Larry Stybel talks what a board need to do to really do its job properly and the critical role of the Nomination/Governance Committee in that process. Do we have the right talent on this board? Are the board members sufficiently educated to handle their fiduciary responsibilities? And does the board understand that it has primary responsibility for defining the corporate culture?
Check out Larry Stybel’s article about Who’s the Board’s Chief Learning Officer which touches upon several issues we discuss in this episode.
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Links
https://www.stybelpeabody.com/
https://www.issgovernance.com/
Larry Stybel Bio
Larry Stybel is Vice President of Boardoptions.com. Nominating & Governance Committees of Boards of Directors retain Boardoptions.com for a talented board and an educated board. Core services include Board Self Evaluation, Board Retained Search, and Board Education.
He also is co-founder of Stybel Peabody Associates, Inc. Founded in 1979, its mission is Leadership and Career Success for senior executives: retained search, leadership coaching, and executive outplacement.
Larry is Executive in Residence at Lexington Growth Funds.
He is listed in Marquis WHO’S WHO IN BUSINESS AND FINANCE and Marquis WHO’S WHO IN AMERICA. In 2019, Marquis Publishing presented Larry with the “Marquis Lifetime Achievement Award” for Larry’s “enduring contributions to leadership.”
He has been on the Board of a venture backed tech company in the HRTech space and a member of the Board of Directors of the New England Chapter of the National Association of Corporate Directors.
Larry received his doctorate in psychology from Harvard University and is a licensed psychologist in the Commonwealth of Massachusetts. Each month PSYCHOLOGY TODAY publishes Stybel Peabody’s perspectives on leadership. To date there have been over 350,000 downloads.
Quotes
“If you really don’t understand the industry that you’re in, who is your chief learning officer for the board of directors, and in many cases, by default, the chief learning officer of the board of directors is the CEO and if the board also has the responsibility of evaluating the CEO’s performance, is there something wrong with this picture?
Board evaluation is that time when the board shines a spotlight on itself and says, “what are we doing positive and negative to advance shareholder value?”
“Every company that I have ever worked with says we are innovative, and the question is: who’s the role model for innovation? If it’s not the board, then where?”
“I think the board has primary responsibility for defining the corporate culture, and then the CEO has the responsibility for executing the corporate culture.”
“The board is usually putting the spotlight on the CEO and senior management. So, in that way, I can understand why putting the spotlight on themselves is not something they actually want to do.
Right it goes like this: “I think performance evaluation is great for you, Joe, but not for me.”
“There is a song by Leonard Cohen, and I think you know it, Raza, “Everybody Knows.” And that song applies to boards. Everybody knows who’s making a major contribution and everybody knows who isn’t. They just don’t want to talk about it.”
“There’s a kind of cliché that I that I see among young, inexperienced founders it’s called “the problem solved problem.” And that is: we had a problem, you know, 70% of our revenue is coming from one company and that one company is threatening to go to a competitor.
I flew to California and I talked with the CEO and I got him not only to stay with us, but to increase our business. And I go back to my friends and family board and I say, we had a problem, its solved – and they say, great, what’s for dinner?”
“I think podcasts like these are, are an excellent way for board people to learn while they’re driving or learning while they’re exercising.” (Thanks Larry!)
Ideas/Comments
If a board wants to keep what is often a superficial sense of collegiality, they don’t want to do board of directors self-evaluation because you’re going to get to issues that one or more board members are going to be uncomfortable with.
When board self-evaluation is defined as an event, it usually is a onetime event.
If a board is really serious, they’re going to do board of directors self-evaluation.
People think of diversity in many ways. Gender diversity is one of them, racial and ethics diversity are others but the way, somebody does problem solving is another important dimension to add to the matrix of what you need on a board to make it truly diverse.
I have encouraged CEOs to do on boards is to send something to the board even once a month or a one pager. It could be a snapshot of financials. It could be three or four sentences about what’s going a brief, but helpful, update so that when you’re walking into the board room, or even when you’re getting the materials for the next board meeting, you have been updated all along. No surprises. The board should not be surprised. You should not walk into the board room and find out something’s been going on,
What happened with Equifax (theft of the credit records of 143 million people) should be part of every board education course., First, they did not immediately inform people that their data had been stolen. They delayed it for six weeks, which gave the hackers a chance to really use the information they had stolen. And the second thing, maybe even more egregious, members of the senior management team actually sold shares of stock during the time before the public knew that the breach had occurred so they would not take a hit on their stock shares. And this gets back to corporate culture. So, what was going on at Equifax that made senior executives think that what they did was okay to do?
