Lucy P. Marcus

The corporate world is emerging from several weeks of boardroom turbulence dubbed the “Shareholder Spring.” In annual meeting after annual meeting around the world, boards have been taken to task by investors and other stakeholders on a wide range of issues: remuneration, board composition, competence, diversity, voting control, dual stock, and more. In the meantime, we have also witnessed the soap opera of Yahoo’s boardroom, the rebuke to newly public Groupon’s board for its lack of oversight of accounting practices, and the public condemnation of News International’s chair – and, by extension, its board – questioning his competence to lead the organization. No sector has been immune; no director has been untouchable.

Now Facebook is about to enter the public markets. Its defiant position regarding its old-style governance is in stark contrast with the temper of the Shareholder Spring. Facebook swims against the tide of a global movement toward transparency, engagement, and checks and balances. It feels as if we’ve all stepped into a time machine and none of the past couple of years of governance lessons – including the failures of boards in the banking-sector crisis – ever happened.

Several troubling issues call into question how this company can consider itself groundbreaking, innovative or new: the concentration of power in the hands of one man, the stranglehold on voting rights, the lack of diversity in the boardroom (which in a way is inconsequential, as the Facebook board does not have much bite anyway), and above all else the flagrant disregard of the lessons of the past several years about engaged, active and independent boards contributing to strong companies. Were Facebook striving to be an innovative company built to last, it would encourage healthy dialogue and diversity in the boardroom, and equal shareholder voting rights. It would not need to lock in power, but rather earn authority through excellent performance and results. The leadership would trust that a democratic boardroom would foster greater strength and stability than dictatorship, which brings a false sense of security. That’s a lesson we can take from the Arab Spring, where dictators thought that they held real control.

Today there is euphoria, anticipation and excitement among investors. A lot of people will make money in the short term, but short-term investing is not what builds strong businesses and strong economies. The world needs durable companies that are innovative in the products and services they sell, but also distinguish themselves through responsive and responsible conduct in their corporate governance structures and business practices.

Over the years Facebook will need to grapple with many issues that affect the development of the company and the lives of its users, from growth to innovating ahead of the curve, and from privacy to social responsibility. My hope is that Mark Zuckerberg begins to see the value of ceding some of the control he holds by rule and is able to trust that he will be able to earn that control through deed. If that doesn’t happen, all eyes will be on the investors to see if at least they have learned the lessons of bad governance and the value of good.

PHOTO: The Facebook profile of founder Mark Zuckerberg on a mobile phone is seen in this photo illustration, May 16, 2012. REUTERS/Valentin Flauraud

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.