Today’s economy continues to offer extensive growth potential for engineering and construction (E&C) companies. Yet, a shortage of available resources can ultimately limit organizations’ abilities to maximize these opportunities. With a short-term focus on completing active projects and meeting current client demands, companies can easily overlook the power of effective corporate governance in helping them reach success.
Originally printed in CFMA Building Profits Magazine, January/February 2019 edition.
The Power of Effective Corporate Governance
Enter: a high-performing board of directors, which can provide reliable insights and tactics for executive leadership strategy while advancing shareholders’ best interests. In short, companies should look to move beyond a sole focus on high-level financial health and, instead, integrate an effective board to assist in addressing strategic issues such as succession planning, talent retention, enterprise risk management and innovation.
These issues all play critical roles in preserving long-term viability. With this in mind, the Construction Industry Round Table (CIRT), an association of America’s leading design and construction companies, partnered with FMI to produce the report, “The Untapped Potential of Corporate Governance in Engineering & Construction: 2018 FMI/CIRT Corporate Governance Study.” The purpose of this broad study was to explore industry-specific governance practices and how they fostered board efficacy.
An array of factors was investigated to support this goal, including leadership, demographic composition, board processes, director training, development methods and time management. Throughout the study, researchers considered the fundamental question: Which factors support great governance?
The study’s findings were based on survey responses from 133 CIRT board members as well as over 40 follow-up interviews. Key study findings were grouped into four main themes1:
- Leadership Matters
- Different Is Better
- The Big Training Gap
- Reordering the Priorities
This article is the first of a four-part series providing insight into each theme and will address the importance of leadership matters within the boardroom.
This first theme highlights the importance of board leadership and how the board leader (chair or lead director) plays a pivotal role in fostering an effective board. Essential to the success of any board, the chair’s role should be crafted with the same intention that goes into that of all executive leaders. FMI’s research underscores the importance of leadership, showing a strong, positive correlation between board leadership and board effectiveness (see Exhibit 1).
Exhibit 1. A strong board chair can make or break board effectiveness.
The “2018 FMI/CIRT Corporate Governance Study” revealed that the more effective the board leader, the greater the overall effectiveness of the board he or she leads. And while this may initially come across as obvious, FMI found that few organizations invested in board leadership training – a potential, critical miss that will be further discussed later in this series.
What Does Great Board Leadership Look Like?
Great board leadership begins with clearly defined roles. As such, the chair’s primary role is to provide leadership to the board versus the organization that it serves, allowing the board to function as the highest decision-making body of the organization.2 Therefore, the chair’s role focuses less on vision and decision-making and more on creating an environment of candor, trust, communication and collaboration.3
An effective chair leverages the unique talents and perspectives of all directors to provide sound advice and decisions to management, which are all focused on the long-term health of the business. “Really good board leadership is making sure that when topics come on to the table…(there) is open, honest dialogue where your opinions are clear,” one E&C director pointed out.
Here are critical areas where good board leadership can create open and collaborative environments to drive better results.
Keeping Things Strategic
Successful board leaders should seek to facilitate conversations where every voice is valued and heard, and where board discussions focus on strategic topics that influence and shape the organization. A strong chair also prevents the board from becoming immersed in operational minutiae and, instead, helps it hone in on the organization’s vision, long-term goals and objectives. Similarly, a great chair takes the time to prepare a balanced board agenda, incorporating both financial oversight and thought-provoking discussion topics.
It can be easy for boards to be distracted by operational details best tackled by management. As such, successful chairs can clearly define the boundary between management versus board responsibilities to ensure directors remain nose-in, fingers-out (NIFO). A NIFO board is “nosy” about all things (in hopes of deepening understanding) and “keeps its fingers” out of management decisions. Directors should understand that their roles are not to run the company, but, instead, to assure that management is effectively running the organization and to ultimately hold those managers accountable.
Confronting Tough People Issues
People are critical resources in any organization. A peak-performing board oversees senior-level executives’ performance, irrespective of whether the board was formally engaged in their hiring process. “One of the main things that boards get involved in is the hiring and firing at the CEO, COO and CFO levels. That includes measuring individuals’ performance and evaluating how those individuals impact the company. We try to make our decisions based on that information,” confirmed David Nash, external director for Weeks Marine and Caddell.4
A good chair (or lead director) should seek to remain impartial and base his or her decisions on the organization’s needs. Of course, potential challenges can arise when a chair and CEO work hand in hand and form a close personal relationship. And in many cases, a CEO can also serve as board chair, which can make a situation even more challenging.
Despite these dynamics, a board should vigilantly monitor the actions of executive leadership. This is particularly true in the case of potential CEO misdeeds (as witnessed in recent public company scandals involving matters ranging from sexual misconduct and fraud to bribery and intentional misinformation shared with investors).
Balancing Director Input and Decision-Making
The board chair should also seek to create an environment that balances candor and cadence during board meetings. For example, if a single director argues his or her case overly strenuously, this could stifle thoughtful comments from other directors. This is especially pertinent to internal directors or those who wear the “dual hat” of executive and board member, and who thus may be direct reports of the vocal advocate.
On the other hand, if only the chair speaks to a given issue, other directors may miss out on hearing management’s thinking and rationale.
While it is important to include all opinions in strategic, organizational discussions, finding balance can be difficult when members are passionate about certain subjects, as the temptation is great to delve into details at the expense of valuable time.
“A good chairman knows when to let discussions flow and when to shut them off. If you can get to a point where you’re prioritizing and really hearing everyone’s voice and getting everyone’s input – and those voices have enough variety (not just a bunch of yes people) – then you get some real effectiveness,” points out Michael Loulakis, advisory director at Capital Project Strategies.5
Building a Culture of Trust and Collaboration
Good board chairs can build a culture of trust that creates an open space for fluid conversations where all perspectives are heard.
