffee or dinner over zoom together, you kind of formed some bonds that you wouldn’t have necessarily formed.

Joe: [00:09:36] Interesting. You can actually bond over the awkwardness is interesting. Yeah, yeah, yeah.

Dede: [00:09:43] in some instances now that they’re socially distance kind of, w

alks and things that can be done. Those are other things that we’ve explored in terms of getting,

Joe: [00:09:51] Yeah, that’s right. I’ve done a couple of walks with people on that actually was a very effective one-on-one technique, but [00:10:00] it is, contrary to zoom. It’s the most time consuming way to do it. Cause you’re really with, at least in my case, one person at a time. Yeah.

So one other thing about boards, you know, one of the biggest challenges even for the best run is offboarding.  And, I know that a lot of times, you know, unless there is a really strong chair or really strong CEO, whatever it might be, bringing a third party in that knows the board is the way boards get at this. And I’m assuming that is something you guys do.  Tell me about how you approach that?

Dede: [00:10:33] Well, one, I just kind of want to I’m nodding, can’t see it because it’s the podcast, but I’m nodding with you profusely because it is a challenge.

Nobody wants to be the bad cop. Nobody wants to off-board especially in a scenario where perhaps they’re pre-existing relationships where you’ve just gotten to know person over time. And then I think that’s fine, a little tongue in cheek, but that’s probably why we have a lot of the work that we have.

It’s much easier to hire an outsider to come in and help [00:11:00] facilitate that than to be the ones that tell your fellow director  or to off board someone. But I guess the question is how do we do it? And what are some of the tools, right.  If there isn’t a it’s predetermined, if this isn’t coming because of a term or what have you, there are different ways.  Sometimes really we’re looking at, in general, we’ve been asked to kind of come in and look at just kind of how the board is functioning.  If you think about it, the board is one big team, and you really want to establish a sense of how effectively are we working together as a team.  Used to be that some people would call this board assessment, or really the spirit of it is how do we make sure that we’re the most high performing board that we can, and often in those discussions or  in those kinds of, engagements, it gives, the board chair a way to kind of look across the team to see where new kind of capabilities could come in and, and where maybe some contributions are not as valuable.

Joe: [00:11:56] Do you use self assessment as one of the tools during this [00:12:00] board effectiveness review?

Dede: [00:12:01] Self assessment is a tool. It is a tool that can be helpful and effective along with kind of one on one interactions as well as discussions with the board chair. All of which are helpful.

Joe: [00:12:17] So one of the, questions that comes up.  In fact, we were on a panel together a few years ago, as you may remember and someone asked with a slightly incredulous tone, but not in any way critical, why a company would pay six figures to find a board member? You know, most boards believe that through their own networks, they can identify and recruit board members. How do you answer that question? What’s the value proposition?

Dede: [00:12:45] Well, first take about the climate today versus years ago. If you think about today, I don’t think it’s a strange thing to say that a lot of boards and organizations are under increased scrutiny. It used to be that you might be on a board [00:13:00] and you were wary of  overreaching. You’re not operating, you’re taking this step back providing some retreats, strategic guidance and then you had your, your dinners and your lunches and that was it. Right.  But what we’ve seen over the last few years is that  there’s room for boards to be more engaged and active.

It used to be that, you know, couldn’t really do any harm, but here, when we’ve seen an era where kind of performance and things at the company level can not just take down a company, but an entire industry, it makes you take a step back to think about the roles and responsibilities of those boards. That level of, I’d say more of a shift, in the nature and seriousness around board composition and responsibility and duties. As I think, encouraged, or kind of sparked, boards to think differently around how do we look for directors?  What competencies do we want to look for? What skill sets are we looking for? And, how can we actually create more diverse and inclusive representation on the board as well? But these are areas that really, it’s hard to necessarily just rely on your own [00:14:00] network.  Going to a firm like ours or the others, allows you to tackle that, those efforts with a few reinforcements.

Joe: [00:14:09] Well, speaking of diversity, there’s been progress albeit slow, for several years and diversifying board membership with respect to gender and people of color. How have recent events, including the death of George Floyd and everything that’s followed, impacted how diversity and inclusion is viewed on for-profit boards?

Dede: [00:14:30] I would say it has had a noticeable or material impact. I think going into this we have, I’ve had, again, that benefit over the last few years, this conversation or notion of diversity on boards is not a new one. It may be one where we’ve seen slow progress with an initial focus on gender but what we’re seeing is a shift in is maybe more comfort or directness and engaging on discussions around, [00:15:00] racial and ethnic diversity and it’s not just the boardroom, if we’re going to be honest.

I think what we’ve seen since may is really a more openness and in fact, kind of more of an expectation coming from the client around running inclusive processes. People feel maybe more comfortable or feel more empowered to say, we need to do something about the representation on our board and in our organizations, and we need your help and support in doing that. So I would say it’s noticeabl y different where the client is driving a lot of these discussions often saying, how do we focus on this? What can we do differently? How do we think about our pipeline for our board? How do we think about board readiness? And these are conversations that maybe before we might’ve been introducing or kind of leading with and now we have a lot of clients who are kind of beating us to the punch and asking that before we even get to it. 

Joe: [00:15:48] Raza and I have had conversations from that have a sense that for a while, people used the lack of pipeline as maybe an excuse for not actually being as aggressive in [00:16:00] diversity as they might otherwise be. And in the conversations we’ve had in the last couple of months, it feels like that just isn’t going to fly anymore. That’s really, it’s really just not a valid, like no one buys that excuse anymore.

Dede: [00:16:14] You can’t say, well, I don’t know where they are. Or they don’t exist, you know, we do exist. We are here and maybe people’s kind of willingness to rely on some of that old complacency isn’t there really anymore and the across the ecosystem , each of us is being challenged certain norms that we used to kind of assume or accept. One of those things being the pipeline.

What does that mean and how does that shift the work? It can shift the work in a few different ways. So when we say, is it true that you can’t find anybody? Well, it depends on what the spec is. It depends on what we’re looking for and how we’re defining a director’s experiences in each event. If you were to say, well, we only want a [00:17:00] sitting CEO of a Fortune 50. Well, of course that pipeline going to look very different. Fact of the matter is while we are getting better, there are so many things that kind of have been created over time through systems that the numbers just aren’t there. Do you then rely on that spec and say, well, we tried, but the pipeline is different. Or do you think about what’s under, what’s underlying that requests, right?

Joe: [00:17:23] Right.

Dede: [00:17:23] Is it important to have a Fortune 50 CEO? Or are you actually  looking for something else in that executive to contribute to the board. If we go there, we can actually move the spec a bit further and give ourselves room to actually build what seems like a more robust and diverse pipeline.

Joe: [00:17:41] Right.

Raza: [00:17:42] Dede, tell us about your work that Egon-Zehnder does for executive searches. What type of searches do you do? What companies, what sectors?

Dede: [00:17:52] Everything.

We’re a big firm. We have nearly 70 offices over 40 countries [00:18:00] and so that gives you a sense of just kind of the global nature of our work.  At least geographic distribution but also we work across every major industry. We are a firm that focuses on every industry. We focus not just on the Fortune 500.  We work with small companies.  We work with PE backed companies, VC backed companies and of course, as I think you might’ve mentioned earlier, we work across sectors. We work with the social sector. We often work with governmental institutions. There is a lot of variety in the work that we offer. Probably the common thread or common theme to the work is that we are looking at leadership.

Raza: [00:18:35] And Dede how has the landscape for CEO searches changed or has it changed over the past year?

 Dede: [00:18:42] The role of the CEO and the responsibilities of the CEO, while many aspects or attributes remain, there are going to new pressures and new considerations. If anything, that’s probably been heightened or highlighted or amplified since we found ourselves in this pandemic. [00:19:00]

What you find is that it’s not enough to have just kind of the right’s CV. It’s not enough to have the right kind of set of experiences. We’re spending a lot more time looking at how you lead.  We’re spending a lot more time looking at the authenticity and leadership. Particularly in those, enterprises where they’re truly consumer driven, a lot of the expectations around  who’s leading the institutions that they work for, is driven by the consumer. Consumer wants to know, what do you stand for? What do you believe in and not just what are you delivering every quarter?

I would say in some regards the nature of the assessment and time spent really with CEO candidates , it’s growing. It’s more and more, a big component, as well as really thinking about what it means to lead in times of kind of stasis and in times of change in times of crisis.

All of that has come to the forefront even more so in the last six months.

[00:20:00] Raza: [00:19:59] Sounds like people need to find wartime CEOs versus the peace time CEOs these days.

Dede: [00:20:06] One way to think of it is that you want leaders who can lead from the front and from behind. It’s that there are going to be times when actually you do need a leader to lead from the front, and there are times where you’re creating the space.

Raza: [00:20:17] In terms of sectors has healthcare, consumer and technology intersection being, playing a little more for you, for the kind of searches that you do or that’s roughly equal to any of the sectors that you’re dealing with?

Dede: [00:20:32] More and more personally, I’ve been trying to actually explore  that intersection.

As we’ve  seen the broader healthcare industry take this shift more towards patient centered approaches, consumer centered approaches and citizen centered approaches. What that’s calling for is different skill sets.  It’s no longer just looking at purely life sciences or purely health technology. Now that we’re seeing this intersection of  consumer and health and technology, we’re [00:21:00] looking for leaders who have been in a digital space, the leaders who have that strong consumer orientation.

Raza: [00:21:05] Like connecting the dots and overlap of various areas brings more to the table than expertise in a single area.

Dede: [00:21:14] Yeah. But if you think of that kind of, that systems way of thinking  where you’re actually bringing to bear  insights from various segments and an ecosystem into a company, those the more agility in the leadership.

Joe: [00:21:25] One of the things you said when we were talking earlier, is that in a lot of ways it’s not a search business anymore, like more of a recruitment business, is that a reflection on the fact that the leaders you’re looking for a more multidimensional and there are just less of them? Or is it something else?

Dede: [00:21:44] Clients and firms have lots of ways of identifying and finding names. Those high performers stand out. Maybe as the demand and specificity around excellence and leadership continues to increase and perhaps, maybe the pool of [00:22:00] those who are at the top of that remains the same or shrinks, it’s now how you get access to you and bring those few on board, right, before a client or a company, a piece around the recruitment process, what is going to be compelling and different about your opportunity, then every other company that is looking for transformation and every other company that is facing the brink of disruption and wants a leader to come in.

I think that piece around not searching for, but trying to also attract  talent into companies  is something that’s not lost. You see that a lot in, in healthcare and environment.  If you look at select chief medical officers and chief scientific officers, where you have very, very, popular candidates and ideas, because they’ve had a track record for excellence. trackers. How are you going to attract them to your company?

Raza: [00:22:47] So it’s the passive candidates that everybody’s after?

Dede: [00:22:50] Yes. Yes.

Joe: [00:22:52] Do you help prepare the search committee so that they’re, in recruitment mode?

Dede: [00:22:58] Well, yes. You still want to balance [00:23:00] recruitment and assessment, because you still want to make sure that you’r hitting the spec directly, but yeah, time for really trying to determine and assess whether or not a person is fit for the role and then there’s a period where you’ve know and crossed over, and yes, we do try to kind of give  coaching here and there , so…

Joe: [00:23:18] you gotta do both.

Dede: [00:23:20] You gotta do both. Sometimes the science sells itself. Sometimes you need more.

Joe: [00:23:25] Yeah, you know, on your bio, it says that you act as a trusted advisor to CEOs, boards and senior executives in exploring new models of leadership. What are the new models of leadership that you’re exploring, what does that refer to?

Dede: [00:23:41] A few different things and some of this is informed by just more of a systems based way of thinking about it.

If you look at how the world has changed,  we’ve seen greater convergence around sectors. Earlier we were talking for example, about consumer health and if you think about where the world is turning, no longer would you [00:24:00] go to your office as a CEO and just sit there.  Often if you’re leading  a large institution, you’re thinking about your employees, you’re thinking about your consumers, but you’re also thinking about governments, and you are thinking about civil society. When you’re looking at new models of leadership, it’s not, how do you actually engage across those things? How fluid are you as a senior executive moving from the public to the private, how facile are you in terms of engaging with heads of state and not just, your consumer base.

Then there’s that other piece that we alluded to earlier, which is this notion of moving beyond thinking about shareholder value and really this concept of stakeholder capitalism. What does that require of a leader? How adaptive are you? Are you looking at the individual? The lines have blurred a bit. They blurred in terms of sector, they’ve blurred in terms of segment, they’ve learned in terms of your home life and your work life. All of that has now become a lot more integrated. We’re looking at that. 

Joe: [00:24:54] Is the notion of stakeholder capitalism really taking hold [00:25:00] in much of the work that you’re doing these days.  Is that pigeonholed in a few places or is it you’re seeing it everywhere?

Dede: [00:25:07] It’s always been part of the conversation. If anything, maybe with the BRT, with the Business Round Table, maybe that just crystallized it and gave people reason and rationale to talk about it in a more acute fashion.  It codified it maybe for the rest of us, but it’s always been I think part of this. Now probably what’s different is that we actually have the mass or institutional support to talk about it in a way with greater commitments.

Joe: [00:25:36] Do you think it’s partly because that notion is potentially impacting the bottom line? So leaders or certainly shareholders see that it is just more than just delivering value to the  owners. It’s, the employees its your supply chain – it’s everything,

Dede: [00:25:56] It’s everything.

 If you think about particularly those companies that [00:26:00] are heavily consumer oriented. We talked about this earlier, where, your consumer doesn’t just want to know, they don’t just want the products, they want to know how the product is made. They want to know the communities that were impacted and making it. And, in fact, some of that can also drive  greater, better consumption when people feel as though, okay, how was this sourced? How much is made and how much of that flows back into the community? What concessions were made in the creation of this product? Those are questions that are now being asked front center. And similarly to your point. Your employee base, people now spend so much time at work, people have choice. They have choice in where they go. They don’t feel stuck. They don’t feel as though they need to stay in any company for 10, 20 years. When you have choice, why do you decide to stay at a company? Is it just because of the product? A lot of times, no.

It’s about what does the company stand for? What do we create? How do we lead? How do we show up in the world? People use that as part of it’s an extension of their identity. All of these actually bring some of [00:27:00] what we maybe didn’t focus on up to the surface more. There was how we attract talent, how we retain talent and similar in what we do with our consumers.

Raza: [00:27:09] Dede, what advice do you have for aspiring board members?  You know, other than being CEO of a wildly successful company, what are the things you look for in potential board member candidates?  And what advice would you give them to be prepared to be a good candidate

Dede: [00:27:25] a good question. I would say probably the things that we look for and what makes for a good board member is probably also makes for really strong team contributor. If you want a board member who has something unique to offer to the group, and that can come from your experiences, from judgment. Think about what your unique contribution is going to be.

Raza: [00:27:46] And do you also recommend folks go through education for becoming board members at various avenues, from NACD to Private Directors Association and be a little more prepared. Does [00:28:00] that help or it’s their experiences that count and that, you know, you can teach them how to be a good board member later?

Dede: [00:28:07] No, no, I think all of those things actually are great resources. Especially if you’re joining a board for the first time, you’re exposure has been in a very different setup. Your exposure to the board may have been just as an executive or maybe your exposure is through a nonprofit avenue.

Actually I would say those resources, whether it’s the courses NACD, or you have board boot camps, even things that the firms offer helpful, because what it does is it puts you into the right mindset of the director. Not the executive or the operator. Appreciating the difference in your responsibilities, the different in the nature of what you will or will not sign on. The relationship with the CEO, all of that’s different from the board. And so I think all of those reinforce them.

Raza: [00:28:50] Well said.

Dede, you are part of the First Movers Fellowship program at the Aspen Institute. Tell us a little about that program.

[00:29:00] Dede: [00:28:59] The Aspen Institute has been around for quite some time and has a number of fellows. The First Movers Fellowship actually is a fellowship that was created over a decade ago, as part of the Aspen Institute’s business and society group and really with the focus on, in the for profit sector, identifying leaders who are intrapreneurs in their companies, the underlying principle being, how can you drive change within your company, through your day job that will, both drive commercial value but also societal impact. The fellowship was created in support of that notion that we can actually drive that from within and how can you as a fellow be a first mover in your company

Raza: [00:29:42] And how has your experience been?

Dede: [00:29:45] I found the community and the fellowships would be fantastic. They just announced a new class, really you’re in a fellowship with executives in companies like Levi’s or IDEO or Facebook and Google, or what have you. Then what [00:30:00] everybody brings to it is this kind of desire to actually drive change and impact. You have a room full of change agents who are finding ways to drive that change through institutions that have big platforms, it’s energizing and decades upon decades all of this work will actually drive greater societal benefit through the work that everybody’s doing.

Raza: [00:30:20] Wonderful.

Joe: [00:30:21] I love that word intrapreneur-  tell us what it means?

Dede: [00:30:25] Intrapreneurs: how do you actually work within the existing infrastructure of a company or organization to make something new and different happen and innovative.

You can’t do that just sitting in front of your desk or sitting in front of your computer. The intrapreneur =is thinking about ways to collaborate across their organization, working outside of their groups or functions to pull people in. An intrapreneurs is trying to find a new way of working or maybe a new thing to deliver and what that person has to do is actually bring together I’d say I used that word before tapestry, but bring together that right [00:31:00] mix of individuals, within the company to help drive that. The hard part, if you’re in it, when you’re an entrepreneur, you, right. I mean, granted, you’re looking for funding and there are different ways, but it’s kind of you and you have that freedom to be the founder of what you want to found.

Right. When you’re an intrapreneur, you’re trying to drive that innovation, but you’re doing so within pre-existing structures. Right. So how do you actually work and bump up against the structures to drive a new way of working

Joe: [00:31:28] Great concept? Really love it.

So when, Raza introduced you, he described your background distinguished and, I think that is more than just accurate, but one of my favorite stories about you is from a long time ago, I think in high school and it was in connection with being dropped off at a lacrosse summer camp that turned out to be an all boys camp and my memory is that you stuck it out which just completely [00:32:00] blows my mind as the, as the father of a daughter, that you were had the guts to do that. Can you tell us about that?

Dede: [00:32:06] Sure. Maybe I should couch this in that I’m not originall from the United States. I’m from Ghana. Lacrosse is not a big sport or at least it was then, so I say that because I don’t think my family is certainly my parents didn’t really know that much about it. but I was playing it and I wanted to go to a camp to get better. I wanted to make the varsity team. I was using my summer to get even better. And, my mom signed me up for a camp and   maybe my name is kind of gender neutral. I don’t know. Or it’s different enough that people didn’t know and so when I got there, I was dropped off and one by one, I realized everybody else who was getting dropped off, it was a boy and I’m sitting there with all of my stuff and each person getting dropped off and it didn’t, it just, something’s not right here.

And eventually we realized, with the heads of the camp, what had happened, but here I was with all my equipment ready to go [00:33:00] and to their credit rather than say, okay, this isn’t going to work.  Actually said, you have this choice, right. You can stay and stay with us and we’ll train you and we’ll coach you, but you’re going to do it our way –  and I did and the thing that the fact of the matter is, I actually probably, I left that place a better goalie. I did make the varsity team and it was just kind of getting past the initial kind of awkwardness when you were a teenager and then focusing on the task at hand.

Joe: [00:33:28] You know, I love it both because it reflects your attitude, but also the attitude of the people at the camp. Instead of panicking or throwing their arms up, looked at it as you did as an opportunity, and that I’m sure clearly it was a great experience for you, but actually it probably turned out to be a pretty good experience for them as well.

Dede: [00:33:49] I’m sure they – it’s definitely memorable.  Its funny, I never even thought about it, but in a day and age now, when we talk a lot about inclusion and belonging here’s kind of an extreme version of, you [00:34:00] know, you’ve come right. And you’re going to join us. Right.  We won’t bend and break and what have you, we’ll make this work.

