When Directors Don't Make the Grade: self-evaluations could be the key to removing bad apples in the boardroom

Chief Executive, The, April-May, 2006 by Beverly A. Behan

The lead director of a major financial services firm was about to do the unthinkable: He was going to ask a board member to resign for not pulling his weight.

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For three years, the director--a high-profile CEO of a large manufacturing company--arrived unprepared for board meetings, then sat and read documents from his own company as board discussions swirled around him. A few directors had gently admonished him--"Hey, Phil, you're in the wrong meeting, buddy!"--to no avail. When the CEO called for his advice, he would be told by the director's assistant, "I'm sorry, but this is not a good time for him."

Although his behavior was unacceptable, it had persisted, which begs the question: At a time when even mid-level managers face extensive annual reviews and incessant pressure to perform or pack up, why don't companies pay closer attention to performance at the very top? The answer is that the reluctance of boards to face up to their members' poor performance remains one of the most resilient artifacts of the old boardroom culture. It's easy to understand why. Because of the professional and social status of most directors, the idea of telling them that they are doing a crummy job is awkward to even contemplate. And yet, it's impossible to imagine how any board can hope to function as a high-performing team without finding some way to demand high performance from all its members.

As it turned out, the lead director just described was actually spared the awkward conversation by a new process some boards are adopting: peer review of individual directors. In this case, the board supplemented its annual board assessment process with a process allowing board members to give each other feedback on their performance. This peer review was designed for professional development purposes only, not for renomination decisions. This meant that only the individual directors--and not the Nominating and Governance Committee--received a summary of their own feedback. But it turned out to be enough. The disengaged director knew he'd been coasting; faced with candid comments from his peers, he resigned.

Peer review is just one of the tools boards are considering as they tentatively come to grips with the impact of individual director performance. Boards historically have relied on retirement ages to ease problem directors out rather than stepping up to the thorny issue. About 75 percent of U.S. companies have implemented retirement ages for their directors (typically ages 70 or 72) while another 18 percent have adopted term limits, according to Mercer Delta board surveys. But the sword cuts both ways: Both ineffective and highly effective directors are shown the door on reaching the same age. Moreover, retirement policies offer little real help when the problem director is 53 years old.

Failure to address director performance issues not only hampers a board's effectiveness, it can impact credibility with management. As one Fortune 500 chairman explained, "How can you go to your management team and tell them that you are an organization committed to performance of the highest standards and then, when they walk into the boardroom to make a presentation, they see people there who are half asleep and practically drooling on the board table?"

In fact, the "boardroom dozer" is one of the more benign of the various types of problem directors. Here are some of the others:

* The CEO Wannabe. This director would rather be running the company than serving on its board. In some cases, this is an individual who was frustrated in past attempts to become a CEO and sees this as his opportunity to prove himself to the dimwits who failed to recognize his talent. In others, it is a former CEO who's restless in retirement and simply can't kick the habit. The problem usually manifests itself in two ways:

Constantly second-guessing the CEO. This is the kind of person who says such things as, "Well, I'm not the CEO, but here's where this company really needs to go."

Chronic micromanaging. As described by one CEO, "You know, there's always one director who insists on a detailed explanation of the variance on line 37 of the Philadelphia plant's monthly operations report."

* The Pit Bull. This is the overly aggressive and combative director. His or her questions of managers and fellow directors always sound accusatory rather than inquisitive. Pit bulls generate unnecessary tension in board discussions and are prone to bully both management and their fellow directors. They inhibit open discussion and put nearly everyone around them on the defensive.

* The Superdirector. On some boards, there is one particular "superdirector" whose experience and credentials are so far superior to everyone else's that he or she assumes inordinate influence over the entire group. Every time an important issue comes before the board, the other directors look first to see how the superdirector is voting. Significant problems can arise when the superdirector uses his or her influence to create an "opposing camp" to the CEO, a situation that often leads to a showdown resulting in the departure of one or sometimes both.