Leadership Development Technique: Board Interaction

Adam Bryant recently interviewed Ilene Gordon, CEO of Ingredion, for his New York Times "Corner Office" column (an excellent weekly feature).   Gordon explained one technique she has used to further the development of young emerging leaders in her organization:

I use one dinner a year with my board to bring in young, high-potential managers. We have everybody give an “elevator speech.” You have three minutes to tell the board and other people in the room where you came from, the challenges you’re facing and how you’re trying to create value for the company. Everybody might want to take 15 minutes, but you have to be succinct.  This is part of what we’re looking for in people who have potential; it’s all about communication. What are the challenges you have, and you have three minutes to explain them, because there are 40 of you and we’re going to be here all night otherwise. And if you take somebody else’s time, that’s not respectful. It’s all about being succinct and articulate. 

Why do I like this technique?  First, it provides the board an opportunity to interact with people who may become senior leaders in the organization in the future.  They can begin to develop a relationship with these individuals.  Second, it challenges these young leaders' communication capabilities.  Can they be succinct, interesting, and engaging?   Can they create a powerful conversation based on their three minutes of remarks?  Third, it fosters the establishment potentially of some key mentoring relationships.   Not only may the young leaders gather advice and counsel from board members, but the board members may learn a great deal by hearing from young people who come from a different generation and may be more similar to the firm's actual core consumers.   Fourth, the invitation to present, in and of itself, offers a wonderful reward and recognition for these high performers.   Yes, they would love to be paid well.  However, these folks also care about their future career path.  Having this opportunity certainly will be welcomed and may help retain top young talent.  Finally, the board hears from voices other than senior managers about what is going on at the company. That can be important.  Senior managers naturally filter information as they present updates to the board.  Senior executives present information through their lens and perspective.  Having a different voice and perspective talk to the board can be helpful. 

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Peer Comparisons & Compensation: Law of Unintended Consequences

Claudine Gartenberg and Julie Wulf have written a paper on executive compensation that you may find interesting.  They examined the effects of the 1992 SEC Proxy Disclosure Rule, which increased the transparency of executive compensation at publicly traded firms.  While transparency is generally a good thing, they found a somewhat unfortunate unintended consequence.   After the ruling, executives became more aware of the compensation received by their peers, and they engaged in more comparison to those peers.  Those comparisons resulted in a convergence and ratcheting up of executive compensation.  The effects proved to most pronounced among geographically dispersed firms.  The scholars argue that those executives had a harder time knowing the pay of their peers before the SEC disclosure ruling.  Executives in firms of close geographic proximity already could compare compensation to one another through other means besides the company proxies. 

This study only confirms what I have felt for a long time, namely that compensation isn't just about the absolute level of pay.  It's about how you stack up against your peers. That is true within firms, as well as across firms.  You might recall Michael Lewis describing how traders compared their bonuses in his book, Liar's Poker.  A giant bonus could still be disappointing if surpassed by one's colleagues.  It may sound insane, but it's human nature. 

The real problem, though, lies with boards of directors.  It's one thing for executives to want to "win the compensation game" against their peers.  It's quite another for boards to escalate this competition.   Boards need to recognize the market dynamics, but they must guard against a "compare and ratchet up" phenomenon that has taken hold in many boardrooms. 

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What Happens When The Former CEO Sticks Around?

Professors Tim Quigley (Lehigh) and Don Hambrick (Penn St.) have published a new study in Strategic Management Journal on the impact when a former CEO stays on as chair of the Board of Directors.  Their results prove quite interesting.  Quigley and Hambrick examined 181 successions in high technology firms.  What did they find?  When a predecessor sticks around as board chair, the firm tends to experience less strategic change.  Resources don't get re-allocated as much to new initiatives or sectors, divestitures are less likely to occur, and executive team members are not replaced as often.   The scholars also found that company financial performance doesn't change much.  As they wrote, "New CEOs who are restricted in their actions are correspondingly restricted in the degree to which they can alter performance."  When the predecessor finally does step down as chair of the board, then strategic and personnel changes begin to occur.  Moreover, performance begins to deviate from the earlier levels. 

Many people advocate separating the chair and the CEO roles in corporations.  These results suggest that we have to think carefully about who occupies those roles.  If the chair position is held by the current CEO's predecessor, we may have a chair who does more than monitor and control the CEO's actions.  That chair may actually restrict the CEO's actions so as to preserve the strategy, structure, and executive team that already had been in place prior to the succession.  In these cases, the governance process may actually inhibit very necessary strategic change at times.

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Biased Samples Hike Executive Compensation

When company boards of directors set executive compensation, they often benchmark against peers to determine the appropriate pay levels.  Unfortunately, as this Business Week article by Zachary R. Mider and Jeff Green indicates, many firms choose "peers" that are much larger than them.  Bigger firms tend to pay their executives higher salaries.  Thus, choosing to benchmark against bigger companies creates heftier pay packages.  For instance, the authors report that:

Setting the CEO’s salary is one of the most important duties of a public company’s board. So CBS (CBS) directors decided to give Chief Executive Officer Leslie Moonves a $69.9 million pay package last year only after assessing the competitive market for senior executive talent. The board of directors, however, looked at companies that are, on average, more than twice as large as CBS and included many in businesses far afield from media.

CBS is not alone though. The practice appears pervasive in publicly held corporations.   According to the authors, four of five academic studies that they found on this subject demonstrated evidence of bias in the selection of peer groups by boards of directors.   Why do directors build these clearly biased peer groups?  They want to stay in the good graces of the CEO, and they are often executives themselves... and would like similar treatment when their compensation packages are set.

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