Joe: [00:34:07] Yeah, no, it’s you’re right. It was a precursor to what everyone is thinking about now, but it happened by mistake and everyone adapted to it. It’s just, it’s great.

Dede, It’s been great speaking with you. Thanks for joining us today. I hope you and your family will continue to be well and stay safe.  

Dede: [00:34:23] Thank you for having me.

 Joe: [00:34:24] And thank you all for listening today to onboards with our special guest Dede Orraca-Cecil. Please stay safe and take care of yourselves, your families and your communities as best you can  .

Raza you take care too. I hope you and your family continue to be well.

Raza: [00:34:43] Yes, you we’re all staying safe. Thank you. And I hope you and your family are as well.

Joe: [00:34:49] Thanks.

14. Diane Hessan on what makes an effective board member and an effective board

Diane Hessan is successful entrepreneur, CEO, author and has been highly recognized for the broad range of impactful work she has done.  And she has served on virtually every type of company board and seen the work of the board from many perspectives.  In the fascinating conversation, she shares her insight and opinion on the experience of running and serving on a board.

Thanks for listening!

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

Links

https://salientventures.co/

www.cspace.com

https://muckrack.com/diane-hessan

Quotes

First Board Experience

My first board experience was very hands on.  It was a real passion project because we all were completely dedicated to the mission.  I started by spending way too much time on operating issues and eventually sat back and became more strategic.

I thought it would be great for my family and my job and my learning, to broaden my horizons and to learn how to do some other things. I had a conversation with a friend of mine who was on a whole bunch of boards, and I just said to him, I feel like I want to do something bigger. I feel like I want to give back and not focus on myself so much and yeah, he said, what are you passionate about? I said, I’m passionate about kids. I’m passionate about antiviolence, I’m passionate about homelessness.

He was just like “Diane. I have a great organization for you and they really need marketing help” because that was why people wanted me on their boards at the time. It really was a great fit and I basically got it by talking to somebody who had already been there.

There were times when I would say something and I learned to say, “is this a board issue or is this not a board issue?” I mean, I was just very explicit about it. 

Changes in the Boardroom because of Covid

Every organization that I’m on the board of no matter whether they’re for profit, nonprofit, et cetera, have had talks about the impact of COVID on how their employees are working, how they’re building culture, how they’re recruiting, retaining, onboarding, what the impact is on people working from home, when they should open up again, whether they should give their employees free stuff to be able to be more effective at home, how they handle the huge challenges of employees who are parents and how to make everyone feel fairly treated there.

(Companies are) Looking for shifts in customer behavior and customer requirements is also a really interesting topic.  Most of these companies have new go to market strategies, new strategic partnerships, interesting new acquisitions, and I think in general, new ways of actually reaching out into the marketplace and building strategy around that.

And for me it’s meant much more time on my boards of just doing my homework and reaching out and try to see what other companies are doing and just generally getting educated so that I can be as helpful as possible. 

What makes an effective board meeting?

I think the great board meetings are when the CEO says, “here’s your deck or here’s three pages about what’s happening in the business. I have three issues that are keeping me awake at night, and I really want your help on them. Here they are. A, B and C.  Please come prepared to help.”  Spending a board meeting with four hours of PowerPoint is the worst most boring thing in the world.  And it really doesn’t help.

Big Ideas/Thoughts

Learned about being a Board member from being a CEO

Number one, when your business is going well, you want your board to just ask questions and beat you up and challenge all of your assumptions.  You’re energized.  You’re doing well.  You want a board that gives you watch outs and says, well, what about this? And could we grow this faster?

When a business is not going well, you don’t really, as a CEO, want to get beat up. So, when things weren’t good, I really appreciated board members that were supportive, that helped me look on the bright side that shared with me information about how other companies were also struggling.  So, when things are good, you want to tough board when things are bad, you want a board that walks in your shoes and also knows how to be supportive.

I learned how sometimes asking questions is more valuable than giving advice to the CEO.

One of the things that I learned from being a CEO, but also from being a board member.  Guess what: the board meeting is not just about the CEO making the board happy. The board meeting is also about making the board members feel that they’re contributing.

One of the things that I’ve done in one of my boards…. We’re going to talk about this for the next hour and a half.  I’m going to leave the last half hour of this conversation to just go around. I’m going to give each one of you a chance to just do two to three minutes more of final thoughts on this issue….Sometimes you’re in a big room, you got a lot of people talking. You feel like you can’t get a word in edgewise. I know I feel that sometimes and if you’re an introvert, and some of my best board members have been introverts, they just give up, they just don’t want to interrupt and jump in and say, I have something.

So if people know that they’ll have their say at the end, because you’re going to go around the room and give everyone a chance to talk, you sometimes get extraordinary advice from people who otherwise just would have given up on participating… and after a while you get really good at packing your 120 seconds with everything you wanted to know. 

We all as board members want to feel that we’re adding value and we can’t do that unless the board process works really, really well

On the broad range of company boards

I wanted to broaden the industries in which I work and it is particularly fun as a board member to just dive into an industry where you’ve never really looked at financials before.  You’ve never really thought about how they make any money.  And you have to learn an entirely new language. It’s just a great stretch experience

Term Limits

I don’t love term limits, but I love bringing fresh faces onto a board.  In some industries that’s more valuable than others. If you’re in an industry, banking is an example, sometimes business knowledge, knowledge of the industry and knowledge of the company and its functions has an outsized impact on your ability to be successful on the board. And year after year, the more you learn, the more valuable you become.  You get to the point where you have somebody that’s been on the board for 10 or 15 years and they are outrageously valuable. They have the history, they still are full of impact, et cetera, and it’s hard to say goodbye to those people.  But every time you bring on a new, extraordinary board member it changes the conversation. It opens up the possibilities. It brings in all kinds of perspectives that you thought you never had before, and I think that’s really valuable. Especially now that the world’s changing so fast. As the world changes, the skills that we need and the perspectives that we need are also changing. 

Boston as a collaborative investment community

Boston is an extremely collaborative community, so that whereas other ecosystems like San Francisco or New York have a reputation for being competitive – you know:  My fundraising is bigger than yours. My product is better than yours. My app is cooler than yours. My black turtleneck is blacker than yours, – in Boston I really believe that the biggest question that you get asked when you’re trying to build a company is “what I can I do to help you?”

Transcript

Joe: [00:00:00] [00:00:00]Hello and welcome to On Boards: a Deep Look at Driving 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 board 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.

Raza: [00:00:33] Joe and I speak with a wide range of guests and talk about what makes great boards great, or make a board unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets of your company.

Joe: [00:00:50] Our guest today is Diane Hessan. She is a successful entrepreneur, CEO, researcher, and author.  She is the founder and [00:01:00] chairperson of C Space, formerly Community Space, which was the first company to leverage social media to help companies get insight and inspiration from their customers , where she was CEO for 14 years and as Chairperson remains an advisor to the company and its clients.  Diane serves on a number of boards over a range of industries, including private company, public company, and nonprofit boards.  She has co-authored the book Consumer Centered Growth- Five Strategies for Building Competitive Advantage, a business week bestseller that is published in 11 languages, and she has keynoted over 50 events in the past five years, focusing on leadership, entrepreneurship, women’s issues and customer centricity.

Raza: [00:01:55] In addition, over the last four years, Diane has been engaged in an [00:02:00] longitudinal study of the American voter. She has personally interviewed nearly a thousand voters from all States ages and ends of political spectrum and has been online with them weekly and she looks for trends, shifts, and common ground.  She has written over 50 op-eds about her findings for the Boston Globe and has shared her perspective on many national and local television shows.

Joe: [00:02:29] Welcome Diane. It’s great to have you as a guest on On Boards.

Diane: [00:02:34] It’s great to be here. Thank you for having me.

 Raza: [00:02:37] Diane. Your board work is extensive. What are some of the boards on which you’re currently serving?

 Diane: [00:02:44] Right now I’m on eight boards. Four of them are nonprofit boards and the other four are for-profit boards. Of those for-profit boards, one of them is a public company, one of them is [00:03:00] about to become a public company.  One of them used to be a public company and we took it private and the other was a private firm acquired by a private equity firm. So we’ve got the whole range there, all kinds of drama.

Joe: [00:03:12] Wow, that does cover a lot of ground.

Raza: [00:03:14] Your for-profit board work reflects a wide variety then in terms of industries, sectors, as we know, and company size, how did that come about?

Diane: [00:03:24] The first for-profit board I was ever on other than my own, was way back.  I was brought onto the board of Crabtree and Evelyn, which most women anyway who are listening to this know is a chain of stores that sell soaps and lotions and creams and all of those good things that we all buy because we think we’re going to have time to use them and it was an extraordinary experience.  The CEO of the company, was a business school classmate of mine and I went on and in that process [00:04:00] really learned a lot about how to be a good board member.  I started by spending way too much time on operating issues and eventually sat back and became more strategic, et cetera. It was really a lot of fun to do that. 

My second board was a similar situation – a former colleague of mine who had built Panera.  And I moved from working on beauty products to working on sandwiches, soups, salads, and all kinds of wonderful, good-for-you stuff and I was on the board of Panera for five years while we were a public company. We took that private.

Those were kind of in my wheelhouse, because as someone who has spent a lot of time thinking about working with consumers, those were two really consumer-oriented businesses. Then as things expanded, I wanted to broaden the industries in which I work and were as particularly fun as a board member to just dive into an industry where you’ve [00:05:00] never really looked at financials before.  You’ve never really thought about how they make any money.  And you have to learn an entire new, an entirely new language. It’s just a great stretch experience.  So that’s when I added a bank, Eastern Bank and a tech company, Brightcove, et cetera.

Joe: [00:05:15] On the first board did someone take you under their wing? Was the CEO helpful? Were other board members helpful? , Were there people that really helped you kind of learn  what you needed to know in order to really be an effective board member?

 Diane: [00:05:29] There were times when I would say something and I learned to say, is this a board issue or is this not a board issue? I mean, I was just very explicit about it.  As a woman, you can’t hang out in the women’s room most of the time with all the other girls and say, well, “how do you think it’s going” very often? You’re there by yourself. So, you have to figure out other “ways to just learn how to make things happen.

I will say that the number one learning experience I had for how to create a great board was when I was a CEO, because then I [00:06:00] had my own board and I had some absolutely extraordinary board members who made a major contribution to the success of the company and through the experience of seeing what worked and what didn’t work with my own board, how to leverage them, what kinds of comments were helpful and what wasn’t helpful. It’s just much easier to be on the other side of the desk later on.

Joe: [00:06:24] How long after your initial board experiences, did you become CEO and have your own board? How much time was between those events?

Diane: [00:06:34] Yeah, the only boards I was on before I became a CEO was I was on that Crabtree and Evalyn board and then I was on one nonprofit board Horizons for Homeless Children, which is a well-known local nonprofit in Boston and all of the others were either while I was a CEO or afterwards.

Joe: [00:06:54] So let me ask you about that very first board experience, Horizon for Homeless Children. [00:07:00] It’s always interesting to me what someone’s very first board experience was like, talk a little bit about what that was like your very first board?

Diane: [00:07:09] Horizons was very interesting because we were a startup.  While I was on that board, we changed our name. We changed our product market fit.  We added some new business lines, et cetera.  We were an organization that was pretty much devoted to building, play spaces within homeless shelter, to actually, help so that, if a mom cause a lot of these people with homeless children are single moms, when they were out looking for housing or trying to get them a job or something like that, we had a playspace, staffed with volunteers so that we could play with the kids and hang out with them while the moms were doing the important stuff and figuring out how to make their lives move forward. We ended up building childcare centers and we ended up changing our name from the Horizons Initiative to Horizons for Homeless Children and we changed our go to market strategy [00:08:00] because the ways that we were raising money and the people who we were reaching out to actually changed.

So my first board experience was very hands on. It was a real passion project because we all were completely dedicated to this.  It was in a business where it was pretty easy to see the impact that we were having, but it was a board filled with a lot of, at the time, pretty young, pretty successful professionals who were excited about literally creating a brand new organization that was going to make a major dent in the universe.

It was a fun experience for me because very few of us had been on a lot of boards before, and we all grew up with each other. I was on that board for 25 years.

Joe: [00:08:47] Wow.

Diane: [00:08:47] And, you know, we all got to the point where we felt so proud of what we had built, but on that board, it was way more hands on way more time consuming and just way, way more [00:09:00] involving because of the fact that it was a brand new organization.  As we got bigger, we had staff and the staff started doing a lot of the work.

Joe: [00:09:07] That is typical of smaller nonprofits but I got to say what a great mission and first board experience .

Diane: [00:09:15] It really was, Joe.  It’s funny.  I always felt that I don’t want to, I have to figure out how to say this the right way, but I always wanted to have a big life.  I didn’t want to just like have a job and have my family and, you know, do that.  Not, it’s not that my job and it’s not that my family is not the most important thing to me. It’s not that I wasn’t really, really engaged with my job, but I felt that those two things had me very, very focused on a very narrow slice of the world and I thought it would be great for my family and my job and my learning, to broaden my horizons and to learn how to do some other things.

I had a conversation with a friend of mine who was on a whole bunch of boards, and I just said to him, I feel like I [00:10:00] want to do something bigger. I feel like I want to give back and not focus on myself so much and yeah, he said, what are you passionate about? I said, I’m passionate about kids. I’m passionate about antiviolence, I’m passionate about homelessness.

He was just like “Diane. I have a great organization for you and they really need marketing help” because you know, that was why people wanted me on their boards at the time. So I, it really was a great fit and I basically got it by talking to somebody who had already been there.

Yeah. Sounds perfect.

Raza: [00:10:30] Diane, coming back to present day, we are in the middle of the global pandemic.  Have any of your board meetings been in person and how was that?

Diane: [00:10:43] Of all of my boards, over the six months, I have had one in-person board meeting –  and it was weird.  It was Eastern bank, which is a very successful bank that has a reputation [00:11:00] for, doing a lot of work when it comes to social justice, diversity inclusion, et cetera. And then the middle of everything going on with George Floyd and really kind of opening everyone’s eyes to what’s happening with systemic racism, we decided as a board that we needed to get together and get educated about it and that it wasn’t a Zoom meeting.  We all got together in a very large room, all 12 of us, you know, with our masks sitting far apart, which is what felt weird because we know each other so well, and we’re used to kind of coming together and hunkering down.

Joe: [00:11:35] Sure.

Diane: [00:11:36] but we did that because we thought that being in more intimate environment and actually literally being able to see the whites of oureyes with something important to do. We fortunately were far enough apart from each other, that we felt comfortable kind of taking our masks off so that we could see our faces, but it did remind me that the benefit of being on zoom in these times, as opposed to being in a room [00:12:00] together is you don’t have to wear a mask on zoom.  You can actually see each other, but otherwise it’s been pretty far apart and they’ve been fine.

Joe: [00:12:08] Was the board meeting, was it effective? Did it help to be in the room together?

Diane: [00:12:13] It did help to be in the room together for that kind of conversation.  In general, I think there are pluses and minuses to everything I’ve found that for most of my boards, doing everything remotely has actually been fine.  For some people, I mean, look, you don’t have to get on an airplane and fly to your meeting. You can take longer for the meeting because people aren’t rushing out to go home.  What I miss the most, like on my Brightcove board, where we’re just really having a great time right now and of course, Brightcove is a video cloud platform so our business has been very exciting and growing. What we really miss are our board dinners.

We miss sitting around [00:13:00] with Jeff Ray, the CEO and drinking wine and talking about not just on the business, but what’s going on in our lives. And so I think with you and fine remotely. What we miss is the bonding that can lead to so many other thing is when you build a machine as a board and, you know, we miss those dinners.

Joe: [00:13:23] Yeah, I couldn’t agree more. I think the socialization of the board, I really miss that and it isn’t, it’s not essential, but I think it becomes really important over time for a board to come together.  It’s like any kind of team, the more you know each other and have a chance to understand each other, I just think it makes a stronger team and I really missed that.  I think that is a critical component

Raza: [00:13:49] I noticed is that existing relationships have carried into virtual and video format, I would say reasonably well with all the [00:14:00] limitations, but newer relationships are much harder if you had never met a both in hiring and investing and maybe if you imagine adding a board member these days, it would at least be different than what the prior experience had been.

Diane: [00:14:20] Absolutely Raza.  In fact, on Brightcove, I’m head of nom-gov, we just added it two new board members and we brought them on and, you know, they came to our first remote meeting the other day and I realized that I spent so much time with these people and I don’t know if they’re tall or short. 

Joe: [00:14:37] Yeah, right !

Diane: [00:14:38] The idea that I spent so much time recruiting new board members, and we’ve all interviewed these people and  now we’re training them and we’re helping them understand how the board works and we’ve never even shaken hands is just, as you say, it’s just very strange

Joe: [00:14:53] Well, at least you know for a fact there’s no height discrimination.

[00:15:00] Diane: [00:15:03] Exactly! One of them, her name is Tsedal Neely, and she’s a Harvard Business School professor and I literally had said to her at some point we just need to, I live in Boston also. So we thought, well, you know, if we each walk two and a half, three miles, We can kind of meet halfway along the Charles River and at least wave to each other.

Joe: [00:15:21] Have you done that yet?

Diane: [00:15:22] We have not done that yet. You just reminded me.

Joe: [00:15:25] What are some of the differences in the type of conversations you’ve been having in the board room?

 Diane: [00:15:30] Every organization that I’m on the board of no matter whether they’re for profit, nonprofit, et cetera, had talks about the impact of COVID on how their employees are working, how they’re building culture, how they’re recruiting, retaining, onboarding , they’re letting people go et cetera, what the impact is of people working from home when they should open up again, whether they should give their employees free stuff, to be able to be more effective [00:16:00] at home, how they handle the huge challenges of employees who are parents and how to make everyone feel fairly treated there.

I mean, there’s just a whole set of conversations there around culture and human resources issues. There are a lot of conversations about what’s happening with the customer, which is of course my favorite thing to talk about, but customers and their needs and priorities and what they want to talk about and what they hear want to hear from brands has completely changed.

Looking for shifts in customer behavior and customer requirements is a really interesting topic.  Most of these companies  have new go to market strategies, new strategic partnerships, new interesting acquisitions and I think in general, new ways of actually reaching out into the marketplace and building [00:17:00] strategy around that. So, you know, you could just go on and on. And, of course, for companies that are challenged, we’re looking at how do we reengineer things? How do we cut some costs or how do we reallocate costs? It’s a huge change all at once and that makes it really really interesting in the boardroom. And for me it’s meant much much more time on my boards of just doing my homework and reaching out and try to see what other companies are doing and just generally getting educated so that I can be as helpful as possible.

Joe: [00:17:31] Yeah. You know, not surprising and actually something we’ve heard a lot, more time because whether your company is doing well or not so well, it’s still, it’s different. And that difference requires more time and attention from the board.

So let’s go back to something you said before, which is how valuable it was to you to be a CEO and have your own board.  When you, then, you know, we’re sitting on a board, it had given you a really different perspective. Tell us a little bit [00:18:00] about what you learned, how did it help make you a better board member?

Diane: [00:18:03] Yeah. well, I guess there were a few things. Number one, when your business is going well, you want your board to just ask questions and beat you up and challenge all of your assumptions.  You’re energized.  You’re doing well.  You want a board that gives you watch outs and says, well, what about this? And could we grow this faster? And here’s how it, you know, you want advice on focus, et cetera.

