Or at least it should be!! This posting is going to be the first in a three part series focused on how things are changing in board structure and strategy that more closely resemble the way ABA has always built, managed and analyzed boards of directors and advisory boards. In Part 1, we will begin to analyze "who" needs to be on your board. Parts 2 and 3 will go through what board members need to be contributing in today's economic climate and regulatory environment and finally some best practices on how to implement this change in your organization.

Who to put on the Board?

For decades board members of public companies were often selected for board membership because of who they were (a board of names), who they knew, because of a special interest related to what the organization did, or because someone asked them and they liked the idea of being a "board member". ABA was built to change this "traditional way" boards are built because it provides little or no transparency, efficiency, accountability and ultimately very little shareholder value. Just ask any of the shareholders of any of the large organizations that are no longer with us. The ABA process was designed to address the needs, concerns and "holes" in a business model or management team and get board members with experiences to fill in those gaps so that they can provide value to the CEO, management team and, ultimately, the organization and its stakeholders.

Private Organizations and Boards

To understand why the "Old Boys Network is Dead - And Should Be!" just look at the recent failures of private company boards of directors and the boards of publicly traded companies. Too often at ABA, we recognize many private organizations making similar mistakes. We see many of the same failures and dysfunction because these organizations have populated their boards with friends, family members of the CEO, employees (current and former) or clients of the organization that were selected based on a preexisting relationship. In addition to the purely subjective process used to build these boards, there is little accountability and transparency associated with these boards. In many cases the individuals on these boards are very smart and accomplished, but they often lack the subject matter expertise, proven experience or success that can be leveraged to help the organization and its management team grow the organization or, more importantly, help position the organization to take advantage of this economic climate (see our blog posting on 1/27/09 Leveraging The Strategic Value of Your Advisory Board in a Tough Economy).

At ABA, we focus on the Multiple Strategic Value Impactor Score (MSVIS) that is generated through our objective system of scoring a potential board member before they would ever be placed on a board. By no means would we expect every organization to be able to develop a process as intricate as ours, but some sort of objective analysis is critical in getting the right people involved with an organization at a board level. This leads to a situation where any number of very accomplished individuals can be analyzed and only the top individuals will be chosen based on the needs of the organization and its management team regardless of their previous relationship with the company. These truly "independent" board members will now be in a position to not only challenge the CEO and management team based on multiple levels of expertise, but they also will be in a position to help the CEO and management team come up with the strategies, ideas, connections and advice needed to take the company to the next level. If they rely only on the CEO to come up with and have all of the answers, they severely limit their knowledge and the benefit of having outside thought leaders add to the collective thinking of the CEO and his/her Management Team.

The Concept of Board Diversity

Board diversity is not always a great thing. It may be a surprise to some that we look at board diversity in this way, especially given that we are a certified minority owned firm. In the past, some board members were often selected because they could fill an "identified slot". For example, the board may want a woman, Hispanic or an African-American or a person with a disability or a combination of the above. This was the main criteria used and they could provide some value from another perspective like a strong network. This makes about as much sense as putting an attorney, CPA or even caterer on the board in the hopes of getting free legal or financial advice or discounted meals for the group. Diversity has also been thrown around when it comes to a diversity of experiences and industries represented on a board. Although diverse perspectives can be very helpful in a board room, too much diversity often leads to a disconnect with the organization, CEO, management team and industry. It is hard to challenge the CEO on strategic ideas or provide true strategic guidance about an industry launch if you have no one that knows that particular industry. Industry knowledge rarely has anything to do with an individual's ethnic background or gender. At a board level there are only so many seats that are available so that is valuable real estate, and it should only be reserved for only those that can provide the highest value that can be measured objectively regardless of their race, creed or color. We would look at the multiple ways that a board member could provide value and focus on that first and if they also happen to be a minority then that would be a multiple value indicator.

If You Don't Believe ABA, How About the SEC?

You may be thinking that of course we would feel this way about boards, as it is self serving to our business model. To a large degree you are right since ABA has developed one of the few completely objective ways to evaluate potential board members to get true independence and expertise on multiple dimensions. My wife would also agree with you that I have been known to "believe" I am the smartest guy in the room. In this case though it is not just our belief, but other experts on boards are coming to similar conclusions as well.

We recently wrote a post that discussed how the SEC was going to begin to examine how many of the boards of financial institutions were structured and if the Directors that were selected could provide the type of effective oversight needed to ensure long-term sustainability. According to the report in the Washington Post, they are planning on analyzing the true independence of the Directors and their conflicts.

There was also a recent commentary posted on CNN.com called "Boards are the real culprits in AIG mess". The commentary was written by Nell Minnow who is editor and chairwoman of the Corporate Library, an independent research company, and who was named one of the 20 most influential people in corporate governance by "Directorship" Magazine and referred to as "the queen of good corporate governance" by BusinessWeek Online. In this commentary she points out some interesting perspectives:

"Why haven't we learned that it is the boards who are responsible for the massive failures of strategy and risk management at these companies? Regulators, journalists, securities analysts and investors routinely ignore the most obvious indicators of investment risk that are presented by bad boards of directors."

She goes on to point out that the Corporate Library released a report in February about the boards of bailout companies. In several cases, they found that individuals that sat on more than four corporate boards also sat on more than one of these troubled boards during the same period. Her conclusion is simple:

"People say that the definition of insanity is doing the same thing over again and expecting a different result. In this case, insanity is allowing the same people to continue to serve on the board after massive failure and expecting them to produce a different result."

Boards of Directors and Advisory Boards are going to have to find a way to become much more strategic in their thinking to be successful in this new economic paradigm. It is going to have to start with the "Who" part of the equation and asking "What" value do these Directors and Advisers really bring to the organization. The days of sitting a group of "members" in a room and having a reporting session from management (a "rubber stamp" board) are gone. That was easy and rarely did it lead too much else other than one of three things:

1. The CEO feeling like they were the smartest person in the organization.
2. The CEO feeling like they were not getting any strategic help from their board when they really wanted it.
3. The board feeling as if they weren't really utilized, but they did their duty as a board member by just showing up and asking "clarifying" questions, if any.

The only good that comes out of a meeting like that is that the CEO checked in with their "boss", the members picked up a check, and all had a very nice meal and a few bottles of wine with a group of their buddies. This will change if you are involved with a board not because of some new Congressional action (although possible), but what is more probable is that your competitors WILL change their board structure and begin to eat your lunch and thus your organization will go the way of AIG, Lehman Brothers, Bear Stearns, Washington Mutual or any of the other companies that have completely failed their shareholders and owners. If you are a private company, the only difference will be with a lot less congressional scrutiny, federal bailout money or media coverage. The "Old Boys Network" does not work in today's new world - it's OLD.

Bob Arciniaga
Managing Partner/Founder
Advisory Board Architects