BOARD MEMBER SELECTION- A TASK OF PERFECTION

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27 Aug 2020

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Lenovo shows us the way

Lenovo is a classic example of perfect boardroom leadership. By 2004, Lenovo was China’s fastest growing computer manufacturer with an annual revenue of $3 billion. It was third only to HP & Dell. However, in order to sustain itself, it had to create a global footprint. Luckily for them, it was around that time IBM approached Lenovo about a possibility of acquiring IBM’s personal computer division. IBM earned revenue more than 4 times for Lenovo but it also spent 6 times the cost to assemble its computers as compared to Lenovo. IBM’s high allocation of overhead cost to its PC division was slowly eroding its bottom line.

After much deliberation, the management accepted this challenge. It acquired IBM’s PC division for $1.75 billion. The real challenge had just begun. Liu Chuanzhi, the then executive chairman of Lenovo aggressively revamped the Board of the Company. A few of the changes he made that ultimately made this acquisition a success are:

Pre-acquisition

Post-acquisition

4 independent directors 3 executive directors

5 executive & non-independent directors 3 private equity directors 3 independent directors

All Chinese directors

4 of 11 directors were American

All board meetings in Chinese

Board meetings in English

Executive Chairman & CEO: Chinese

Executive chairman: Chinese CEO: American

Entire top management: Chinese

Chinese: 6 members American: 11 members

The acquired company truly became an international company. But the credit for its success goes to the tough decisions that the management took at the time of acquisition. Post-acquisition, the Board expanded its role from being concerned with company audit & executive pay. The Independent directors too took an active interest in the strategies developed by the company and did not restrict themselves only to protect the interests of minority stakeholders as they did pre-acquisition.

 Impact of an acquisition on Board:             

·        improved board capacity

·        enabled the right governance to the management team

·        created a board that was pro-active

 This example shows us the importance of having a perfectly balanced board. Lets’ now see the evolution of the roles of directors.

 English Oxford dictionary defines a Director as “a member of the board of people that manages or oversees the affairs of a business”.

 The traditional role of directors:    

·        to manage & overlook the execution of business plans & strategies

·        governance matters

·        to direct the affairs of the company

·        play second fiddle to the limited interests of the family members

Usually, all the major decisions are taken by the executives who we now designated as the Chief Executive Officer Chief Operating Officers. However, with the expansion of business, the growth of international markets, stakeholders like customers, investors, shareholders & governments are pressing Directors to be more accountable for their actions. They are seeking a more focused attention on building a more engaged leadership in the boardroom and not just the executive suite. The aim is clear: Governing boards should take a more active leadership of the enterprise, not just mentor it.

 Accordingly, selection of right candidate as a Board Member is the need of the day as such Directors are not only the lighthouse for the Company’s growth but also the drivers of such growth.

 As an attempt to consolidate our opinion, we have created a checklist which encompasses the qualities a director should possess & the basis on which he should be selected:          

·        Does a prospective director have the capacity to think strategically about the firm’s competitive position and thus contribute to the on-going evolution of its long-term goals?     

·        Is the board candidate familiar with and experienced in the specific strategic and execution issues derived from the central idea of business?      

·        Does the would-be director have a proven record of working collaboratively with executives at other companies in developing and implementing business practices stemming from the company’s central goals?  

·        Will the prospective candidate add intellectual and experiential diversity to the board, plugging weak spots and adding bench strength for guiding the strategy, goals, and execution?   

·        Will he be ready to tell when vital issues are on the line, the stakes and stress are a high and direct leadership of the company becomes essential?              

·        Does he generally add real value not only to the boardroom but also to the executive suite?

Hiring a right Board leader will make the Boards more competent through the process of right selection, setting right expectations from such Directors and timely evaluation of their performance to keep the Boards highly performing which drives the growth of the Organization. Further, the need to invest in its Boardroom by continuously upgrading their skills and caliber to embrace the challenges and outperform is the sign of the High Performing Boards.