A version of this post appeared on the Harvard Law School Governance Blog.
Boards of directors have historically operated behind closed doors, unseen and unknown to the outside world. If you asked a director whether they think their board should have a public reputation — one that is distinct from the company — most would respond with a resounding “No.”
However, proprietary research conducted by Edelman concludes that a board of directors does indeed possess its own reputation, which must be actively considered and managed. The research surveyed institutional investors with assets under management of over $1 trillion. Two thirds of respondents said they “must trust a company’s board of directors” before making or recommending an investment. Two thirds of respondents also agreed “an engaged and effective board is important when considering a company in which to invest”.
A board’s reputation is most acutely on display during times of severe corporate controversy or distress. In these circumstances, the specific actions of the board come under a public microscope and become an unquestionable factor in public trust in the company.
Shareholder activism has intensified the spotlight on boards. A weak board is vulnerable when activists use social or traditional media to call into question the board’s integrity or motivations. Activists will criticize the qualifications of individual board members, they will accuse boards of being asleep at the switch, or they may chide boards for being subservient to management. All of this creates an image, a reputation of the board that can be harmful for the company and impact its license to operate.
The world’s biggest mutual funds and index funds are also drawing more attention and pressure on boards. These large institutional investors are rapidly growing dedicated teams focused on evaluating the quality of board governance in the companies in which they invest. These stewardship teams are in effect increasing the accountability of boards and causing them to more readily engage with investors.
Beyond investors, other stakeholders are increasingly holding boards publicly accountable, further dragging boards into the limelight. In a rare but recent example, federal regulators forced change in the boardroom of a major bank for not responding fast enough to protect the bank’s customers. Sophisticated labor unions have compelled boards to conduct internal investigations of their own compliance practices. And the media is increasingly scrutinizing board decision-making.
This raises a threshold question: Should a board care about its public reputation? If yes, what should the board be known for? Beyond the obvious characteristics of expertise and perspective, below are four reputational dimensions all boards must consider:
A board must be known as independent and strong-minded. The board must demonstrate a capacity and track record of making sound decisions, unimpeded by the personal views of management. Boards must actively challenge management to ensure the corporation is pursuing the best course to maximize value. The number of independent directors on a board can be an indicator of this characteristic.
A board must be known for diverse thinking and perspective. A board of aging white men no longer receives the respect of the past and is no longer viewed as having the perspective necessary to anticipate the future. It is now well accepted that a board diverse in gender and race is more effective in navigating the most complex issues that companies face today.
A board must be known for having the capacity to steer ahead of technology disruption. Most industries are facing existential threats brought on by technology, creating real and present danger for corporate valuation and long-term viability. Investors expect boards to have the foresight to guide management in anticipating and overcoming these threats. Many investors believe average age as well as tenure can be an indicator of a board’s capacity to comprehend technology disruption and help their company stay ahead of it.
A board must be seen as deeply in touch with strategy as well as a company’s impact on society. I recently had the opportunity to ask a group of 200 investors what percent of directors are capable of explaining company strategy? The answer was surprisingly grim, as a large majority said that directors typically do not truly understand the strategies of the companies they serve or the dynamics of the industries in which they operate. Regarding impact to society, the CEO of the world’s largest investor recently charged boards in a public statement to take more responsibility for the way companies address social issues.
In the middle of a fight with an activist investor, we see boards actively managing their reputations through a variety of means (such as the classic “fight letters”). But outside of these extreme and short-lived circumstances, what tools are available for a board to cultivate its reputation? Here are a few:
- Boards are increasingly meeting with shareholders directly, to hear their perspective and convey their thinking. Robust preparation is essential though: the head of governance for one of the world’s largest institutional investors admitted that “half the time directors come to see me, they would have been better off not doing so”.
- Boards are writing personalized letters in proxy statements to emphasize their dedication, input and actions to salient corporate matters.
- Certain directors engage with media either on-background or on-the-record to reinforce their direct involvement in addressing major corporate issues.
- Directors sometimes create IR videos in which they explain their involvement in strategy-making and their philosophy for key governance topics such as compensation, enterprise risk or succession planning. (Such videos are often posted on the IR site of the company or as part of the company’s annual report.)
Perhaps in an ideal world there would be no need for a board to have a reputation, never mind actively cultivate one. If all companies performed well and never faced a crisis or major controversy, this might be true. The reality is that companies are increasingly facing life-threatening issues that call into question the decisions of the governing authority. If the board is known as a strong steward during these challenging periods as well as calmer waters, this can in fact become a competitive advantage for the long-term viability of the corporation.
Lex Suvanto is global managing director, Financial Communications & Capital Markets.