I am happy to repost an excellent piece I first read in March 2013 that is as applicable and useful today as it was then. Many thanks to Mr. Henry Wolfe for his wisdom, candor and expertise.
What You Want in a Non-executive Chair
By Henry D. Wolfe, Chairman of DaVega & Wolfe Industries Holdings.
The following qualifications for the position of non-executive chairman are presented in the context of broad generalities. There certainly will be exceptions for many of them but, in most cases, I would suggest that the exceptions would be rare.
The lens through which the non-executive chairman position typically is viewed as it relates to the functions of the role and most specifically to the qualifications is limiting at best. The bulk of the literature on and conversation about this subject seems to arise from an academic perspective (even if the purveyor of the thoughts on this issue is not an academic) or at best from a “governance movement” mindset. Much of this jargon also fails to acknowledge the still sorry shape and performance of many, if not most, corporate boards.
The non-executive chairman is not in place to serve academic theory, the governance movement, nor the overly formal and rigid world of the corporate insider. Instead, the non-executive chairman position should be viewed as the lynch pin in improving the agency relationship between capital (shareholders) and enterprise (the management and company). Therefore, what I would propose is that the proper lens through which to evaluate the role of the non-executive chairman is the lens of the investor. To that end, I offer the following qualifications — ones that are not absolutely essential and ones that are vital — in a non-executive chairman candidate.
Not Absolutely Essential:
• Currently serving on the board as a director. While this may give a candidate deeper insight in what needs to be improved in the overall functioning of the board, it also may eliminate the candidate if the board has not performed at a high level during the candidate’s tenure. More importantly, incumbent board membership does not ensure that the other critical qualifications have been met.
• Having served as a former CEO. Depending on the individual, this can even be a negative from two perspectives: (1) May still have the desire for executive leadership and therefore will overstep bounds as non-executive chairman, and/or (2) May be too entrenched in the corporate management mindset to effectively challenge management when necessary.
• Having served in a senior operating role. This may not be a negative but is certainly not essential. (On average, give me a good corporate senior executive or a good private equity partner with no hands on operating management experience and I will pick the private equity guy every time.)
• Industry knowledge and experience. That said, the incoming non-executive chairman must make the commitment to take the requisite action and spend whatever time is needed to get up to speed on the company and its industry as quickly as possible. Really good candidates for non-executive chairman positions are: (1) Very quick learners, and (2) Have the ability to cut to the chase in regard to the key drivers of the company.
Vital Characteristics:
• First and foremost, the non-executive chairman should have a deep and full understanding of value creation and should further have a mindset that seeks to maximize value over the long term. This is not a common trait, but is essential for the fulfillment of the agency relationship between capital and enterprise. This is absolutely one qualification that should be non-negotiable. (See Experience and Track Record below.)
• Closely related to the immediately preceding item, the candidate should naturally or innately, even without ownership, think like an owner. Said another way, the candidate should have a completely independent mind and mindset, with loyalty to the shareholders only.
• Must have the ability to cut through the clutter, buzzwords and “corporate-speak” and get to the heart of what really matters in a simple straightforward manner. In almost every company, there are two or three levers that can be pulled to maximize performance and value; the candidate must have the ability to sort through the maze and determine if management has correctly identified these “heart of the matter” elements.
• Must have extremely high awareness in general and especially in regard to people.
• Must be an individual who functions with complete candor and expects same of any group that he or she leads. Said another way, the candidate must have a personal ethic that is devoid of corporate politics and gamesmanship.
• Must be highly disciplined as this trait is essential to ensure that there is a focused approach to strategy development and, most importantly, to execution. Note: While it is management who initially proposes strategy and is responsible for execution, the board needs to have a disciplined process in place to monitor progress toward targets. The non-executive chairman must have the discipline to ensure that this monitoring process is followed relentlessly.
• Absolutely no desire to be the CEO or to serve in any executive capacity.
• Should possess what might seem to some as contradictory characteristics: Toughness and the ability to inspire. The toughness is necessary to ensure the highest standards and to communicate in a critical manner when needed. The ability to inspire is necessary to be able to provide genuine positive feedback when warranted.
• And, although this goes without saying, the non-executive chairman must be an outstanding leader and coach.
Vital Experience and Skills:
• Must have a track record of performance improvement and value creation (note that one does not have to have an operating role to accomplish this as this can be accomplished by serving as a catalyst as an owner, investor, board member, and/or other non-executive chairman roles).
• Governance experience of some type, including nonprofit and for-profit organizations, coupled with a solid understanding of board responsibilities and the agency role of same.
• Past leadership experience with a solid track record, preferably including non-executive chairman roles with successful tenures and outcomes. This track record should include a proven ability to get the most out the individuals to whom leadership was provided.
• Must have skills and experience with the full range of the strategy process, including strategy development and execution and, more specifically, a demonstrable ability to hold people accountable for same.
• Highly developed financial experience and skills, including solid understanding of financial statements, capital structures, investment return measures and ratios, and the capital markets.
• Understanding of the CEO succession planning process and specifically how to evaluate the requirements for the next CEO based on the company’s strategies and place in its overall lifecycle.
• Ability to ascertain board member requirements and needs as the company changes and evolves, including but not limited to the ability to determine the specific timing of same.
• Basic understanding of Robert’s Rules of Order and experience with successfully running formal meetings with positive outcomes.
Reality vs. rhetoric
This summary of the qualifications for the role of non-executive chairman is not what is typically found in the modern-day governance literature. The perspective here is logical and rational only if one genuinely believes that the primary responsibility of the board is to ensure that long-term shareholder value is maximized and that the non-executive chairman is the leader of that group which has this as its primary responsibility. It is not certain, in my opinion, even with all of the lip service provided to this end, that the reality matches the rhetoric. If that is the case, why is the uncommon ability to deeply understand the value-creation process and a track record of same not at the top of the criteria for non-executive chairmen?
While there appears to be some progress toward recognition that there is a specialized nature to the position of non-executive chairman, I would submit that the full understanding and development is still in its infancy. Much as there has been some discussion about the possible need for “professional” directors, it is my perspective that this should be near to completely mandatory for the non-executive chairman position. And, contrary to the warning from a participant in the Yale Millstein Center Chairmen’s Forum, “If a director wants the job of chair, he probably shouldn’t be the chair,” I could not disagree more. For those who are eminently qualified to serve in the non-executive chairman role, there is absolutely nothing problematic regarding a desire to serve in that capacity.
In conclusion, I would submit that much of what is presented in regard to the non-executive chairman role has a combination academic and management bias. I would even go so far as to say that it approaches the realm of attempting to neuter the chairman before he or she takes office. When economic performance trails downward, the stock price follows and the activist or raider is then at the door; the fact that the chairman had organizational experience, ran good meetings, was able to build consensus, and followed governance best practices rings hollow. Yes, these are viable attributes. It is just that, viewed through the lens of the value seeking investor, they are simply not enough.
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