Lucy P. Marcus

When news emerged in May that Facebook had hired an executive search firm to look for a woman to add to its board of directors, I had hoped that with the appointment would come a great deal of diversity of thought and experience and an independent voice. Facebook has now announced that it has chosen its COO, Sheryl Sandberg, to join its board. Having Sandberg on the board is a good step, but does it address the larger shortcomings that are concerning Facebook users and investors?

Facebook has the same problems it had a month ago, and the company is still running counter to this year’s “Shareholder Spring” – a global movement toward transparency, engagement, and checks and balances on corporate boards. The newly public company lacks diversity of thought and international experience outside of the Silicon Valley bubble; and because Facebook is a controlled company, if the board takes issue with something, it doesn’t have the teeth to do much about it.

Sandberg may come on to the board with full voting rights, but her vote won’t count for much if a boardroom battle occurs, since Mark Zuckerberg holds more than 50 percent of the company’s voting shares.

As COO she may not be an independent board member, but one positive change from Sandberg’s appointment is that it brings another internal executive voice to the table. Sandberg is capable, speaks with authority and knowledge, knows Facebook inside and out, and has strong board experience. It will certainly be important that there is more than one executive voice in the boardroom.

Yet her appointment doesn’t address the wider issues that are still at play. If, as a user, you were unhappy with Facebook’s policies – be it privacy issues or inadequate information about changes to the site – or, as a stockholder, you were unhappy about a botched IPO and a lack of communication from Facebook during the weeks that followed, then Sandberg’s appointment to the board won’t make much of a difference to you.

What does Facebook still need if it is to fix these issues? It needs an outside independent director, preferably a woman with strong international experience who adds diversity of opinion, experience, skill, cultural background, and more. This is not a matter of optics – putting a woman on the board because it looks odd not to have one – but rather an issue of good governance.

The timing of the announcement is not coincidental: Wednesday, June 27, marks the end of the 40-day post-IPO quiet period, when analysts from the underwriting banks, including Morgan Stanley, Goldman Sachs, and JPMorgan, can begin offering up opinions on Facebook. Is adding Sandberg to the board going to be enough to counterbalance the concerns that investors and analysts have about the company? Unlikely.

PHOTO: Sheryl Sandberg, Facebook’s chief operating officer, speaks during Class Day ceremonies at Harvard Business School in Allston, Massachusetts, May 23, 2012. REUTERS/Brian Snyder

Last year 60 Minutes and Jon Krakauer investigated Greg Mortenson, the executive director of the Central Asia Institute (CAI) and author of the best-selling, and, it seems, largely fabricated, Three Cups of Tea. They discovered that he had violated the trust of the people who donated money to the CAI and of those he was claiming to help. This past week Montana’s attorney general said Mortenson must repay $1 million to the CAI. He is allowed to remain with the charity, but can no longer serve as a board member, nor is he allowed to hold a position of financial responsibility.

This case offers some lessons about the role and responsibilities of boards of non-profits that are too important to ignore.

A good board can be hugely beneficial to the stability, growth and effectiveness of a non-profit. On the other hand, a bad or self-indulgent board can be a time-consuming distraction or a drag on scarce resources. In the worst cases, it can allow the abuse of funds and trust on a large scale, as seen with the CAI.

Non-profits come in all shapes and sizes. Some are small niche organizations that come from the passion of one or two people and have limited resources. Others are large, complex organizations with significant donations and operating costs that rival many global corporations. No matter the size or scope, the principles behind the board’s responsibilities are the same: Donors give money to an organization in the belief that their money will be used for a specific cause. The organization and the cause are at stake, and the ethical imperative behind the organization goes beyond the bottom line.

Non-profits require deliberate care and attention in building a strong, capable board, one that will ensure that the mission of the organization is honored in word and deed, and that the donated funds are used in responsible and careful ways. These boards have multiple “grounding and stargazing” responsibilities, from governance and oversight to fundraising and strategic planning. These responsibilities are made greater in challenging economic times.

