CHRO's are a 3 out of 10

10/16/12

I recently came across a report on "The Weight of America's Boards" put out by James Drury Partners (hat tip to Kevin Cox at American Express). They criticize institutional investor advisors, shareholder activists, greenmail investors, government regulators, special interest groups, and academics as only pointing out fault in boards but not presenting models of exemplary performance. In response, they focus on the "weight" of boards, defining weight as the amount of business acumen represented by board members. So far, so good, but as the saying goes, "the devil is in the details."

In order to assess board weight, they have created and then later modified a weighting system, weighing each board member between 0 and 10. Heading the list with a rating of 10 are "Active Chairman or CEO" at companies with greater than $4.4B in revenue. This is followed, for example by "Retired Chairman or CEO" (9), "President" (8), "CEO of Company," "CFO" or "CAO" (7), "General Counsel" (6), "Advertising Exec" (5), "Academic - President" (4). What caught my attention was that CHROs (and Professors) both only score a 3, only slightly above hospital executives (2), religious leaders (1), and "No Professional Affiliation" (0).

Now let me explain my differences with the rating system in three ways. First, the focus of the rating system is on the necessity of "business acumen," and few would argue that board members should have a reasonably strong level of business acumen. However, because boards are not involved in basic operations, nor even in the development of strategy, but rather are elected to represent the shareholders, one could argue that there could be a point of diminishing returns with regard to acumen.

Second, at a general level, the weighting system would suggest that the strongest boards have homogeneity of representation as the "weightiest" would be a board made up entirely of current CEOs. This seems obviously dysfunctional in two ways. My interviews with CHROs about board dynamics reveals that one of the most dysfunctional aspects of boards is that they are made up of a number of individuals (most CEOs) who are used to being the main decision maker, rather than being one of many, (in other words, too many chiefs and not enough Indians). Additionally, applying the logic of the weighting system to Executive Leadership Teams (ELTs) would suggest that the best ones would not have a general counsel, CFO, CMO, CIO, or CHRO, which seems ludicrous on its face. Rather, the ELTs function better when there is a diversity of individuals, each of whom brings a deep functional knowledge along with a significant level of business acumen.

Finally, I take particular issue with the low rating for CHROs (and I'm not particularly fond of the rating for Professors either, but I'm honored that if I were on a board I'd be considered equal to a CHRO!) In a world characterized by a "War for Talent" one would expect that any board looking out for the shareholders would be able to conduct deep dives into understanding the development and availability of leadership talent and succession planning. While some CEOs are great at this, our recent survey of CHROs suggests that far from all of them are. Thus, having CHROs who can spot talent and critically evaluate talent processes would seem to be a significant addition to boards. In addition, often governance issues emerge from the failure of board members to distinguish when CEOs are telling the pure truth versus presenting what they want the board to hear while hiding what they don't want the board to hear. Again, given that CHROs tend to be the ones who have the emotional intelligence to see the difference, it seems that having someone on the board with such ability might increase governance effectiveness.

I agree with James Drury Partners that we need a way to evaluate the quality of boards. However, I think it's reasonable to argue that a board full of hammers may not be able to build as much as a board filled with the entire tool belt, and the skills that CHROs bring to the board table may be one of the most critical tools needed.