Thought Leadership

Leadership &Talent CommitteeTime to push the reset button andrepurpose CompensationCommittees.

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Every year, shareholders vote to appoint orreappoint boards to act on their behalf to ensurethe company maximizes shareholder value.

Imagine if all board meetings and board activitieswere observed behind two-way mirrors andshareholder votes were based on “real-timeobservations” of the board’s contributions as awhole and as individuals.

With the lack of transparency and real-timeinformation in the voting process four types ofboards have emerged over the years. There areboards that have no impact, those that have anegative impact, and still others that are strongin compliance and fiduciaries. And then there areboards that are true strategic assets and are thesource of competitive advantage, the goldstandard that all shareholders are assuming whenthey vote their shares.

The biggest positive trend in governance is thesincere understanding that directorship is aprofession (not a hobby or a means to stayrelevant) with serious responsibility. Educationalprograms have flourished and top directors feelobligated to “earn the right” to be reelectedthrough serious reflection each year, looking atthemselves in the mirror and asking questions like"Do I know what the future challenges are for theorganization?” and "If the company searched fora new director, would they find new candidateswhose skills were more relevant?”

Enlightened boards are not waiting for activistsbut instead are pushing the “reset” button andreflecting on questions like "What are thecharacteristics of a high-performing board?" and"How do they benchmark themselves against thisgold standard?” A model to use as a frameworkand then customize to your needs is the oneestablished in the Blue Ribbon Commission onBoard Evaluations. (See Figure 1.)

It clearly establishes the mission of the board inthe center circle and the desired endpoint—acompany that has maximized shareholder value.It is the responsibility of the governancecommittee to know the characteristics of a high-performing board, how to measure, evaluate, andestablish a culture of accountability andcontinuous improvement. If a company hasunderperformed for an extended period of time,it cannot give itself a high rating and, frankly,should be putting in place a succession plan forthe board. In such cases, it's time for differentplayers around the table.

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Figure 1 Framework - Characteristics of high performing boards: Boards that are truestrategic assets and some competitive advantage.

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A board’s focus should be on topics that aremost closely aligned to what drives long-termshareholder value.

An excellent reference would be the exhaustivestudy by McKinsey & Company that analyzed thecharacteristics of the top high-performingcompanies in 36 different industry quadrants andasked whether there were commoncharacteristics among the 36 different “winners."The answer was yes.

Attributes of high-performingcompanies.

Based on the research, companies that haveconsistently outperformed over the past 10 yearshad boards and management working bothseparately and together to foster theseattributes:

A “winning strategy.”

Superb operational execution.

Consistent, exceptional CEO leadership withleadership skills aligned with strategicchallenges.

Superior talent in all key roles.

An aggressive, ethical, value-basedperformance culture.

High-quality, branded, customer-focusedproducts.

Flat, responsive, and non-bureaucraticorganizational structures.

A mastery of innovation.

Razor-sharp capital allocation, riskmanagement and M&A.

Now let’s review a recent survey by the NACD

Where boards spend their time60.80% Corporate performance and valuation54.50% Strategic planning and oversight27.50% Financial oversight/internal controls10.70% Risk oversight9.10% Board meeting processes (agenda, committees,

etc.)7.90% Executive talent management and leadership

development6.00% Regulatory compliance.4.00% Regulations with shareholders/owners2.70% CEO succession2.20% Board effectiveness2.10% CEO evaluation1.50% Crisis oversight1.20% CEO compensation1.00% Board culture (openness, mutual respect, action

orientation, CEO relations)1.00% IT oversight4.20% Other

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There is a major disconnect. We are elected toensure the company maximizes long-termshareholder value. We have a research-based pointof view of the characteristics of high-performingcompanies, yet we do not focus our time on thesekey success drivers.

When we examine the research further, the threeattributes that come to the top as the key enablersare:

Exceptional CEO leadership.

A talent-rich company.

An aggressive, ethical, value-based performanceculture with high expectations and rewards.

Our thesis-if you get these right-the rest will follow.

How do we push the “reset button” andreengineer the board agenda?