Board seats of non-profits should be filled not simply by those who give the most money or even those who have the greatest passion for the organization or regard for the person running it. To do so discounts the seriousness of the role of a non-executive board member or trustee. A board should be carefully curated to ensure that the skills and abilities around the table will safeguard the health and well-being of the organization and its mission.

Who needs to be around the table and what skills should they have?

Governance

The board is about governance. It is about ensuring that the organization remains healthy, adheres to the mission and uses funds responsibly. Not every person who donates money, even sizable amounts, should automatically be given a seat at the board table. It is possible to honor donors and to value their input in places other than the governing board, including a separate advisory board.

Financial acumen

The board must have people who are financially astute and who understand the finances of the organization. Their role will include oversight functions, such as serving on the audit committee, as well as financial and strategic planning. The combination of financial oversight and planning is critical to a non-profit’s long-term strength.

Independence

Commonly overlooked is the value of genuinely independent board members. As with corporate boards, it is useful to have people who are neither donors nor beneficiaries and who bring true independence to the discussion and the oversight role of the board. One good choice for this role is an accountant who can serve as chair of the audit committee and in other oversight capacities.

Fundraising

Fundraising is a critical part of a non-profit’s existence. Having board members who take this role seriously is vital. However, a board member’s role is about more than fundraising, since the primary role of the board is governance and ensuring that raised funds are used as intended. Separate bodies can be created to ensure that there are enough people doing the necessary fundraising.

Relevant skills and abilities

A good board has members who have skills, abilities and knowledge relevant to the organization. This means that if the organization is building schools in Afghanistan, it needs board members who understand building, education and the country. These same board members can help bolster the skills and abilities within the organization. That often happens through mentoring and skills matching, where a board member is coupled with a full-time staff member to ensure that the organization has access to valuable, and sometimes costly, expertise, ranging from marketing to human resources.

Increasingly, public-sector responsibilities are being taken on by charities, especially as governments around the world are forced to cut back on services that they have provided in the past. As such, non-profits are touching the lives of more people every day. In the end, serving on a non-profit board is not about loyalty to the founder, personal agendas about the direction of the organization or the prestige that comes with sitting on the board. It is about ensuring that these non-profits are strong, capable organizations with integrity that honor those they are intended to help and those who have entrusted the money to fulfill their mission. Serving on these boards is about ensuring that organizations are sustainable and can help those in need for many years to come.

PHOTO: Greg Mortenson poses with Sitara “Star” schoolchildren in Wakhan, northeastern Afghanistan in this undated photograph released to Reuters, March 11, 2009. REUTERS/Central Asia Institute/Handout

Boards are tone-deaf in a soundproof room

Why is it that executive pay continues to seem so out of line with what common sense would tell us is justified?

We’ve seen a number of striking examples over the past several months of compensation packages that, when exposed to the light of public scrutiny, evoke a range of negative reactions, making people anywhere from mildly annoyed to genuinely appalled. The packages seem out of line with results, and pay ratios are striking. Recent cases are unbounded by sector or location and include AstraZeneca, Barclays Bank and Shell. So what happens in the boardroom that lets such a package emerge?

In most board structures, a remunerations committee is assigned to set the level of compensation and determine the components of the pay package that senior executives receive, including base pay, bonus, stock and privileges such as use of the company jet. In recent years this committee assignment has gone from fairly light to as time-consuming as the audit committee.

There are several factors at play as the remunerations committee and the board as a whole try to weave together pay packages.

Compensation consultants. Often compensation consultants are used to help determine the packages of senior executives. Although many make a sincere attempt to prepare a comprehensive view, taking into consideration peer groups, market pressure, and many other factors, they may not fully appreciate how such a package will appear to stakeholders. What they advise may seem fair in the vacuum of the boardroom or on paper, but oftentimes it does not reflect other realities and pressures on the company from stakeholders such as investors, employees and the community at large. Also, there is a real danger that consultants can become part of the problem, driving up compensation packages as they create an aura of ensuring that the CEO and senior team feel fairly compensated relative to their peer group – a sort of “keeping up with the Joneses.”

