The Analysis: How to Pick a New Team of Directors

When an upheaval sunders your board, it's a chance to think hard about what skills are best going to benefit the company

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The governance issue Smurfit-Stone Chairman and CEO Pat Moore describes—suddenly losing half his board because a private equity deal created conflicts of interest for several directors—meant a loss of knowledgeable board members and left the company scrambling to replace them. But such a situation has a real upside, too:

Most CEOs inherit the boards of their predecessors, and many spend their first few years angling to remove the underperformers and add directors whose expertise would be genuinely helpful to the company. While the situation may initially have seemed daunting, Moore was in a position many other CEOs would envy.

Start with a "Blank Sheet" Approach

Any CEO in this situation needs to work with the governance committee, which is responsible for director recruitment, to make sure those empty board seats will be filled with new directors who optimize the board's composition. Start with a blank sheet of paper and this mindset: If the company had no directors and were about to do an initial public offering, what skills and experience would you want to make sure were resident at the board table? You need to think about issues the company will probably be dealing with in the next three to five years.

Optimal board composition can and should differ widely from company to company: All boards need a financial expert. Most find it helpful to have at least two directors with a background in their industry. And nearly all find the perspective of an active or recently retired CEO of a comparably sized company to be a real asset.

But after that, boardroom expertise should reflect corporate strategy: If international expansion is fueling corporate growth, this should be reflected in board composition. If growth is linked to R&D or technology breakthroughs, directors with a background in the relevant science can be critically important. If M&A is the pathway, directors who understand different aspects of doing deals and integrating acquired companies can be invaluable.

Once they've agreed on what optimal board composition looks like, the CEO and the governance committee can see what skill sets they already have from remaining board members and determine where there are gaps. If there are more "gaps" than spare chairs in the boardroom, they'll have to make some decisions about priorities or look for people who can do double duty.

Set Up an Off-Site Meeting

Moore's situation at Smurfit-Stone is similar to what a Midwestern utility I worked with went through when it spun off its largest business unit. Half the board went with the new company, and half stayed with the parent. Having replaced the lost directors with some outstanding new recruits, the company wanted to capitalize on the talent at its board table and make the most of its first off-site with a "new" board.

Before this off-site, I interviewed all of the board and executives who regularly interface with the members. Among other things, I asked longer-serving board members and executives about the areas where they felt the previous board had been particularly effective—and where this new board could be even better.

I also asked new directors about their expectations and what they saw as priorities in the next 6, 12, and 18 months. This provided the basis of a terrific dialogue at the off-site, which accelerated the board's development and aligned the board and management on some important issues, including how the board and senior execs would engage on corporate strategy, how they could streamline the board agenda, and how they could modify packages of preparatory reading material to make them less cumbersome.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance. .