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. Hey Raza.
Raza: [00:00:12] Hi, Joe happy to be here with you co-hosting.
Joe: [00:00:15] Good to be with you too.
On Boards is about boards of directors and advisors and all aspects of board governance. Twice a month, in 30 minutes 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: [00:00:33] Joe and I speak with a wide range of guests and we talk about what makes a great board great, what makes a board unsuccessful, how to be a good board member and how to make your board one of the most valuable assets of your company.
Larry: [00:00:47] Our guest today is a longtime leader in career coaching for senior executives, in leadership coaching and retained searches for boards of directors, CEOs and other members of senior [00:01:00] management and has been deeply involved in board education.
Raza: [00:01:03] He is the founder of boardoptions.com and co-founder of Stybel Peabody Associates. His articles are published regularly in Psychology Today and have been downloaded by hundreds of thousands of readers.
Joe: [00:01:20] We’re very excited to have Larry Stybel as our guest today. Welcome, Larry.
Larry: [00:01:25] Great to be here.
Joe: [00:01:26] Good to have you here with us on On Boards.
Larry, you do a broad range of work with boards and board members, one of which is working directly with nomination governance committees to help them do their job better.
Why in your view, are nom/gov committees so vitally important to the board and to the company which they serve?
Larry: [00:01:47] Well, if you’re looking at for profit companies, typically there are three core committees: nominating/governance, compensation and audit, and all of the committees are very [00:02:00] important.
What makes nominating governance unique is that it’s really looking at two issues that are critical for corporate governance. Issue number one is do we have the right talent on this board? And the second issue is: are the board members educated to handle their fiduciary responsibilities?
Joe: [00:02:21] So in your view nom/gov should serve at least two purposes, which is evaluating the board andalso making sure the board is educated as to what their duties are?
Larry: [00:02:33] Yeah. I assume that the readers here are interested in both for profit and nonprofit boards. Is that right?
Joe: [00:02:40] I think our listeners are interested in a wide variety of things. Yeah, I think that’s right.
Larry: [00:02:45] So, when we’re looking at a lot of boards, but particularly in the nonprofit area, people are on boards of directors of industries that they have no idea about what’s going on.
The [00:03:00] biggest example I can think of is hospitals. You know, many of the people that are our hospitals are business leaders who really don’t really understand that much about healthcare. And so, if you really don’t understand the industry that you’re in, who is your chief learning officer for the board of directors, and in many cases, by default, the chief learning officer of the board of directors is the CEO and if the board also has the responsibility of evaluating the CEO’s performance, is there something wrong with this picture?
Joe: [00:03:32] Right. What about for profit though? Should norm/gov committees still be making sure that their board members are educated about their industry, their sector, their business generally,
Larry: [00:03:43] Typically a board of a for profit company might meet four times a year. If, that, and so they’re always behind the curve in terms of understanding what’s going on in a rapidly changing industry. Who has the responsibility of making sure that the board [00:04:00] members are up to date with information? That’s the nominating governance committee.
Joe: [00:04:04] So in your view, really, in addition to maybe educational segments during a board meeting, things should be done between board meetings to keep board members updated.
Larry: [00:04:14] Sure, absolutely.
Yeah. so one of the things, that nom/gov does is board evaluation. It’s critically important that, a board remains strong and well-matched for the business of the company that they’re supposed to serve.
Why is this so important?
There is an old Turkish saying, when a fish Ross had rots from the head. Right. And many of the thought that was a…
Joe: [00:04:42] I thought there was a Lebanese saying, actually,
Larry: [00:04:45] I think you’re, I think you’re right. Turkish. Lebanese. It’s in middle East. Okay. Every company that I have ever worked with says we are innovative, and the question is: who’s the role model [00:05:00] for innovation? If it’s not the board, then where? I mean, one of the fascinating things I’ve found in my career is I look at the dynamics of the board. And then I start talking to people in middle management, most of whom have never been in the boardroom and don’t know who the board members are and I find the communication dysfunction of the board is filtered down to management.
Joe: [00:05:24] Explain that, I’m not sure I understand that completely.
Larry: [00:05:26] For example, if you have a board culture where everybody gets along and says nice things to each other. In front of them, but then behind the back, you know, I find the same culture at the middle management levels.
Joe: [00:05:42] Is that so, interesting.
Larry: [00:05:43] It’s like, again, who’s the role model for the corporate culture? If it’s not the board, where’s it going to be.
Joe: [00:05:50] Well, how would middle management know what the board culture is?
