Boards are more than a required governance mechanism. “Great boards can create value and help the enterprise differentiate itself in the marketplace,” says Salvatore D. Fazzolari, a former CEO and current member of four boards. He says that a company’s board can be an instrument of strategic value-creation for the enterprise.
Great boards can fulfill their core purpose of creating shareholder value by building a value- creating mindset, Fazzolari says. Building and sustaining a value-creating elite board, however, is not easy because short-term considerations often trump the investments needed to actualize long-term value. In his 2017 book, “CEO Lifelines: Exceptional Habits of Elite Companies,” Fazzolari describes four habits of value-creating boards.
Habit 1. Form a Technology or Innovation Committee. Value-creating boards prioritize the power of technology to radically improve every process of the company, starting with board governance itself. That starts with a board that advocates for strategic transformation of the company by fully embracing digital technology in the boardroom. The transformative and disruptive nature of technological innovation, and the threats of lapses in cybersecurity, all demand that boards think in new ways about how global enterprises are managed and governed.
One response is for the board to form an innovation committee comprised of members with a strong grounding in both technology and market trends, combined with transformative attitudes about how the former impact the latter. Some boards are appointing digital directors to the board to support the innovation committee. An effective innovation committee can guide the company in its quest to embrace technology at every level.
“A WORLD-CLASS SUCCESSION PLAN ENSURES THAT THE COMPANY IS NEVER FORCED TO RECRUIT THE CEO FROM THE OUTSIDE, BUT THAT DECISION BECOMES A CHOICE.”
Habit 2. Embrace Succession Planning Beyond the CEO. All boards prioritize succession planning, particularly the job of preparing for CEO succession. Value-creating boards take this responsibility to the next level with a coordinated focus on building an organization prepared to endure for generations. For such boards, succession planning covers the entire C-Suite and often one layer below.
While the CEO properly owns the talent development process, the board must be responsible for overseeing and evaluating its execution. On an annual basis, such boards conduct an in-depth review of the company’s succession plan. Here’s one test: A world-class succession plan ensures that the company is never forced to recruit the CEO from the outside, but that decision becomes a choice.
Habit 3. Optimize the Structure of the Board. The average size of boards of large corporations is about 11. Fazzolari believes that the optimum size of the most effective boards is closer to eight or nine members. Smaller boards tend to be more nimble and more tightly focused on the issues.
While smaller boards create staffing challenges for committee work, the benefits of smaller boards (think Apple or Netflix) are well documented. The benefits generally outweigh the limitations.
Habit 4. Act Like a Private Equity Board. All boards can learn something from a key attribute of private equity: an unsentimental focus on key metrics. Private equity boards focus on making an enterprise better, concentrate on value creation, and make decisions guided by a relentless focus on key metrics, performance goals and leadership execution.
While all boards prioritize metrics, private equity boards invest more in the dashboards and instrumentation necessary to develop and act on both historical and real-time metrics. Fazzolari credits two reasons for why this is so. First, private equity boards tend to be smaller, which allows them to move quicker. Second, private equity boards tend to be more hands-on, often because members are heavily invested in the company. With more skin in the game, board members of private equity groups are incented to make fact-based decisions quickly. Such an insistence on key metrics contributes to a fast-paced, value-creating mindset that would be well emulated by every board.