Health care industry boards are revisiting the benefits of a strict competency-based approach to their composition. This, given that multiple new regulatory and environmental challenges to the health care system are placing a premium on strategic experience and perspectives at the board and committee level.
General governance principles, as promoted by organizations such as the Business Roundtable and the Commonsense Governance Principles group, have traditionally promoted a system of board composition that reflects a broad cross-section of thoughts, backgrounds, experiences, and expertise. Projected into the current regulatory environment, this usually excludes concepts that promote diversity of age, gender, and ethnicity that could be challenged as discriminatory.
The premise behind competency-based governance is both logical and appropriate – in a complex, evolving industry, there is value in adding board members with recognized expertise in the critical operational areas in which the company may be involved on a regular basis. (This is particularly the case with committees such as Executive Compensation and Audit). The expectation is that the board will be able to better address its oversight and decision-making responsibilities by including subject matter experts on the board, whose particular skillset the board can rely on. In health care, this has often taken the course of seeking directors with expertise in mergers/acquisitions, technology, finance, HR, real estate, legal, and government affairs, in addition to medical services and specific health industry familiarity.
However, this approach is increasingly pressured by the extraordinary technological, transactional, regulatory, and economic changes buffeting the health sector. Identifying which skill sets should be represented in board composition is a difficult task in such an operating environment. There may simply not be enough ‘chairs around the boardroom table’ to accommodate directors representing all of the necessary areas of expertise. A related problem arises when the specific skill set represented by an individual director becomes less relevant or important to the company’s operation. In that situation, the director’s governance value may dramatically diminish, and offboarding may be necessary to open the seat to someone with more valuable knowledge.
Perhaps more critical is the concern that the competency-based board creates a siloed system of governance; a collection of individual experts whose knowledge base does not integrate well in a collective sense. In such a siloed model, knowledge and information sharing among the skills-diverse directors becomes more challenging, and cross-disciplinary communication becomes more difficult. As an additional concern is the potential for the board to overly rely on the “expert director” on a particular issue, to the exclusion of its own collective judgment or the perspective of an outside advisor.
Then there is the more practical problem that arises from slavish adherence to a competency-based model, e.g., where the board is unable or unwilling to add a potentially stellar candidate because there is already one or more directors with the same fundamental skill set. “We don’t need ‘Candidate X’ because we’ve already got a board member with the same expertise.” Such a rigid approach ignores the possibility that “Candidate X” has unique governance skills that transcend his or her recognized experience.
These and other concerns are prompting governance and nominating committees to reduce emphasis on narrow levels of expertise and concentrate more on factors such as general industry expertise, substantial governance experience, human capital familiarity, and – especially – broad strategic experience. While there’s no generally accepted definition of “strategic experience” as applied to board service, it typically includes attributes of observation and foresight; inquisitiveness and incisiveness; perspective and critical thinking; and systems analysis, i.e., the “ability to see the whole field.”
The interest in attracting directors with strategic backgrounds is reflected in recent board composition surveys from the Conference Board (Board Practices and Composition in the Russell 3000 and S&P 500). These surveys suggest that, on a year-over-year basis, strategic experience and business acumen continue as dominant skill sets within the boardroom. The Conference Board survey results are consistent with recommendations from the National Association of Corporate Directors (Building a High-Trust Board-CEO Relationship | NACD), that boards should strategically align director competencies with the company’s long-term strategy and value creation. “Boards function best when composed not of a collection of single-domain experts but rather of directors with integrative mindsets who can effectively guide the company.” NACD encourages board composition strategies to seek more directors who “think more broadly at the enterprise level and not just through the lens of their expertise.”
None of this is to suggest that the competency-based board is by definition an inappropriate, outdated or ineffective model. Nor is it to suggest that boards composed by a significant percentage of directors with strategic perspectives constitute “best practice.” It is to suggest, however, that strict “check the box” approaches to board composition can be particularly limiting in the current health care environment, especially as it relates to maintaining an integrated, broad-based approach to oversight and decision making. A useful practice may thus be for the board’s nominating and governance committee to periodically review the process and criteria by which it selects candidates for board service and update the expertise and perspectives it believes to contribute best to effective oversight and decision making.
Michael W. Peregrine is a retired attorney and Fellow of the American College of Governance Counsel.
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