Larry: [00:05:53] That’s the fascinating thing is somehow it, it gets transmitted from the boards to the CEO, from the CEO [00:06:00] on down.
Don’t forget for many for profit companies, when you look at CEO tenure, it’s getting shorter and the CEO often is actually not the one who sets the corporate culture. He’s the one that’s hired by the board to make the corporate culture.
Joe: [00:06:17] So in your view, the board really has primary responsibility for corporate culture.
Larry: [00:06:23] I think they have the prime responsibility for defining the corporate culture, and then the CEO has the responsibility for executing the corporate culture.
Joe: [00:06:33] Fair enough. That makes perfect sense. Given how important evaluation is why isn’t it done well in so many for profit companies?
Larry: [00:06:42] Well, first of all, board evaluation is that time when the board shines a spotlight on itself and says “what are we doing positive and negative to advance shareholder value?” The rest of the time the spotlight is on the CEO and the CEO’s [00:07:00] team about what are they doing to, to advance shareholder value.
So that’s what board evaluation is all about. To answer your question, Joe, there’s, there’s two issues involved here. One having to do with the board members themselves and one having to do with the consultants who sell boards of directors self-evaluation.
The first is the board members themselves. I don’t know how many times you’ve been involved with a board and they say, we’re collegial. We cooperate. We’re very honest with each other. Well, often, when you really strike below the surface, what it means is we’re superficially friendly with each other. And we don’t really hurt each other and we don’t create a lot of controversy with each other.
And so if a board wants to keep that superficiality, they don’t want to do board of directors self-evaluation cause you, you’re going to get to issues that one or more board members are going to be [00:08:00] uncomfortable with.
Joe: [00:08:00] Well to go back to what you’ve said though, the board is usually putting the spotlight on the CEO and senior management. So in that way, I can understand why it’s probably that putting the spotlight on themselves is not something they actually want to do.
Larry: [00:08:16] I think performance evaluation is great for you, Joe, but not me.
Joe: [00:08:23] Yeah, exactly right, exactly right.
Raza: [00:08:25] So Larry, when you do work with companies for a board evaluation, what process do you follow.
Larry: [00:08:32] Yeah, well that gets to the say I said the first part is the board members themselves. They often don’t want to be evaluated, which I don’t blame them.
Then the second is those who sell board evaluation A. lot of times it’s sold as an event. It’s a big process. There’s an organization called the National Association of Corporate Directors, and they have a big deal about this. It’s a very [00:09:00] complex thing. It’s expensive, it’s very time consuming and what happens if you’re a board member, you put that much time into something, you’re expecting an epiphany, you’re expecting a major change and then if it turns out it’s not that major, people then say that was a lot of work, that was a lot of money for very little results. We’re not going to do this again. And so when board self-evaluation is defined as an event, it usually is a one-time event.
Joe: [00:09:31] So maybe it’s just a matter of setting expectations that are more realistic.
Larry: [00:09:35] Absolutely, what would we think is really important is small, baby steps. If we can help the board incrementally improve itself 1% every year, then in five years we’ve improved it 5%, which is going to be pretty good. We try to make every intervention every year, no more than 20 minutes. No more than 20 [00:10:00] minutes of the board member’s time, but every year we’re going to spend that 20 minutes.
Joe: [00:10:05] At some point, the board members themselves have to be evaluated.
Larry: [00:10:08] That’s right.
Joe: [00:10:08] When you do that, how do you go about doing it?
Larry: [00:10:11] Well, first of all, again, we’re looking at boards self evaluation. There is the evaluation of the board as the totality. That’s one module. Then there’s the of the different, the three committees and how they relate to the board. That’s another module. Now we’re getting to what you’re saying, Joe, which is the evaluation of the board members themselves.
Joe: [00:10:32] Okay.
Larry: [00:10:33] There is a song by Leonard Cohen, and I think you know it, Raza, “Everybody knows.”
Raza: [00:10:41] Yeah
Larry: [00:10:42] And that song applies to boards. Everybody knows who’s making a major contribution and everybody knows who isn’t. They just don’t want to talk about it.
Raza: [00:10:55] So Larry, does that turn into an effective exercise [00:11:00] that effectuates offboarding for an ineffective board members?
Larry: [00:11:03] Exactly. What happens is the only thing that I’ve ever done in my professional life where I accomplish the mission before I start. And that is once a board is willing to make the tough decision and say, we’re going to do board of directors, self-evaluation, which includes individual board members, we will evaluate each other and then you will know how you stand with your peers.
