Would You Make a Good Company Director?

Russell Reynolds is probably the world’s best-known recruiter of directors of large corporations.  What does he look for in sizing up a candidate?

First and foremost, he says, is the obvious: basic intelligence and common sense.  It’s a given that you’re looking around among the top few percent of available people.

Next would be good character, which is likely to come from your upbringing, and perhaps from your religious beliefs, which will fortify your character, since most religions have common objectives.  One needs a balance between being restrained from doing wrong and losing the ability to take necessary action, particularly in new areas.

Then there’s collegiality.  A director’s cardinal duty is to the shareholders, but the way to get things done at a high level is through harmony, a fraternal feeling.  A director who thinks in other than those terms will probably fail in his mission.  Russell cites the small Goldman Sachs board as the tightest he’s ever seen, and on the other side mentions a huge American commercial bank as being so risk-conscious that it’s really run by lawyers.

One must not interpret one’s function as shareholder’s representative as implying a right to adopt a carping attitude in the meetings.  Rather, meetings are to encourage and energize the CEO.  He should come out of a directors’ meeting feeling he can conquer the world.  A director should air elsewhere any policy concerns he may have, in private conversations with other directors or with the CEO.  Concerns about management’s performance can be handled through the Governance Committee or one of the other smaller bodies.

Nothing is more unpleasant and useless than certain activist directors, says Russell, sometimes from the company union, who push their particular agendas that may not be of benefit to the company as a whole.

The director you want is enthusiastic, thoughtful and pleasant to have around.  A sour personality is counterproductive.  “You catch flies with honey, not with vinegar.”  However, the good director should know as much as possible about many aspects of the company’s business, and be forthright in expressing his views.  He should not hesitate to speak up when he thinks matters are heading in the wrong direction.

In finding directors for large companies, Russell Reynolds says he believes strongly in the corporate old boy network.  Its members have been formed by decades of similar training and experiences and have learned to trust each other and speak freely, without being intimidated.

A director should help management do a better job, by suggesting marketing approaches, finding new customers and employees, and being “passionately positive.”

The director should remember that he speaks for the shareholders, but not for the company.  Many directors get into trouble talking to outsiders.  Instead of answering questions from outsiders, a director should refer them to management.  Similarly, the proceedings of directors’ meetings must remain confidential.

On a mechanical level, Reynolds says that a good director is fully prepared in advance for meetings, having mastered the board papers, which, in turn, must be delivered in good time for contemplation.  If he has questions or concerns, he should call ahead of time to discuss them.  He should arrive early and stay late.  In exchanges before and after meetings, one can often acquire useful information and opinions.

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One of the greatest areas of public concern these days is bloated executive compensation, particularly, of course, to unsuccessful CEOs who leave their jobs early and walk away with multi-million dollar severance payments.  Reynolds recognizes the danger of this situation, and mentions that political revolutions are encouraged by a perception from below of greed at the top.  Business must correct this abuse before Congress does it – badly.  But how? Executives must show more restraint, and not demand – or accept – more than they’re worth.

Directors should observe the same principle in determining executive compensation.  But a problem is that the directors are often themselves big-shot CEOs making immense sums, so to them, the huge numbers don’t seem so huge.

Among Russell’s heroes is the CEO of AMR – American Airlines.  He had been chief financial officer until at about age 42 he was tapped for the top job, for which he was unproven.   However, he is a natural leader.  He succeeded in pulling together a fractured board, and resisted the temptation to go into bankruptcy in order to increase his bargaining power with the unions. This year a profit of a billion dollars is expected!  Last year, the board approved a $10 million pay package, including restricted stock and cash.  The unions were very critical.  In fact, though, they should have thanked him for saving the company from bankruptcy.  On the opposite side is Nardelli at Home Depot and Grasso at the Stock Exchange: “Oink, oink, oink!”  In the same unhappy band is Ray Irani, who, Reynolds says, “absolutely raped” Occidental Petroleum, walking away with a $96 billion package which he then renegotiated, to take another huge bite.

Business, says Reynolds, needs more CEOs who are content to live in the knowledge that they’re doing an outstanding job for a reasonable compensation, and who give examples of humility and restraint.

Another qualification of a director is absence of conflicts.  Sarbanes-Oxley defines this very broadly indeed, including the appearance of conflicts.  Rubbish, says Reynolds: we should be governed by facts, not perceptions.  Lord Browne of British Petroleum, an outstanding manager, was fired not for having a gay companion, which had always been known, but because he said he had encountered him while out jogging, instead of via an escort service. He waived a $30 million severance payment!  No BP director made a statement on the subject.  I observed that gay companions seem all right for Episcopal bishops, although perhaps not necessarily recruited from escort services.  “Brown is a brilliant executive,” said Reynolds; “he was crucified by the press.” I observed that financial reporters are paid to write stories, usually not, alas, to dig deeply into a situation and present a judicious conclusion.

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How should one become a director in the first place?  Go to a major recruiting firm, one with hundreds of open assignments.  These days there is less demand for African-Americans, or women as such.  It’s considered an advantage, but not enough to justify lowering the criteria.  Lawyers and investment bankers are no longer in great demand, but rather executives with operating experience.  The relationship between the board and the CEO has also changed somewhat.  More boards are seeking CEOs who are understated, intellectual, modest, and gifted with humility; conscientious leaders, not bombastic egocentrics.

Also, slightly smaller boards than formerly are now desired: perhaps nine members instead of fourteen.  What about nonprofit boards?  Russell Reynolds opines that the best number of directors on a non-profit will be even fewer than on a corporate board: perhaps five to seven, like the Harvard Corporation.  He cites the Huntington Library, with five trustees, chosen from a larger background group.  Huge, ornamental non-profit boards, with dozens of members, end up being run by half a dozen insiders.

A frequent pattern of directorship is short-term, with high turnover.  That’s a mistake.  It invites factionalism and quarreling.  Once you identify strong leaders of great experience and get them well installed, hold them for a long, long time! ■