Meeting the Challenges of the C-Level Executive to Board Director Transition

Life is full of transitions. Some are easy. But most are hard, for one reason or another. The good news of that for many transitions, plenty of guidance is available about how to succeed in making it. But it some cases, helpful, practical guidance is still lacking.

From our board consulting and personal experiences, Neil and I are painfully familiar with one of these: The challenge of transitioning from being a C-Level executive to being a board director. In this post, we’ll briefly summarize some of the key lessons we’ve learned.

A famous saying pithily claims that “management is about telling the answers, and governance is about asking the questions.” That’s definitely something to keep in mind, as well as the fact that many new directors (as well as some long serving ones) struggle to make that transition. But there’s more to it than that.

Broadly speaking, various courts have recognized that directors have two or three fundamental fiduciary duties.

The Duty of Loyalty says that directors must at all times act in the best interests of the company, and avoid personal economic conflict.

The Duty of Good Faith is a doctrine emerging out of various court decisions that requires fiduciaries to have subjectively honest and honorable intentions in all professional actions. Whether that is a separate, standalone duty or one that is subsumed under the duty of loyalty is still a matter of debate.

The Duty of Care refers to the principle that in making decisions, directors must act in the same manner as a reasonably prudent person in their position would.

In practice, the Duty of Care can be further disaggregated into seven key activities that boards perform:

(1) Establish the critical goals the organization must achieve to survive and thrive;

(2) Approve a strategy to reach those goals;

(3) Ensure that the allocation of financial and human resources aligns with that strategy;

(4) Hire a CEO to implement that strategy, and regularly evaluate their performance;

(5) Regularly review critical risks to the success of that strategy and the survival of the organization, and ensure they are being adequately managed;

(6) Ensure the timely and accurate reporting of results to stakeholders;

(7) In line with the “prudent man" rule, ensure that directors have received sufficient information and given it due consideration before making any decision.

In terms of content, C-Level executives transitioning to board directorship are already quite familiar with most of these. As noted above, the main challenge in these cases is developing a constructive Socratic approach -- learning to ask the questions rather than tell the answers.

However, in our experience there are two areas that can be a source of confusion and consternation.

Most C-Level executives tend to think of risk in operational, financial, regulatory, and reputational terms – basically, the standard contents of their previous company’s Enterprise Risk Management program. Typically such programs are organized around specific risks, whose probability of occurrence (over a usually undefined time horizon) and potential impact (sometimes netted against the assumed impact of mitigation measures, and sometimes not) are graphically summarized in the familiar two by two “heat map”. In the case of these risks, the board’s focus should be limited to the adequacy of the Enterprise Risk Management program.

The main focus of the board’s attention should be on strategic risks to the survival of the company and the success of its strategy.

There are good reasons for careful board focus in this area, including management compensation incentives that are strongly tied to upside value creation, not avoiding failure; a natural management focus on short term issues in an intensely competitive environment with constant pressure from investors to deliver high returns; and r recognition by many senior managers that their average job-tenure is growing ever-shorter.

This is not a criticism of management teams, who are rationally reacting to the situations and incentives they face. Rather, it highlights why strategic risk governance is a critical, if often underappreciated, board role.

Technically, these are usually not risks at all, in the sense of situations in which the full range of possible outcomes, and their associated probabilities and potential impacts are well understood (and thus can be priced and transferred to other organizations more willing to bear, for a fee, at least part of the company’s exposure to them). Instead, they are true uncertainties.

Governing strategic risk consists of three critical activities: anticipating future threats, assessing emerging threats (including their potential impact, and, critically, the speed at which they are developing), and ensuring that the organization is adapting to them in time.

The latter is similar to the familiar math problem involving the crossing point of two trains that are both accelerating. The first train is the emerging threat; the second is the process of developing and implementing adaptations before threat passes a critical threshold.

The second, potential source of frustration revolves around whether directors have received sufficient information and given it due consideration before making any decision.

C-Level executives know that sometimes decisions must be made under time pressure, in the face of uncertainty, with less than perfect information. Unlike management decisions, however, board decisions are subject to shareholder litigation (and sometimes regulatory review). It is for this reason that boards often retain independent outside advisors, such as investment banks in the case of mergers, acquisitions, and buyouts.

C-Level executives transitioning to directorship almost always have a strong track record of making good judgments in the face of uncertainty. For this reason, the need to think about information adequacy, alternative interpretations of the information at hand, questioning and validating assumptions, and ensuring that the board follows a clear decision process can easily lead to frustration.

Besides content challenges, new board directors may also face a number of process pitfalls that are deeply rooted in our evolutionary past.

At the individual level, we are naturally both overoptimistic and overconfident. Evolution has also predisposed us to choose people with these characteristics as group leaders.

We also unconsciously strive to maintain a coherent view of the world, and consequently pay less attention to, and underweight, bad news and information that does not fit well within our existing mental model of a system or situation. Most people seek information that confirms their beliefs, rather than information that calls them into question. This is accentuated when directors believe things are going well.

At the group level, when the fear center of our brain (the amygdala) is triggered by rising uncertainty or actual loss, our aversion to social isolation spikes, making us much more likely to conform to the views of a group and to resist voicing our concerns and/or sharing private information that conflicts with the dominant group view.

On boards, this tendency is further reinforced when directors come from similar social and educational backgrounds; a significant number of directors have experience in the organization’s sector, which can cause other directors to give excessive deference to their views, even when they are blind to the emergence of non-traditional threats; and/or the CEO has been in her/his role for a long time and harmonious relations exist between the board and the management team.

Last but certainly not least, the relationship between a Non-Executive Chairman (and the board more generally) and the CEO is, as we write in our research paper on this subject (download it here) a critical organizational bearing point on which long-term organizational survival and success rests.

This is another situation in which things that were quite obvious when one was a C-Level executive often cease to be so when one becomes a director.

In an era of unprecedented complexity and uncertainty, in which digitization and network effects are causing more and more industries to display “winner take all” dynamics, effective board governance has never been more important.

People with previous C-Level executive experience are well positioned to provide it. However, before they can make their critical contributions, there are challenges they must first overcome in the “not as easy as it looks” transition process to becoming an effective board director.