Why Some Directors Want to Scream: ENOUGH!

EDWARD MUNCH'S celebrated painting, SEC chairman Christopher Cox once quipped, reminds him of the Enron investor. Judging from our second annual board survey, it also captures the mood of directors fed up with regulatory burdens that demand more of their time and push up opportunity costs to their companies for negligible economic benefit. Worse, one out of five worry that SOX has made CEOs risk adverse.

"You have to wonder, why does anyone even want to be on a board?" Corporate governance expert, Stanford law professor and former SEC commissioner Joseph Grundfest told Fortune in 2004. "The pay is lousy, there's potential legal liability, the workload has gotten much heavier, and your reputation can be tarnished by something you had no way of knowing about." This is still true despite many changes that have taken place in how boards operate today.

In a Directorship/RHR International survey conducted in late 2005 of 120 board members, most of whom are independent, directors say the rules of the game are tougher and that greater demands are causing some to rethink the number of boards and type of company they choose to serve. Compared to last year, board members are spending 15 percent more time on board activities. The typical directorship now requires about 134 hours a year as compared to 117 hours last year.

Two years ago, most directors, including many CEOs, conceded that the Sarbanes-Oxley Act provided a needed prod to shake things up. But sentiment has changed and not just due to Section 404 compliance. Most say SOX is not just a financial burden like other compliance obligations; it's becoming a drag on company productivity. The most damning indictment is that some believe that SOX has made their CEO more risk-averse - a direct consequence of what some regard as the "comply or be hanged" mentality among the regulators and business media.

Figure 1
As a result of SOX oversight and compliance, my company CEO is inappropriately risk-averse in his/her decision making.

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    All figures in percent

Figure 2
Overall, benefits of Sarbanes-Oxley are worth the cost to companies on whose boards you serve.

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    All figures in percent

Figure 3
Over the next two to three years I expect compliance costs to:

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SOX aside, over 98 percent of directors surveyed believe their board operates effectively. No doubt there is a certain Lake Wobegon effect in that each member surveyed thinks his or her board is above average. And over 84 percent are confident in the management team surrounding the CEO, down somewhat from 96 percent in 2004. But this is counterbalanced by the fact that 91 percent feel the board and management's senior team are having candid conversations. An equal percentage say the CEO keeps the board informed in a timely manner.

The survey revealed an inverse correlation between the number of hours devoted to board work and the confidence board members have in the senior management team.

Correlation is not causality. We cannot say whether the lack of confidence in senior management prompts directors to put in more board time or if shaky confidence comes as a result of their spending more time finding out what's going on.

Figure 4
How far in advance of formal meetings do materials come to you?

1 to 2 days
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In addition, the single best predictor of board effectiveness - from the point of view of board members themselves - is the degree to which directors feel free to challenge, assist and engage the CEO to develop potential leaders two or more layers further down the organization. (See figure 8.). Leadership development clearly trumps other responsibilities in giving board members a sense of purpose and accomplishment in carrying out their duties. Yet only two-thirds surveyed say they spend time getting to know these emerging leaders personally. And only two-thirds say their board links performance in this area to the CEO's overall compensation.

One suspects that too many directors are content to see the occasional presentation by handpicked rising stars as sufficient for this purpose.

Although most board members continue to voice confidence in the quality of information flow from management, there are signs that more directors are increasingly relying on other sources to find out what's going on in the company. Three-fourths of those surveyed say their board gathers information on its own independent of management. Many of those surveyed indicated that they are relying on sources other than management for learning what's going on. For example, on average directors visit with people in the company (not at headquarters) at least twice per year. Many say they would like to do more.

Figure 5
Ideally, how far in advance should materials arrive?

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Figure 6
The information contained in the board book is:

Accurate-high quality
Always pertinent complete
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More voluminous than necessary
Important items are obscure/opaque
    All figures in percent

Clearly, the mood in board meetings is becoming more open. Only 3 percent say their board meetings do not include lively disagreement and debate. This is down from 5 percent from our 2004 survey. Yet there is room for improvement on several board process issues.

