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Hiding in plain sight: how to find and develop the next generation of directors.

It's TOO SOON TO SAY that the CEO director is a vanishing breed but ... a revolution in slow motion is certainly under way when we look around the boardroom.

At companies large and small, many CEO-directors are nearing retirement or have reached a point where they are fully "boarded up" and unavailable for service on additional boards. Some are dropping off boards to stay focused on the increasingly complex demands of their own companies. A number are not allowed by their boards to serve on outside boards or are restricted to one outside board. Finally, facing the requirements of Sarbanes-Oxley, activist shareholders, and increased SEC scrutiny, some CEOs just don't find outside board service appealing anymore.

So, what's a board nominating committee to do?

Faced with this rapidly shrinking pool of CEO-director candidates, boards face a formidable challenge: connecting with the next generation of board talent and recruiting them to boards. Most CEO candidates are visible and, in many cases, known to boards. In today's environment, nominating committees have to look in alternate places for talent, assess this new generation effectively for fit and readiness, and ensure that they are 'onboarded' appropriately and with care. Any one of these steps can represent a challenge for even the best and most skilled boards.

Where to look

The next generation of board members will likely be found in some familiar and not-so-familiar places, each with unique promise and problems:

* Large U.S.-based global companies known for best practices in talent development: International Business Machines, Procter & Gamble, Hewlett-Packard, and numerous other companies have rightly enjoyed stellar reputations for nurturing top talent and fully developing high-potential executives. Companies that invest in talent and leadership development are, of course, where boards would expect to find experienced and talented next-generation leaders whose careers have been well managed.

However, because many boards are likely to look at these kinds of high-profile companies first, the competition for those who are genuinely qualified for board service is fierce. And most of these executives are allowed to serve on only one board, if any. There are many, less well known but equally impressive businesses with up and coming general managers on the CEO or similar track who can and should be considered for boards. The message here: Don't just look in the most obvious places.

* Large non-U.S. global companies: While the challenges of international travel to board meetings remain complex, looking at large, sophisticated non-U.S. global companies may be an option. Most likely candidates can be found in regions where executives are familiar with Sarbanes-Oxley and have sophisticated board environments (like the U.K.). Also, many global executives have spent time in the U.S. and are comfortable with the business environment and have reason to travel here. These can be interesting board candidates as well.

* Well-run private companies: Traditionally, many boards have been unwilling to look to private companies for board candidates. Rightly or wrongly, directors regarded private companies as having different priorities from a public company and perhaps not generating the scale and scope of experiences required for service on the board of a large, publicly traded company. However, the surge in private equity (PE) investment and the recruitment of strong public company-trained leaders to the private company sector has changed the environment. In fact, many outstanding public company executives have migrated to private companies.

The challenge, however, is that PE firms expect these executives to devote their full attention to running their particular portfolio company. They often discourage or even forbid service on outside boards. Nevertheless, there is a rich vein of talent and it may be worth exploring. Further, there are some dynamic private companies that are also adept at developing leadership skills and are mirroring some of their public counterparts in this regard.

* Top functional executives: In the past, many boards have been reluctant to bring on executives with strictly functional depth rather than broad general management experience. Today, however, boards increasingly recognize the value of a director whose functional experience is relevant to a key area of the company's strategy. For example, the financial expertise of CFOs has long been valued, especially given the increased demands on audit committees. But now boards are looking even more broadly at other functional experts. For example, in industries where customer privacy, network security, and business recovery are critical, companies are considering adding CIOs to their boards. Companies in formerly heavily regulated industries facing unfamiliar marketing challenges are looking at CMOs to provide a customer-centric perspective to board deliberations. General counsels with deep M&A expertise can be valuable when a company is growing rapidly through acquisition.

The challenge here lies in finding the right balance: Functional depth has to be combined with a breadth of perspective. Seeing the world exclusively through one functional 'filter' will not necessarily be useful in the boardroom. A candidate has to demonstrate that he or she is a broader thinker and strategist who can comfortably add value in a general business context, not just in a specialty area. In addition, the board as a whole should be balanced. There must be a blend of skills and experiences that work well together. Too much of any one 'ingredient' is not healthy--but a balance of pertinent functional experts, general managers, CEOs, and others with a variety of experiences should result in highly interactive and rich discussions in the boardroom.

