All About Boards - Storm & Company

All About

Boards

*Eighty-eight percent of all respondents commented that Storm & Company exceeded their expectations when contrasting the firm to other known search firms.

Building a

Board

Finding talented and willing executives to sit on corporate boards (private or public) is as difficult — perhaps even more challenging than recruiting a CEO. Corporate corruption has resulted in making it more difficult to find individuals who are amenable to the responsibilities and risks of board seats.

“Danelle was very responsive to our needs, quickly came up with candidates, and things got done immediately after every conference call. I was very pleased with the search.” Henry Samueli, Ph.D. CTO, Chairman of the Board Broadcom Corporation

Despite these changes, the purpose of a board hasn’t changed for years; but these changes have underscored the value of a good board member. The Harvard Business Review1 defined a board’s mission in 2002 as: 1. To monitor performance, 2. To advise the CEO, and 3. To provide connections with a broader world. These tasks remain the same, notwithstanding a clearer definition of “connections,” and a stricter interpretation of “monitor performance.” “Today you want members that have great connections because they are movers and shakers, not because they are a supplier or customer,” said Ms. Moe Grzelakowski, a former international telecom executive, currently a technology industry consultant and senior advisor to Investor Growth

Capital, and new Board member of Broadcom, the $2 billion global leader of wired and wireless broadband communi­ cations semiconductors. “That’s all gone away. It’s a very fine line now.” Risks such as personal financial obli­ gations, jail terms, kidnapping, and even death sentences in some countries, have made many business people wary of assum­ ing a board seat. Worldcom directors ultimately paid $20 million out of their own pockets to investors as partial com­ pensation for their losses; and the former CEO and board member of the Bank of China’s Hong Kong subsidiary was given a death sentence for embezzlement, which was later suspended. “Boards may be responsible for per­ formance, but most boards don’t get involved operationally,” said Grzelakowski. “They really should empower the CEO.”

1 Jeffrey A. Sonnenfeld, “What Makes Great Boards Great,” Harvard Business Review, September, 2002

“I like her process — how she handled candidates and her periodic summary. She did a thorough job of whom to talk to, how she defined their experience, and her perceptions of their strengths and weaknesses.” Lonnie Smith, Chief Executive Officer, Intuitive Surgical, Inc.

As a result of circumspect candidates and companies equally concerned about finding experienced and honorable people, Storm & Company (SCO) has found itself helping more firms search for and recruit board members in the same way as C-level executives. “With the new more stringent requirements, compa­ nies must now be more creative when building their boards of directors. They need to add new members who bring valuable, distinct core com­ petencies. So the personal network is no longer sufficient,” said Danelle Storm Rosati, Founder and CEO of Storm & Company, a top Silicon Valley executive search firm. “You have to think clearly, judge the risk, and do your homework on the company to determine if it is appropriate to be on the board,” says Ms. Nancy Handel, SVP and CFO of Applied Materials, who also now holds a seat on the Broadcom board. “Board members should never forget that they represent shareholders, and are not merely an ad hoc group of people,” Handel said.

What’s Important Like CEOs and other C-level managers, board members should have deep knowledge in the industry of the company, subject matter expertise, and experience with various business practices. This facilitates coaching, trust, and with multiple individuals overseeing areas, it can ensure that processes are followed correctly. A relationship of trust between an executive and a board member is important, notes Grzelakowski. “Everyone needs a mentor, or coach,” she said. “When board members bond with company executives like this, conversational dialogue continues out of the boardroom as well as in.” They must also be able to act with diplo­ macy, exercise good judgment, be decisive, and team players — all excellent CEO attributes. Board members should also be capable of stepping into a role at a firm when something unforeseen happens to a CEO or CFO. “Succession planning is not a priority, but it’s a consideration,” says Handel. “It has to be in people’s minds, but it’s

2 Announcement, May 11, 2005

not a requirement for a board member to be a transition person.” “It’s equally important to have board members with experience in the various stages of a company,” noted Mr. Sunir Kapoor, who sits on two boards, NeoEdge Networks, Inc. and UBMatrix, Inc., and is a recidivist entre­ preneur and CEO, now at UBMatrix. “They should know what it’s like in a start-up, for example, if it’s the board of a private company. They should be familiar with the challenges and what’s appropriate at each stage of a company — from early founding to almost-public — and help the company avoid mistakes they themselves may have made else­ where.” In addition, he said, it’s important to not let boards become too large. “You have to have the right size and complexion in terms of investors and industry people — and that changes over time as a company evolves.” “When you are on the board of a private company, you have more latitude in some respects because the investors you represent are usually sophisticated and knowledgeable about the company; they better understand the risks of the investment they have made compared to those typically investing in a public company,” Kapoor said.

