RATING BOARD PERFORMANCE: WHAT DO WE EXPECT FROM DIRECTORS?
Skytop Founder & CEO, Christopher P. Skroupa, interviews David Pogemiller, President and CEO, Boardroom Alpha
March 22, 2021
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Christopher P. Skroupa: 1. How do you feel the role of boards has changed between 2008 and today? Is it a significant shift?
David Pogemiller: The role of boards hasn’t changed so much as the expectations of what good looks like and what it actually takes to be good. They are still there to help set the strategic direction, pick the right leaders, be an on-going check against that direction and leaders, and, when necessary, bring to bear additional expertise to accelerate the company.
Today we’re seeing an incredible increase in expectations driven by multiple forces: the very powerful ESG trend; a more proactive approach to stewardship from big investors; big, systemic issues such as COVID and cybersecurity; and from increasingly powerful data and analytics such as our Boardroom Alpha ratings. And, because of these forces, there is an increasing amount of transparency and accountability – increasingly boards are being forced out of the shadows.
With this, boards are becoming more diverse across gender, age, tenures, and skills. On the skills side, there is an increasing professionalization of the board where the members will increasingly create a tapestry of skills – financial (the one must-have legacy skill), technology, cybersecurity, human capital, etc. – that create a more effective board.
The board should be an essential piece of making a company successful. If, for whatever reason they aren’t, there should be meaningful change.
Christopher P. Skroupa: 2. We struggle today with CEO tenure. CEOs stay less than 4 years, on average and boards stay over 10 years. How is this addressed in your ratings?
David Pogemiller: Tenure as a measure in isolation isn’t very helpful. In some cases, longevity in a position is both good and warranted, in others it could be a sign of bad stewardship. The question companies need to ask is, “Do we have the right team of directors and officers to capitalize on the opportunities in front of us and to effectively manage the inherent risks.”
This comes back to a focus on having the right set of diverse ways of thinking and skills that we spoke about before and then “what” and “how” team should be measuring success. This is one of the ways in which the Boardroom Alpha person and team ratings are very helpful because they are objective, consistent measures of value creation. By assessing every director and officer in a consistent and comprehensive way across their peers we can readily identify those people that know how to drive return and those that do not.
Christopher P. Skroupa: 3. How does “ESG” fit into the Boardroom Alpha ratings?
David Pogemiller: The Boardroom Alpha director/officer and team ratings are a performance-linked measure of the “G” (governance) in ESG. Ultimately great governance will lead to great and observable outcomes such as shareholder return and strong company fundamentals.
Boardroom Alpha also produces “traditional” governance ratings, but these types of ratings are more risk-based and are much harder to tie to long-term performance as most companies. In addition, today most companies are ticking the box on the right, basic governance practices that are observable from the outside. Effectively, the outside world is seeing the tip of the iceberg and it can be very unclear what lies beneath the water’s surface. For this reason, being able to tie back a person and team’s full track record for every company they’ve been an officer or director at is so crucial. As outside observers we must find additional data points beyond the company in question that lets us know we should believe in these company stewards or not.
Beyond “G”, the “E” and “S” are very important, but even more difficult at this point as there is inconsistent, non-standardized (or total lack of) reporting. The good news is that there is an increasingly rapid move toward standardization in reporting, but there is a long way to go. This is especially true in regard to the basis behind the reporting where the questions are (a) which ESG factors are truly material to a company, (b) how should those factors be measured, and (c) how those factors should be reported.
Christopher P. Skroupa: 4. Do you have a data point on gender diversity? Has the needle moved?
David Pogemiller: Board diversity, both gender and racial, have an incredible focus on them and great, powerful forces pushing on it, but still moving relatively slowly. For example, the average percentage of women on boards at large corporates is still only 20%, according to the MSCI ASWI Index.
Many big institutions (e.g., Blackrock, Goldman, etc.), diversity focused organizations (e.g., The Board Challenge, The Board Diversity Action Alliance, Latino Corporate Directors Association, and many more) and even governments (e.g., California) are pushing hard on this.
Unfortunately, the reality is it will be a long, slow, and frustrating effort as the whole end-to-end process of bringing new directors onto boards evolves from a “who do I know and like” process to a merit-based, skill-focused process that has the right motions at the start of the funnel (i.e.,” where do we find new directors”) through to the end process of director evaluation.
One only needs to look at the NFL’s Rooney Rule to see how these efforts that seem to have the right focus and structural support can still be too slow in fixing diversity inequities.