Personal feelings. Directors may have developed personal relationships with the CEO and senior team and feel as if they must give them a certain compensation to “save face.” Or the directors may feel that the work the executives have done and are being asked to do in the future is onerous and must be compensated in a predetermined way – a way the board is accustomed to and feels reluctant to stray from. This can be a slippery slope, or rather a speedy escalator, as each year the desire to reward and inspire means that ever grander packages need to be put in place.

A disconnect from today’s reality. Those of us in the boardroom can often feel we are in a soundproof room. Even though we come armed with a great deal of knowledge and information, it is hard to factor in all the input from outside voices or truly take seriously some of those voices. The conversation around the table about compensation may sound reasonable in the vacuum of that room, where big numbers can be bandied about, but it is vital that directors have a finger on the pulse of the market and consider how the pay package, or severance package for that matter, will be received by the wider world. Board members who have been through this process often express surprise at the response by the public and had little appreciation or understanding of the impact their decision would have on the company’s reputation.

A lack of direct accountability. To date, most board members have done their work in a “black box,” so the decisions they made went fairly unscrutinized. Even if there was any outcry about the package, the issue was usually not linked back to the board. As such, there was little accountability for individual board members; they did not have to deal personally with any backlash that came as a result of unpopular choices.

This is changing rapidly. The perception and accountability of the boardroom, and indeed the personal accountability of individual board members, has been transformed. Increasingly board members have to demonstrate why they have taken certain decisions or voted in a certain way, and remuneration committees are being asked to substantiate their choices.

Boards need to come to grips with compensation structures of their senior executive teams, and stakeholders need to continue to voice their concerns about compensation packages. CEOs and other members of the C-suite deserve fair compensation for running companies, particularly in demanding economic times, when only organizations with the best talent will survive and thrive. On the other hand, these difficult economic times call for judicious decisions about compensation packages that are more clearly linked to performance and demonstrate that board members are not tone-deaf in a soundproof room.

PHOTO: A gambler counts out cash while making a proposition bet on Super Bowl XLV at the Las Vegas Hilton in Las Vegas, Nevada, January 27, 2011. REUTERS/Las Vegas Sun/Steve Marcus

In a new video, Lucy Marcus explains the basic functions and importance of boards of directors.

On Tuesday, the California State Teachers’ Retirement System (CalSTRS), the second-largest pension fund in the United States, wrote to Facebook to address the fact that the company has an unusually small, insular board with no women. With this bold and public step, CalSTRS brought to the fore an issue of genuine concern: diversity in the boardroom.

Most of the press will pick up the part about the absence of women board members, and that is vital — there is no doubt that women are severely underrepresented in the boardroom. The lack of women on boards, however, is a reflection of a wider problem with diversity: It is one of color, age, international perspective and more. The Facebook boardroom has virtually no variety, and that is a serious issue. Boards that don’t represent the stakeholders of the business and the environment in which companies operate are not able to do their jobs as capably.

A lack of diversity is not simply a problem of “optics.” In the modern world, it does look odd not to have it, but does diversity make a difference in real economic terms? Does it actually affect the bottom line? To my mind the answer is a resounding yes. We do not need diversity for diversity’s sake, but because diversity on the board contributes to the profitability of the business. Diversity of thought, experience, knowledge, understanding, perspective and age means that a board is more capable of seeing and understanding risks and coming up with robust solutions to address them. Businesses led by diverse boards that reflect the whole breadth of their stakeholders and their business environment will be more successful businesses. They are more in touch with their customers’ demands, their investors’ expectations, their staffs’ concerns, and they have a forum in the boardroom where these different perspectives come together and successful business strategies can be devised.

Some fear that too much diversity and independence of thought can be damaging to the cohesion of the board. Given the iron grip that Chairman and CEO Mark Zuckerberg has on the Facebook board, that may be a concern that is driving him. Yet for healthy boards with capable independent chairs, the very opposite is true. The modern board requires that there be room for open, constructive, dynamic discussion, with respect and regard for the people around the table. In my experience, the result is a more capable and better functioning board, one that can withstand the challenges of an ever-shifting landscape in which the organization it serves operates. Diversity then becomes part of the very DNA that marks a business as healthy and ready to face the future.

