Demands for more diversity. Investor calls for greater accountability. Technology that creates as many threats as opportunities.
Corporate boards are continuing a makeover that is increasing their oversight and responsibilities at the behest of investors who have seen the effects a weak board can have on the bottom line.
At the same time, the boards themselves are working to embrace the advantages of members with varying backgrounds while boosting efforts to recruit the right candidate for each position.
“Boards are changing. There’s more awareness of diversity, and diversity also as a thought process rather than just what we see physically,” says Susan Cain, who has been on the board of Medford-based auto dealership Lithia Motors since 2009. “There is a great deal more being done on corporate governance. I’m not even sure I heard that phrase 20 years ago.”
The Southern Oregon University professor sits on Lithia’s audit, compensation and corporate governance committees, and worked with accounting firm KPMG for 21 years, including 11 as a partner. She says boards have made progress in recent years, helped along by the financial crisis, which ratcheted up the pressure on directors to guide their companies through rough seas.
Still, when it comes to diversity, surveys indicate companies can do much better. Research house Catalyst in June released data that shows just 19.9% of board seats at S&P 500 companies belong to women.
And 30 tech companies such as Airbnb, Pinterest and VMware pledged in a June letter to President Obama to do better on hiring minorities and women at the top, and to publish the results every year to increase transparency.
No Oregon companies were among the 30 signatories of the letter. For Lithia’s Cain, diversity shouldn’t be mandated by quotas or guided by a simple push for diversity. She says diversity should come from a desire to find the right candidate for the position.
“It should be people who actually use the product. After I joined the board, I went and bought a car at a Lithia store without telling them I was a director. I think that’s part of your job as a director,” Cain says.
But recent criticism of boards of directors has gone beyond their composition. The plight of medical testing startup Theranos, based in Palo Alto, Calif., has raised the question of how accountable boards must be for the actions of their companies. Theranos’ difficulties are so spectacular that Hollywood is now producing a movie on the company’s woes with Jennifer Lawrence portraying embattled founder and CEO, Elizabeth Holmes.
Before a Wall Street Journal investigation unveiled Theranos’ problems, the company’s board included names such as former secretaries of state Henry Kissinger and George Shultz as well as onetime secretary of defense Bill Perry. Now that the company’s troubles are well-known — federal investigators are questioning the capabilities of the company’s blood-testing kits—criticism has focused on what those high-profile names knew about Theranos’ activities.
Theranos no longer lists the former politicians as board members — they’re merely “counselors”— and the company has now also recruited a scientific and medical advisory board.
“That would never have happened at the companies I was involved with,” says Ray Link, who’s been on the board of Beaverton’s Cascade Microtech since 2005 and Portland based ElectroScientific Industries since 2015. “You need people who know what the company does.”
Link, who sits on ESI’s audit committee, says boards began to change from a collection of a CEO’s friends to professional panels about 15 years ago, alongside the Sarbanes-Oxley Act of 2002. The act, as well as investor demands for more board accountability, grew out of high-profile accounting scandals at companies including Enron, WorldCom and Tyco.
The increasing demands have boosted the amount of time directors spend focused on one company to more than 200 hours per year from just 15 in the past, according to Link. Investors must ensure boards are performing but the boards themselves as well as company management must put effort into finding diverse candidates for any openings — especially in the tech industry, where Link spends most of his time.
“There are people out there, you just have to work harder to find them and be open to that,” he says. “Boards are doing a much better job. Are we at the nirvana where it’s perfect? No.”
Board recruiting still starts among current directors, both he and Cain say, but is then supported by professional executive search firms, as well as associations such as the National Association of Corporate Directors.
Sherrill Corbett, a partner at Portland law firm Tonkon Torp, agrees that companies have to focus on recruiting the right candidates for boards but that change comes slowly. That’s mainly because companies can only slowly replace board members — boards must maintain the right mix of institutional knowledge and fresh perspective.
“We’re seeing boards move from interest to action on diversity,” she says from her firm’s 16th-floor downtown office. In recruitment, her firm helps companies develop skill matrices before setting out on a search for the ideal candidate. Tonkon encourages clients to seek candidates who “encourage less group-think” and favor innovative ideas.
In addition to what skills companies need, they also have to determine if a potential director is a good fit. “It’s less about name recognition and more about availability and skills,” she says with an eye toward new technologies that are making businesses more nimble but also more vulnerable.
Corbett says companies can sometimes fill expertise gaps by inviting outside experts to speak on specific markets or technologies, but having such expertise within a board can also be advantageous.
“You can have someone tell you all about the road map, but companies often need people who can help guide them in that direction,” she says. Only a board member would have the ability to steer the company or see how a specific technology can fit in a broader corporate fabric, making board members with technological expertise vital.
Directors, she cautions, aren’t responsible for the day-to-day operations of a company but rather “oversight, insight and foresight.” And to achieve this, management teams are increasingly looking to outsiders to bring in fresh perspective.
“You are seeing more publicly held companies move toward an independent board,” she says.
Still, this demand for new ideas means more is expected of directors, who are also subject to more detailed corporate governance guidelines to ensure they’re kept in the loop of a company’s direction.
Corbett agrees that boards have come a long way since the turn of the century but admits there’s still work to be done.
“The volume of information that directors receive now because of corporate governance is huge,” Corbett says. “Directors are having to spend more time being directors.”