“A really good board chair is an excellent listener, who helps guide honest discussions where everyone can challenge each other and finds a way to reach some sort of consensus, so that the board is giving clear direction to the CEO at the end of those meetings,” says Peter DiMaggio, managing director at Thornton Tomasetti.6
Allowing an open dialogue is central to facilitating consensus and informed decision-making by all board members. Here are some of the most popular words that study participants used to describe a healthy board environment:
The Role of Boardroom Chair: Four Variations
Successfully creating an environment where directors are active, engaged and focused on strategic issues can be influenced by the chair’s role in the boardroom. There are multiple ways to define the scope and purview of the chair’s role. Each comes with unique advantages and challenges, and all are influenced by the chairperson’s degree of involvement in the management of the business.
Here are four different chair roles, including an in-depth look at the E&C industry’s prevailing model of dual CEO/chair.
In this situation, the chair is an employee of the business, but not the CEO. An executive chair is often seen during transition periods, when a CEO steps out of that role but remains active in the organization. Alternately, many businesses start with two partners, with one being designated as CEO while the other steps into the role of board chair, bringing a degree of balance to the entire organization.
This chair is not an employee of the business and, hence, usually not a member of the executive management team. Chairs with this relationship to the organization should find ways to deepen their knowledge about the company that they serve. Their degree of engagement between meetings (i.e., to stay intimately connected with the organization) becomes vital.7
A lead director is an external board member who works hand in hand with the chair to provide leadership to the board. This approach is often used when the offices of chair and CEO are occupied by the same person. It can be critical to have an early-tenure conversation with the chair (and presumably CEO) to clarify roles and responsibilities. One way to look at this role is “first among equals,” or someone who is there to facilitate and plan board meetings and ensure free-flowing communication among all participants in the governance process.
Dual Hat: The Combined CEO/Board Chair Role
Findings from FMI’s survey show that 52% of board chairs are also CEOs of the same organization.8 But the role of board chair is distinctly different than that of CEO, and the leadership dynamics in a boardroom are different from those in the C-suite. While this dual role can provide unique challenges, much can be done to ensure the integrity of both roles.
First, look to clearly distinguish the role of management/CEO (to lead the company) from that of board/chair (to provide governance).9 Clearly define the responsibilities and expectations of each role and then include that information in board and committee charters. The clearer the expectations, the easier it will be to detect when the board begins to veer into management’s lane.
Another difficulty of the dual-hat role is making sure that board members feel open to constructively challenge the CEO on key decisions. While all directors should be able to voice their opinions freely, sometimes people can feel that their voices are constrained when the board chair is also CEO.
In this regard, research shows that candor is essential for creating productive discussions in the boardroom. Our study found that only one in three directors feels confident enough to challenge the CEO “very often” or “always” (see Exhibit 2).10 Consider the conundrum faced by internal directors: How can one productively dissent in the boardroom and then managerially report to the CEO/chair thereafter?
Exhibit 2. Only one-third of directors feel confident enough to challenge the CEO “very often” or “always.”
Robert Majerus, vice president at Hensel Phelps, posits, “To have an effective board, everyone must feel empowered to voice opinions, to make suggestions, to make recommendations, to support those recommendations and to drive the board to a consensus.” In some cases, directors do not feel that they can openly display opposition due to the nature of their professional relationship with the CEO, which can limit thought diversity in the boardroom.
Setting board agendas is another area where dual role factors can heavily influence. Hugh Rice, senior chairman of FMI Capital Advisors, Inc., summarizes this situation well:
“As chairman you get to set the agenda, establish priorities and decide what gets discussed. That is a subtle thing, but it is really important. Making sure the right topics get covered is critical.
“If management sets the agenda, then its subjects get visibility and others may not. If you have an outsider as the board chair, it’s not just about running the meetings. It’s about setting the agenda. We would talk about different things, and certain things would be at the top of the list, and I think that’s healthy. Because if you’re the CEO, you’re worried about running the business every day. If you’re an outsider, you’re more likely to push topics that are longer-term and bigger-picture — risks, strategic direction and all those kinds of things.”11
Moving Forward: Chair Assessment Checklist
Understanding the characteristics of great board leadership is only the beginning. The next step is to examine how well a chair is leading the board. These questions will help glean insights into board efficacy. Try using this checklist as a tool to reflect on how well a chair fulfilled his or her responsibilities:
- Were all board materials provided to directors well in advance of the meeting to allow ample time for review and preparation?
- Was the meeting agenda followed in a timely manner?
- Did the agenda provide adequate time to address the most critical items confronting the business?
- Were all board members encouraged to participate in the discussion?
- If some members were reluctant to participate, did the chair seek out their specific input?
- Were discussions kept at a strategic level (without delving into operational/managerial details)?
- Were all directors involved in decision-making?
- Similarly, even if there were disagreements, did all leave the meeting with a unified front?
- For open action items, were follow-up roles clearly assigned to the appropriate directors, committees and/or management?
- Were disagreements addressed promptly and openly during the meeting?
While not all-encompassing, this checklist provides a snapshot into chair effectiveness. The more facilitative role of a chair does not always come natural to many leaders, especially those who sit (or previously sat) in the CEO seat. However, when achieved, the role provides tremendous benefit to both the board and organization as a whole.
In summary, strong board leadership will drive organizational effectiveness in both the short term and long term. However, leadership forms just one piece of a larger puzzle. Extracting value from a board of directors requires the right people in the right places at the right time. It also requires a positive group dynamic that combines diversity of thought, experience and expertise.
In the next article, we will delve into the second theme, “Different is Better,” to highlight how having a group or directors with diverse backgrounds, experiences and expertise can boost board effectiveness to new levels.