Diversity Defined Diversity is another dimension important to a board. It extends from gender and race to location and career orientation. “We went to great lengths to achieve diversity on Applied Materials’ board. We wanted global diversity, with people from China, Japan, Taiwan, as well as experience diversity, represented by individuals who had service business knowledge and targeted capabilities. The result is a board with diverse perspectives,” Handel said. But there is a distinct under-representation of women and ethnic minorities on boards in North America, according to The Alliance for Board Diversity2, a collaboration of three organizations — Catalyst, The Executive Leadership Council, and the Hispanic Association of Corporate Responsibility (HACR). This Alliance reported that just

16.9 percent of board seats in the Fortune 100 are held by women; 14.9 percent of board seats are held by minority individuals (three percent of which are women); and only 3.9 percent of board seats are held by Hispanics. In contrast to a CEO, board members should be more independent– and open– minded. Academics, for example, can make excellent board members for early–stage companies because they are often well–versed in the research of new technologies. However, being outside the corporate world of dead­ lines, academics can either focus on process, or be open to too much discussion of too many perspectives, to be practical for a corporate board. “I think you’ll find more diversity in the tech industry in Silicon Valley than in other industries,” Kapoor said. “Start-ups are looking for every opportunity to have competitive advantage. They don’t really care who the people are as long as they are the right people.”

Added Value But the larger role for board members is far more than monitoring and advising sug­ gests. Where will the company be in five years? Or ten? How will the company achieve its goals? Strategic thinking is a talent that not every executive possesses, whether a board member or part of a management team. Often CEOs struggle to maintain strategy, and, at the same time, execute–to–plan. Nevertheless, continually evaluating a company’s market and strategy may very well be the true, added value a board member can contribute.

Improving Boards The establishment of the Sarbanes-Oxley Act of 2002 was put in place to prevent lessthan-orthodox practices. But that law itself is cumbersome for businesses, and has caused some companies to figure out how not to deal with it. One trend is to take the firm private, which has angered some business people. At the annual business and economic confer­ ence in Davos, Switzerland this past winter,

one hedge fund manager boldly criticized buyout-firms taking companies private and making very large returns: they are “appropri­ ating profits that should belong to public shareholders,” he said. Another perspective on “going private” has less to do with hiding something, but more to do with all the regulations and costs associated with a public company.

External Measures Despite its high cost to business — SOX (as the act is commonly called) has increased the average cost for a public company3 233 percent — is working. This is “the most significant change to the securities laws since they were put into effect in the mid-1930’s,” according to Dennis M. Nally, the chairman of PricewaterhouseCoopers. Interestingly, Senator Sarbanes has said that the fundamental purpose of the law “was to get auditors to start being auditors again.” Despite criticism, SOX has changed behavior. And realizing the high cost to business, the Securities and Exchange Commission (SEC) is researching how to minimize the costs. SOX has had many, perhaps unintended, after-effects, such as new resolutions. A reso­ lution requiring that companies adopt an election standard where only directors who received a majority vote would maintain their board seats appeared on only 12 proxy statements in 2004. But supporters of this resolution submitted it to 79 companies in 2005, and it appeared on the ballots of 55 companies. This “majority vote” resolution has been embraced broadly by companies including Pfizer, Microsoft, Disney, and Aetna, which have voluntarily adopted election pol­ icies that require directors who fail to achieve a majority of votes to resign their board seat. 2005 was also notable for a merger and acquisition action during the proxy season: shareholders were focused on the process by which boards arrived at deals. Management was typically successful if it could demonstrate it had pursued and exhausted all avenues for maximizing shareholder value.

3 Firms less than $1 billion. A typical large corporation paid $14.3 million in corporate governance costs, most of which to comply with

Section 404, which requires that managements assess their companies’ internal financial controls, and then have their outside accountants audit those controls annually, according to the New York Times.

“Danelle may be above average because she was so tenacious — tenacious and aggressive.” Scott McGregor President and Chief Executive Officer, Broadcom Corporation

“Storm & Company does not have the typical image as in a large firm because it’s a boutique, and clients can get more individual attention at a boutique…that is added value.” Vic Mahadevan, Chief Executive Officer, NeoEdge Networks

Internal Measures The recent, well-publicized issues with public corporate boards point directly to absent or nominal board members. “A board can be improved simply by having its members realistically assess how much time they can devote to the role,” Kapoor noted. Other improvements could be in the areas of under­ standing the balance between creativity and control, because “you need dialogue on both sides,” Handel noted. In addition she said, there is increasing attention on enterprise risk management, and that board members should be more conversant in this area so opportunities can be maximized and peril mitigated. Grzelakowski is a strong believer that the addition of women can improve boards. In her experience women tend to have people issues higher on their radar than men, and are more comfortable addressing CEO performance issues. Having recently written a book titled, Mother Leads Best,4 Grzelakowski said her research indicates that compa­ nies that place women in some key positions outperformed their peer companies, which do not have women on their executive team. She also noted that organizations and universities are now conducting training sessions to teach women to be board members.

“Danelle has executive presence — that is, she strikes the right air of engagement, competence, energy and understanding.” John Major Chief Executive Officer, Apacheta

4 Mother Leads Best: 50 Women Who Are Changing the Way Organizations Define Leadership, 2005,

Dearborn Trade Publishing, a Kaplan Professional Company