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

In this edition of “In the Boardroom with Lucy Marcus,” Lucy Marcus and Axel Threlfall are joined by the CEO of technology startup PeerIndex, Azeem Azhar, to talk about what the boards of early-stage companies should look like and do.

Early-stage companies anywhere in the world need to think about integrating good board principles from the start. If an entrepreneur plans to expand the business into a strong entity with real longevity, then it is more important than ever to get the foundations of that business right and build best practices into the very DNA of the company. One crucial area that will pay real dividends is ensuring that the company has a strong, committed, well-functioning board.

Even at an early stage, the discipline that comes with following the skeleton of corporate governance – having regular board meetings, putting together the documents for board meetings, having people around the table who ask challenging questions about both “grounding” and “stargazing” issues, and having independent, non-invested, non-aligned directors involved – sets important precedents for the future of fast-growth companies and helps build strong organizations for the long term. Boards composed of truly active, engaged and interested directors bring benefits, no matter the size of the organization.

In this edition of “In the Boardroom with Lucy Marcus,” Axel Threlfall talks to Lucy about the “Shareholder Spring.”

If the past couple of weeks of annual general meetings (AGMs) around the world haven’t sent a strong signal to boards about the way investors and other stakeholders are feeling, it is hard to know what will.

Remuneration levels for CEOs and members of the C-suite have been a hot button issue for Barclays, Aviva, UBS, Citigroup, AstraZeneca, Shell and other companies. In meeting after meeting, investors stood up to challenge remuneration committees about their decisions and decision-making process. Stakeholders also asked some pointed questions about corporate social responsibility. With Apple and Foxconn on their mind, they asked about a wide spectrum of areas from global working practices to wages to conflict minerals.

Board members ignore this shift at their own peril.

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 video produced by The Wall Street Journal, Lucy Marcus explains what she looks for in a new startup and what makes some succeed where others fail.

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