Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewmanaging board succession
Several years ago, one of our own members and very successful investor, Ted Weschler, made the observation that one of the most persistent shortcomings of boards was the failure to properly manage board succession. More recently, many governance experts and activist shareholders have raised board atrophy as one of the reasons for their concerns and challenges. This issue has also received attention within the field; for one excellent example, see the attached article, Succession Planning for the Board, by Spencer Stuart. It discusses the need for board succession management and the challenges thereof in some detail. It is worth reading.
The need for board management arises from three main factors: times and/or needs of the business change; people change, including aging; and new members sometimes don’t meet expectations in terms of skill, engagement or chemistry.
Those factors are well recognized. Yet, the phenomenon of a “fossilized board” is common per Ted’s comment. The primary reason for this is that managing the board’s make up, often leads to having to ask a member to step off the board before they desire to leave. In a group setting where congeniality is an important part of an effective board, “voting someone off the island” can be awkward. This is especially true given that the criteria are somewhat subjective.
The WSFS board accepted this challenge many years ago when it established the WSFS Board Principles and Guidelines policy (copy attached). In that document we stated:
“The board recognizes that its “structure” is an aid to, rather than the ultimate determinant of, effective corporate governance. That determinant instead consists of the quality, skills, expertise and judgment of the individuals who comprise the board and management of WSFS. Having the right structure [including process] is of little use without the right people working as [a] true leadership team to maximize the performance of the company… The WSFS Board is committed to being a high performance Board.”
Later on, one of the listed principles in the document is to:
“…[r]eview regularly the effectiveness of the Board corporate governance structure and the performance of the Board.”
Although we have endorsed and practiced board management for the last several years, we still struggled to find a smooth process for accomplishing this part of our responsibility. The most dramatic example of this was when we formally started our “board refresh and downsizing project” several years ago. The catalyst for this effort was the collective realization that we had gradually become a less effective board primarily due to size and some chemistry issues.
The process started with a unanimous board vote to reduce its size. Yet in spite of the vote, we were not able to implement the decision during the ensuing year. We encountered the awkwardness mentioned above. Although we eventually worked through the downsizing, it remains one of the most difficult board situations that many of us had ever faced. Furthermore, despite the fact that the results immediately affirmed that the effort had been worth it, we continue to struggle with developing a process that will keep the board relevant to the current and future needs of the business; to keep it fresh, and at the appropriate size.
This history has brought us to the realization that the process of board management must be institutionalized. There must be an agreed upon, deliberate, methodical and transparent process to manage the board. Absent this, over time the awkwardness of board management will make the path of least resistance easier and therefore more likely to be followed.
So the purpose of this paper is to outline a philosophy of board management. What follows are the lessons learned from our recent past as well as presenting certain philosophical underpinnings.
1. Board membership is an incredible honor and responsibility. Board succession is a critical component to WSFS’s long-term health and decisions to change board composition will need to be made over time. Every effort will be made to make decisions thoughtfully, respectfully, and with as much care as possible. We recognize and value each other individually and as a team.
2. Size matters, a lot. We have found that 10 is the upper limit and research indicates that effective leadership teams are even smaller (6-8 in size). It is recognized that unique circumstances (an acquisition, new talent, etc.) may cause an increase over 10, but when this happens there has to be a commitment to reduce the size over the next 1-3 years. The effectiveness of the board depends in large part on this.
3. Engagement, chemistry and diversity of background and experiences add richness to the board. They must be evaluated.
4. None of us can be fully objective about our relative or absolute contributions to the board.
5. It is also very hard to evaluate our fellow board members individually when we realize that said evaluation may influence whether a member is asked to not stand for reelection. Nevertheless, it is essential to do this, and to be as honest as possible.
6. It is very difficult for a committee (more than 2 or 3 people) to make the decisions required for managing a 10-person board. The corollary is that leadership must be willing to make tough decisions without regard to individual expectations. However, in doing so they must be sensitive and transparent in the implementation of those decisions.
7. Expectations about board service must be clearly established.
8. It is important to watch for “bubbles” and particularly, “double bubbles.” An example of the latter is an age bubble in which the incumbents all have the same or similar skill sets.
9. New members that bring new skills and or just a fresh perspective are important to the success of the board.
10. Transparency in the board management process is essential.
11. We reject the concept that board management can be effectively implemented by term or age limits. Such an approach has its own shortcomings, such as implied guarantees of length of service; missing the opportunity to add extraordinary talent; restricting the ability to respond to changing business needs, etc. We prefer the concept of a board dedicated to managing itself for the best interests of the company and having the rigor and courage to do it.
With the above foundation what follows are the elements for managing the board:
1. The process of board management will be supervised by the CGNC. The committee will develop a process calendar to insure implementation of the philosophy.
2. The process will be under the leadership of the board chair and lead director/chair of the CGNC, both reporting to the CGNC. These two individuals shall be designated the Leadership team. If a Lead Director is required for the Board, that person shall automatically be the Chair of the CGNC. If a LD is not necessary, the head of the CGNC shall be someone other than the chair.
3. Board membership expectations are as follows:
a. Each member is expected to exhibit maturity and wisdom in the best interest of WSFS at all times, but especially when their service to the board is re-evaluated.
b. There is no guarantee for board membership past an individual’s current term.
c. The board will regularly assess collective and individual performance.
d. Said assessments will be part of the input to making decisions about future board make up
e. The board will always seek to identify extraordinary talent and be opportunistic about inviting said talent to join the board.
4. It will be presumed that a member desires to remain on the board unless they indicate otherwise, although this is not to be interpreted as any assurance of remaining.
5. Board members will be asked to indicate if they have any plans for retirement from the board. While said indication will be taken into account, it will not necessarily control how long a board member remains on the board.
6. The board will maintain a matrix of desired board skills.
7. There will be an annual board evaluation process that includes the assessment, in some manner of individual contributions. Periodically, this assessment must include a relative assessment of individual contributions. Assessments can be internally conducted but periodically the board shall use an outside facilitator for the assessment.
8. To further transparency the leadership team will promptly share with an individual any emerging observations about their board performance that might arise between surveys. The goal of such discussion is so that corrective steps can be implemented where appropriate.
9. As soon as the leadership team begins considering the idea that an individual will not be re- nominated, regardless as to how long before their term is due to end, that thought will be shared with the individual.
10. The CGNC will establish a process for interviewing directors whose terms expire at next annual meeting. It is anticipated that the leadership team will conduct the interviews but that is subject to CGNC. Said interview is to cover all aspects of their board contribution. In the case of the leadership team, two other members of CGNC will conduct the interviews. The purpose of the interviews is to ensure a forthright discussion of an individual director’s plans, level of engagement and any other pertinent subjects.
11. Annually the board shall have an evaluative discussion of the leadership team (in the absence of the team). Said meeting will be under the leadership of the chair of the Personnel committee and the results thereof communicated to the incumbents. Said evaluation must include specific comments on how well this process of board management is being implemented.
The WSFS Board considers the process of board management one of its two or three most important accountabilities (hiring the appropriate CEO and properly holding him/her accountable for performance being the first). While it is the responsibility of the full board, the CGNC must lead the process. As part of its annual calendar the committee shall discuss the process and be a catalyst for a full board discussion. This process can be refined as needed, but only after a robust discussion of the reasons for changing.
We believe that our approach of institutionalizing a process and being transparent about its use can alleviate some of the challenges faced when looking to rework board structure. It is a key step in order to keep a board at the right size and with the right composition to best serve the shareholders.