Directorship April 2006 www.directorship.com
For example:

• Only 71 percent constructively give each other feedback.
• Only 58 percent give significant attention to the integration of a new CEO with the board.

Figure 7
The board discusses succession issues regularly and in-depth.

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In addition, 68 percent report that formal materials come to them less than a week before board meetings. Most say that ideally they should get these materials more in advance than they actually do.

Figure 8
Our board encourages, challenges and assists the CEO to develop current and future leaders.

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    All figures in percent

Figure 9
Our board members spend time getting to know the leadership capabilities of key leaders two or more layers below the CEO.

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    All figures in percent

The survey also revealed an apparent anomaly in how directors think about CEO succession. 81 percent report having in-depth discussions with the CEO about succession, and 54 percent say they have confidence in the plan concerning the current CEO, but only 35 percent feel the transition would be smooth if it were to occur today. Given that they are optimistic and supportive by nature, directors may be whistling past the graveyard while knowing full well that the execution of the succession plan may be a lot harder than it looks on paper. To be fair, too many CEOs put off transition until they are practically out the door themselves.

Figure 10
The board links performance in internal leadership development to the CEO's overall compensation.

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    All figures in percent

Figure 11
Our board encourages, challenges, and assists the CEO to develop current and future leaders.

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    All figures in percent

"Many organizations spend significant time and money searching for and selecting a new CEO, but few give attention to effectively integrating the new leader. The transition is actually a multistage, 12- to 18-month process, and sometimes takes longer," says Constance Dierickx, organizational psychologist and senior consultant with RHR International. "During this transition time, 40-60 percent of new executive-level hires leave the company. In top-level jobs, this translates to losses, but perhaps more significantly, costs come from lost momentum. As Morgan Stanley and others have learned to their cost, high turnover can tarnish the reputation of the company, impacting market value and making it more difficult to attract needed talent."

Figure 12
Our board has a clearly defined succession process for managing the current CEO's transition.

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    All figures in percent

If recent experience is any guide, the board can ill afford to be a spectator when it comes to the handoff of leadership. As the average CEO tenure drops to about four years, boards are finding that they have to reach down into the organization to assess executive bench strength as never before. This becomes particularly acute when companies experience market turbulence. When CEOs run into trouble, boards get blamed too.

Figure 13
The transition to a new CEO would be smooth if he/she left today.

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"Leadership development clearly trumps other responsibilities in giving board members a sense of purpose and accomplishment in carrying out their duties."

3. Speak the language of business value and growth

• CIOs often speak in operational metrics and technology goals; CXOs want them to translate technology investments into larger business goals.
• CXOs in today's environment look to CIOs to play a key role in increasing value to the business. They want to hear a focused set of key business value metrics that align to each new investment:
• Increased efficiency and effectiveness
• Reduced costs
• New opportunities to serve clients
• Increase in revenue
• CIOs who clearly tie their investment and innovation strategies to these measures will find a more receptive audience for their plans to help grow the business.

"The CIO needs to be a good communicator, and translate technology into something that others can understand. The most helpful CIOs are able to relate technology to how it can help or hinder the larger goals of the business."

"I want to see an ROI on most everything. If we are going to spend money to make money, we need to have better returns, better analyses, more money, or less people."

"We have always looked at technology as the source of new products and enhancements. The economic environment has reinforced and highlighted the fact that the IT organization plays a key role in effectiveness and efficiency as well."

"The economic environment defines the role of the CIO - consolidating costs or developing game changing e-commerce options and bringing these opportunities to the business. The recession has caused a once-in-a-lifetime opportunity to give the CIO a louder voice."

4. Protect business value by identifying risk

• Several CXOs highlighted the influence and impact CIOs can have on managing risk, and the emerging importance of this role as a key way to lead the company forward.
• CXOs are looking for CIOs who understand the risk parameters and can provide early risk indicators.