And if we can create a time lag between that commitment and the execution of the program, usually we do six months time lag. What we find is those board members that are the least productive announce that they are retiring and the board can organize a party for them, thank them for the service and by the time we actually start the program, we’ve accomplished the results, without any bloodshed, without any bad [00:12:00] feelings. Everybody leaves. Cause everybody knew. Everybody knows. Nobody wants to talk about it.
Joe: [00:12:06] Boy, that’s a good job if you can get it!
So is it really even possible for a board to evaluate itself without outside help? I mean, it that viable?
Raza: [00:12:20] Is self-evaluation a misnomer, and it’s really the overall process. Like is it even possible as Joe was saying.
Larry: [00:12:27] I think to start with it helps to have an outside kick it off and, and what the, and get the process going.
I think over time, once the corporate culture is set it can be done as an ongoing internal process through the nominating governance committee. Yes. I think it’s really important. There’s another issue here too, and that is a lot of board members that are, let’s say, World War II boomers.
Their attitude about being on boards is, [00:13:00] maybe I make a couple of bucks and maybe it’s good for my resume and maybe it’s good for networking and, you know, if it’s a nonprofit, okay, I promise I write a check every year and I swear to God, I’m not gonna fall asleep at the board meetings and that is usually good enough for the boomer.
Joe: [00:13:18] That’s horrible. That is terrible. But I’m sorry. It is, I don’t care.
Larry: [00:13:24] It’s true. You know it’s true.
Joe: [00:13:26] I’m not saying it’s not true, but it’s not a good thing.
Larry: [00:13:29] Oh, that’s right. That’s okay.
But now you’re looking at, at the next generation, they say people in their forties and 50s and maybe even 30s. And they’re saying, I don’t have a lot of time to waste and I’m not, I’m not going to waste my time on a board that is not serious and how do I determine if a board is really serious or basically in the pocket of the CEO. Board of Directors self-evaluation. If they’re really serious, they’re going to do board of directors [00:14:00] self-evaluation.
Joe: [00:14:00] I want to go back to something and defend my boomer generation because there are very few things that drive me crazier than sitting in a boardroom and wasting my time.
Maybe other boomers have time to waste, but I think that is an unfair observation. I really do. There are a lot of people on boards for profit and nonprofit who have said to me, boy, “I wish we could get more done.” “I wish we’re using our time better.” “I wish we were doing strategic stuff instead of talking about the color of the balloons at the next party. “I think that cuts across. – anyone that takes their job seriously. I really do.
Larry: [00:14:41] I wish you were right.
Raza: [00:14:45] You’re in the minority of, but…
Larry: [00:14:48] I do see a generational difference, and I do think the younger people are just, they just don’t want to waste their time.
Joe: [00:14:57] Well, if that’s true, then that’s great. If it’s [00:15:00] trending in the direction of people board members wanting to use their time more effectively, that’s a great thing.
Let me ask you this though, going back to what you said about announcing that there’s going to be an evaluation of board members,giving it six months before it happens and kind of letting nature take it’s course. Does that happen on for profit boards as well as non for profit boards?
Larry: [00:15:24] Yes, both for profit and nonprofit. If you’re looking at New York Stock Exchange companies, they are mandated to do board of directors self evaluation, that is a requirement. No one’s telling them how to do it, but companies that take it seriously will see this happen.
Nonprofit, we do a lot of work with nonprofits, particularly larger nonprofits where people come in and they’re going to write a check and they’re going to say, my reputation hangs on the reputation of this nonprofit. And so if it’s going to get [00:16:00] a negative story in the Wall Street Journal it’s going to affect me so I’m not going to let that happen. So they insist on it.
Joe: [00:16:07] That’s good. That’s a good thing.
Raza: [00:16:09] Going back to the earlier point of the generational change of how boards operate in effectiveness, I see that, as we’ve talked with other guests, that it also may relate to whether a company is investor-backed and the investor-backed board is going to insist on performance and it is going to insist on solving the problems that the business has and developing a strategy because otherwise the business doesn’t exist. So it might as well also be true that it depends on the kind of the board it is that these, you know, cultural, things happen.
Larry: [00:16:45] Raza, I totally agree with you and I think there’s certain dynamics of private equity dominated boards because they’re really focusing on short term, grow this business, grow the top line so we can sell this thing [00:17:00] in three to five years. So, everything is focused around that. I often found they don’t do board of directors self-evaluation cause they’re all focused on that goal.
Joe: [00:17:10] Right. Well it would seem like bringing that kind of focus to all boards wouldn’t be a bad thing.