Assessing the readiness of next-generation candidates

Rigorous, thorough, and effective assessment of candidates has always been critical in recruiting top talent for boards. Rigor aside, however, the template for assessment has often been based on the assumption that the candidate is a CEO or future CEO and should be evaluated in that light. The template for assessing new-breed board talent differs from that traditional template. It's not necessarily more difficult, but because it is different it can be tricky for nominating committees to navigate.

The chief differences between the CEO template and the new template could best be expressed as fit versus readiness. The CEO template assumes that chief executives generally are ready to serve on a board--they have had the requisite broad business and leadership experience that should enable them to make meaningful contributions to the work of the board. That's why CEOs have traditionally been the preferred choice of many nominating committees. The real question is whether they are a fit for the board--will they add positively to the culture and personality of the board?

Assessing next-generation board candidates, however, requires one key step before assessing fit. It requires assessing readiness for a seat at the board table. For example, one might ask whether this executive has competencies that can fill gaps in the board's knowledge or that are crucial for long-term strategy. Can they participate in broad discussions outside of their area of expertise--for example, do they have the agility of thinking and communication needed to ask the right questions and play a broader role? Do they have the seasoning and life experiences to add to the boardroom conversation? Are they comfortable sitting at the table with experienced and possibly high-profile CEOs and other top executives? Will they fit within the boardroom culture? There are many other questions of fit as well, but for non-CEO candidates who are possibly earlier in their careers the first question is all about readiness.

In assessing next-generation candidates in particular, these critical questions can help determine readiness to serve. Some of those questions might also be asked about CEO candidates, but they will be asked in a different register and from a different point of view, and the supporting evidence will be sought from somewhat different sources. But for new-breed candidates, these questions go to the heart of the issue of readiness:

* How do they fit into their current company's organization? Look at the organizational design of the candidate's company and the real nature of the candidate's job within it. Ideally, the candidate's work requires a broad view across the company, the opportunity to learn and grow, and frequent exposure to the top of the organization, including interaction with the CEO and board. Exposure to the board is especially important because it provides the candidate with experience in how directors think and behave.

* Where have they been and where are they going? Assess their career paths through both the rearview mirror and the windshield. Consider the job rotations, experiences, and roles they've had. You may want to determine if they have the potential to be CEOs, but in many cases--such as looking for someone with great functional depth--it's not critical. It is critical, however, to understand where they are in their careers. For example, if a board desires a future CEO, it is important to ensure that the candidate hasn't 'bottomed out' careerwise. Assessing a career trajectory requires careful referencing well beyond the board members of the candidate's current company.

* Have they encountered the ups and downs of the business cycle? If during their careers and in their industries they have known only prosperity, they are unlikely to be able to contribute much during lean times. Wisdom comes from adversity, and some of the best board members have experienced multiple business cycles and have the scars to show for it. Often, they can be helpful advisers to the CEO, the management team, and the rest of the board. A next-generation candidate may not have the same level of experience, but it is critical that he or she has experienced some ups and downs of a business cycle.

* Do they have the requisite courage and wisdom for effective board service? This is a crucial question for any board candidate, but because courage and wisdom are often forged in the crucible of experience it is particularly pertinent for next-generation candidates. The exercise of courage in the boardroom requires a delicate balance of candor and collegiality that is persuasive without being confrontational and that gets results. Further, courage must be supplemented by substance: the ability to provide wise counsel. The assessment process should determine whether these relatively early-in-experience candidates have the presence, self-confidence, and stature to speak up constructively in board deliberations. In the course of your interviews with them (and with references), it is critical to ask about the tough moments everyone encounters in a career and assess how they have dealt with taking an unpopular stand on a position or gone out on a limb for a strategy or initiative they believed in.

Taken together, the answers to all of these questions of should help answer the overall question of readiness: Is this the right time to put this person on a board?

The opportunity ... and the danger of delay

A great deal of outstanding non-CEO talent waits to be tapped. There is no reason not to go after it--and many compelling reasons to consider the next generation. Boards and their companies can benefit from the presence of board members who bring diversity of all kinds, including different experiences with markets, customers, geographies, or functional areas that are crucial to the company's strategy. They also bring a fresh perspective and new ideas.