"As the role of technology increases, the risks associated with technology become greater as well. It is a significant challenge for CIOs to continually monitor that they are not solving one problem and creating others."

"The CIO needs to be able to think about risk. I need more data at my fingertips to prepare for impending disasters, especially in this economy. I want the CIO to look at the data and know what risks are right in front of us, identify our risk exposure and help to mitigate it."

5. Be reactive at your peril

• A key weakness commonly identified by CXOs is the reactive nature of CIOs. Most perceive that CIOs wait to be invited to participate and assume that others have the responsibility to bring them along.
• Effective business leaders show others the path to innovation, increased value and new ideas; they already know what needs to be done, and they bring the ideas to the table.
• CIOs can seize the opportunity to be proactive to learn what their C-Suite peers want and what the business needs...or continue to look to others to pave the way.

"It would be great if the CIO was more involved in the business and did not wait for it to come to him. He needs to become more integrated. For instance, every week we have a call to talk about our clients. The CIO should participate in that call because he has really good ideas."

"My CIO told me, 'I understand you are different and are the new guy in town - just tell me what you want.' He retreated from the real conversation! He still wants me to tell him what I want. He doesn't understand that he needs to take ownership and figure this out for himself."

"Sales, strategic marketing, product management are the drivers for understating and bringing changes and client needs to the table. Technology is usually reactionary, responding to demands brought to the table."

6. Business experience provides a beneficial edge

• CXOs recognize the benefits of mixing broader business experience with technology expertise.
• CIOs who fill in their own business skill mix, and the business skills and knowledge of their teams, enhance their ability to contribute at the executive table.

"One expectation I have of my C-Suite direct reports is that they are good enough business leaders that if someone had to leave for a few weeks, they could go in and run another department on a short term basis. They need to be able cross train."

"The problem is that CIOs often don't have experience outside of IT. The CIOs who have done well have taken sideways moves and have managed a part of the business that has nothing to do with technology."

"Our CIO is not a propeller-head techie. He comes from the business. He has an understanding of business first, and operates as a CIO second. We get ideas vetted from the perspective of ROI before they even get to me, so we have the advantage of both technical and business knowledge."

Key Takeaways

The results of these interviews with the C-Suite underscore several truths for today's CIOs. CIOs themselves refer often to the struggle to communicate business value and to the skepticism of their C-Suite peers in their ability to participate as business leaders in creating that value. The CXOs we interviewed confirm both the struggle and the skepticism. However, and more importantly, the CXOs also emphasize the opportunity they see for CIOs to effectively step into the role of strategic business partner and furthermore provide a clear set of levers for the CIO to pull to make this transition. The receptivity is there, but CIOs need to proactively seize the opportunity to make this happen.

Additional Resources

For additional resources on communicating with the C-Suite and understanding the perspective of your executive peers, visit the Center's resource library.

Methodology and Background

The Center for CIO leadership is establishing a research effort to help advance the CIO profession by performing research, providing education and tools, and facilitating community outreach programs.

The Center launched a quantitative survey in 2008 to assess the core competencies of CIO leaders, which revealed gaps where CIOs identified the need to improve their competencies and skills. Our 2009 research program seeks to understand these skills gaps and to gather insights from CIO members on addressing the core issues.

Earlier this year, the Center conducted a series of research interviews to explore the gap CIOs identify as a major challenge - communicating business value. Read the summary of those findings on the site. One of the key findings emerging from that research is the critical role of the rest of the C-Suite in solving this challenge together with the CIO. The Center conducted this new set of CXO interviews to help member CIOs more effectively define and communicate business value and serve as strategic business leaders.

Acknowledgements

The Center would like to acknowledge the generous partnership and collaboration with RHR International to conduct this research. RHR International is a world leader in executive and organizational development. For over 60 years they have been assisting senior management in the areas of executive selection and integration, CEO succession, management due diligence, accelerated executive effectiveness, and senior team effectiveness. Learn more at www.rhrinternational.com.

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