When a business is not going well, you don’t really, as a CEO, want to get beat up.  At Communispace, we had three years of hell followed by 10 years of exponential growth. During that three years, there was nothing my board was going to tell me in terms of bad news that I not only didn’t already know, but I had just lost hours and hours of sleep over.  So when things weren’t good, I really [00:19:00] appreciated board members that were supportive, that helped me look on the bright side that shared with me information about how other companies were also struggling.

You know, that, helped me get new customers that thought about helping me, you know, fill in places in my leadership team where I really needed help, et cetera. So when things are good, you want to tough board when things are bad, you want a board that walks in your shoes and also knows how to be supportive.

I learned a lot about how sometimes asking questions is more valuable than giving advice, right question at the right time has you leaving with a whole new set of issues, I learned that PowerPoints are like spending a board meeting with four hours of PowerPoint is the worst most boring thing in the world.

And it really doesn’t help, you know, I don’t know, raising your hands. Yeah. I mean, I will tell you that I, [00:20:00] you know, I do. I think I speak for most board members. I do my homework. I get the board deck. I have a board meeting tomorrow at two o’clock. I will have read and digested that deck in full by 1:55 PM.

I do not need anyone in that organization to come in and read me that deck, review the deck, let me know what I ought to look at in the deck because I’m there. 

So I think the great board meetings are when the CEO, and I did learn to do this, when the CEO says, here’s your deck or here’s three pages about what’s happening in the business. I have three issues that are keeping me awake at night, and I really really want your help on them. Here they are. A, B and C.  Please come prepared to help. You know, when, when we’re here, I will lay out a little bit more about what’s going on with those three issues and then let’s really talk and I want you to be as candid as possible.

[00:21:00] Those were the meetings that were helpful to me. So as a board member, whenever I’m sitting in PowerPoint hell, I do after the meeting, pull the CEO aside and say, I have an idea for how you might be able to get more out of this meeting.

Joe: [00:21:13] Oh my God.  I could not agree with you more. When I give boards advice or when I’m working with a CEO, the number one thing is: don’t make it all presentation, and assume that board members have done their homework and then focus on the things that matter exactly what you just said.  I can’t think of anything more boring than sitting in a meeting, looking at a PowerPoint that you’ve already spent the time looking at and thinking about when you could be, hopefully, adding something to, you know, what the conversation should be.

Diane: [00:21:48] Yeah.. You know, this seems so obvious, but it’s not like people will say our board meetings are really interactive. I, we, after every parentheses, big, long, boring PowerPoint [00:22:00] presentation, we have 15 minutes of Q and A, but I’m not talking about Q and A  I’m talking about our real in depth conversation where, you know, everybody is digging deeply into an issue. One of the things that I’ve done in one of my boards, in fact, I’ve actually done this with, board committees also is if you have a large group, the other thing that’s worth doing when you have a lot of people in the room is to just signal something and say, look, we’re going to talk about this, right?

I’m going to make this up. We’re going to talk about this for the next hour and a half. However, we’ve got a dozen of us in this room. I’m going to leave the last half hour of this conversation to just do around. We’re going to go around the room. I’m going to give each one of you a chance to just do two to three minutes more of just final thoughts on this issue

Joe: [00:22:54] I love that.

Diane: [00:22:55] And one of the reasons it’s great. If you know, sometimes you’re in a big room, you got a lot of people talking. You [00:23:00] feel like you can’t get a word in edgewise. I know I feel that sometimes and if you’re an introvert and some of my best board members have been introverts. They just give up, like they just don’t want to interrupt and jump in and say, I have something. So if people know that they’ll have their say at the end, because you’re going to go around the room and give everyone a chance to talk, you sometimes get extraordinary advice from people who otherwise just would have given up on participant.

Raza: [00:23:27] I think that’s a great technique.

Joe: [00:23:29] I love that technique. I think that is absolutely brilliant, I really do.

Diane: [00:23:33] It’s so great.  And you know, I love being a board member in a meeting like that because I’m not like I’m not taking up the air time. I’m kind of taking notes. I’m listening to what everybody else is saying and after a while you get really good at packing your 120 seconds with everything you wanted to know. So you get, you get two minutes and I say, okay, I have two minutes. Okay. Have three things to say A, B, [00:24:00] and C, and you just go for it. So it makes the board members sharper and more articulate over time. Also, if you build it as a habit.

Joe: [00:24:06] Well, I,  think  I understand yet another reason why you’re on eight boards,

Diane: [00:24:12] Right, I’ve done everything wrong.

Joe: [00:24:14] Right. But your experiences. You’ve learned from your experience and where you’ve come out is a place where you add so much value because of the perspective you’re bringing. I think it’s terrific.

Diane: [00:24:28] Here’s one of the things that I learned from being a CEO, but also from being a board member.  Guess what: the board meeting is not just about the CEO making the board happy. The board meeting is also about making the board members feel that they’re contributing.

I mean, I don’t know anybody who’s on a board that doesn’t say to themselves. I wonder if I’m adding value. I wonder if I’m adding enough value. I’m I wonder if I’m making a difference. [00:25:00] We all want to do that, and we can’t do that with PowerPoints and a bunch of Q and A, and in situations I’ve experienced that I find myself, like this afternoon, right after this podcast, I’m getting on the phone with the CEO of one of my boards, cause I have some additional thoughts and I just couldn’t get a word in edge wise. The last time it’s a board meeting and we’re going to have a seperate conversation about it. Cause I’ve got strong feelings about a particular issue and I just, you know, didn’t have the time in the meeting.

So we all, as board members want to feel that we’re adding value and we can’t do that unless the board process works really, really well.

Joe: [00:25:42] Absolutely right.  But that does kind of lead me to a different thing that we’ve talked about before and that is, onboarding and maybe more importantly off-boarding. So what you said is true for every good board member, you’re thinking about, am I adding enough value? [00:26:00] Have I been on the board too long? Is my voice no longer heard, whatever that may be? That’s what board members, good board members should be thinking, you know, am I really adding value here, but not, everyone’s a good board member.

So I’m curious about your experience, either as a board member or when you were a CEO, about how you have approached, or how you’ve seen others approach, off-boarding those members who either are no longer valuable, maybe they never really were, but should not be on the board anymore because, Raza and I have had this conversation a number of times, it seems to be one of the most challenging things, even for the best CEOs and the best board chairs and the best nom gov chairs. It’s an area that isn’t always handled as well as maybe it should be.

Diane: [00:26:47] Yeah. Well look, there are formal and informal ways to do it.  I mean the formal ways to do it are just to have term limits and say, everybody gets to be on for five years or 10 years, [00:27:00] or everybody’s got to get off when they’re age 72 or, you know, so term limits and age limits and there are ways to do that.

The problem with those to me is for the great board members, they get to age 72 and you say, Oh my gosh, up the age limit to 75, because there’s no way I want to lose Raza. Absolutely. Or you say, we need to change the term limit. You know, let’s do two terms of five years each because this person’s amazing.

I’m not sure that the formal ones really do the trick. When you have a board member that’s not working, it’s either the responsibility of the CEO or the chairman of the board slash lead director or the head of nom gov to at some point , on an annual basis, take a look at the board and how it’s working, get feedback from the board on whether they, I mean, you can pretty much tell quickly if you’re doing annual assessment, how things are working and whether everyone’s contributing.

I just did that with one of my boards where as head of [00:28:00] nom got, I went out and I interviewed each person on the board for 45 minutes just saying, how’s it going? Well, how are the meetings. What do you think? Do you feel like you’re making a difference? If you had to pick one thing to do differently, And I had a whole questionnaire put together that I’d be happy to share with you.

Sometimes issues arise, where there’s just someone who is not carrying their weight or who’s being super domineering or obstructing, or who’s just not adding a lot of value. And I think the sooner that you flag that for the person the better and the way to flag it is just the way I did it when I was a CEO. I mean, you sit down with a person and you say, Joe, how’s it going? Because you seem really unhappy. Or I’m just wondering, you know, you don’t seem as engaged as you used to be what’s going on.  So you’ve just got to call it and you’ve got to [00:29:00] tell the person ASAP that it’s not working, not when you’re ready for them to leave.

Just, you know what I mean? When you fire an employee, the easiest way to fire an employee is to say, Raza. I know this is not going to surprise you but we’re done.

Joe: [00:29:14] Yup.

Diane: [00:29:14] And you can’t say that first part of the sentence, unless you’ve had conversations with that individual before.  If they don’t shift, you say, Joe, this is not going to surprise you but we need to think about you’re moving on within the next year. And it’s not always easy.

Joe: [00:29:30] Yeah, I know. I totally agree.  So what happens with board members who, don’t hear the message?

 Diane: [00:29:36] I will tell you that, I’ve had, that actually happen twice and, it just, it takes a really, really long time to figure it out.  But the problem is not that they don’t hear the message. The problem is there are people who hear the message and quote, refuse to leave. And, you know, if [00:30:00] someone is experienced enough and, and seasoned enough and respected enough that you brought them onto the board in the first place, you don’t want to ruin your reputation with that person. You don’t want to be disrespectful to them, but it’s a conversation of: we’ve been talking about it and based on the following three things, we think at some point within the next six months, we ought to replace you with somebody who has this kind of expertise and you try not to make it personal.

You say, you know, we need to have, we need to bring somebody onto the board. There there’s universal feeling that we don’t want to add to the size of the board. We want to bring somebody on with this level of expertise and we have overlap here and, you know, or whatever the situation is. But sometimes you go back to the person and say, look, with one of these people, the problem was that they were dominating the conversation, ordering management around, interfering in things that they had no business interfering.

And we talked to the person, he didn’t change. So we finally basically [00:31:00] said we’re done. And he resisted for a really long time. It’s about saving face. You just don’t want to participate if you feel like you’re not making a difference and he left, but the board had PTSD as a result of it. I mean, the next time we brought somebody on every person had to interview that person and we did a very, very extensive background check, et cetera.

Joe: [00:31:21] Well, that makes sense. Do you like the idea of term limits as a general rule? 

Diane: [00:31:27] I don’t love term limits, but I love bringing fresh faces onto a board.  In some industries that’s more valuable than others. If you’re in an industry in which, and, and for me, I think banking is an example. you know, sometimes business knowledge, knowledge of the industry and knowledge of the company and its functions it has an outsized impact on your ability to be successful on the board. And year after year, the [00:32:00] more you learn, the more valuable you become.  So you get to the point where you have somebody that’s been on the board for 10 or 15 years and they are outrageously valuable. They have the history, they still are full of impact, et cetera, but it, you know, and it’s hard to say goodbye to those people, but I think, you know, every time you bring on a new, extraordinary board member it changes the conversation. It opens up the possibilities. It brings in all kinds of perspectives that you thought you never had before and I think that’s really, really valuable.

Joe: [00:32:35] Yeah, it makes sense. I agree.

Diane: [00:32:37] Especially now the world’s changing so fast, right?  I mean, I grew up in marketing. I’ve been in marketing, you know, I’ve basically been marketing companies since 1976.  I will tell you there’s almost nothing that I did to become successful in marketing that’s absolutely critical today.  I mean, understanding your customers still critical, understanding how to [00:33:00] build a brand still critical, but lead gen and demand gen and managing the funnel and content market and search engine optimization all of the things that are really, really critical for a lot of companies, especially in tech now, yeah, I didn’t know any of that. So I just think the world’s changing, therefore the skills that we need and the perspectives that we need are also changing. 

Raza: [00:33:22] I want to switch the conversation a little bit. You’ve been part of the Boston and New England ecosystem for a pretty long time. How do you see business innovation, venture money raised, the attractiveness for talent and competitiveness of this region with respect to others in the country?

Diane: [00:33:40] Yeah. Okay. I’m going to be totally unobjective here. You know what, I’m just like, I love Boston. I love Boston because it’s filled, there are zillions of people in this city who are more brilliant than I am, who are working on, you know, what we’re proud of here is that we [00:34:00] work on really, really hard problems. I mean, if I gave you a list of the 30 fastest growing companies in Boston, you would probably understand no more than half of them. I mean, so many of them are working on things that no one really understands and so we’re trying to solve very important problems and I think that’s really great.

It’s also an extremely collaborative community, so that, whereas others, other ecosystems like San Francisco or New York have a reputation for being competitive. You know, my fundraising is bigger than yours. My product is better than yours. My app is cooler than yours. My black turtleneck is blacker than yours, you know, or whatever, you know, in Boston. I really believe that the biggest question that you get asked when you’re trying to build a company is what I do to help you?

And I think that feeling that our success is a collective undertaking is really, really helpful, especially [00:35:00] when things are not going well. So I’m a big fan of building a company here.

Raza: [00:35:04] I landed in Boston and I’m kind of a testament to that story. I’ve always been very welcomed and everybody has been extremely helpful to me as an immigrant, a founder of companies and then investor in companies. So I absolutely it’s, I think it’s one of the most wonderful places where you can be.

Where do you now see heading looking to the future? You know, the relative position of Boston, are you optimistic or are you thinking that there are things that Boston area still needs to work on?

Diane: [00:35:41] Oh, I’m sure there are always things we need to work on.  Look, we have certain areas that we’re very strong in. I mean, we are very strong in biotech, for all the obvious reasons we have, you know, we’re the center of healthcare, the universe, if you’re anywhere in the world and you are really really sick, there’s a chance that you’ll end up in Boston, [00:36:00] so biotech is big, as is anything related to healthcare. IT, tele-health or any industries like that. So there are areas where just by nature of the fact that our biggest industry, I can’t remember how this works out. I know our two top industries are education and healthcare. So anything related to entrepreneurship in those areas, we’re going to be extremely strong.

I think the fact that we’ve always been known as working on hard problems has us way stronger in B2B, so B2B enterprise software, B2B, artificial intelligence, et cetera. Those are going to be stronger for us than I’m building a consumer app and I’m going to you know, sell it to Apple and flip it and you know, I’ll be rich. Those happen in Boston, but it’s not, we’re not the center of the universe for consumer tech,

Raza: [00:36:55] We’re more on the, you know, here’s the really tough additive [00:37:00] manufacturing process with Desktop Metal or other things that really, really require a fundamental innovation.

Diane: [00:37:08] Absolutely. And you know, yet we’re also at critical mass.  So I know people building, you know, fashion businesses here.  I know there’s a, there’s a great food innovation cluster in Boston.  I mean, there are those basic businesses and you know, we’re big enough now we’re at critical mass.  So that even if you are building something that doesn’t necessarily sing Boston to you, you know, you can find a dozen other people who are really passionate about that and probably find some investors who will be willing to hear your story. And you know the last thing is our capital is here. So, we, you know, when Boston is also the capital of Massachusetts, it’s much easier for people who are trying to get funding from government or get some kind of collaboration from government or who are working on regulation because we have the city and the mayor, but we also have everybody who’s hanging out at the [00:38:00] state house trying to make Massachusetts number one in everything possible.

Raza: [00:38:04] And I would say since I have landed, I think there have been 11 parades and I think that that’s the best four teams as well.

Diane: [00:38:16] I know, I do think about that with young children. Like they never knew when we were bad at sports.

Joe: [00:38:23] My daughter has no idea what it’s like to have bad sports. None with Tom Brady left Boston she was lost because her whole sports experience is, you know, for the Patriots is Tom Brady is the quarterback. They have no idea how spoiled they have been.

Diane: [00:38:42] I know,

Joe: [00:38:42] I sound like an older generation saying that but it is so true.

Diane: [00:38:46] It is true. And yet now, you know, she’s going to be fine because we have Cam Newton and as far as I can tell, he’s a warrior. I mean, the guy is fantastic and people are so excited about, you know, having, having him on there. So we have been really [00:39:00] lucky.

Joe: [00:39:01] We have been really lucky.

Diane: [00:39:02] Yeah. 

Joe: [00:39:03] Let me ask you, we’ve talked a little bit about this. There’s been progress. Albeit, you know, relatively slow, for many years in diversifying boards with respect to gender and people of color.  From your perspective, how have recent events, including obviously the death of George Floyd, how has that impacted where we are with that now?

 Diane: [00:39:29] I have always thought the diversity is really important and it goes back to avery difficult experience I had three years into my CEO job.  I was trying to hire a new CEO. I found the person I wanted. It was a critical job. The guy who I wanted had a great background and I told him that he was the guy and I said what else can I tell you? He said, well, I just need to think about this a little. Can I get a tour of your company? And I remember people have heard this story before, but as I gave him a [00:40:00] tour of my company, I walked around realizing that I had a very white company and I found myself walking past the desks, taking him on a weird tour, past the desks of the people of color who worked for us, because as we were doing that, I thought, Oh my gosh, I don’t know if we’re going to look like the kind of company where he feels like he belongs. He didn’t take the job. He never told me that that was why, but the following day when he turned me down, I sat with my leadership team and I said, we are white and it is a competitive disadvantage for us because there are a whole bunch of people out there who are not white who will not want to come work here. This is the end of that chapter.

Joe: [00:40:45] One thing you said that I think really hits the mark is that people have increasingly begun to appreciate that failure to diversify, gender and color, hits the bottom line. [00:41:00] Okay. So whatever your perspective was before, whether you thought it was a moral issue, whether you thought it was the right thing to do, all of which is true. The fact is that it has gained momentum because companies are realizing that it really will affect the bottom line for many of the reasons that you’ve suggested and the other thing you said about, yeah, those people out there, the pipeline is there. So the comment that I had heard in the past. Well, you know, we really can’t find that person that is just not true and people know it’s not true.

Diane: [00:41:33] Yeah. we just added to our Brightcove board two women of color and we were very intentional about preferred. You know, we also had other specs around the skill set that we wanted. We were hoping to be able to get somebody that had very deep technology experience. We were hoping to get somebody that knew a lot about remote work. I will tell you we had 12, 12 candidates for those jobs and [00:42:00] we had four finalists.  And the two that we didn’t take, I am literally talking to them on a weekly basis because they’re so valuable right now. I mean, these people are all getting phone calls, but we did not have a pipeline problem. Getting the list of 12 after I reached out to my network, took about two weeks. And we have  just extraordinary new board members, but the people who we said no to, I mean, it’s heartbreaking that we said no to those people. So, you know, when you hear it’s a pipeline problem, I think that’s, I think that’s old data.

Raza: [00:42:37] Lot of the time people do reach out to their network and that network tends to be similar to you.  Not everybody’s like yourself to really know and make an effort to connect with people that are different than you.  What would [00:43:00] you recommend to people what they do for uncorrelated network or reaching out beyond all the people that they know that are exactly like them?

Diane: [00:43:11] You know, I think that, I think that building your network is the most important thing that people need to do these days. Not, maybe not the most important, but one of the top, most important things. I mean, think about it. Think about how much time for the two of you and for your listeners. Think about how much time you think about getting a master’s degree of any kind. Now millennials don’t spend a lot of time right thinking about that anymore cause they don’t think it’s as useful.

But for me, I spent an enormous amount of time thinking about getting a master’s degree, what I wanted to do, taking the test and then spending two years hanging out, getting that degree and now I have that and it’s an asset that I value and I think we all have other things whether it’s what school you went to or what skillset you’ve built [00:44:00] over the years. I think that we need to think about building our network in that category. How much time and effort and skill and priority will you place on building your network as an asset? Because I will tell you at this point in my career, I would take my network way before I would take my Harvard MBA as an asset that I leverage all the time and for me, sometimes I’m just doing it to help other people. I mean, somebody will call me and say, you know, I’m looking for somebody who can do blah, blah, blah. I mean, the joy in being able to easily just say, you know what? I know you’re looking for this kind of person. I have somebody great. You know, let’s put the two of you together is really fantastic, but I think you, as a professional, you have to build your network and when you do that, you don’t have to be the smartest person in the room anymore because you have all of these other people to help you solve your problems and fill your jobs and as a board member [00:45:00] to just get things done much faster. So I think we just need to value it more.