We propose elevating and repurposing theCompensation Committee to the Leadership &Talent Committee. We need to comply to the NYSEregulatory requirement, but all the time and energywe spend on compensation does not driveshareholder value. As you will see in the CommitteeFramework, executive compensation will beaddressed as only one part of the agenda.

The framework for the newly repurposedLeadership & Talent Committee is outlined on nextpage. (See Figure 2). .

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Figure 2: Leadership & Talent Committee

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The sample topics to be covered under eachheadline are outlined below and the calendar ofworkflow spread throughout the year. Theseshould be customized and enhanced for eachcompany.

Leadership

CEO performance review and development.

Establishment of both short- and long-termperformance metrics.

Approval of CEO’s talent strategy andphilosophies.

CHRO evaluation: Does CEO view CHRO as akey business partner?

Strategic Succession Planning

Continuous review CEO succession.

What percentage of leaders have successors?

Development effectiveness review metrics forsuccess.

Compensation Alignment

Is there alignment with shareholder interestsand strategy?

Approval of prior year-end bonus.

Approval of future goals and objectives?

CD&A approval.

Review regulatory compliance.

Talent Management System Review

Benchmark against world-class talentmanagement.

Talent alignment with long-term strategy:Identification of gaps and plans to ensure thattalent not a barrier to achieving strategic goals.

Talent acquisition strategy review successmetrics.

Turnover analysis–key trends and learnings.

Diversity and inclusion assessment–review ofmetrics used and success.

Cultural Assessment & Ethics

Cultural assessment–can we define our cultureand measure it?

Glassdoor review.

Compliance versus ethical culture-discussion.

Talent Risk Management

Identification and protection of critical “talent”assets including key leaders in CEO successionpipeline.

M&A talent assessment.

Percentage of leadership in stretch positions.

Review health status key executives, includingCEO.

Talent review competitors: Who is winning thetalent war?

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7 © Korn Ferry 2018. All Rights Reserved.

About Korn Ferry

Korn Ferry is a global organizationalconsulting firm. We help clients synchronizestrategy and talent to drive superiorperformance. We work with organizations todesign their structures, roles, andresponsibilities. We help them hire the rightpeople to bring their strategy to life. And weadvise them on how to reward, develop, andmotivate their people.

Questions and implications.

Are we crossing the line between the board and management? A corollary is the board’s role instrategy. It is not the board’s role to create strategy but it is to ensure the company has followed theright process, asked the right questions, done the appropriate risk and competitive analysis, etc., inorder to feel comfortable that it has approved not a strategy but a “winning strategy.” Same principleapplies here. It is not the board’s role to do this work but to ensure the company has all the elements ofa “world-class talent management system.” This starts with a CEO who puts talent and culture as thetop priority and a highly strategic top HR executive who is seen as business partner to the operatingleaders.

Is this not the role of the whole board? Answer: Yes, but to ensure it is done, it does require focus andengaged accountability and leadership to make it happen. i.e. – the committee.

Does this have implications on the “right people” on the board? Yes, of course, with CEO leadership,talent, and culture so aligned to what drives long-term shareholder value, it is imperative that there areboard members who are exceptional assessors and mentors of leadership and talent. This certainlyshould include the highly successful “Level 5”-type self-effacing CEO’s and group leaders but also topHR executives who have been respected business partners of CEOs and business leaders.

Our challenge to readers: This is not an article—it is a journey we are on to dramatically change howwe spend our time in the boardroom and how shareholders want us to spend our time. It is not thefinal word on this topic, and we are hoping it will invoke discussion and debate as we refine this new“best practice.” The good news is everyone we have exposed this to immediately says it makes sense,and there are no barriers to start implementation—just renaming the committee and enhancing themission and charter will kickstart this refocus. We look forward to engaging you on this journey.

Robert Hallagan is the Co-Founder & Former CEO,Center for Board Leadership and Former Chairman,now Chairman Emeritus, NACD National Associationof Corporate Directors.

Robert HallaganVice Chairman, Co-LeaderBoard Services+1 617 790 5790robert.hallagan@kornferry.com