Healthy businesses need comprehensive diversity. Without it there is no independence of thought or action, and no way to hear what is happening outside of what would otherwise be an echo chamber. Also, diversity is not a static, one-time result that boards need to achieve, but one that poses a constant challenge of renewal. Good corporate governance in this sense also requires “turnover” in the boardroom so that organizations are capable of dealing with today and tomorrow.

In an ever-more-global business environment, diversity also has an international dimension that extends beyond gender, culture, age, etc. Every board needs to keep a finger on the pulse of what is happening around the world, and given the exceptionally global nature of Facebook’s business, the absence of international expertise is that much starker. International diversity is required to broaden a board’s knowledge and understanding of what is happening in the rest of the world and how this affects the environment in which the organization it serves operates. International diversity in this sense also means that the best boards will be able to be proactive in instituting these changes, striving to live up to the highest standards of corporate governance from around the world, not simply waiting for the world to force them to do so.

When I see a business with a board that has a preponderance of people with similar, if not identical, profiles, this is a signal that it is not a healthy business built for the long term. It is the canary in the coal mine — the warning that business fundamentals are not being looked after. If a board is not diverse, it makes me wonder about the business as a whole. If Facebook wants to continue to grow, now is the time when Mark Zuckerberg needs to be willing to release a little bit of his grip and open his boardroom to new voices and ideas.

PHOTO: People walk past the Facebook wall inside their office in New York, December 2, 2011. REUTERS/Eduardo Munoz

Hewlett-Packard has announced that Lawrence Babbio will be stepping off its board, and this comes hot on the heels of the news that Sari Baldauf would also not be standing for re-election. GlaxoSmithKline Pharmaceuticals has announced that James Murdoch will not continue to serve on its board. He has served on GSK’s board since 2009, on its Ethics Committee. Murdoch has been embroiled in controversy this year, which led to loud rumblings as to whether it was prudent for him to remain on the board.

This news brings to mind an issue that comes up time and again when independent board directors gather: inactive, unproductive, distracting or simply “dead wood” board members. It is often discussed in hushed tones, but it is time to address it openly and frankly, and to look upon it as the responsibility of each of us as individual board members, rather than simply an issue for the board or the board chair to tackle.

There are a number of reasons that you should consider stepping off a board:

You’ve served too long.

There is a finite amount of time that anyone can serve on a board in a truly independent manner, yet a surprising number of “independent” directors have served for 30-plus years. The UK Corporate Governance Code‘s guideline on this issue sets out nine years as best practice. It seems hard to fathom that independence would stretch to 36 years, the tenure of Coca-Cola board director James D. Robinson, or 41 years, as is the case with Douglas G. Houser, a director on Nike’s board. Questioning their length of service is not a reflection on their abilities as board members, but rather stating the obvious: It is impossible to remain independent and to serve for that long.

Your expertise is no longer required.

Flux is an integral part of business. Innovative companies shift their priorities and direction routinely, in large and small ways. The object is to have people around the table who reflect the expertise needed for today and tomorrow. As the business changes direction, it may be that the reason you were brought onto the board no longer exists. It is not personal, and it can be awkward to say, but if this is the case, recognize the change and make room for someone else whose expertise is a better fit.

You’re not pulling your weight.

No one joins a board with the intention of going along for a ride. Work and personal circumstances change, and sometimes interest simply wanes. If you find you are missing board meetings or committee meetings, or are not engaging in, let alone beyond, what you are duty-bound or required to do, it is time to look again. If you are “phoning it in” by attending meetings but not reading your board papers fully or are not participating in the meetings you do attend, you can guess that everyone around the table has noticed. Be honest with yourself and exit gracefully.

You’re obstructively disruptive.

I am a strong proponent of healthy creative tension. It is vital to ask hard questions and to be confident about stepping up and taking an active interest in the discussion. However, there is a line. Your behavior should not be a distraction or deliberately combative. It is one thing to have creative tension; it is another to have an all-out war. If discussions become ego-driven, if your contributions are based on concern for your reputation, and if the best interests of the organization and its stakeholders you are there to serve and protect take second place behind that, you have outlived your usefulness to the company.