Joe: [00:45:05] But it’s somewhat goes back to board composition, because if you’ve built the right board and it is diverse in the way that we’ve always said it should be, which has everything – experience, perspective, everything else – then that collective, that collective database of people that they know should be able to locate what you need for the board.

I mean, if you’ve built the board, right? Your nom gov committee collectively should have a collective network that can identify the next people that you need on the board. So it just comes back to who’s your board and have you really built it the right way.

Diane: [00:45:42] Yeah, definitely and we spend a lot of time on a couple of nom gov committees and we spend a lot of time talking about those issues. It’s job one on those committees to say: how are we as a board?  What are we missing?  Just like when you’re a CEO, you sit with [00:46:00] your leadership team and say, what skills are we missing?  What do we look like as company?  Yeah.

 You know, in tech very often, people are super proud of gender and you know, racial diversity and everything but, you know, the average age of the company is 12, right and you get a really really talented software engineer coming in who can solve all the problems and they don’t want to work there cause it’s like, you gotta be kidding like, who am I gonna have coffee with, or are these people all coming in at noon and leaving at midnight because I want to work six to six. So, you know, there you’re always working, you’re never done right.

Joe: [00:46:37] Diane, it’s been great speaking with you. Thanks so much for joining us today. I hope you and your family will continue to be well and stay safe.

And thank you all for listening today to On Boards with our special guest Diane Hessan, please stay safe and take care of yourselves, your family, and your communities as best you can.

Raza you [00:47:00] take care. I hope you and your family continue to be well. And they are staying safe also. Yes,

Raza: [00:47:05] Joe, we are all staying safe. thank you and I hope you and your families as well.

Joe: [00:47:10] Yes. Thanks. Take care. Bye bye.

13. Ed Pendergast: What it takes to be a board member that every company wants

Ed Pendergast has served on numerous boards – public, private, and nonprofits – for more than 40 years. Very few people have had the opportunity to serve on such a broad range of boards over such a long period of time as Ed, and for good reason. He is the consummate board member. Armed with a deep understanding of business finance and operations, and what it takes to be an effective board member, Ed exemplifies the qualities that every company seeks on its board.

Thanks for listening!

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

Links

https://dunnrush.com/

http://pendergastco.com/

Quotes

Impact of the pandemic:

“Well, it’s varied pretty dramatically. I sit on five boards…and some of them have been hit very hard, some are booming. It seems to depend upon the industry they’re in or the impact that coronavirus has had on the business.”

“You probably have heard more talk in the last few months about supply chain than you have in the rest of your life.”

“In our investment bank, we are advising companies generally not to sell the business right now because valuations are so strange.”

Question: If you’re advising a family owned, operated business, and they’re thinking about forming a board for the first time, but they’re hesitating and there are several reasons why they do. What advice do you give them?

Answer: Well, I advise them not to start out with their uncle’s lawyer and their brother’s banker, but that they try to think about “why are we having this board?” What type of skill sets do we need that would be helpful to this business and try not to pack it with all people you’ve known for a long time? It’s okay to have a couple of people that you’ve known a long time, but it’s very helpful to think outside of the box.

Question: When people say “we don’t have time of the money for a board, what kind of advice to give them? What do you tell them?

Answer: Well, what’s the return on the investment? If we can bring together five people with great talent, some of which you don’t have in your business who can help in business development and it costs you $50,000 and it generates a strategy that builds the business from $50 million to $250 million, pretty cheap. On the other hand, if you don’t put it together properly, it can be a pain in the ass and not be successful.

When there’s a crisis is when the private company board is really helpful to calm things down. How are we going to get through this? How are we going to work our way out of it?

Big Ideas/Thoughts
Board meeting haven’t changed much – we’ve had a focus on coronavirus that we didn’t have before , but board meetings always have talked about risks and how do we deal with risk and what are the risks we haven’t foreseen? And how do we think through that process?

One difference is that when you’re in person, you have some casual time, you usually have a meal. Something when you’re off the topic. When you’re on a zoom board meeting, you’re on topic, the fraternization, the getting together, the personal aspect of it is missing and so it’s harder to gauge how people really feeling or what’s going on. When you’re sitting across from somebody at dinner, you really get a different approach. And that’s particularly true in boards where we have traditionally had the senior leadership team present at the dinners.

And that’s key because one of the major parts of being a board member is to make sure that the people are the right people. That they’re performing properly, that motivated properly, and develop properly. And that’s harder to do through video conferencing.
Going forward, I think you’re going to see a lot of closings, a lot of bankruptcies, particularly companies relying on disposable income: airlines, restaurants, hotels, casinos, even clothing. I think it was Bloomingdale’s that said they’re only selling tops.

On why more private companies are forming boards
Well, part of it is that the visibility of governance has expanded dramatically. I think a good deal of it as to what the National Association of Corporate Directors has done, to raise the visibility, the standards of sitting on a board have clarified over the years and, many people who have started their own business had worked for a larger company and have seen that there was some efficacy to the board in family businesses. Particularly when family members say we need somebody outside of the family to have a role here so that we can listen to people who have had outside experiences.

Question: One thing that seems to be a constant challenge for many companies is refreshing the composition of their boards. The board that may have been right five years ago is not necessarily the right board today. What is the best approach of reviewing the composition of the board and offboarding when necessary?

Answer: Refreshing the composition of a board is probably one of the thorniest issues any board faces. One way to address it is to have a regular evaluation process. How is the board going? How are individual board members are doing? How committees are being operated? It’s a tough process. I have some ex-friends that I have counseled off boards and, as I sometimes say, it’s not who got you here it’s who is going to get you there.

Transcript

Joe: [00:00:00]  Hello and welcome to On Boards: a Deep Look at Driving 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 board 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.

Raza: [00:00:32] Joe and I speak with a wide range of guests and talk about what makes great boards great or makes a board unsuccessful, what it takes to be a valuable board member and how to make your board one of the most valuable assets of your company.

Joe: [00:00:50] Our guest today is Ed Pendergast who has served on numerous boards, public, private, and nonprofits for more than 40 years. For [00:01:00] more than 25 years, Ed has served as President of Pendergast and Company, the corporate financial consulting firm, which has advised a wide variety of companies on corporate financial strategy.

Raza: [00:01:13] He has also been a Managing Director of investment bankers Dunn Rush and Company since the firm’s inception in 2009.  He works across several industries helping owner-managers increase their company’s value.  He has been President of the New England chapter of National Association of Corporate Directors, Massachusetts Society of CPAs and Small Business Association of New England.

He  also served as Vice Chair of Greater Boston Chamber of Commerce. We’re excited to have Ed Pendergast as our special guest today.

Ed: [00:01:47] Great to be here.

Joe: [00:01:49] Welcome Ed. It’s a pleasure to have you On Boards.

Ed, can you let us know on the boards on which you’re currently serving, what has been the [00:02:00] impact of the pandemic environment on those companies?

Ed: [00:02:03] Well, it’s varied pretty dramatically.  I sit on five boards, actually, and a nonprofit board. And, some of them have been hit very hard.  Some of them are booming.  It seems to depend upon the industry they’re in or the impact that coronavirus has had on the business.

For instance, one of them, DeMoulas Supermarkets, when they were first in the pandemic they were at a point where they could only be open for 50% of the time that 50% of the capacity that they had before, but people are buying more because they don’t want to go to the groceries more often. So DeMoulas has really been impacted with employees more than they have anything else.

One of the companies that is a supply chain consulting firm, called Maine Point, [00:03:00] that has been a period of time when people were so distracted by the coronavirus, that they weren’t doing anything about supply chain, but that’s changing pretty rapidly.  You probably have heard on television in the last few months more talk about supply chain than you had in the whole rest of your life.

One of the companies is a software service company and they are it’s called Fonative, and they, are connected to call centers and for awhile, the volume on call centers was somewhat diminished, but that has resurged.

Another company is called Tikus Cranberry and we are having trouble finding enough product to satisfy the demand. 

The last private company is called Municipal Headquarters.  We upfit police cars [00:04:00] and, while the demand for police cars hasn’t changed, the uncertainty of budgeting in the municipalities has made it difficult for us to be the predictable.  We’ve done well and continue to do well, but there are real challenges because police departments have been very distracted by the coronavirus in particularly, most recently.

The last board that I sit on is the Old North Foundation, which is a organization that supports and maintains the Old North Church and provides education and tours and a lot of items around trying to have people understand the history of the formation of this country. The coronavirus has been a disaster because we couldn’t open up. and traffic is what makes major part of our revenue.  We tried to [00:05:00] open a couple of weeks ago and the timing right now is the first part of August, and, the traffic was so low that we had to close down for the rest of it.

Joe: [00:05:10] Boy, that’s too bad.

Ed: [00:05:12] So many of the foundations that I know about are in survival mode now.  So you can say it is very different across the board.

 In our, investment bank, we are advising companies generally not to sell the business right now because valuations are so strange.  Although there is one company where the buyer says I will pay pre-COVID prices. We’ll see if that’s true, but generally the M&A businesses been quite a bit slower because of that.  Although it looks like it’s picking up also, but it’s a very strange time. 

Joe: [00:05:51] You know, it’s not surprising that companies have been impacted what surprises me is sometimes you don’t see what the impact [00:06:00] would be. You know, when you talked about, for example, the police cars.  Well, the fact that budgets are questionable, people don’t know what resources are going to be allocated and how, that’s not necessarily something that anyone would have foreseen, even if you had a great risk strategy in place.

Ed: [00:06:20] Yes, the disruption in so many industries is way beyond what you thought about.  I’ve had  associations with a couple of universities around here, Bentley and Northeastern, and they both are struggling to try to figure out, can we do it in person? Can we do it remotely? Can we alternate? How do we do that?  So there’s a, a lot of disruption.

Joe: [00:06:46] Yeah, that is going to be a difficult question for every educational institution.

Looking at boards, so all of the boards now of course, we’re meeting in some kind of virtual format.  I’m interested: other [00:07:00] than saving time and expense, we all have experienced the fact that it’s, you know, we’re saving some time and we’re saving some money. What’s been the general reaction to meeting in this format?

Ed: [00:07:11] Well, I think it’s been more positive than otherwise because you can have a meeting pretty quickly. For instance, in one of the boards we have a board member who lives in London, one lives in Florida, one lives in Kansas City.  And if you wanted to have an in-person board meeting, there’s a lot of time and energy to get it going.  We have an issue that we, as we did today, we had a board meeting, and, we were able to put it together in no time.  So that’s a big change.  And the teleconferences we used to have in the past were not as near as satisfying as video conferencing.  Video conferencing is much more satisfying.  You can see people, you can get their reactions, you can get a feel for them.  I still would [00:08:00] love to be in person, but, as a practical matter, I’m not sure at least for the next maybe year, certainly next six months, that we’re going to have any in person meetings.

Joe: [00:08:14] Yeah, I think you’re right about that. The meetings themselves, how have they changed , how are they different other than the fact that they’re virtual?

Ed: [00:08:23] They haven’t changed much.  I would say that because we have a focus on coronavirus that we didn’t have before , but the board meetings always have talked about risks and how do we deal with risk and what are the risks we haven’t foreseen? And how do we think through that process?  But I would say generally, I wouldn’t think there’s been any real difference in the board meetings.  The material comes through the internet, through email.  The meetings tend to be about the same length, although people find after two hours [00:09:00] on zoom, they have to take a rest, bio or otherwise, and then we come back and so I wouldn’t say that it hasn’t been a significant change in how the boards are operating.  The committees are a little bit more of a challenge, but I think it’s, it really hasn’t impacted it in a major way.

Joe: [00:09:22] Are there sensitive issues that you find more difficult to address virtually than you would in person, and I’ll just take one for instance.  There’s one board that I’m on, and I find that when we’re talking about, kind of an assessment of board members or, you know,  who we might invite off the board or invite on the board, that kind of conversation, I have to say, feels a little bit difficult when it’s virtual.  Somehow it seems more comfortable when it’s in person. Have you experienced any issues that just didn’t seem quite as comfortable because you’re not in person with other board members?

 Ed: [00:09:59] I [00:10:00] would say no.  I think that all you see as the top half of people. Oh yeah. I don’t know what’s going on with the rest of them. In fact, that the Old North Foundation, we hired an Executive Director that we never saw outside of zoom. It was weird. So we never saw her and never actually shook a hand.

I think the,  difference is that when you’re in person, you have some casual time, you usually have a meal.  Something when you’re off the topic. When you’re on a zoom board meeting, you’re on topic, pretty much. The fraternization, the getting together , the personal aspect of it is missing and so it’s harder to gauge how people really feeling or what’s going on. When you’re sitting across from somebody at dinner, you really get a different approach. And that’s particularly true in boards where we have traditionally had the senior leadership team present at the dinners.  So we’re not getting that.  [00:11:00] And that’s key because one of the major parts of being a board member is to make sure that the people are the right people. That they’re performing properly, that ther’re motivated properly, and develop properly. And that’s harder to do through video conferencing.

Joe: [00:11:20] That social tim – with fellow board members and with senior management, that really is missing, there’s no real substitute for that.

Raza: [00:11:30] Joe and Ed, I’ve seen groups basically add those times, like water cooler meetings or, you know, other off meetings, although it’s still in virtual format, but an attempt to approximate or recreate a little bit of that.

But yeah, it is challenging. New relationships are challenging.

Ed: [00:11:47] And you can’t make the asides that you might make in an in-person board meeting where you’ve missed something person next to you. What was that? You really can’t say that [00:12:00] in the videoconference. Yeah. Right.

Joe: [00:12:03] It’s just different.

Ed: [00:12:04] I guess, in some ways I misspoke initially, because as we talked about it, I realize the differences, maybe deeper than I had thought beforehand, because I’ve been pretty happy that I’ve been able to keep track of what’s going on in our boards, and in our companies, but as you talk about it, it kind of feels a little bit more…

Raza: [00:12:25] Some people have commented that making new relationships is much harder.  Ed as you mentioned, like, you have hired somebody that you’ve never met and we have invested in companies that we’ve physically not met the entrepreneur, but that part is much harder.

It is a huge benefit that if you knew the people going into the video format, that you were still able to kind of say kind of roughly work the same.

Ed: [00:12:51] I think hiring and onboarding is much different and, bringing on new board members,  I like to put them [00:13:00] through the paces as much as possible so that they understand all the vagaries of the business and we understand all the bumps in the road that we might face with a new board member.  And that’s true of employees as well, it is frustrating.

Joe: [00:13:17] Yeah, it really, it’s funny. It permeates so many aspects of what we take for granted.

Raza: [00:13:24] And just to add to that, I would say at least in the last five years, there have been plenty of successful companies that are remote only.  People did figure out how to create a culture, how to know each other, despite being remote.  I think with time all the folks that are now forced to be in virtual will also find ways and figure it out.

Ed: [00:13:51] Except for I think a lot of the companies that were almost completely virtual, they did have in person interviews of people, they were hiring, which they [00:14:00] can’t have now.  Some of them didn’t did it without that, but pressing the flesh, as they say, shaking hands, having a drink with somebody, having a meal with somebody, you got an entirely different picture of the person than you do when you’re on stage in the interview process.

Joe: [00:14:16] Agreed. Absolutely.

Ed, let me ask you this: if the pandemic continues for many more months, as unfortunately many people believe it will,  and it has a continuing impact on the revenue of the companies that are in a difficult situation, what do you foresee?  Will those companies whose businesses are being impacted in a negative way be able to ride this out?  Or are we going to see a lot of closings and bankruptcies down the road?

Ed: [00:14:46] Well, I think you’re going to see a lot of closings, a lot of bankruptcies, particularly companies relying on disposable income: airlines, restaurants, hotels, casinos, even clothing.  I think it was [00:15:00] Bloomingdale’s that said they’re only selling tops.

Raza: [00:15:05] There’s another category of companies. There are ones that are clearly directly impacted, but I think, but Joe is also kind of thinking about is the, the companies that were just maybe not doing as well already.  Do you feel that with the availability of cheaper credit and debt from the government and all the things that we will actually see, maybe zombie companies that are able to kind of carrying on?

Ed: [00:15:31] It’s going to make a big difference is how the credit markets are willing to lend.  I think that when the interest rates go low, the company sales is great for us. Banks aren’t as enthusiastic about it because their margins tend to get narrowed, so I am not sure that the lending will be as aggressive as it was before the pandemic.

On the other hand, [00:16:00] if you think about it, there are Venture Capital funds, and Private Equity firms and Mezzanine Funds that have money they need to get rid of.

Raza: [00:16:08] A lot of dry powder.

Ed: [00:16:10] They need to invest.  So there may be some risks taken, but I think that it will be focused in on industries where people think there’s a real opportunity to grow.

I think the restaurant industry, I just don’t know. They always have thin margins. Now they having trouble getting their product and customers are leery about going in. Right now, we’re down on the Cape in Harwichport and we’re not going into restaurants.  If the restaurant doesn’t have curbside or delivery, we’re just not patronizing. I found on the other hand that, if you say by the way, I’m I can come in, but I’ll give you $20, somebody comes running out with the food.

Joe: [00:16:55] Yeah. Most places are able to do that now.

Raza: [00:16:57] Ed, what was your early board [00:17:00] work? You’ve been doing this longer than I have been alive!

Ed: [00:17:03] Well, probably the most people been alive.

 Well, I started out really working with associations.  When I became a CPA, I felt that getting active in the society, Massachusetts Society of CPA’s, was important.  So I donated a fair amount of time to it.  And in time they decided that maybe I should become President.  At that time, they used to alternate between a big national firm and a local firm for presidents.  I was a local firm so working on that board was the, probably the first real board work I did.

I got active in the Small Business Association of New England, sometimes called SBANE, in the same way . I felt that it was a great vehicle to develop my practice. The contacts also, I could make contributions with my expertise [00:18:00] to the association. So I worked with that for a long period of time and I became President of that sitting on the board and then became President.

I got very interested in governance because I started sitting on boards and starting to go to the National Association of Corporate Directors meetings, and eventually became a board member and then become Chair of the New England chapter.

And the same thing a little bit with the Greater Boston Chamber of Commerce.  So the word got out that I had sat on a few boards, had some financial expertise, and those were characteristics that many boards were interested in.

 Raza: [00:18:34] Ed, you recently spoke about that a number of years ago, you decided not to be as interested in sitting on public company boards.  What led you to that decision?

Ed: [00:18:47] Well, the public company boards I sat on were frequently what we called Reg. A offerings, which no longer exists, small offerings and the more I got [00:19:00] involved with them, the more I realized that as I got a little older, that the fiduciary responsibility of being a public company board member was weighed fairly heavily on me. 

And, I was chair of the board of public company, a medical device company, where the CFO quit and then the CEO quit.  I became CEO and doing all those road shows with small public companies got to me to the point where I realized that  the difficulty and small public company had to stay public and to grow was pretty strong. The risks were high and the fiduciary responsibility weighed heavily on me.

And I was always amazed that and boards that would be a board member or two that would sit there and not participate at all.  And I felt, [00:20:00] why am I sitting on this board when I got board members that should be working to help?  So I decided that I didn’t really need to be on a public company. In the process, I started to serve on a number of private company boards, which I find more interesting because the impact you can have on a private company board, sometimes is much more significant than you can in a public company board.

Raza: [00:20:24] And Ed, we heard this statistic in our earlier podcast episodes that since 2000, I think the number of publicly traded companies is about half from what it was then. It also reflects what is going on generally in the public markets.  By implication, there’s a lot more activity in the private markets and as you’ve mentioned, I think that’s probably a better place to contribute as board member.

Joe: [00:20:51] Ed, can you talk to us about your experience sitting on the board of family owned and operated companies. How does it differ from the non family-owned [00:21:00] private companies?