Boards that carefully undertake such recruiting can be assured that they are adding real leaders to their ranks, and they may very likely be bringing on board future CEOs. Many forward-looking boards are already securing this new-breed talent. Those boards who don't begin considering the next generation soon could quickly find themselves facing a shrinking pool of available board talent just when they most need the best and brightest minds.

Boards who don't begin considering the next generation may soon find themselves facing a shrinking pool of available board talent.

RELATED ARTICLE: Onboarding: Protect your investment

Like effective assessment, effective onboarding is critical with any director. But for the new-breed director, who likely finds board service a far more daunting prospect than a CEO does, onboarding is doubly important. Because the new director's gaps in knowledge have been identified during the assessment phase, the process of closing those gaps can begin immediately.

In the near term, the onboarding process should:

* Bring the new director up to speed on company strategy: This should occur prior to the first board meeting and is critical for any incoming director. For the new member, the packet of pre-meeting reading that goes out to directors can be supplemented with key strategy documents and analysts' reports. A systematic call schedule or, ideally, in-person meetings can be arranged for top management team members to begin briefing the new director. The new director can also come to company headquarters prior to the first meeting for briefings on company strategy, preferably from, among others, the CEO.

* Educate the new member about board processes and policies: This, too, should occur prior to the new member's first board meeting. Policy and process documents can and should be supplemented with conversations or meetings with the corporate secretary, general counsel, and, critically, the lead director.

* Identify a mentor: A member of the board who has the experience, time, and the right style and personality should be enlisted to help the new director get acclimated to the board. He or she should get acquainted with the director well prior to the first meeting and remain available and in touch for the first year.

* Use information from references to develop the onboarding plan: References for a prospective board member should be asked for specific suggestions they may have around onboarding. These individuals will be best positioned to understand a prospective board member's strengths and areas for development that should be considered when onboarding.

For the medium term, the new director can:

* Consider director education outside the company: Numerous organizations like the National Association of Corporate Directors (NACD), Women Corporate Directors (WCD), and various universities offer director education. Because new directors may not fully understand the depth and magnitude of their responsibilities or what constitutes best-in-class behavior for board members, such outside education is essential.

* Spend time with the leaders of the board: Depending on how the board is structured, that should include the chair/CEO, independent chair, or lead director. During the interview process, which is usually handled by the head of the nominating committee, the new director is unlikely to have spent much time with other key leaders. The foundation of a solid relationship with top executives should be laid as soon as possible.

* Visit headquarters and plant sites early on: Such visits enable the new director to get a firsthand look at the business and to benefit from contact with key executives at many levels of the organization.

Over the long term, onboarding shades into continuing director development. That means a substantive system of director evaluation and feedback--not merely a "check-the-boxes" approach but a comprehensive assessment along all of the dimensions of director performance. Those should include oversight contributions in business strategy, compensation, audit, and overall governance as well as issues of teamwork and board dynamics. The system should include feedback from peers and, if necessary, coaching.

Careful attention to all of these stages--from near- and mediumterm onboarding to long-term director development--ensures that the investment in looking for new-breed talent and assessing it appropriately will pay dividends now and far into the future.

--Thames Fulton and Bonnie Gwin

The authors can be contacted at tfulton@heidrick.com and bgwin@heidrick.com, or by phone at 312-496-1345.

Thames Fulton is a principal with Heidrick & Struggles (www.heidrick.com). In addition to conducting board director searches, he serves as a board-and CEO-level adviser, assisting clients with board analysis, development, and succession planning. Bonnie Gwin is a partner with Heidrick & Struggles, focusing on board director and CEO searches across a wide range of industries. She is a director of the Make-A-Wish Foundation of America.
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Title Annotation:HEIDRICK & STRUGGLES GOVERNANCE LETTER
Author:Fulton, Thames; Gwin, Bonnie W.
Publication:Directors & Boards
Geographic Code:1USA
Date:Jun 22, 2008
Words:2616
Previous Article:The year in governance; A month-by-month recap of the people, actions, and organizations that defined and refined board oversight in 2007.
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