Your actions, inside or outside the boardroom, bring distraction or disrepute.

We’ve seen a couple of cases of board directors behaving in a way that taints everything in which they are involved. This runs the gamut from insider trading to saying things in public that are ill-advised or off-color. It could also mean being strongly associated with unfortunate decisions made by the board you sit on. If your personal or business actions are bringing disrepute to the company, if you have become the story and thus a distraction for the company, do the decent thing for the sake of the company and step off in short order.

No one wants to be the person everyone around the table feels is not contributing, and you never want anyone else to have to tell you that you have outstayed your welcome. Even worse, you don’t want to be the subject of shareholder activism about whom the things that are said ring true. Although humbling to admit, no one is irreplaceable, and the best service you can give is to step down and help encourage board refreshment. There are several mechanisms that can be put into place to make this process easier for boards to deal with, including term limits, clear job descriptions and regular board evaluations; but really, it shouldn’t take that for directors to figure out the right thing to do — and do it.

When it is time to go, don’t leave it too long, don’t wait to be pushed, step off gracefully, and finally, don’t try to “manage from the grave.”

PHOTO: BSkyB Chairman James Murdoch speaks at the BSkyB Annual General Meeting at the Queen Elizabeth II Conference Centre in central London, November 29, 2011.  REUTERS/Timothy Anderson/BSkyB/Handout

By Lucy P. Marcus

The views expressed are her own.

In the past couple of weeks we’ve seen board-related stories from Japan with Olympus, India with Tata, Italy with Finmeccanica, South Korea with the Korea Exchange Bank (KEB), and more. Each story brings up a different issue around corporate governance, but taken together they raise a fresh question: Is a new global approach to board ethics emerging?

Corporate governance rules and requirements are distinct in different countries, and are often bound up in local attitudes and cultures. Yet there now seems to be emerging an overarching and universal ethic and attitude towards boards, board service, and the responsibilities boards and their members individually and collectively need to fulfill.

Part of the streamlining stems from the fact that most companies of a certain size operate across several jurisdictions, and therefore companies that are subject to differing rules operate to the strictest or highest standard. Another factor is that with transparency comes a new ability to look into the operations and actions of boards, and with this shift, public sentiment and ethical judgments come into play. Yet another factor is that in an increasingly globalized workplace where cultures mix, long-established cultural norms are challenged and the (mal-) practices they have given rise to get publicly questioned, as in the case of a British CEO of a Japanese company.

Also, there are issues that capture attention in one country and then move their way around the world. For example, the issue of gender diversity in the boardroom has been discussed for a number of years internationally, but Norway’s introduction of regulations for quotas has had a galvanizing effect, and legislating for gender diversity beyond simple non-discrimination rules has become a substantive item of discussion in other parts of the world, as can be seen with proposed EU legislation, as well as individual European states including France, Germany, and even the UK.

“That is the way we do things here” doesn’t work in Japan anymore. “We can’t find good enough candidates to fill the slots” won’t fly in the face of calls for diversity. Filling posts with big names who are comforting on the face of things, and then are left to operate without proper oversight, doesn’t seem as convincing or reassuring in the face of Rajat Gupta or John Corzine.

What are some of the emerging universal ethics that come from a “pick & mix” of best practice from around the world?

• International board of directors
• A preponderance of independent non-executive board directors
• Separation of the chair and CEO roles
• Term limits for independent non-executive board directors
• A voluntary code of diversity in the boardroom
• Ongoing board education through training, both inside & outside the boardroom
• Director performance review by independent outside assessors

Boards shouldn’t be guided by the minimum of what they need to do to live by the legislated obligations they have in their primary jurisdiction; rather, they should think about the larger reasons why they gather and exist, and how their actions will be perceived on a broader stage. Board members should not be calculating how little time they can spend, or the minimum amount of effort they can put in to protect their liability and the liability of the company, but rather be driven by building shareholder value as well as community value and a better sense of responsible stewardship.

