Director recruitment: planning and process

Citation

Daily, C.M. and Dalton, D.R. (2004), "Director recruitment: planning and process", Journal of Business Strategy, Vol. 25 No. 4. https://doi.org/10.1108/jbs.2004.28825daf.002

Director recruitment: planning and process

Director recruitment: planning and process

Catherine M. DailyDavid H. Jacobs Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (cdaily@indiana.edu).

Dan R. Dalton Dean and Harold A. Poling Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (dalton@indiana.edu).

One of the most important organizational activities is recruiting new talent. In fact, there is an argument that the higher the organizational position, the more important the recruitment process. By extension, recruitment of new board of director members is of central importance. Despite its critical nature, recruitment at this level is typically characterized by informal and ill-defined processes. Drawing on effective human resource management principles, director recruitment should be guided by clearly defined board needs and be broadly based to ensure that multiple candidates are considered for any given board vacancy.

The most anticipated time of the year for many is the summer vacation. It's the Friday afternoon of your last day in the office before vacation. Your bags are packed. You are ready for some much needed downtime at your favorite vacation spot. But, you forgot to make hotel reservations. You have no plane tickets. You didn't request that your mail and newspapers be held during your vacation. Oh, and there's the kennel to call. In sum, you have a great plan, but a failed process.

In too many organizations, our vacation metaphor describes the approach toward director recruitment. Boards of directors recognize the need for a new board member – whether due to retirements, voluntary (or involuntary) exits, or board expansion – but do not necessarily plan well for the search. The rules changes adopted by the Securities and Exchange Commission (SEC) at the end of 2003 highlight the importance of having a well-defined director nomination process. With shareholders having greater access to the proxy and requirements for boards to disclose the director nomination process, the pressure to have a well-defined recruitment process in place has increased substantially.

To this end, we offer some guidelines to assist boards in recruiting directors:

• •

  Define your need. The most critical step in recruiting a board member is to define the board's needs clearly. A board skills matrix can greatly facilitate this process. The skills matrix has desired skills, characteristics, and traits on one axis and the current cadre of directors on the other axis. By including each director in such a matrix, the board (or appropriate board committee) can readily identify gaps that need to be filled. These gaps, then, guide the description for director openings. Engaging in this activity will also assist the board in meeting the SEC guideline that the minimum qualifications for director nominees be disclosed.

• •

  Information central. Equally as critical in the director recruitment process is determining who will assume responsibility for the recruitment process. Many boards will rely on a "nominating committee". Consistent with current SEC and stock exchange rules, this committee should comprise independent members of the board. If a nominating committee is not used, the board must disclose the reasons why in its proxy materials and identify an alternative process and those who will assume responsibility for the process.

• •

  Cast a wide net. Many director search processes result in too few candidates being considered and often yield a single nominee for a given director vacancy. Consider an example: if a company was seeking a new CFO, a broad search would likely be authorized, multiple candidates identified, interviewed and evaluated, and at some point a new CFO would be selected and welcomed to the company. This is essentially human resource management 1A – select the best from multiple candidates. Board members are rarely chosen on this basis. Usually, the number of board candidates is equal to the number of openings, one to one. Reliance on informal networking often explains why companies do not identify multiple candidates for each director vacancy. Feedback on potential candidates should be solicited from as many sources as possible. In addition to the oft-used informal network, the nominating committee (or board) may wish to engage a professional search firm to assist in identifying and screening potential candidates. These firms can enhance the efficiency of the search process and have access to a significantly larger pool of potential candidates than can be generated by relying on informal networking.

• •

  Due diligence. Whether a director search is managed internally or through an independent search firm, we would suggest that it is mandatory today that an external firm be engaged to conduct "due diligence" for director candidates. Extensive background checks, confirmation of credentials and experience, and verifying references are essential. There are a number of organizations that specialize in screening of this type, including International Business Research, IPSA International, and Kroll. These services are not inexpensive but the current governance environment is not kind to subsequent embarrassing information about a director that could have been easily detected prior to his or her addition to the board. Only those candidates who pass this initial screening process should be interviewed by the nominating committee, at a minimum. If possible, the entire board should interview director candidates. It is through the in-person interview process that directors can begin to assess whether the candidate is a good fit in terms of interaction style and whether the candidate is likely to have the time to devote to preparation and attendance at board meetings.

• •

  Separation of church and state. There are two areas where it is appropriate for the firm's CEO or other top executives to be involved in the director recruitment process. First, it is certainly appropriate for management to nominate individuals for board vacancies. Even so, the nominating committee should thoroughly vet nominees. Also, it is appropriate, and even encouraged, for management to interview candidates. Involving key officers, as well as board members, in the interview process provides corporate officers with the opportunity to interact with a potential board member. More importantly, director candidates are afforded an opportunity to assess their ability to successfully interact with the management team. Beyond these activities, however, we recommend a clear separation between management and the board in order to preserve the independence of the process.

A common mantra today is that people are organizations' most valuable assets. To that end, detailed attention must be devoted to attracting, selecting, and retaining organizational members at all levels. Nowhere is this process more important than at the board of directors level. It is on this group that the organization relies for strategic guidance and effective oversight. Why, then, would the process for selecting a CFO, a CIO, a COO, or any high-ranking corporate officer be more exacting than for a corporate director? As with any recruitment process, obtaining and retaining a high quality individual for the board is only the first step on a long road. Director orientation and on-going education programs will ensure that the resources devoted to recruitment are amortized over many years. Now about those hotel reservations, flight arrangements ...