Ed: [00:21:01] Well, you get involved with the pathology of the family and, the family members have long history, many of them from birth and maybe multigenerational and when they go from generation to generation, it’s a trauma of what do you do with dear old dad who’s maybe not as effective as he used to be and the young daughter who really wants to run the business is more capable than dad.  So no matter how you try to avoid it, you get into the family . And when I was doing consulting with family businesses, I used to joke that there were three outcomes. That I could help them really address the family issues that would be great, or they couldn’t and decided to sell. But then also the third thing if we weren’t making a lot of progress, the one thing they [00:22:00] could agree on was either to fire me or for me to fire them.

Joe: [00:22:03] Good to have a point of agreement.

Ed: [00:22:07] I had one family business where there were 14 cousins in the business.  Three families, two of the families were fighting with the third family and the two families that were fighting came to me, they were I think nine cousins in that group.  I persuaded eight of the nine on a plan of action, the ninth, who was the one that actually brought me into the process, was the only one that wouldn’t go along.  So, the company is still around. It’s got a lot of visibility and if the world knows what I knew about the company, they would have a very different perspective.

Then the boards frequently are a mixed family, mixed independence.  I sit on a family board where, or I did for  quite a while, Legal Seafoods, where it was a complete independent board, [00:23:00] except for the CEO.  And I I’ve sat on family boards where I was the only non-family member, and then you become the consigliere to the family.

I don’t know if you really are a board member or what you are, but, family business is a very different.  I think you’re always kid that you have to be a little bit of a masochist to work with them, but I really enjoy it because they frequently, the culture of the family business is so much more caring about the employees because they look at them as part of their family.

Joe: [00:23:34] Right.

Ed: [00:23:34] And that that’s good or it’s bad because sometimes they keep people around a lot longer than they should. but, you know, the, DeMoulas family takes care of the employees.  They really worry about the employees.  They have many families who are, employees, uncles, cousins, and the like, and that atmosphere for the employees is a wonderful atmosphere.

[00:24:00] Joe: [00:24:00] You know, one really positive trend that I’ve noticed is that more family owned and operated businesses now have boards.  In the past that wasn’t always true.  I’m curious what you attribute this trend to – why have family-owned businesses really recognized that having a board might be helpful to them, what has changed?

Ed: [00:24:24] Well, I think part of it is that the visibility of governance has expanded dramatically.  I think a good deal of it as to what the National Association of Corporate Directors has done to raise the visibility, the standards of sitting on a board have clarified over the years and, many people who have started their own business had worked for a larger company and have seen that there was some efficacy to the board and family businesses, particularly family members say, you know, we need somebody outside of just [00:25:00] the family to have a role here so that we can listen to people who have had outside experiences, sometimes as an advisory board, sometimes as a fiduciary board.

Joe: [00:25:12] If you’re advising a family-owned, operated business, and they’re thinking about forming a board for the first time, but they’re hesitating and there are several reasons why they do.  What advice do you give them?

Ed: [00:25:28] Well, I think that I advise them not to start out with their uncle’s lawyer and their brother’s banker, but that they try to think about, well, why are we having this board? What type of skill sets that we need that would be helpful to this business and try not to pack it with all people you’ve known for a long time. It’s okay to have a couple of people that you’ve known a long time, but it’s very helpful to [00:26:00] think outside of the box. As a little example, I set an advisory board up for moving company. There’s the fellow that started with the moving company. Young man, was growing fast and he asked me to organize the board and that frequently, if you have somebody who knows how to organize a board, that’s helpful.

So I brought in a fellow who’d been very successful in a business, it was a tire business. So moving and tire, maybe they’re not the same, but they serve kind of the same types of employees and so it’s got some similarities. And I have another young man who’d grown his plumbing business significantly. Again, the types of employees are similar. And I brought in the banker that I knew who done a lot of work with small businesses, and it was very successful, because we’d figured out what are the skill sets we need? What would compliment this man?  [00:27:00] He needed financial advice. He needed, organizational advice.   He needed to have a, somebody who we viewed as a contemporary, the guy that had the plumbing business.  We’ve been successful and so it really worked and to his advantage.

So it’s an art, and frequently people turn to their accountant or their lawyer.  And sometimes that works.  Sometimes it doesn’t.   I’ve felt that the accountant may not have the understanding of what the skill sets are needed for a board.  And the lawyer might not either, but it’s more likely a lawyer, and recruiting board members, depending only upon the size of the business, can be very different.  That moving business was a relatively small business.  And we’d paid pitilty.  People were interested because they wanted to get board experience.  They were willing to work for almost nothing.  Now, some other boards, you’re going to have to pay [00:28:00] some money. And so you can attract different types of people.

Joe: [00:28:04] Yeah, you know, I was going to ask you sometimes, you know, one of the things I do is help, businesses form their first board.  And one of the things I hear is, well, it’s a lot of time commitment and it’s going to cost us a lot of money.  When people say that to you, what do you, what kind of advice to give them?  What do you tell them?

Ed: [00:28:24] Well, what’s the return on the investment?  If we can bring together five people with great talent, some of which you don’t have in your business who, can help in business development and it costs you $50,000 and it generates a strategy that builds the business from $50 million to $250 million, pretty cheap.

On the other hand, if you don’t put it together properly, it can be a pain in the ass and not be successful.  And also private company boards [00:29:00] when there’s a crisis is when the private company board is really helpful to calm things down. How are we going to get through this?  How are we going to work our way out of it? I think frequently I suggest that in order to put your foot in the water, you set up an advisory board and you say to the people, I want to try this out for a year and see if it’s what I want, because it may well turn out that some of those advisory board members are not people you’d really want on a fiduciary board and you don’t know that until you’ve gotten used to them for a period of time.

Raza: [00:29:35] In general, as a board member, what responsibilities does serving on a board include? What should every board member understand about his or her responsibilities?

Ed: [00:29:48] Well, I recommend everybody that’s interested in being on a board is the NACD, National Association of Corporate Directors, has a two day Director Professionalism course, [00:30:00] it’s something that I’ve taught in the past. And I’ve taught at both, to a group that were not in the same board.  I’ve taught in board where we can do it in a day.  And, it really outlines all the fiduciary responsibilities, but also how you need to think of yourself as a board member.  Many people sit on boards with no training and I don’t think that’s a good idea.

NACD puts on, generally once a month, a program on different aspects of boards, some private company, some public company boards and so it’s education and I’m a lifelong learner, and I think that if you’re not a lifelong learner in this environment, you probably won’t even know how to handle your cell phone.

Raza: [00:30:49] One thing that seems to be a constant challenge for many companies is refreshing the composition of their boards.  The board that may have been [00:31:00] right five years ago is not necessarily the right board today.  The level of commitment, and the attention, you know, that’s needed by the board members to adapt to the change as well.  What is the best approach of reviewing the composition of the board and offboarding when necessary that you would recommend?

Ed: [00:31:19] That is probably one of the thorniest issues any board faces. One way to address it is to have a regular evaluation process. How the board going, how individual board members are going, how committees are being operated.

It’s a tough process. I have some ex-friends that I have counseled off boards and, as I sometimes say, it’s not who got you here is going to get you there. And, just in line a little bit, with what you’re talking about, somebody [00:32:00] who was an A board member at a $50 million dollar company, board becomes a B member at a 200 million board and a C million and 500.

Some people can grow in it and one of the things I’ve been thinking about in preparation for this is about having three year renewable.  The terms, because normally considered to be automatic and renewable.  It doesn’t mean you’re going to go off, but that you are being looked at every three years rather than every year.  And, a third of the board and is going to be doing is going to be being reviewed by the other two thirds. And at that point, if you get a self-evaluation, you sit down and say, well, this is what the other board members have said about you. They like you, they just think that your time has come to leave.  It is a thorny issue.

 I was on the Legal Seafood [00:33:00] probably for 25 years and I finally decided last year that, you know, that’s a long time.  I know the family very well and how independent can you be when you’ve been there 25 years.  I got so involved and I do this with most of my boards, I will talk about “we” rather than the company  It becomes pretty important to you that the company is successful.

Joe: [00:33:27] Well, good for you that you actually were thoughtful enough to realize that at a certain point you get so close to the family or to the company that the notion of independence  is really in question. I would suggest most board members are not that thoughtful about it. I mean, they don’t really. Think about their independence being potentially compromised.

Ed: [00:33:48] Many people, I’m afraid, sit on boards because it’s prestigious or maybe it’s the money but more often is prestigious and they feel that [00:34:00] it would be demeaning if they have to go off the board and that’s unfortunate, but that’s the way some people feel.

Joe: [00:34:08] You know, we talked a little bit earlier before we started the podcast about what’s going on in terms of diversity.  Let’s talk a little bit about the importance of diversity, all types of course, there is skill set diversity and there other times, but specifically gender and racial diversity on boards has become, and appropriately so, it’s very important.  Can you talk a little bit about how that has evolved  and what impact it’s had on boards, that you’ve been able to observe?

Ed: [00:34:39] Well, here’s a lot of statistics about this.  If you start with having women on the board, it’s clear that when you have two women on the board, they’re much more effective than when you have one because , the men on the board treat a single woman on the board differently than they do when there are two and I think it’s clear that [00:35:00] the discussion takes a different level when you have a woman on the board. And I said before the old boy network stuff doesn’t work quite as well. And that’s good. so I think that the increase in having women on the boards has been wonderful for board governance.

As far as people of color, it’s clear that this country’s population’s moving more and more toward having a majority of people of color and they should be represented.

Raza: [00:35:33] Ed, finally, we have a rapid fire set of questions for you.

What have been the two best boards in your board career and why?

Ed: [00:35:41] I had a sneaky suspicion you’re gonna ask me that. And I think that the best boards are the ones where I’ve learned the most.  The company PLC Medical, which I was involved taking public, became Chair of the board, became acting CEO.  It was just an amazing [00:36:00] experience, going on the road shows, I learned so much, so it’s the boards where I’ve learned. It’s more than whether this is a great board.  It’s what, what have I learned in the process.

Raza: [00:36:12] What board best practice do you recommend that most boards should follow?

Ed: [00:36:17] Ethics.

Raza: [00:36:20] Number one rule you would implement for conducting board meetings if you were the board chair?

 Ed: [00:36:26] Keeping to the subject and parking issues, if they got too complicated in the discussion.

Raza: [00:36:33] Favorite book or books?

Ed: [00:36:36] Well, I’m reading a lot of Scott Turow who is a wonderful author, but I’m also reading a book on The New Jim Crow, and it is just an amazing book of how do you start to learn and understand the level of how people of color have lived . And part of the [00:37:00] reason it’s so surprising is there are so many, well-placed very successful people of color professionals that are people I’ve known for a long time. And never really understood that they had to say to their kids, “Hey, you can’t go here. You have to carry your driver’s license with you wherever you go.” I understand that. So that’s, that’s kind of where I am right now.

Joe: [00:37:25] It’s something that a lot of us are learning

Raza: [00:37:27] Nonprofit or mission that matters the most to you?

Ed: [00:37:32] I think the one that was most edifying for me was called Crittendon Hastings House. when I became more on the board and then became chair, we were providing transitional housing for homeless mothers, mothers, children, and we merged it with a Women’s Industrial Union, now it’s called EMPath, Economic Mobility Path. And, it developed a program of [00:38:00] taking a poor person, working with them over a five year period, and at the end of that five years, 80% of those people are coming out of that program ,making $18 an hour or more and have saved $10,000. And many of them have gotten degrees in the process. and so being able to transform people’s lives from poverty to stability is just an incredible goal.

Joe: [00:38:28] Ed, it’s been great speaking with you today. Thank you for joining us on On Boards. I hope you and your family will continue to be well and stay safe.

And thank you all for listening today to On Boards with our special guest Ed Pendergast. Please stay safe, take care of yourselves, your families, and your communities as best you can.

Raza, you take care. I hope you and your family are well and staying safe also.

Raza: [00:38:57] Yeah. That’s Joe we’re staying well and safe. Thank you. [00:39:00] And I hope the same for your family as well.

Joe: [00:39:03] Thanks.

12. David R. Koenig: understanding and utilizing risk well is critical to optimizing the success of any business

David R. Koenig has been fascinated by and focused on understanding risk virtually his entire life and is recognized as a global leader on the governance of risk.  He has held executive and board positions, published across multiple media (including 2 books: Governance Reimagined and The Board Members Guide to Risk), founded the DCRO (The Director’s and Chief Risk Officers Group),  co-founded PRMIA (the Professional Risk Managers’ International Association) and advised many companies in a wide variety of industries and sectors, over many years.  If you listen to this episode, you will understand that managing risk, in a comprehensive, forward-looking manner is an essential best practice in running any business.

Thanks for listening!

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

Links

http://www.linkedin.com/in/davidrkoenig

https://dcro.org/

https://davidrkoenig.com/the-board-members-guide

Quotes

My father introduced me to the stock market when I think I was 10 or 12 and I was just fascinated by what made stock prices go up and down.  It’s, you know, it’s kind of a sad story, but that was part of what I was raised to understand.

“Any company not doing the type of risk analysis you’ve described is not really looking at its strategic plan in a holistic way. They’re missing an important piece in trying to project what it can really accomplish.”

The reason you put a Risk Committee in place is to understand the impact of let’s say cultural changes.  Once you start piecing those all together and say, “where does this come back and impact us?” it becomes much more clear that it’s akin to understanding your clients better, to understanding market share better, to understanding your competitors better.  You have now a much clearer picture about the things that affect the bottom line of your success and what you might do about them. That’s the forward-looking aspect of risk management and again, culture is but one example.

The really good Chief Risk Officers are the ones who think like businesspeople. They’re not control people. They are people who have the same mindset of an entrepreneur, the same mindset of the head of a business unit.  In fact, the best thing that risk managers can be doing within the business units is advising those businesses on how to take risks well.  Since they think like a businessperson, questions a board might ask are “What opportunities to take risks better do you see?” “Are we competitive in terms of what it’s costing us to get the capital to pursue our objectives? “What aren’t we looking at closely enough?”

Big Ideas/Thoughts

I started by helping organizations to understand the risks that they could or couldn’t control and ways to change that more to their liking.  I worked with airlines, endowments, portfolio managers, banks, all sorts of different entities to help them change their risk profile,

You want to understand as much of it as you can.  You’re never going to understand every part of it. 

Let’s, for example, look at factories that pollute.  In the 1970s, I grew up not far from Gary, Indiana.  We would get some of the steel mill air that would come to our town.  Lake Michigan was polluted, there are places up there that you couldn’t believe people were swimming or eating fish from.  But those companies weren’t being charged for that pollution.  Then the Environmental Protection Agency came along, rules about clean water, clean air came along and now the Southern shore of Lake Michigan in most places is pristine and beautiful.  Those firms a lot of them aren’t there anymore, or if they are they’ve significantly revamped what they were doing, and the problem was that they were not accurately paying for the cost of doing what they did. One of the things that risk management does is give you inputs that you’re generally not seeing now  – which is: what is the cost of pursuing our objectives or in some cases, the cost of not pursuing something else.

I’ve been in this risk management profession for 35 years or so and most companies still don’t have formal risk management departments.

I think the question really is for a board to have a conversation about how well they understand the complexities of all the systems they depend upon for success.  If they feel like they’ve got a handle on that, they can have a really deep discussion, and if they really feel comfortable that they get those complexities and how they interrelate, you may not need a risk committee.  But I find it challenging to think an organization of $100MM in revenue, or maybe even half that size, can’t generate enough positive return through a better understanding of risk to justify some investment in risk infrastructure.

I’ll just talk about a company I talk about in the book what in essence was the equivalent of a Risk Committee at an executive level that was looking at the kinds of things that would threaten their ability to serve their customers.  There’s a good story in Texas Monthly talking to CEO, their senior executives around sustainability and supply chains. They started looking at the possibility of pandemics back, I think, 15 years ago and so they knew what to do.  They had a plan laid out.

Another example, and this is not a formal Risk Committee at the company at that time, but it would be the equivalent of such, saying, “how are we going to make sure we can stay in business?” If something interrupts our normal facilities for operation?

When I worked there in Des Moines, Iowa, which is where the company is based, it was the largest city at the time in the country to lose its entire water supply because of the confluence of two rivers flooding that overwhelmed the 30 foot high banks of their water treatment plant. Suddenly everything in downtown Des Moines was flooded and unusable because there was no fresh water.  The next day I was told to meet at a specific point.  I went to that point.  I was handed a folder.  The folder told me exactly everything I was going to be doing for the next 12 hours and over the next week. We were up and running, managing a multibillion-dollar risk portfolio in about a day and a half.  If they hadn’t been thinking forward within what was the equivalent of their Risk Committee, that would have been never happened and I can’t tell you how many millions we might’ve lost, because we weren’t able to do anything about our exposure

The case for a Chief Risk officer.  Once it gets up to the board, you don’t necessarily want to have business unit specific discussions about whether you’re taking the right risks.  It’s really a question of how is the CEO looking at this and how is the CEO incorporating all these different moving parts?  I would say the Chief Risk Officer is somebody who has that task of taking all these disparate technical skills and technical roles and bringing them into a common risk framework.

Cyber risk has become a massive concern and it’s been there for a while, but the DCRO did a survey recently and there’s a multiple fold increase in the amount of phishing attacks that companies are seeing because they have employees working home.  I’ve seen people who are really smart fall for these because they’re getting really good. 

To the extent that our corporations are more effective risk takers, they’re better employers, they’re better at returning into their community, they’re better at serving their customers, they’re better at serving their suppliers.  All their relationships become better.

If you have a board nominating people to join the board, to replace people who are leaving, they’re almost always going to be more naturally drawn to people who are like them. We see that in our social sorting in all parts of our own lives.  It’s much easier for us to be around people like us, who agree with us in times of threat when an organization’s facing a competitive challenge or crisis, like we’ve got with COVID.  But lack of diversity in board composition creates risk. 

Transcript

Joe: [00:00:00]  Hello and welcome to On Boards: a Deep Look at Driving 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 board 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.

Raza: [00:00:31] Joe and I speak with a wide range of guests and talk about what makes great boards great and makes a board unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets for your company.

Joe: [00:00:47] Our guest today is David Koenig. He spent the first half of his career building firm-wide and portfolio specific risk management programs for multiple companies. His work over the [00:01:00] past 20 years has focused on establishing and implementing global best practices for risk governance at the board level and the general practices of risk management.

He is the author of Governance Re-imagined: Organizational Design, Risk and Value Creation, first published in 2012, as well as The Board Member’s Guide to Risk, published just a couple of months ago in May of 2020.

Raza: [00:01:29] David is the founder of the Directors and Chief Risk Officers Group, the DCRO, which is a global collaborative of C-suite executives and board members focused on risk governance and he is one of the founders of the Professional Risk Managers International Association.

Joe: [00:01:47] Welcome David. It’s great to have you as a guest on On Boards.

David: [00:01:51] Thank you. I appreciate being here. I’ve enjoyed the episodes that you guys have had in the past and hope that we can deliver something as good today.

Joe: [00:01:57] Well, thanks so much. I’m sure this is going to be an [00:02:00] interesting conversation. I know it’s interesting to Raza and to me.

You know, you’ve spent much of your career studying, analyzing and quantifying risk in business. More recently in the context of risk management for boards. But tell us a little bit about the first half of your career creating risk management programs for companies.

What led you to become focused on risk in the business setting?

David: [00:02:24] Well, I did my undergraduate studies in economics, mathematics and statistics, and then got my graduate degree in economics and this was in the mid 1980s   There was a profound interest in markets at that time. The market idea in economics, the dominance of the market, was very prevalent and, in fact, as I mentioned in my first book, my father had introduced me to the stock market when I think I was 10 or 12 and I was just fascinated by what made stock prices go up and down. It’s, you know, it’s kind of a sad story, but that was part of what I was raised to understand.