Over the next several months we are sure to see more news stories about the role of boards and their individual directors from around the world, from both developed and developing economies, particularly in high growth countries like the BRICs. As companies move onto the global stage and are judged by their actions in this larger context, the one thing that comes clear to me is that boards that strive to meet only the minimum requirement of legislated behavior are short-sighted, as that will not serve them well in the future in the global marketplace where their actions and performance are scrutinized in greater depth and in public. How well they discharge their responsibilities in an ethical way will therefore increasingly affect their organizations’ bottom line.

PHOTO: Former Olympus chief executive Michael Woodford (R) leaves after meeting with members of the Justice Department and the FBI in New York November 29, 2011. REUTERS/Brendan McDermid

The board room is going through an extraordinary time of transition. More is being demanded of boards than ever before, and the activities of boards are under greater scrutiny.

Corporate boards no longer operate in a secretive world behind closed doors, beyond the watchful eyes of the public and media. Investors, stakeholders, regulatory bodies, and governments are demanding more transparency and accountability. The past six months have catapulted the boards of HP, Yahoo, NewsCorp, Goldman Sachs, MF Global, and Olympus, straight into the news headlines.

The reason for this increased scrutiny is a greater public understanding of the role boards can and should play. There is growing awareness by investors, employees, and customers of the consequences of boards and board members not asking hard questions, not adding real value to the organization, and not protecting its future health and wealth.

Many question what boards do and if they have the skill, vision, and determination, and indeed any power, to affect the real change necessary in steering organizations and improving their business practices. The answer is that the best boards do. Most organizations have boards, be they in the public or private sector, a FTSE 100 company or an NGO, a university or a utility, and these boards have the power to influence the direction of business, to ensure that organizations are doing what is necessary to operate at its best, and to take real action if the organization is not performing well.

Boards will be judged in the future on their ability to “future proof” their organization, ensuring that their organization has longevity and fortitude and the ability to withstand the vagaries of the marketplace, serving not only those invested in the company today, but the investors and all of the stakeholders of tomorrow. They’ll also be viewed for how well they fulfill and balance their grounding and stargazing responsibilities, making sure the company meets all of its legal requirements, manages risks properly and does business in a responsible way, while at the same time making sure the organization is ready and able to become the robust and resilient business that is capable of responding effectively to the yet unknown challenges in its future. Boards will be assessed on whether they simply chase short term gain or build strong organizations for the long term, and whether the people around the table of the board room complement each other well for the tasks at hand.

The best organizations of all sizes, in the for-profit and not-for profit sectors alike, have boards with independent chairs who can help mitigate conflicts of interest and ensure that the board acts as an effective oversight body. These boards are composed of truly active, engaged, independent, and interested directors who strive to have the best possible understanding of the business the organization is in, and the one it wants to be in. These boards are diverse in the true sense of the word, not only when it comes to gender but also in terms of professional expertise, sector background, color, age, international perspective, and more, representing the stakeholders of the business and the environment in which it operates.

Beyond that, the best organizations encourage a climate in which actually having the best people on board can bear fruit. These board rooms are environments in which independent board members are comfortable, and indeed required, to ask hard questions, challenge the status quo, and step up to assist in areas where they can. In such an environment boards are able to discuss a whole range of agenda items that are essential for their organization’s short- and long-term success, including sustainability, the changing work force, innovation, infrastructure, technology, internationalization, communication, and the balance of continuity and change. The role of the board here is to help the organization put the relevant items on its agenda and prioritize without losing sight of the bigger picture of the local and global ecosystem in which they operate.

In times of crises like the one we are currently experiencing, effective boards help their organization to emerge strengthened and to recognize and seize opportunities for critical innovation and investment into a future of sustainable growth that benefits all stakeholders of the organization.

Greater public and shareholder scrutiny will demand more engagement on the part of board members who, in turn, should actively promote transparency and accountability as a means to ensure that organizations can truly serve their stakeholders’ and the public interest.

We’ll be seeing more news stories about boards, and this column will be here to help navigate them.