Larry: [00:17:17] You know, when I started my career, we’re speaking not far from Harvard Business School, and when I started my career, there was a book by two Harvard Business School professors, and it was about boards of directors and it was called “Pawns or Potentates.” Remember that book? And unfortunately, I’m not sure much has changed. And what they were saying in that book was, it sounds very impressive that you’re on a board.
Is it? And it was saying, for a lot of board members, they’re really pawns of the CEO or, I’ve seen [00:18:00] it with, private equity firms, the so-called outside board members who are taken from a list of friends of the partners of the private equity firms. They’re pawns. They’re really not outsiders.
I’ve seen this in family businesses where we’re going to have outside directors of our family business. So I’m going to bring in my college roommate and I’m going to bring in the lawyer that depends on my business as, and I’m going to call them the outside directors cause they’re non-family.
Joe: [00:18:30] Yeah. Well, my reaction to that is in those instances the board is not serving, is not providing the value to that company that it could provide.
Larry: [00:18:40] Totally!
Joe: [00:18:40] And that is really unfortunate.
Larry: [00:18:43] But the dynamics that they were talking about in that book, I think it was like in the 70s, still exist.
Raza: [00:18:50] Well, what we’re saying is there probably is a curve, with many boards that are simply not as effective, in governing or providing [00:19:00] strategy to the company as there should be, but we also know that, in the value creation process, there do exist effective boards as well and those are the things we want to talk to our audience and what makes a board effective.
Joe: [00:19:14] Well, one thing that makes a board effective is, at least in my view, if a board is doing its job, then it should be asking questions of management.
And it should be holding management accountable, in a respectful way, for achieving its strategic goals. A question I have for you is if a board’s not doing that, or when a board doesn’t do that, sometimes it can go really off the rails. How does that happen? What’s the dynamic that occurs where things are going on at the company and the board really is asleep at the switch, so to speak. And they don’t, they don’t make thcall, they don’t ask the questions, they don’t say anything at a board meeting. And then things can get [00:20:00] bad enough that you know, the next thing you know, you’re on the front page of the Wall Street Journal.
Larry: [00:20:04] Well, I think this conversation is just gone full circle.
Now we get back to the nominating and governance committee. Yeah. So the two core roles of the nominating governance committee, first of all, is an informed board. And I was saying earlier, if there is no chief learning officer for the board of directors, then by default the CEO is the chief learning officer and the CEO and the CEO will tell the board what it needs to know and what’s wrong with that picture.
And so often what happens is the board is given information by the CEO and then they make the decisions based on that information. That can really be harmful to a company. The second is, do we have the right talent on the board? And again, it’s the nominating governance committee that us supposed to write the job descriptions.
Supposed to hire theisearch firms or [00:21:00] decide how are we going to find the right talent. And, and often, you know what I have found is we want a collegial board. Now, a collegial board is defined as often people with similar backgrounds to us who look at the world in very similar ways. So we have collegial meetings.
And on the meetings go really smoothly, where you know, you really want to mix it up. I don’t just mean mix it up in terms of having people from different sexes and races, but also different perspectives, coming in. So I think that’s important. That’s a nominating and governance issue.
Joe: [00:21:42] Yeah. Very important committee.
So let me switch a little bit here. we talked about this earlier and one of your articles.
Larry: [00:21:49] Yup.
Joe: [00:21:50] I’d love to start a guy, by the way. You wrote “15 years from now, the Equifax case will be taught to aspiring business leaders as a good example of what [00:22:00] not to do in a crisis.” And I noted in the article. I won’t go through everything, but two of the things that happened after the breach of this critical data became known is one, the board decided to not release that information for six weeks, which allowed the hackers to have the information and use it for a long time before anything could be done.
Larry: [00:22:24] Let’s step back. Some of your listeners may not be familiar with the Equifax case. Okay. Why don’t you give us, it was a big deal in I think, 2013 when this happened. So let me go back over this.
Joe: [00:22:38] So let me ask you the question. Tell us a little bit about the Equifax case.
Larry: [00:22:42] Equifax is an Atlanta-based public company with a market cap of $14 billion andemploys 9,500 people. so it’s, it’s a big company.
What happened is in September, 2017, Equifax revealed that there was a [00:23:00] cybersecurity theft of 143 million records of people, you and me and people listening to this podcast.
Raza: [00:23:10] I was included.
Larry: [00:23:11] You were, you were part of it. And their social security numbers, their names, their birth dates, their addresses, their licensed number, the driver’s license numbers.