So coming out in that environment, I felt very fortunate to [00:03:00] get a job with First National Bank of Chicago. It doesn’t exist anymore. It’s part of the JP Morgan Chase conglomerate, but the work we did there, was about helping organizations to understand the risks that they couldn’t control or could control and ways to change that more to their liking.

So I worked with airlines, endowments, portfolio managers, banks, all sorts of different entities to help them change their risk profile, to something more to their liking and it was fascinating work. we were really on the cutting edge. This was when Chicago was the hotspot for markets and I would argue in some cases, risk management.

So that’s where it got started and then, as you had mentioned, I moved into doing this work for specific companies and I’m happy to talk more about that too.

Joe: [00:03:48] So, yeah, if you would, that would be great. What work did you do for the companies, for which you created these risk management tools, what was it that you did and what was the goal that they were trying to achieve?

[00:04:00] David: [00:04:00] It was all very new. I mean, you can look the actuaries and they’ve

been doing risk management for a long time, but what I would argue is that modern risk management really came into being in the 1980s, early to mid.  I was fortunate that that was the time that I was starting my career. A lot of organizations, particularly financial institutions and energy companies understood the risks that they faced or understood that they face substantial risks. There was more of an openness to how you might control those things. I went to a company called Principal Financial Group. That was the first one that I did, you know, very active risk management program. It was in their mortgage subsidiary. Mortgages are such an interesting financial instrument. I think most people don’t appreciate the complexity of a mortgage, but this company was originating mortgages, had servicing rights, and they had really complex risks, but they didn’t know that they were taking risks that I think they didn’t quite understand, but there were some smart people there, in fact, the CEO is an actuary. A lot of the people running the [00:05:00] organization were actuaries. I think they understood that there was something more to it.

 I came into that environment and helped them look at risks first on a portfolio basis. So the origination portfolio, servicing portfolio, and then next in what we’ll call a firm wide risk management approach which was what we used as a term back then.

This was probably around 1993. And I’m pretty sure that was the first for my risk management program in the mortgage banking business. The whole idea was to understand the moving parts of a business. What is it that drives your success? What is it internally that you do that might offset some of the changes in those drivers of your success?

What is it you don’t like about that? What is it you can change about that? What can you do internally in terms of your production mechanisms, your communication, to enhance the good stuff and what can you trade off to other people? That really fit well with what I been doing it for Chicago and in some of my other work prior to that.

That was actually one of my favorite jobs and we were really successful. The company grew in market share tremendously in part [00:06:00] because we had this really strong risk function. I think of that one as a big success. I’ll point to another one that I thought was pretty interesting too, which was right before I made this transition, that you talked about the introduction, at Piper Jaffray, which was owned by US Bank Corp.

At the time I worked for them, Piper had not been owned by US Bank Corp, except for the fact that they had a massive loss following the 1994 bond market debacle. 1994 happened to be a year that at Principal Financial Group, we did really well because we understood our risk, but Piper had some exposures to mortgage securities that they didn’t understand and it almost put them out of business.

They were over a hundred years old. The bank took them over, they knew they didn’t want these things to happen. When I went into interview with them, I remember sitting down with the CEO and the chair of the board, and then saying, first thing we want you to do is tell us if there’s anything more like this out there.

 I spent a few months looking at that, but the goal ultimately was to take risk management, which was [00:07:00] new there and frankly it  was viewed by a lot of people with skepticism, turn it into a valuable tool. Over the years that I was there, yeah, I think I was there three to five years, somewhere in that range, we took it from a place where people were very skeptical about it to where understanding risk became part of the business process, the business planning process, whether it was charging for capital or putting it in planning documents, looking at every deal we were doing with this risk lens on it.

And it wasn’t a risk lens saying what can go wrong? It was a risk lens of saying how does this fit in our portfolio? Do we understand the exposures? And are we making anything on this? Given the amount of capital we have to commit to it. I thought also that was a very successful implementation of where risks can be done well.

Joe: [00:07:49] The way you’ve described it, my reaction is that any company not doing the type of risk analysis you’ve described is [00:08:00] not really looking at its strategic plan in a holistic way. They’re missing an important piece in trying to project what it can really accomplish.

David: [00:08:12] I would agree. I’m happy to go deeper into that, but it’s like any aspect of your business, you want to understand as much of it as you can. You’re never going to understand every part of it. 

Let’s say, for example, look at, factories that pollute. In the 1970s, I grew up, not far from Gary Indiana. We would get some of the steel mill air that would come to our town, Lake Michigan was polluted, there are places up there that you couldn’t believe people were swimming or eating fish from.  But those companies weren’t being charged for that pollution. Then the Environmental Protection Agency came along, rules about clean water, clean air came along and now the Southern shore of Lake Michigan in most places is pristine and beautiful.

Those firms a lot of them aren’t there anymore, or if they are they’ve significantly revamped [00:09:00] what they were doing and the problem was that they were not accurately paying for the cost of doing what they do. One of the things that risk management does is give you one of those inputs that you’re generally not seeing now which is what is the cost of pursuing our objectives or in some cases, even the cost of not pursuing something else.

I think the transparency that comes with an enhanced risk program does exactly what you had just said, in terms of fulfilling your ability, especially at the board level, to govern, the risk taking that the organization necessarily does.

Raza: [00:09:32] David, over the past 20 years, you shifted your focus to establishing and implementing global best practices for risk governance at the board level and general practices of risk management. What led you to shift that focus?

David: [00:09:48] I think a lot of it’s always been there, in part of just describing the work that I was doing in the first half of the career, we really were looking at big organizational issues. Sometimes they were small parts of it, [00:10:00] but it was, but it was really how the things come together. When I was at Piper, I had run, chapters in Chicago, in Minneapolis for Professional Association of Risk Managers and that association had some governance issues that collectively several of us who ran chapters around the world tried to fix. We weren’t comfortable with how that had all been fixed.

I had this sort of detour in my career where we started another professional association with a commitment to helping an education high standards of governance. In fact, the model of governance that I talk about in my first book is really what we implemented at this organization with the idea being that if we share with each other still in the infancy,  this is around 2001 or so let’s say 15 years into modern risk management, if we shared with each other, what was working in Poland and Russia and China in Australia, wherever we were, we could make the profession better and we could start moving towards this place where more organizations [00:11:00] were incorporating risks.

That was the first go at that and I spent about seven years now, I guess it was about six years working on that and as I said, it was a career detour, but one that I truly loved when I handed that over to the people who I’d hired, over the years, I looked back at that organization and I saw we were really focused on how the technicians and how the practitioners of risk management can do their job better and then we were looking at how to bring that up to the C suite through a Chief Risk Officer or other means but in my work and my interest in the big picture of an organization the leap or the gap between the C-suite and the board hadn’t yet been addressed.

There were two things in that one leaving the organization I no longer was traveling the world, you know, meeting people in these roles every day I had to think to myself, how am I going to stay in touch with people? and so I started to create, this group, this DCRO that you had mentioned.

The other thing was, how do we then take this to that next level, the C-suite to the board. I’ve looked in [00:12:00] all of these places to say, where is there a need? Where can I be helpful? I’m reasonably good at getting people to collaborate on things. I try to bring people together to share their best practices.

And that’s what we did within Premia and now with the DCRO. honestly, it’s quite fun for me to do this. It’s fun for me to have these connections with people all over the world, in they’re really smart, good people. it’s a pleasure to try and contribute in a positive way to doing this.

Raza: [00:12:27] Well said David.

You recommend that boards create a separate Risk Committee and a number of companies have adopted that practice, but most have not. Why do you recommend a separate Risk Committee? Why can’t the Audit Committee, which is often tasked with this function, handle it? And isn’t it, the case that this depends on really the type of business and the level of risks a company faces? A grocery chain might be very different from high tech company?

David: [00:12:58] I’ve been in this risk management  [00:13:00] profession for 35 years or so and most companies still don’t have formal risk management departments. I’d say I’m patient, but the impact of risk management is significantly greater than it was when I started at this. You can find where there was risk management programs, 30 years ago, they are incredibly more important now. Companies that would have never thought of it before have them now and they’re really helpful. I think this progression is going to take place at the board level too. I joke with some of my colleagues that I’m not sure it’s going to take place to the degree that I’m satisfied during my career, but I have confidence because this is something that has value. If you can demonstrate value to someone and doing something, eventually it’s going to come around because if their competitors start doing it, which again what happened when we were at principal in that mortgage company we grabbed so much market share because we were doing this the right way, you’re going to see that in others, others are going to follow.

 You had asked about the difference between risk committees and audit committees. The way in which I’ve [00:14:00] described this to people is that it can be done together but an audit committee’s primary task is to be backward looking and validating. A risk committee as a stand alone, it has the primary task of being forward looking and anticipatory. You could take an Audit and Risk Committee agenda and cognitively somewhere in that conversation they have to make 180 degree shift in their thinking and I think that’s difficult for anybody to do. I think there are certain people who have a mindset that I describe as stochastic and stochastic mindsets don’t look forward and see one path, they don’t look forward and see three or four paths, like a best case, worst case, average case. They see thousands of possibilities and they actually see the steps that happen to get to those, some of the threats to those and some of the things you can do to enhance your success. Those are the kinds of people who serve really well on Risk Committees [00:15:00] and the value of risk committee, you’d mentioned grocery stores and I think high tech companies, there may be people who when they heard you ask that question, so well a grocery store that’s easy, that’s low risk and high tech company you know that’s stuff that maybe is significantly more risky, but grocery stores are like a lot of other businesses and that they operate on incredibly tight margins, they’re commoditized to some extent, they have a lot of competitors, they have high infrastructure, they have perishable inventory and they have a dependency on supply chains and on people being willing to enter their facilities. Now there’s more delivery going on now that in response to COVID, but every organization has complex risks and the complexity of those risks grows based on the number of relationships that you have. If you have third parties doing work for you the complexity of that relationship grows substantially. If you do work outside of one country, the complexity grows [00:16:00] substantially if you’re regulated.  I think every organization, I know some people like to throw out a number and say, if your organizations is this big, you should have a risk committee.

 I think the question really is for a board to have a conversation about how well they understand  the complexities of all the systems they depend upon for success. If they feel like they’ve got a handle on that  and I don’t mean feel like, yeah, I get risk, but they have a really deep discussion, maybe even guided by somebody else on the outside, if they really feel comfortable that they get those complexities and how they interrelate, you may not need a risk committee, but  I find it challenging, even if I throw out a number and say a hundred million in revenue, I find it challenging to think, an organization that size, or maybe even half that size can’t generate enough positive return through a better understanding of risk to justify some investment in risk infrastructure. Probably a longer answer than you wanted, but you know, there’s a reason why I advocate for this so strongly.

Joe: [00:16:58] You said something about [00:17:00] forward-looking and anticipatory is one of the things that distinguishes what a Risk Committee might do versus an Audit Committee, that I understand and that does resonate. Give me an example of something in an actual company where a risk committee looked forward and was anticipating something that made a difference to bring it to, you know, an actual example so that people can really kind of maybe understand a little bit better.

David: [00:17:30] I’ll do is I’ll just talk about a company I talk about in the book and HEB had what in essence was the equivalent of a Risk Committee at an executive level that was looking at the kinds of things that threaten their ability to serve their customers. There’s a good story in Texas Monthly talking to CEO, their senior executives around sustainability and supply chains. They started looking at the possibility of pandemics back, I think, 15 years ago [00:18:00] and so they knew what to do. They had a plan laid out. I’ll go back to Principal Financial Group, and an as example again, and this is not, it, it wouldn’t be a formal Risk Committee at the company at that time, but it would be the equivalent of such, saying, how are we going to make sure we can stay in business? If something interrupts our normal facilities for operation? When I worked there, Des Moines, Iowa, which is where the company is based was the largest city at the time in the country to lose its entire water supply because of the confluence of two rivers flooding that overwhelmed the 30 foot high banks of their water treatment plant. All of a sudden everything in downtown Des Moines was flooded and unusable because there was no fresh water.

The next day I was told to meet at a specific point. I went to that point. I was handed a folder. The folder told me exactly everything I was going to be doing for the next 12 hours and over the next week. [00:19:00] We were up and running, managing a multibillion dollar risk portfolio in about a day and a half. If we hadn’t been thinking forward, if they hadn’t been thinking forward and what was the equivalent of their Risk Committee that would have been ever happened and I can’t tell you how many millions we might’ve lost, because we weren’t able to do anything about our exposures. Those kinds of conversations of the same things that our Risk Committee is having on a much bigger picture about the drivers of an organization.

Some of these drivers are cultural, so I’ll have conversations with individual board members, which I tend to work with individuals as opposed to boards as a whole, but those could be about cultural changes and some of those cultural changes come about because you put a Risk Committee in place.

The reason you put a Risk Committee in place as to understand the impact of those cultural changes. Once you start piecing those all together to say, where does this come back and impact us? It becomes much more clear it’s akin to understanding your clients better, [00:20:00] to understanding market share better, to understanding your competitors better.

You have now a much clearer picture on the things that affect the bottom line of your success and what you might do about them. That’s the forward-looking aspect and again, culture is one example that I think is generic enough that I can mention but we live in a time over the last three years, I would say where cultural issues have exploded for all boards. It’s not just gender, it’s not just race, the cultural issues are changing rapidly with the generations that follow, the ones we’re in and if you don’t identify that as a risk, if you don’t have somebody looking forward and saying, do you understand where this is going, you’re missing out on something substantial.

So I don’t know if those are specific enough for you, Joe, but, but I think the, the idea generally is understand what drives your success, go to the first principles of those and make sure [00:21:00] you understand them and that’s what a Risk Committee tends to be really good at. These are things the whole board should be doing, but the risk committee can refine that to what the board can most effectively spend its time focused on.

Joe: [00:21:10] Yeah, no, that is helpful.

 When I’ve raised this possibility of a Risk Committee, one thing I’ve heard is There’s a danger that the Risk Committee will veer into management role. How do you make sure that the Risk Committee doesn’t do that because obviously that’s an important aspect of all governance. We don’t want the board to be doing management work and vice versa. How do you look at this in a way so that the Risk Committee does not veer into doing management’s work?

David: [00:21:40] I think it’s no different than the board. In the environment we’re in right now where boards and organizations are under threat, there’s substantial pressure towards forming what are called tight cultures. Michelle Gelfand has written a book on tight and loose cultures. Tight cultures are ones that try to set rules and limits and you get tight and tighter [00:22:00] cultures when there’s a threat.

If you’re somebody who is moving towards more tightness at the board level, you want more control. Most of your people on the board are successful people who’ve run businesses. That means they want to or they’re going to be driven towards trying to interfere more with the management of the organization.

 Just because you’re looking at risk , I don’t think it’s any different and your board colleagues are going to do a good job of telling you, Hey, we’re crossing the line into management. I haven’t been on a board yet where somebody didn’t start to ask a management question and somebody else in the room, didn’t say, “Hey, that’s management, not us,” but not always right when they say that, but I think there’s that personal check on each other.

If you’ve got somebody on a Risk Committee who’s had some experience in a risk role and I don’t think that that’s necessary, but if you do, we all understand what that’s like too.  We don’t want somebody coming in and telling us how to manage risks. I’ve had that experience. It’s I don’t enjoy it. Nobody’s in the trench, like a Head of Risk or somebody who’s doing the risk management.  It’s still like [00:23:00] any other board position it’s incumbent upon other board members to make sure you’re not crossing that line. You know how important that is because it’s a breach of trust and there’s a huge, there’s a huge trust element to the board empowering the CEO, to achieve and pursue the goals that the board has set within the boundaries. As soon as you cross that they don’t have accountability anymore. You have to be adamant about maintaining the trust of that handoff or you can no longer hold them, hold them accountable.

The same is true of risk.

Joe: [00:23:31] Yup. That makes sense. Let me ask you just a little bit about the Chief Risk Officer. Traditionally, as I understand it, the Chief Security Officer CSO has been responsible for physical security and safety of employees, assets, facilities, et cetera. While the Chief Information Security Officer has been responsible for protection of data may have, you know, an IT systems or an engineering background.

Why should a company move to a Chief Risk Officer rather than a [00:24:00] CIO or a CISO, you know, what’s the case for that?

David: [00:24:03] And I don’t think it’s a rather. Everybody has specializations. The Chief Risk Officer, one of the things that they’re able to do is to aggregate and bring it all into a common framework. A CISO is going to be concerned or a CIO are going to be concerned more than just about the impact of risk taking on the bottom line of the company. I mean, there’s some very technical issues that they’re involved in the head of risk management say in, an investment portfolio, they have a different set of technical things that they’re working on, but their work, their reporting, their analysis looking forward needs to roll up in some sort of a framework where the organization can look at itself at a big picture.

Once it gets up to the board, you don’t necessarily want to have business unit specific discussions about whether you’re taking the right risks. It’s really a question of how is the CEO looking at this and how is the CEO incorporating all these different moving parts? I would say the Chief Risk Officer is [00:25:00] somebody who has that task of taking all these disparate technical skills and technical roles and bringing them into a common risk framework.

Raza: [00:25:09] So David then, from the board’s perspective or the risk committee’s perspective, what do board members want to hear from  CROs CSOs CISOs what is the kind of information that should be coming up to that function?

David: [00:25:24] Well, the really good Chief Risk Officers are the ones who think like business people. Okay. They’re not control people. There are people who have the same mindset of an entrepreneur, the same mindset of the head of a business unit. In fact, the best thing that risk managers can be doing within the business units is advising those businesses and how to take risks well.

The questions that come back to the board,  Risk Committee or board as a whole are really ones about the whole picture. Let’s take the Chief Risk Officer, put them in a Risk Committee meeting and I think some questions that that Risk Committee might ask of that person on a regular [00:26:00] basis, a couple of examples are: what’s changed in our risk taking since you last talk to us. It’s pretty open question, but that person, if they’re a good Chief Risk Officer, they’re already going to have been thinking about that. They already have things that concern them or things that are interesting to them that they’re going to want to share with you. Since they think like a business person, one of the other questions you might ask is “what opportunities to take risks better do you see? “Are we competitive in terms of what it’s costing us to get the capital to pursue our objectives? That’s a really critical one. “What aren’t we looking at closely enough?” Again, getting to this idea, something more that, that maybe at the board, it hasn’t popped up yet.

I think another really important one, because sometimes there’s a conflict in risk management with the business units is “what can we be doing to support you?” So does the Chief Risk Officer feel like they’re being supported within the organization and by the board or do they need something more?  And then one, I think that’s [00:27:00] really critical is, “is there a free flow of information in the organization? ”

Raza: [00:27:04] If you extend this, then, some people would argue that at the end of the day, isn’t it the case that the CEO of the company is really the Chief Risk Officer?

How does a Chief Risk Officer in a company that doesn’t have any real impact on them if the risks that they’re tasked to manage blow up, is the risk management job, even real without any skin in the game?

David: [00:27:28] An answer to your first question it’s yes, especially from a board perspective, the Chief Executive Officer is the ultimate Risk Officer for the organization

There are some countries in some jurisdictions where Chief Risk Officers are hired by the board where Chief Financial Officers are hired by the board. And I think what we wind up doing at that point then is again, diffusing, accountability. The board has the responsibility to validate what’s being represented to them. That’s different than hiring the Chief Risk Officer.  If I want to ask a question of the [00:28:00] Chief Risk Officer to validate what’s being represented to me by the CEO, that’s not just fine, that’s part of your fiduciary role.

This question about skin in the game: there was a time when risk managers were seen as owning the downside. Well, if risk managers own the downside, then that means the business unit owns the upside. Again, accountability goes away. Because why didn’t my risk manager take care of that?

