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Change isn’t coming. It’s here. The global financial crisis has created a game-changing scenario in which corporate boards increasingly will find themselves grappling with government laws, regulations and policies. To function well in that environment, says Nels Olson, managing director of Korn/Ferry International’s Eastern Region and member of the Board & CEO Services Practice, corporate boards must increasingly include directors with strong backgrounds in government policymaking.
Since taking office a year ago, the Obama administration and much of Congress have signaled their intention to increase oversight not only of the banking and finance sectors, but of such industries as health care, automotive and energy. Similarly, most European nations have followed the example of British Prime Minister Gordon Brown, who, as part of his country’s financial rescue plan, insisted upon government ownership of a major share of the participating banks and restrictions on executive compensation and shareholder dividend policies.
Aside from the anticipated oversight stemming from the financial crisis, a variety of policy issues already confront corporations. A review of proxy statements offers examples: General Motors shareholders put forward proposals in 2008 regarding national health care reform and adoption of a corporate plan to reduce total greenhouse gas emissions from company products and operations; Microsoft shareholders proposed requiring management to institute policies to protect access to the Internet and also sought to establish a separate board committee on human rights; Boeing shareholders also proposed health care reform and initiatives related to human rights.
Given these pressures, says Olson, boards that take the innovative step of bringing in directors who are savvy about public policy will be rewarded with an enhanced risk management capability and a deeper understanding of the dynamic between business and government — a dynamic that is very much still evolving.
Olson, who also heads Korn/Ferry’s Government Affairs Practice, presented his analysis in a 2009 Korn/Ferry Institute paper, “A New Breed of Director Emerges as Public Policy Enters the Boardroom.” The paper includes corroborating insights from a variety of influential players.
“The whole question of how much intrusion and regulation is appropriate is under discussion,” says Kenneth M. Duberstein, chairman and CEO of The Duberstein Group and the former chief of staff to President Ronald Reagan. “Obviously, it’s not zero.”
As that discussion unfolds, having former government legislators and administrators like Duberstein in the boardroom will be an invaluable asset in both shaping the debate and managing its outcomes. Duberstein currently serves on the boards of Boeing, ConocoPhillips, Mack-Cali Realty and The Travelers.
Managing the interplay between business decisions and social policy will require exactly the kind of consensus-building style that former legislators and administrators can bring to the table. “The politics of governance have entered the boardroom,” says John Castellani, president of the Business Roundtable. “Understanding regulations and management of the proxy process, as well as having the ability to withstand the heat of politics, are skills boards can really use.”
In a potentially watershed moment, advertisers spent more online than on television in the first half of 2009. Source: Interactive Advertising Bureau and PricewaterhouseCoopers, 2009.
Olson reports that board selectors had seemingly begun to recognize this new leadership mandate even before the recent financial upheaval. An internal analysis of Korn/ Ferry’s Global Board Services (GBS) proprietary database containing research on more than 20,000 executives reveals that over the last decade the number of directors with prior government experience sitting on Fortune 1000 boards increased by nearly 16% — including people like former Missouri Congressman Richard Gephardt (who sits on several boards, including that of US Steel and Ford), former Clinton White House chief of staff Erskine Bowles (Morgan Stanley) and the former chair of Clinton’s National Economic Council, Laura D’Andrea Tyson (Morgan Stanley, AT&T and Eastman Kodak).
Given the current environment, says Olson, nominating committees will no doubt continue to find it useful to broaden their searches to include such individuals. And that’s not only because their understanding of legislative and regulatory processes may be exactly what corporations need to map today’s effective strategies, but also because they offer a relatively untapped pool of talent in an increasingly constrained environment. While traditional director candidates, such as former C-suite occupants, bring the necessary broad background to the director’s job, they are difficult to recruit because board membership is time consuming and, since the passage of the Sarbanes-Oxley legislation, many boards now restrict the number of directorships their CEO may hold or prohibit such service altogether. The pool of director candidates with legal, accounting and other credentials is further limited because more stringent conflict-of-interest policies prevent directors from serving if they are employed by professional services firms that do business with the company. With any director from a non-traditional background, however, there is a learning curve. “A director who has never been embedded in a business will not yet have a developed business instinct,” notes Constance Horner, former assistant to President George H.W. Bush, who is now lead director at Pfizer, as well as a director of Prudential Financial and Ingersoll Rand. Non-traditional directors will need to become more conversant with finance and accounting practices, as well as gain a better understanding of line operations, something they do not encounter in the public sector where their work is less bottom-line oriented. In addition, they will need to make decisions in a new environment. Horner notes that in government work you have an advantage in that generally you know your opponents: “They’ve come to talk with you. They speak to you through the news media or political allies. In the private sector, though, that’s not the case.”
To that point, Business Roundtable’s Castellani notes that corporations are addressing learning curve issues with a variety of efforts to improve the business literacy of non-traditional directors because they recognize the value of the perspective such directors bring to the table. “What’s happened has intensified the scrutiny on boards,” says Castellani. “If there is anything we’ve learned it’s that boards need to be more diligent and more skeptical on risk management issues.”
The only way to accomplish that, Olson’s work suggests, is for the composition of those boards to reflect the broad nature and complexity of the problems they now face.