They secured 209,000 credit card numbers.
Joe: [00:23:25] Whoa!
Raza: [00:23:27] So, once you get that information, you can sell thato on the black market, the dark web. And so, over the years, people with armed with this information were able to open bank accounts in your name, established lines of credit in your name, obtain new credit cards in your name and steal your tax refund. That’s, that’s what the Equifax case was all about.
Joe: [00:23:51] Okay, so now let’s talk about what the board did, that should be part of every board education, you know, course. [00:24:00] Two things that I remember from the article, and there are other things. One, they did not immediately inform people that their data had been stolen.
They delayed it for six weeks, which obviously gave people the hackers a chance to really use it. And the second thing, and I actually find this even more egregious, that members of the senior management team actually sold shares of stock during the time before the public knew that the breach had occurred so they would not take a hit on their stock shares.
Larry: [00:24:34] And this gets back to corporate culture. So what was going on at Equifax that made senior executives think that was okay too to do.
Joe: [00:24:46] That’s my question! What made them think they could do that?
Larry: [00:24:51] And, and you know, again, you can point your finger at the CEO and said, that was the CEO’s fault.
We’ll fire the CEO, we’ll get another CEO and problem [00:25:00] solved. And I would say, no. Was the board of directors. It’s the board of directors that defines the culture. Somehow there was something in the corporate culture where the senior managers sayimg, I can do this and I’m not gonna, I’m not going to get penalized for it.
Joe: [00:25:15] It just absolutely boggles my mind that a group of people sitting on a board could think that either of the things I just described was okay.
Raza: [00:25:27] And Larry in the checks and balance paradigm, then if you’re saying that it’s the board’s job and not the CEOs, how does the CEO then make sure that the board is doing its job?
Larry: [00:25:40] I think that’s where board of directors, self evaluation comes in. It’s also part of the governance of public companies, that the board members are going to be elected by the shareholders. Also, there’s, are you familiar with the ISS ratings?
Raza: [00:25:55] I know, please tell our listeners.
Larry: [00:25:57] ISS stands for Institutional Shareholder [00:26:00] Services.
It is a for profit company that evaluates board governance, and you as an individual can look at the ISS rankings of a public company. And the way you can do that, you can go to Yahoo Finance, and then you type in the name of a public company. And one of the information will be the ISS rankings, and it’s ranked from one to seven and the higher the ranking, the worse it is.
And, usually when you see something that’s a six or seven as the ranking, there is something wrong and ISS service is to help institutions decide whether or not to cast their votes in favor of the current board or against the current board.
Joe: [00:26:53] Does a bad ISS rating, have an impact on stock price?
Larry: [00:26:57] It should, I haven’t seen [00:27:00] any evidence on that yet.
Joe: [00:27:02] So let’s go back to nom/gov committees. And one of the things you said earlier, it was that they’re responsible to make sure that the skills and expertise and attributes of the board as a whole are well matched to the company and to the strategic goals of the company.
Larry: [00:27:19] Right.
Joe: [00:27:20] So when a nom/gov committee is looking at that, talk about how it should create the matrix or however it’s going to go about looking at its board and thinking about what the board should look like in the future to support those strategic initiatives.
Larry: [00:27:38] Okay. We’re going to focus on for profit companies for this. And that means usually they have somewhere between five and seven people on a board, and they’re usually on two committees and of the three and, and any time. And then they get rotated and move around. [00:28:00] I’m going to tell you how I see things as they are, and then I’m going to make an offer for your listeners.
Joe: [00:28:05] Okay? It’s not going to be anything free, so don’t anyone get any, don’t get too excited.
Larry: [00:28:10] No, it’ll be free, it’ll be free. You can be excited.
What I do find is that when nominating governmencd people are thinking about what do we need. In terms of skillsets, they talk in terms of industry expertise or maybe some experience and maybe doing, finding, private equity funding or some experience with doing an IPO or that’s all important.
But, what I would like to see, and what I can share it with your readers, is we have a matrix that we have developed looking at problem-solving approaches as a function of corporate strategy and freedom of action.
So, for example, if you have a credit union, you have a very [00:29:00] defined corporate strategy and very limited freedom of movement because it’s highly regulated.
Joe: [00:29:05] Right.
Larry: [00:29:06] On the other hand, if you’ve got a, a FinTech company that’s just starting out, you’ve got a lot of freedom of movement and a lot of strategic maneuverability and a lot of freedom. So that’s different. So we look at the two variables, what’s the strategy and what’s the freedom of action? And then we have a matrix of different problem-solving styles.