A few minutes earlier, I was talking about this idea of the risk managers, having this role, where they’re advising, they’re advising on risks that maybe the business unit doesn’t understand well, they’re advising on how they might be able to get the capital to pursue this risk better, they’re advising on possibilities of doing the same thing in a different way. Ultimately, it’s still the head of the business unit or roll it all the way up, it’s the CEO who has to decide what the portfolio of activities is going to be that makes the best use of that capital. Then the risk manager has skin in [00:29:00] the game because the risk manager is compensated when there’s success and they also pay the price when there’s failure. You want them to have an interest in the upside. If a risk manager thinks their career is based on not having loss, guess what they’ll pursue.

There was a time in the 1990s, I don’t know if you guys remember Proctor and Gamble and Gibson Greetings, and a few other places that had massive derivative losses. Well, I had a role during that time as a very short period of time, they had this role where the risk manager was supposed to be the cop. Find everybody who’s doing stuff that’s out of policy and make sure they don’t do it. That’s a horrible relationship. I mean, those relationships just don’t last and they’re not very fun.

 I really advocate for this idea that business lines and businesses own the risk and the risk capital is something that the organization owns. You compete for risk capital. You compete for the capacity to take the risk and pursuit of what you want to do as a business unit. And sometimes times your ideas don’t pass muster and part of the reason they don’t pass muster, just because [00:30:00] you have a good risk management person telling you the cost of taking those risks. Sometimes the risk manager says, Nope, you’re not taking enough, go for it. This is a great risk to take, especially given what we do in other parts of our business.  I think that gives them skin in the game and I think it’s a really good question Raza. You want everybody, everybody who has some business mindset to them, to have skin in the game.

Joe: [00:30:22] What should board members look for in management with respect to risk reporting? What should they see? What are helpful tools? What’s the dialogue like? Can you talk a little bit about that?

David: [00:30:36] Yeah. So again, it’s like that question before. It depends on what the organization’s structure is and the kinds of risks that they face and that’s going to shift throughout time.

You know, cyber risk has become a massive concern and it’s been there for a while, but, one of the things that the DCRO,  we did a survey recently and I want to say, I’ll get the number wrong [00:31:00] here, but let’s just say there’s a multiple fold increase in the amount of phishing attacks that companies are seeing because they have employees working home. I’ve seen people who are really smart fall for these because they’re getting good.  If you’re on your iPad and you click on a link, and you can’t mouse over that link to see what the link takes you to, you’ve just fallen over for that phish. Cyber risk is something  that organizations have to have pushed farther forward now.

Reporting on the human story, what are we doing in terms of understanding our customers different needs in the pandemic and what those needs might be two to three years from now? What is it that we’re seeing financially? Are there changes in the financial flows that we’ve heard based on some outside event or some internal event that gets into more of the data. You’ve heard people talk about heat maps and ways for people to summarize things they should be concerned about by making them red, green, [00:32:00] and yellow. I find those to be shortcuts that take away the value of a discussion of why somebody thinks you should be looking at an issue positive or negative.

I’m not a big fan of these heat maps. Ultimately what we’re trying to get to is this transition from risk is downside or I get risk because I’ve been successful in my business to saying risk is something that costs us money. It’s much harder to see it because it doesn’t necessarily appear on an income statement, but it does cost because either in reputation or financial cost or borrowing, whatever it might be, you need all sorts of forms of capital to pursue whatever your goals are. Ultimately what we’re trying to get at is to say through the reporting back to the board, how do we know that we’re making the most effective use of this really scarce thing we call capital [00:33:00] and human capital, technical capital, IP, financial capital, whatever it might be. How do we know that we’re getting the most use out of that and without crossing that line, that you talked about management, the answers that you’ll get will tell you whether you should have faith in what’s being told to you because the CEO should know this is being allocated and how they’re making those decisions.

 They ought to be able to spell it out, in ways that are clear for the board. I think it’s a dynamic process, just like every board discussion I’m sure you’ve been part of  Joe. The things that are there change each meeting based on the environment that you’re faced with, but I like discussion, I like the qualitative analysis maybe more so than the quantitative analysis.

Raza: [00:33:40] David, we talked about it earlier, you’re the founder of DCRO, can you tell us what led you to create that group?

David: [00:33:47] When I left PRMIA before was to look at that next gap between the Chief Risk Officer and the board and the C-suite and the board.  DCRO stands for Directors and Chief Risk Officers group. [00:34:00] It’s a collaborative, it’s a non-revenue entity. You could call it my hobby but it’s something I really enjoy and we have members now about 120 countries. It’s a couple thousand, maybe 2,500 members, and we collaborate by sharing our best practices.

I have a podcast, similar to what you guys do to talk about specific risk governance issues. We’ve put out best practice documents to help people create board Risk Committees, Compensation Committee, Risk Governance, Cybersecurity,  how you find the right kind of people who have this stochastic mindset that I talked about and our goal there is to raise the practice of Risk Governance at the board level, because if you think about some of the social issues that exist, all of our organizations have relationships that extend way beyond the legal boundary of our company, to extent that our corporations are more effective risk takers, they’re better employers, they’re better at returning into their community, they’re better at serving their [00:35:00] customers, they’re better at serving their suppliers. All of these relationships become better. My wife was a pastor. It was much easier for me to point to the things that she did to make lives better than what I did. But I could thru about three or four different steps go through to the point where what I’m doing today can make people’s lives better. I think a lot of the people we have in the DCRO are smart giving, people who want to see us all do better in whatever it is that we’re pursuing.

Raza: [00:35:27] Talk a little bit more about what DCRO offers its members and how do people get involved and engaged?

David: [00:35:34] Let me talk generically about the DCRO, the whole goal there when I’m working with individual board members and then pushing these documents out to boards as a whole, is to get them to think about what they’re doing differently. Where I come in and work with individual board members, the conversations might be here is the situation I’m facing this week, how do you think I might address this with my board members?  

I’d mentioned cultural issues or we’ve got [00:36:00] this emerging challenge in our subsidiary in Latvia. I don’t have any clients who have subsidiaries in Latvia, so I’m safe, but I can have a perspective that I bring from conversations with these people all around the world, or if I don’t have that perspective, what I’m able to do is to reach out to somebody in the DCRO and say, Hey, do you mind if we have this conversation or even better, I connect those two people and they have the conversation together.

When I try to work with boards, I try to introduce people to each other because, you’ve got a boards that you serve on that there are companies, yes, that would be similar enough, but are not direct competitors that you might find it. Interesting to talk to a board member about it.

If you go to an NACD meeting or the same kind of organization and other countries, one of the most valuable things you’ll do there is meet other board members and you have a one off conversation and that conversation takes you down a path you’d never anticipated, and it might be a relationship you have for years but you get something good about that interaction. We’re really [00:37:00] trying to do that. When I work with individual board members is to say, here’s some resources you may or may not have known of and here’s some things you might want to think of. Here’s some stuff that I’ve done or seen others do and I find that when I work with the individual board member and they bring that to the board themselves, that’s much more effective than having a consultant come in to meet with the board as a whole, because regardless of whether the board is hiring that consultant, that consultant is still an outsider and when the change comes from within when the change it comes from somebody they’ve worked with and the respect, I think it’s much more, more successful. Sometimes these things take two, three years to come to fruition.  I’m like a counselor.  It’s nice because I do have a lot of people I can connect people with and I’ve seen a lot of different ways of doing things and so I’ve generally been pretty good at being able to conne people.

Joe: [00:37:50] David, Raza and I both really enjoyed reading your most recent book: The Board Member’s Guide to Risk. I thought it was comprehensive and accessible [00:38:00] and that’s really what makes it, I think very valuable. Why did you decide to write the book and who is your target audience?

David: [00:38:07] Well, I appreciate those kind words and one of the words, particularly that you use, that I appreciate most is accessible. So it’s easy for people in risk management to start getting into technical speak. And, even if you, if you read my first book, I mean, my first book has some pretty deep ideas in it and you know, my wife made it through maybe the third chapter. I can’t remember. She never finished the whole book. and I told her I wasn’t offended by that, but you know, it’s, there’s, it’s still out there and I still remember that.

But if you can’t get people to a common point of using language or understanding people will resist talking about something. So if I walk into a boardroom and I start rattling off about risk topics that I’ve worked on for 35 years, I guarantee you at least a third, if not two thirds of that board won’t understand much of what I’m talking about [00:39:00] and because they don’t want to sound like they don’t know what they’re talking about, the discussion won’t go any further.

So one of the key objectives of this book was to create something that is small enough, accessible enough to use the word that you had used, nontechnical enough, that you could almost have a book club at the board and say, we’re all gonna read that this book, if you understand risk, you can read this book in an hour and a half, if you don’t understand risk, it’s going to be maybe two and a half hours. So you’re not looking at a huge commitment of time but in the same way that people who are in book clubs come back to a discussion and say, well, what are the key things you took away from this? What are the key ideas we think that resonated with each other that starts a great discussion about risk.

The other thing about it which was really important to me was that we get away from this idea that risk is about loss or uncertainty and in particular, that risk and opportunity are two different things. As soon as you take [00:40:00] risk and put it in the realm of loss only, it becomes a negative, it’s framed negatively, we have all kinds of social psychology studies on how people respond to negative framing of discussions and questions. We’ve got to get past that and we know that organizations have to take risks or they go away. I mean, that’s essential for the long-term survival of any organization, so let’s make sure we take risks smartly.

The first chapter in the book is about that. It’s about coming from where we likely are today, which is risk as loss and getting to a place that’s much more positive learning an essence to embrace risk.

Joe: [00:40:38] One of the things that really struck me was your discussion about risk in the context of group think. Which creates risk, you know, on this show and, and really everywhere in governance we talk about the importance of diversity on a board, and there’s so many reasons for that, but I love the way you put it in talking about the risk [00:41:00] that would you refer to as group thing creates.

Can you talk about, how that again makes the case for the importance of diversity at the board level?

David: [00:41:11] And we talked just a little bit about this earlier. I hinted at it a little bit earlier when we talk about some of the issues of, of boards under threat, but, you know, you had asked in the last question and I don’t think I ever answered it with the target market was for the book. but it’s boards C suite the MBAs, like I had, I’ve mentioned before.

In part, because we need to have this change of mindset about risk, but two things happen at a board that can stimulate this kind of, well, maybe three things that can stimulate this kind of group think. One is that we really like people who are like us. Generally, we do. So if you have a board nominating people to join the board, to replace people who are leaving, they’re almost always going to be more naturally drawn to people who are like them. We see that in our social [00:42:00] sorting in all parts of our own lives. It’s much easier for us to be around people like us, who agree with us in times of threat when an organization’s facing a competitive challenge or crisis, like we’ve got with COVID. I mentioned how we’re pushed towards these sort of tighter controls. We also were pushed then to be more like each other and to not want to do anything that’s different when times are really good though. We have a similar problem in that we stop listening to other people, particularly outside of our group, because we’re so good at what we do. I want to challenge you guys to tell me where the closest Kmart is. Did you guys have Kmarts out there? I’m not sure if you had Kmarts out there

Raza: [00:42:43] We did, the last one, I know where that one was.

David: [00:42:47] Yeah. In the Midwest, they dominated and, They knew what they were doing, right. They lost, they lost perspective that somebody might know what they’re doing better than, than those people did because of their success.

In our trading rooms, we [00:43:00] used to have this expression, the gods first make proud of those they would destroy. It was really helpful to have somebody else in the room, tell you that at the time that you thought the most of yourself, because it was a good reminder that things can go wrong. When you push for and when you demand diversity again, not just gender and race, but experience. When you push for that diversity among a board, you make it far less likely that any of these situations take hold because people come from problems and come to problems with a different set of experiences. So it’s one of the great challenges in our lives, right? One of the great challenges in our lives is to develop an understanding of where somebody else has come from. And to listen and learn from that. That’s one of the reasons why diverse boards are better generally than non diverse boards. And again, it’s diversity across all sorts of measures. It’s because people come to problems with a different set of experiences to [00:44:00] solving problems and since they’re on the board, they’ve probably been sitting successful at solving problems in a different way than the others. So when we have to be nimble, when we have to change, we have to innovate. We have to be able to respond in a competitive environment, or even at nonprofits, honestly, to have these diversities of experience and perspective and incredibly important to have that an openness to hearing those and learning from those, our boards become better.

Joe: [00:44:28] So essentially you’re saying there is an inherent risk and having a board that’s undiverse, because people are thinking of like, they’re going to miss something.

David: [00:44:38] It’s one of the reasons why I don’t like when publicly traded companies try to make it difficult for shareholders to nominate people to the board because the people who the board is bringing, yeah, they may, they may be great for the board and the board may have gone through nom gov and said, we need this talent set. We need this skill set. We need this experience set. But there are [00:45:00] people who have every interest in that organization succeeding the same, if not more interested in that organization succeeding as the existing board does, who may have people, they think it would be even better for the board at this time, because they’re looking at it differently. So yes, it’s critical in order for the organization to achieve its best.

Raza: [00:45:17] David. I have my favorite story from the world of risk, where a Turkey is fed every day, reliably, and every day the Turkey gets food makes the Turkey believe that they will get the next meal, and their belief even stronger in that, of course it goes on until the Wednesday before Thanksgiving and then abruptly there is a catastrophic event of great impact to the Turkey.  From the Turkey standpoint, it is a Black Swan event, but from the butcher’s perspective, it is not. How can boards and then, an enterprise avoid being a Turkey?  What do they need to do to be able to deal with the unknown [00:46:00] unknowns?

David: [00:46:01] Well, you know,  this example or this story that you cite resonates a bit more with me cause, out here in the Midwest, I happen to live near some Turkey farms. So I see turkeys in horrible conditions in cages, on the backs of trucks, going off to discover what the butcher already knew.

 You know, I suppose there’s something in this that really relates to the conversation before about the gods first make proud of those they would destroy. If you’re only focused on how good things are and what you’re doing to get more of what’s good or if the good is just coming through and you don’t seem to be having to do any work for it. Turkeys, at least that I’m aware of, can’t organize and communicate. Maybe they communicate, but probably not at a level that allows them to organize if they could, it’d be a pretty dangerous thing to start putting them on that truck because they would have already thought through this now humans, we, we thankfully have the benefit of the ability to communicate.

So for us, I think the question isn’t why, or the question [00:47:00] isn’t, what’s going to happen tomorrow, but there’s a good question to ask,:”why are we getting this food? “Why is it that our customers are buying our product? Why is it that we have this market position? And then the natural conversation has to go to what could change that.

And, and so, you know, maybe your outside consultant is the butcher. And if, turkeys could organize and talk, somebody might say, you know, I’ve heard of this thing called a butcher. Why don’t we have him come in and talk to us about, you know, his job and if, and if it did, you’d have a much smarter set of turkeys.

So, so there’s, you know, maybe I’m, maybe I’m taking this analogy too far, but the idea is that that as long as we’re getting different perspectives, and as long as we’re always questioning what it is that we do well and why it is we’re being paid for what we do. I think we can avoid that fate for the most part, when you respond, let’s say they they’d also have this resiliency. They also had this problem response mindset. If the [00:48:00] truck showed up, that’s when they would organize and do something.

Joe: [00:48:02] The best answer to the Turkey question that I’ve heard yet.

David: [00:48:07] I’m glad to hear that. Thank you.

Joe: [00:48:09] No, but it makes perfect sense to me. That’s why that is the answer. Actually, you need to think beyond why is this, you know, it’s good now you really need to think about the future and asked questions about what is going into making today good and what could disrupt that? And to the extent you’re not doing that, you’re not doing your company, your business, or whatever, endeavor in which you’re involved you’re not doing any favors.

David: [00:48:36] and I think that’s part of how boards are evolving, Joe. It’s becoming more of a job. and I think that limits the number of boards people can be on now in ways that it didn’t before. So it wasn’t all that uncommon 15 years ago to find people on five, six boards of large companies, it’s pretty hard to be on more than two or three right now. And to do the role as you just described it. And I think that’s a good [00:49:00] change.

Joe: [00:49:01] Excellent.

David. It’s been great speaking with you today. Thanks for joining us. I hope you and your son and your daughter will continue to be well and stay safe, and thank you all for listening today. To onboard with our special guests, David Koenig.

Please stay safe. Take care of yourselves, your families, and your communities as best you can.

Raza, please take care. I hope you and your family continue to be well, and that you are staying safe also.

Raza: [00:49:30] Yes, Joe, we’re all staying safe. Thank you. And I hope you and your family as well.

David: [00:49:34] And thank you both. I really enjoyed this conversation.

Joe: [00:49:37] Thanks David. Thanks Raza.

11. David Rosen on the importance of boards in private companies

David Rosen has been a CEO, served in other C-suite capacities has served as a board member and is a life-long entrepreneur – and has developed a passion about the importance of boards in private companies.  As a result, helped found the Boston Chapter of The Private Directors Association (PDA), a national organization whose focus is to support the owners, board directors, investors, and C -suite executives to improve their board caliber as well as the governance practices for private companies.

Thanks for listening!

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

Links

http://www.linkedin.com/in/davidarosen

PDA Boston

Quotes

“I won’t start a company without creating a board almost from the beginning.”

Big Ideas/Thoughts

There are a lot of governance needs is on the private company side, which is why I believe the PDA is so important. 

There is more money on the balance sheets now, as of 2019, in private companies, then there is in public companies, while the number of publicly traded companies since the .com bubble is almost half for what it is today.

The private capital formation into companies has been a tremendous driver of activity and wealth not only in this country, but worldwide

I advise my clients from the beginning that they should think about board governance- after they’ve learned cashflow balance sheets and cost of goods sold it is time to start focus on governance issues

It really behooves a board to understand the skill sets that are required for the current and long-term future of a business, which may be different from what it was three-five years ago.

Transcript

Joe: [00:00:00] Hello and welcome to On Boards: a Deep Look at Driving 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 board 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.

Raza: [00:00:26] Joe and I speak with a wide range of guests and talk about what makes a board great and makes a board unsuccessful, what it takes to be a valuable member and how to make your board one of the most valuable assets for your company.

Joe: [00:00:42] Our guest today is David Rosen.

Raza: [00:00:45] David has been a CEO, a board director a C-suite executive and entrepreneur, and an investor in private companies. He is the founder of the Acrelic Group, which works with companies on revenue, growth, strategic [00:01:00] initiatives, organizational alignments, and managing risk. He is also a founder of the Boston Chapter of Private Directors Association.

 Joe: [00:01:11] Welcome David. It’s great to have you as a guest on On Boards

David: [00:01:15] Thank you. I’m really glad to be here. And, I really think you’re talking about a very important topic here, so whatever I can do to help, Joe and Raza, I’m glad to be here.

Joe: [00:01:26] Great. So, David, you’re one of the founders of the Boston Chapter of the Private Directors Association. Can you tell us a little bit about what the PDA does?

David: [00:01:37] Sure. The Private Director’s Association or PDA, it’s a national organization that was founded in 2014 in Chicago, and really got ramped up in 2015. Its focus is to support the owners, board directors, investors, and C -suite executives to improve their board caliber as [00:02:00] well as the governance practices for private companies.

Now  five years later, it has 900 members across 17 chapters in the US and it serves its member goals and aspirations in four areas: First,  in identifying and positioning for their first or additional board director, employment or other business opportunities. It helps them in expanding their network of peers and smart business and board directors along with supporting thought leaders, academics and practicing service providers.

The third goal that our members typically have is learning and educating themselves about private company governance, best practices and challenges as well as up-leveling their skillset in board governance.

And finally, the last goal that most of our members have is that they want to get involved in a pay it forward and have an effective community where they [00:03:00] can pursue opportunities where they can speak, moderate, provide thought leadership. They want to often test their, skills or perspectives before they put it into practice or they want to collaborate in actionable committees.

