In This Issue:
Industry Experience for Corporate Boards: Both a Powerful Advantage and a Double-Edged Sword
Between when this newsletter went to subscribers in late September and when it was posted on this website, an important update occurred about Darden, owner of the Olive Garden restaurant chain, mentioned in this newsletter. As reported in the October 11-12, 2014 Wall Street Journal and other sources, Darden has replaced its entire board with directors nominated by activist Starboard Value LP.
Corporate Boards have been recruiting more directors with industry experience. This is a plus in that it reverses the earlier trend toward independent directors whose lack of any connection at all to the company might mean they don’t adequately understand the business. Industry experience is generally valuable and, in most cases, an extreme lack of it on the board can be a serious disadvantage because directors may not have sufficient knowledge of the business.
Still, industry experience is not a magic bullet. Boards need the right blend of what it takes to oversee and support strategic direction, regardless of whether that calls for industry experience or for some other type of expertise. And, getting the right blend of expertise for success requires more than simply recruiting industry veterans. In fact, industry experience can be a double-edged sword if it blocks the use of outside perspective and insights that might be needed to pursue the right strategic direction. So, merely recruiting directors with industry experience may be an oversimplification.
Yet, more boards are doing it. This is good if it strengthens the board, and in many cases it will.
“More boards are heeding activist demands to bring on more members with industry experience,” according to the September 24, 2014 Wall Street Journal article “Experience in the Field Helps Win Board Seats” by Joann S. Lublin. As the article states, “About 36% of the directors joining Fortune 500 companies between August 2013 and August 2014 had industry backgrounds similar to the company’s,” based on data from executive recruiters Korn/Ferry International. The article reports that this number is “up from 30% during the prior year, an increase driven by requests from boards, says Dennis Carey, a Korn/Ferry vice-chairman.” The article discusses how this has been affecting the restaurant industry, which has faced tough times and where activist investors have proposed that Bob Evans Farms as well as Darden, owner of the Olive Garden chain, should add directors with industry experience.
As I see it, this is a plus if it improves the board’s grasp of the business. This is a plus if it adds useful knowledge to boards previously lacking an adequate understanding of the business. It is a plus if it eliminates the weaknesses boards can develop when their knowledge is limited by being independent and far removed from the business.
I grew interested in the role of board members’ knowledge as a result of my work on how strengths drive business success. So, for quite some time now, I have been pointing out the value of having board members who understand the business. In this newsletter, I have written before about the downside of boards emphasizing director independence and, thus, sacrificing knowledge of the business. I even wrote a letter to the editor on this that was published in Business Week back in 2002 when the call for director independence was just starting.
Additionally, I have blogged about this issue, agreeing with prominent finance and accounting professor Baruch Lev that the role of independent directors requires rethinking. Lev is author of the book Winning Investors Over: Surprising Truths about Honesty, Earnings Guidance and Other Ways to Boost Your Stock Price. I also blogged agreeing with prominent board expert and Harvard faculty member Jay W. Lorsch, author of the book The Future of Boards, when he wrote that director independence was a major reason why board members were having difficulty understanding the business of the companies on whose boards they serve. Thus, I definitely support the view that board members who understand the business are valuable, and that the shift toward director independence can be an obstacle to building a knowledgeable board.
For the most part, directors with industry experience will tend to understand the business better than independent directors who are far removed from it. So, bringing more industry expertise to boards is generally a step in the right direction. Yet, companies must not oversimplify. Instead, they should strive for the appropriate blend of background, expertise, and perspective to take the company in the right strategic direction.
In fact, other parallels between a board member’s background and the company’s business can sometimes be just as or even more valuable than industry experience per se. An example is experience in the markets a company serves. In a company that sells primarily to young people with modest incomes, for example, a board member from a different industry also selling to the not-so-affluent young may better grasp the business than an industry veteran experienced with marketing to older, wealthy customers. Rejecting that kind of market perspective merely because it came from another industry may be a mistake when selecting board members.
The key here is to tap the added perspective, but to have enough of the right background on the board to guard against industry differences becoming an obstacle that impedes success. This is essential because sometimes what works well in one industry cannot be easily transferred to another.
Similarly, too much old line industry experience may be a disadvantage on the board of a cutting edge company in the same industry. In industries facing major change or disruption, filling the board with industry veterans may merely result in a board that uniformly fails to grasp a possible new direction that someone with a less traditional background might better understand. True, the perspective of industry veterans can still be valuable, and is often essential. But, boards need to be sure that recruiting industry veterans does not lead to a herd mentality, where several players experienced in a struggling industry join the board, and continue to espouse industry norms that may not necessarily bring the greatest success in the changed environment.
This may be an issue in the restaurant industry, for example, where it ties in with an investor activist proposal that includes the highly publicized possibility of cutting back on the Olive Garden’s famous bread sticks. It is beyond the scope of this article to say what Olive Garden should do to revitalize itself. But, better breadstick management, as proposed by the investor activists who are also demanding more industry experience on the board, may merely be me-too cost cutting that follows moves by others in the industry, and may or may not be an appropriate part of a strategy for the chain’s revitalization.
Even beyond the restaurant industry, this has implications for business revitalization. When striving for revitalization, care must be taken because tough times can easily become times of vulnerability in any industry. During tough times, it can be tempting to make the wrong moves because pressure to improve is intense. Those wrong moves can seem so attractive when the urgent need for revitalization masks their downside. Yet, those are the times when it’s especially important to work at getting things right.
That said, the bottom line is that, yes, industry experience is valuable. And, the complete absence of it on the board is a serious disadvantage in most cases. Yet, boards do need the right blend of experience for the company’s strategic direction. So, always insisting upon industry experience can be a mistake if it leaves the board lacking other vital expertise.
We have already seen the difficulties that arise from focusing primarily, and almost exclusively, on director independence. In a similar vein, blindly focusing upon industry experience above all else can also result in a board whose mix of backgrounds isn’t best for the company. As others have said before, boards are not one size fits all.
Again, this does not mean boards should lack industry experience. It means that boards should have the right background for the business and its strategy. Since understanding the business is so crucial, industry experience generally is valuable. But, it is also important for board members’ backgrounds to fit together in the right way for successfully overseeing strategic direction. Just as overemphasizing director independence can result in boards without enough understanding of the business, overemphasizing industry experience can lead to boards without the best fit for optimal corporate performance.
La Grange Park, IL