And the idea is you want to have a board that consists of people with a portfolio of problems solving, so the board will look at things from different perspectives. So, for example, if you have a credit union and everybody is very conservative and risk avoidance, that’s probably somewhat okay.
But the problem is everybody’s going to feel very collegial with each other cause they’re all thinking the same way. And you can have men, you [00:30:00] can have women, you can have minorities. It’ll, be great. But the problem is you don’t have anybody whose thinking outside the box,
Joe: [00:30:06] Right.
Larry: [00:30:07] And you want to have one or two people who think outside the box.
Raza: [00:30:11] So Larry you’re saying that people think of diversity in many ways. Gender diversity is one of them. Others may have race. but you, you were saying the way somebody does problem solving is another important dimension to add to the matrix of what you need on a board in a diverse manner.
Larry: [00:30:32] And, it also is affected by the strategy of the company and the freedom of action.
Joe: [00:30:38] Now that’s interesting. You know, when I’ve been involved in looking at a board, the kind of matrix that I’m used to is looking at the skillsets and and experience that we all consider critical to driving the kind of strategic initiatives the [00:31:00] company has. So maybe it’s strategic background or maybe it’s financial, or maybe it’s regulatory, maybe it’s cybersecurity, whatever the things are that matter to the company.
But you’ve added an interesting dimension, which is how do they solve problems? How do you determine that?
Larry: [00:31:18] Often that’s through being clear in the job description about what you’re looking for. In doing interviews, it often, we often add, we’ll ask the question, tell me about some things you’ve done that you’re proud of, and then we ask him for maybe three or four stories and we usually get some sort of consistency. The the stories may be different, but the, the way they approached the problem was very similar.
Joe: [00:31:44] So it’s really an interview process that you use to determine their problem solving approach.
Larry: [00:31:51] Yeah. You’re not going to get it on a resume cause, it won’t really talk about that.
Joe: [00:31:54] But I was thinking maybe there’s some kind of a, I dunno, a test you can give my or something. [00:32:00] .
Larry: [00:32:00] Yes. there’s no Myers-Briggs for board members, but there is something called the big five personality factors. And you know, there’s a lot of research on personality. And most of the common psychology tests are versions of what’s called the big five personality factors. So for example, one personality factor is openness to new ideas.
Joe: [00:32:24] Right.
Larry: [00:32:24] Well, I would argue on a credit union board, you want to have one person that is high on that that is high on that dimension. But if you had a board of five people and you had three people that are high on that dimension, you couldn’t get anything done because it’s a highly regulated environment.
It’s, it’s kind of cut and dry, you know? As long as you stay between the lines, you’re going to be okay. On the other hand, if we’ve got an early stage FinTech company, I want more than one. I want maybe two or three people [00:33:00] who are really open to new ideas and really out there in terms of exploration.
Joe: [00:33:05] So it really goes back to nom/gov or whomever. But nom/gov in most situations, giving really deep thought to what the makeup of the board should look like, and then taking action to make sure that that’s what it looks like.
Larry: [00:33:20] Right.
Raza: [00:33:21] So Larry, switching to more tactical, I think we talked the, or touched upon it a little bit earlier. When the board is meeting only three or four times in a year, they have a packed agenda. They can often get behind as to what’s going on. What should boards expect management to do to address that?
Larry: [00:33:40] Well, this is gets to the other role of the nominating governance committee, which is about board education. How is the board going to be educated between meetings? And I find that in, at least in the for profit side, and I think in the nonprofit side too, you’re really talking about incredibly busy people and they don’t have a lot [00:34:00] of time. And so I think podcasts like these are, are an excellent way for board people to learn while they’re driving or learning while they’re exercising.
Joe: [00:34:12] I just want to say something – I couldn’t agree more!
Raza: [00:34:17] Where we’re talking about both aspects of education. One aspect of education is generally learning effectiveness of a board, and I’m sure our podcast is going to be very helpful for that in small ways.
We were also talking about education, about what’s going on in the company, and the idea that you meet three or four times, but management is not necessarily giving you the full information or as frequent information. Should there be more touch points or more interaction in between, the three or four times the board meets, what do you think?
Larry: [00:34:54] It would be nice if that were possible. Logistically, it’s a [00:35:00] problem. I think politically it’s a problem when the board member is going into the company asking employees questions and the CEO is getting, starting to get paranoid.