Joe: [00:03:15] That’s great. Was there anything prior to the PDA that was focused exclusively on private companies, as far as you know?

David: [00:03:26] You know, that’s a good question. I’ve been a member for a little more than two years now. And I don’t know what was here before that, but, I think we distinguish ourselves as the primary organization and member-driven nonprofit towards private company issues.

Joe: [00:03:45] I gotta say it is interesting to me, you know, most of my work, in fact, exclusivel my work is with the private sector, that it is so recent that the PDA came into existence, but I suppose that does underscore the growing importance of [00:04:00] private company boards.

David: [00:04:02] Right. You know, it’s interesting, Joe, when I joined the PDA a couple of years ago, I didn’t think about private company governance versus public company governance. When I’ve done M&A work, and I’ve developed strategies to get into new businesses and markets I’ve never segmented the market by private versus public.

But what was interesting is that I found all these factoids and when I see these factoids happening at a macroeconomic level, you know that things are happening or bubbling up and things are changing in the current industry.

One factoid is that there’s more money on the balance sheets now, as of 2019,  in private companies, then there is a public company.

Another factoid that kind of blew me away to give me a sense of the, of the momentous size of private companies and their impact to our GDP, was just the fact that there’s more money being spent in [00:05:00] private family offices, not necessarily the businesses, but just family offices that invest multigenerational wealth, than there is in the total worldwide hedge fund market.

Joe: [00:05:12] Right. You know, Raza and I have talked a little about this in the past and it really is pretty stunning to think about. I don’t think it’s commonly recognized the extent to which the money and the private business world has grown so much.

Raza: [00:05:28] The private capital formation into companies has been a big, tremendous driver of, activity and wealth not only in this country, but worldwide. We also talked about it earlier in our podcast episodes that the number of  publicly traded companies since the .com bubble is almost half for what it is today. And so that also tells you the state of the public markets. So both of those dynamics combined really does mean that a lot of [00:06:00] governance need is on the private company side.

Joe: [00:06:04] I’m curious, David, what brought you to the PDA to begin with? I think you joined the chapter in Chicago. You said?

David: [00:06:09] I was invited to a speaker panel program in Chicago by a neighbor and friend of mine and the program itself and the way the PDA conducted its program, and the happy hour beforehand of networking was strikingly interesting to me. So not only was it a great program of content around board governance and private companies, but the networking portion where there was good cocktails and food before the presentation, I remember meeting at least six people who had amazing experience across the spectrum of family businesses or founder-led businesses and had great stories and they were smart people and they were friendly. One thing that attracted me was the culture of this association.

I’ve been a member of [00:07:00] NACD. I’ve been a member of the Planning Forum. I’ve been a member of the ACG, Association for Corporate Growth and I was also as a CEO of my own companies. I’ve been a member of Vistage off and on based upon what my needs were but I really liked the culture that I found here and the fact that it really it’s a culture that I’m not sure was basically a Midwestern culture or whether it was the principles that were driven by the founders. What I now know is it was really a combination of both, where they really pay attention to the members and the networking value, and the fact that most of our members want to expand their network when they joined the PDA.

Joe: [00:07:40] Yeah, well, it’s interesting because a lot of organizations offer networking, but it’s variable to say the least, sometimes it works, sometimes it doesn’t sometimes it’s just almost useless. So it’s interesting that that is one of the things you think is a real strength of the PDA.

I guess the mid-Western roots could [00:08:00] explain it and maybe, I mean, is it possible that it just, that the people, because it’s a relatively new organization, more likely to have more in common to begin with? Is that possible? I mean, I’m just trying to figure out what makes a group better at networking, more valuable to those members for networking purposes.

David: [00:08:20] Well, I can give you an example. So one of the things that was apparent to me after my second or third meeting was that no one was standing alone for too long and if I’d see someone standing alone, I’d see another member walk over to that person, introduce themselves, start a conversation, and then immediately move them over to somebody else that they could introduce them to that was probably in line with what was on their mind at the time and that culture, I think is principled and proactively demonstrated, but also [00:09:00] it may come from the Midwest.

I’m very visual person and you know, when I think of public companies, when I’ve looked at them in the past, I see them in their lanes and there’s a lot of conformity across public companies and how they govered.

You’ve got your FINRA lane, you’ve got your SEC lane, you’ve got your Sarbanes Oxley lane and you’ve got your IRS lane and all those lanes force you to manage and govern consistently across company to company. So when I think of public companies, I think that they’re managed and as long as you get the ball down the middle, keep it out of the gutters you’re going to hit the pins at the end.

I never realized until I joined the PDA that while I was learning more at a macro level, and I’ve looked at thousands of companies that were mainly private for acquisition by my clients, that when I look at the governance styles of private companies and even the leadership styles [00:10:00] there’s very little conformity. With my visual mind, what I think of as a miniature putt golf course, and so your first hole, you’re starting out where your cup’s 180 degrees behind you, and you’ve got to go through a windmill and a river to get there.  No two companies are ever alike because they’re no two miniature putt golf courses are alike.

Joe: [00:10:21] I just want to ask you though in terms of the companies that are involved in the PDA, is it everything from startup to major family businesses? Is it private equity and venture businesses? Is it all of that or does it focus on one area of private?

David: [00:10:39] Our members on a national basis come from almost all sectors of private companies and that includes family offices or businesses owner ,founder led companies, PE/VC backed companies, even employee owned ESOP’s -we have a number of people who are [00:11:00] on boards or are fiduciaries for ESOPs.

I’ve been in Boston for nine months now. We started the PDA in January, February timeframe and what I’ve noticed is that there’s a much more heavily, PE/VC backed focus here than there is in Chicago. I think that makes sense with all the tech companies here, the biotech companies here, there’s a lot of patterns, but at the same time there’s construction companies in Boston, there’s construction companies in Chicago and there’s construction companies in Tampa and all the other locations of the PDA.

I think that we’re going to develop our own flavor around technology, but we’ve got chapters in San Francisco, in LA that have commonalities with us and so we’re starting to bring our chapters together for social so that we can meet other chapters as well.

Joe: [00:11:53] Does it encompass both fiduciary and advisory boards? Is it all kinds of governance or is it more in the, the [00:12:00] roles of directors of fiduciary boards?

David: [00:12:03] We actually encompass both. We’re focusing on experienced board members because we believe that that if you get experienced board members, you’ll attract the aspiring and emerging ones,  but we, we really are very member-centric. So we pay attention to the various demographics of our members and the various goals of our members so that we can pay attention to their needs.

So we have fiduciaries. We have a deal makers. We have a lot of service providers. I think somewhere about 25% of our membership are service providers, but interestingly enough, part of the Chicago culture again, is that everyone knows that when they’re at an event for the PDA, it’s really a pay it forward, share your intellectual property and knowledge in a solicitation-free zone. So there’s no real solicitation going on. It’s okay if you go outside [00:13:00] and say, “Hey, can we meet another time or something else?” but we really are looking for people who want to give back and pay it forward. 

Joe: [00:13:07] Can you talk a little bit about some of the programs that offers that you think are particularly effective?

David: [00:13:12] We offer some amazing programs for our members and again, it’s focused on the needs and goals of our members, including ourselves. One of our most attractive programs is our directors development program: that’s a hands on program where an experienced board member who has typically been involved in recruiting, more board members for their boards will be a mentor to a PDA member that gets assigned to them.

And what that mentor does is that they help them one review and improve their board CV.  If they have one, they’ll help them improve it. If they don’t have one, they’ll help them create their first board CV, which is really important if you want to get selected out of those two or 300 [00:14:00] candidates to get down to the top 10 that are going to be interviewed, you need to have a board resume that speaks to your board experience or your potential for a board experience.

The second thing they do is they walk the mentee through a 70 plus page compendium document that’s been created from the founding of the PDA back in 2015. It’s a document that spans all the challenges and governance practices across the various forms of private company models.  Family business issues, where you have a fiduciary board, you’ve got a family board and then you’ve got somebody wearing their matriarch cap on or wearing their grandchild hat on, and how do you distinguish what they’re asking and how do you keep things in order, to, you know, the various forms of ESOP models and what the issues are CUT . If an ESOP gets an offer for a dollar above their current market share [00:15:00] price, what do they have to do? Do they have to sell an ESOP company? Those are real tough issues that have to be resolved.

I didn’t finish your other question, which was other services that we offer to them as a part of what we talked to them about. One of them is we offer a free board listing service and that board listing service goes to board directors or board chairs or owners of companies. And in fact, their recruiters actually use our pre-board listing service, where they recognize that they can reach out to the 900 plus PDA membership and they can find a real fertile ground for their candidates to be found. In 2019, we had 52, assignments put through the PDA membership.

Joe: [00:15:47] The resource you have for  listing people available for board positions is particularly interesting to me.  I help companies build boards, and the  the more [00:16:00] diverse areas I can go to find those board members is really, really attractive. I think that’s a terrific resource, particularly if it, if it actually works and it sounds like it really does. I mean, I know there are others that I’ve counted that don’t they say they’re doing it, but I don’t think it’s really working that well, this sounds like an excellent function really

David: [00:16:19] Yeah. the real distinction is that my understanding is that other associations and organizations actually charge fees for a service like this.  So  I can’t speak to those other programs, but by having a free board listing service with very qualified people, it’s a big connection.

The other thing that we offer our members is that we have, very early on, the PDA has been putting on about three zoom presentations a week since the pandemic started. And they.

Joe: [00:16:50] Thats a lot  zoom!

David: [00:16:53] It really is, and I believe that they stepped up to the plate a while other associations were [00:17:00] clueless on how to continue programming during a global pandemic. You see all these conference companies and in-person conference event companies that are still maybe only put on one or two events.

Ours set out with a goal of putting on two a week and have consistently put on three or more a week and all about private company governance issues and dealing with, avoiding insolvency during a pandemic, or how does the board govern itself during pandemics to, dealing with, shifting roles of boards in a crisis and how do you support your C-suite team without violating some of the typical tenants of board governance, roles and responsibilities. I’ve been very happy with how PDA stepped up to the plate in that area.

Joe: [00:17:50] I think you make a compelling case. I can see why you’d be a very effective leader in the PDA because it really does sound good so let me just ask you [00:18:00] this next one to three years what are the goals at least, for the local chapter? What would you like to accomplish?

David: [00:18:08] I’m a growth person. I’ve been very happy with the growth I’ve received from my own companies and my client companies and we looked at the marketplace , we think that our targets are middle market companies that are considering their first boards or have already placed a board and those companies are likely to be in the 10 to half a billion dollar size range.  What we found is that there’s 15,800 companies just in Massachusetts alone that are between 10 million and a billion. And so, there are only about 13,000 companies that are between 10 million and a half a billion.

So either way you slice that market segment, that’s just for Massachusetts. We believe that we should easily be able to grow [00:19:00] into a thousand members or 2000 members in the new England region as a whole.

We’re also starting to figure out, should we call ourselves Boston or do we call ourselves Boston and New England? Or do we just go by New England? I want people to be clear that we are centered in Boston, not in Springfield or not in, you know, where the Philharmonic plays in the summer, but that were centered in Boston.

Joe: [00:19:27] You got to figure this out. You’re going to live here. Tanglewood. You got to know Tanglewood

David: [00:19:32] Okay. Tanglewood. Right, right. only been back.

Joe: [00:19:37] Chicago is behind you now.

David: [00:19:38] Yeah, no, I got that. I’m very happy to be here, but the idea is that there’s a significant population here and because of the fact that there’s very little commonality, there’s a great need to better understand what could become common, what could be best practices around board governance in private companies.

[00:20:00] And so, I think there’s a great need and I we’re in a good position to fill that need.

Joe: [00:20:05] Perfect.

Raza: [00:20:06] Well, David, thank you so much for giving us a very wonderful introduction to the Boston chapter of, PDA.

I want to shift and talk a little bit about your work with the Acrelic Group.

David: [00:20:20] Thanks for asking Raza. The Acrelic group is really a holding company that itself is a strategic advisory of experienced business, operational and strategy executives and we focus on delivering high impact efforts for boards, owners, and C-suite executives of, middle market and larger companies or divisions of large companies.

We focus on four things, identifying, defining, and approaching new profitable sources of revenue. We focus around creating rapid operational improvements  [00:21:00] like the lean manufacturing levels that have occurred, we actually believe in lean strategies and lean operational tactics to make things done faster and to be more competitive on a global basis which many of our companies are.

We also believe that you need to couple your strategies and actions to the organization. In some cases you might have a culture that needs change and needs modification and in my experience of changing five, six, 10,000 person organizations, it’s not always getting them to do new, interesting things,  but sometimes it’s the difficulty of getting them to stop doing the things that they’ve always been doing and the results they’ve been getting and stopped doing that, which might be counter strategic or counter-cultural to the new business heading that they’re leaning towards. Making sure that there’s organizational alignment with the strategy and direction, [00:22:00] is very important.

And then finally, we also focus around  managing risk and longevity to the business, as well as any ESG or sustainability issues that may be important to the stakeholders of a company as well.

Raza: [00:22:18] David, what culture have you seen, for private boards that still makes them distinct?

David: [00:22:23] I would classify private boards in a couple of ways. it often spans the gamut of I have a board because they have great brand recognition in the industry and often I’ve talked to the owner of that company and I said, Oh, well, you know, you’ve got Wozniak on your board, when was the last time you talked to him? Oh, I haven’t talked to him for a year. I said, but my sense is he doesn’t invest in things that he’s not interested in and why aren’t you engaging him? He goes, well, I don’t [00:23:00] need them right now and so, but he considers him a board member. He’s an investor in the business and I look at that and I think, Oh my God, what waste of talent and what waste of, of connections that, that Wazniak could provide. I never understand how people have these boards and they just put up these brand names. It looks like eye candy on their website and they never speak to them and talk to them.

Raza: [00:23:25] David, this is what this whole podcast is about: how to turn your board into the most effective tool for you even though the CEO serves at the pleasure of the board, but really it’s the job of  management and the company to use their board as a resource and to really leverage it out.

Joe: [00:23:45] And I want to say, I think boards could be a significant driver of enterprise value. I mean, that’s what you just said.  I think people miss that. Boards are really when well composed, when well-built [00:24:00] can be a huge help in creating and growing enterprise value for a company.

David: [00:24:06] Yeah. Thank you.

Raza: [00:24:08] David, as you’ve invested in these companies, have you become part of their board and  is that also how you’ve seen, the investor adding value to the company?

David: [00:24:18] I have taken board seats in a couple of companies that I’ve invested in and the more I’ve learned about private companies and how they operate and the more I’ve learned and looked at it from a macro view, which I’ve been doing over the past couple of years. I won’t start another company without creating a board almost from the beginning, especially if I know that I’m going to take on outside investors.

One of the ideal values is, and the reason why I’ve joined the boards of a couple of my companies, that I know that when they go to take on outside capital, that that outside capital comes with a request for one or two board [00:25:00] seats.  So, if you start with two founders and you have an investor coming in with two board seats, that’s a board of four, therefore you really need a, an odd number board. You would typically say, okay, let’s bring on an independent board director.

Well, if you wait for those VCs or PE firms, they have plenty of people who they can bring in as a quote, independent board director, unquote and suggest that this person come on because they’ve got great experience and yada yada and the founders will typically, agree to that.

The reality  is that in many times, those independent board directors, quote, unquote, are typically investors in the funds that are investing in the new company and therefore have a significant concern about  what the issues are around that VC firm that might trump those of the business that they’re [00:26:00] investing in. The second thing is they might have a series of interim assignments that have been given to them by their PE or VC firm to go work in their portfolio companies and they might be getting significant six figure salaries from those either their portfolio of companies directly or the PE firm themselves.

Are they truly independent directors or are they really an extension of the investor? And so if you start with three board members, two founders and an independent, you’re  going to be in a much stronger negotiating position when you’re taking on outside capital to ensure that you have one, an odd number board too, that you truly have independent directors that you’ve selected, that might be unbiased and, and maybe more biased towards the longevity of your business.

Raza: [00:26:53] David, are you saying that, as you invest in these companies, not only you joined the board, but you also bring with you an [00:27:00] independent member that the founders can agree on?

David: [00:27:04] I advise them from the beginning now that they should think about board governance after they’ve learned cashflow and after they’ve learned about the balance sheets and after they learn about what their cost of goods sold is then I think it’s time to start introducing issues about governance.

Raza: [00:27:22] David, in this  world of private boards what challenges issues that you have, observed related to boards, some war stories or some other areas where it has been contentional, maybe because it is private?

David: [00:27:39] What I’ve seen that distinguishes strong boards in the boards that I’ve been involved with and I, I was lucky to be on an executive board of the largest ESOP in the world at the time a company called SAIC and  I got to see how they operate and function, and what I always thought was important for effectiveness was the strong [00:28:00] preparedness that you have for getting ready for a board meeting.

You’re not reading through the stuff real time. You should have read it and you should be able to talk about the issues so that you can come to action or decision in that meeting when you’re together with your peers on the board. A good friend of mine was on the board of Fidelity and he used to talk about, he’d get five binders of six inch sent to his home and it would take them about two weeks to prepare of full time time before he’d go to the board meetings and this was an amazingly smart guy. He was the head of DARPA at one point and just brilliant man and for him he takes half the time that anybody else takes to prepare for something cause he’s that smart. But I think open dialogue and discourse is really critical that  you not only dialogue about things but you have discourse and debate about them so that you’re not biased towards any one issue and making [00:29:00] decisions quickly for brevity sake, that you’re actually looking at all the issues in an unbiased way and making decisions based upon what, what makes the most sense to the ongoing strategy and direction and policies of the business?

Knowing when to ask the right questions and at the right time is a critical component of effectiveness of a board. The board paradigm of having your nose in and your hands out is really key and I think that’s the driver of knowing when to ask the right questions. You’re there to be inquisitive, but you’re not there to operate the business and you’re not there to take action.

It’s the CEO and the leadership team that have to take action, but you have to have the open dialogue too and very clear reporting that you’re seeing especially times like during COVID where you need to look at a lot of different data and you don’t know what the validity or the assumptions are [00:30:00] and you need to really get down to the bottom of what you’re seeing to know if there’s faint signals in there that you could take action on and are being ignored.

The other thing  is effective matching of the company’s needs in appropriate board director skills. There’s a lot of conversation I haven’t experienced as much because I focus a lot on high tech companies, but there’s a lot of conversation about people are over boarded. They have too many boards, or they’ve been on a board for 25 years or they’re really adding value and I think it really behooves a board to understand the skill sets that are required for the current and long-term future of the business, which may be different from what it was five years ago.

Joe: [00:30:42] Yeah, I think there’s no question that the crisis that has been created by this pandemic has caused a lot of companies to look at their board composition and really think about it.  It’s easy to be a board member or to be serve on a board when everything’s going great [00:31:00] but it’s true for both senior management and for the board that when there’s a crisis, you really get it.

You really understand where they the right. People in the board, wasn’t the right senior management, the CEO, whatever it may be. So I agree with you. I think there’s likely to be a fair amount of disruption, more disruption than normal in boards in the next year or two years, because companies that need help, and maybe didn’t have the right help during this crisis.

There are more crises to come. This isn’t the last one, but this might be a chance for boards to do what they should have been doing all along, which is to look at their composition and always be aware of what the skill sets are needed to drive it to the future.

David, it’s been great to have you with us today. Thanks for joining us as our guest on Onboards.

David: [00:31:50] Thank you. I really enjoyed being here and, I’m looking forward to listening and seeing more programs from you guys.

Joe: [00:31:56] Excellent! That we like to hear !

And thank you all for listening to [00:32:00] On Boards with our guest, David Rosen.

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

Raza: [00:32:11] You too, Joe.

Joe: [00:32:12] Thanks.

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