Joe: [00:35:11] So one of the things that I have encouraged CEOs to do on boards is to send something to the board even once a month or a one pager. Here’s what’s, it could be a snapshot of financials. It could be three or four sentences about what’s going a brief, but helpful, update so that when you’re walking into the board room, or even when you’re getting the materials for the next board meeting, you have been updated all along.
I think that’s a good practice and I don’t know why it can’t., I realize it takes time on the part of the CEO, but if care and nurturing of your board is important, that seems like something that, you know, you should make time for.
Larry: [00:35:51] Well, Joe, you’re preaching to the choir, right? And, I tell my CEOs that I’m working with that 20% of your time should be [00:36:00] on board work, you know, communicating on board.
I even go further than you, Joe. I say you should be on the phone and talking to the most powerful board members and talking with them about what’s going on. There should be no surprises. And many CEOs resent that, particularly when I say 20% of your time.
But I think that’s appropriate. I think, you know, my experience is when the CEO is fired, they’re not fired because they were incompetent. They wouldn’t have gotten the job if they were incompetent. They’re fired because the board didn’t trust them anymore. And that’s about, that’s about board communication.
Joe: [00:36:40] 20% is high. But I respect the fact that that’s what you’re telling the people that you’re working with. I would pick up at the one thing, and I think the key thing. No surprises. The board should not be surprised. You should not walk into the board room and find out something’s been going on…
Raza: [00:36:57] we’re running out of money.
Joe: [00:36:58] Yeah. [00:37:00] Whatever it may be, that should not happen.
Larry: [00:37:02] I’m going to start sounding like a consultant. I’m going to say it depends. Cause one of the, one of the things that we find, we’re sometimes hired by private equity firms. I’m, I’m talking about really good private equity firms. And they say, you know, we’re, we’re funding this founder to be CEO and we have a responsibility to evaluate the CEO’s performance, and at some point we’re probably going to fire him. He knows that, but I can’t be his coach and his judge at the same time. So we’re going to outsource the coaching work to you.
And here’s what I find. When a founder starts a company, the board, if there is one, consists of my friends, my family, the people who really believe in me.
And they’re there because I asked them to, and they actually appreciate not [00:38:00] being too involved because they’re my friends and my family. Of course, that whole situation totally changes once it’s a private equity dominated board, now they want to know and they don’t want any surprises. And, and often what I find is the CEO slash founder doesn’t fully appreciate that he’s got to change your behavior.
And what worked, you know, there’s an old saying in coaching, what got you here won’t get you there. What got you here to the point where the private equity have faith in you to give you the money, won’t get you there in terms of the trust.
Joe: [00:38:38] Yeah. So I get that. I would, I would submit that the no surprise kind of guideline is not a bad one to have, no matter who the company is and no matter who is sitting on your board.
Larry: [00:38:50] In theory I totally agree with you, Joe, but there’s a kind of cliche that I that I see among young, [00:39:00] inexperienced founders its called “the problem solve problem.” And that is we had a problem, you know, 70% of our revenue is coming from one company and that one company is threatening to go to a competitor.
I flew to California and I talked with the CEO and I got him not only to stay with us, but to increase our business. And I go back to my friends and family board and I say, we had a problem, its solved – and they say, great, what’s for dinner ?
Joe: [00:39:37] I want to ask you about something else. You’re involved in many activities. One of the things you do that Raza and I both enjoy a great deal is the Seat at the Table.
Larry: [00:39:46] Yep.
Where people in your network come together once a month and sit as a board and have conversations about key issues in corporate governance. How did you develop this concept and how has it evolved over the years? [00:40:00]
The word evolve is really the right thing. We started at stable Peabody started as an executive level outplacement firm. And we had these monthly meetings for people who were out of work and it was sort of job search related, but we were working with so many CEOs and they were out of work because they didn’t manage the board. They wanted to talk about board issues. So we started talking about board issues.
Joe: [00:40:34] Interesting.
Larry: [00:40:35] I called it, our job candidate meetings, and then somebody once said, no, this is like seat at the table for, for board people and I said Oh, okay. And so we started doing that.
Then for a number of years we were doing, people would come and give lectures, or make presentations, but we were finding we were getting, you know, pretty smart, savvy, highly [00:41:00] opinionated board members coming. And so we decided to do cases instead and they, they loved the cases.
Joe: [00:41:08] Yeah. I think the conversations that take place at the seat of the table are really terrific.
Larry, it’s the great having you here today. Thanks so much for joining us.
Larry: [00:41:17] Thank you.
Joe: [00:41:17] And thank you all for listening to onboards with our guest, Larry Stybel
Take care Raza
Raza: [00:41:24] You too, Joe.