Thompson Stratetgy - Doug’s Blog

A mainstay of most board of directors in design firms is the board Executive Committee. This subset of the board typically meets more regularly than the full board does and is often (not always) populated with the senior members of the board. While this committee is often very efficient – decisions can be made quickly – it is not very effective. Here’s why.

The Executive Committee becomes the place where decisions are made, or discussed in detail, before they are presented to the full board. When an issue is presented to the full board after it has been reviewed by the Executive Committee it often seems like a fait accompli and any hopes for meaningful discussion is lost. Over time the other members of the board can become disengaged from the governance process and their role as board members. Here are some of the comments I hear from people on these boards:
• “When issues are presented to the board by the Exec Committee it seems like all of the discussion has already occurred. The board is asked to vote, but we have not had the advantage of hearing the background, so how do we make informed decisions?”
• “If the Exec Committee has endorsed an issue, it takes a lot of courage to speak up. After all, they are the senior members of the board.”
• “After awhile you start to question why you are on the board – it seems that the Executive Committee makes all the decisions.”
• “Sometimes it is hard to tell if the Executive Committee is acting in their role as managers or as members of the board.”

The Executive Committee is out-dated and usually does more damage than good. In his book Boards at Work, management consultant Ram Charan notes, “More than any other committee, the Executive Committee tends to lead to, or reinforce, a two-tier power structure that is a major drag on board dynamics.”

The most common explanation I have heard for an Executive Committee is that they can be more responsive to the board in dealing with issues as they arise. Supposedly they are the rapid response team that can assemble when the full board cannot meet – technology has made this a moot point. I suspect most firms established Executive Committees out of convenience. It’s a lot easier to discuss issues in a smaller group (usually more collegial group) that meets regularly. However, this convenience comes at a cost to a firm’s governance model.

If the shareholders have elected seven (or five, or nine, whatever) members to the board, they have a right to assume that all of the members will be actively involved in board decisions. The existence of an Executive Committee can make the other members of the board feel like their role is more limited than the few who sit on the committee. This often starts a vicious cycle where board members feel less responsibility to the board, and the less they participate, the less they participate, the more it appears there is a need for an inner circle of board members that are truly dedicated (e.g. the Executive Committee).

I challenge those firms with Executive Committees to ask themselves what would be different if the committee did not exist. The issues that are really board issues should be discussed with the whole board. If you really think that the board is too large or that the membership of the board may not be able to ‘handle’ the discussions, maybe it is time to think about the composition of your board. Do you have the right people at the table? If the Executive Committee is used to circumvent this problem it is a patch and not a solution.

Finally, chances are that much of the content being discussed in the Executive Committee meetings is not really board content anyway; it is operational and is best discussed in a manager’s meeting. If this is the case call the group something else other than a board committee. They should be sitting at the table with their manager hat on, not their board member hat.

Getting rid of the Executive Committee might not only make for a more engaged board, it might help to clarify the line between management/operational issues and board issues. I suspect the benefits would outweigh the costs.

I would be interested in your comments on the role Executive Committees – for or against.

Getting the best board members on the board

With all the hype this week on the winner of American Idol, it made me think that there may be a better way to select board members for design firms. Many A/E firms have shareholders vote on the board annually. In most firms this is a frustrating exercise –the CEO and/or the existing board recommends a slate and the shareholders are herded into a room, the vote is taken and the winners are announced.

But what if we changed the process? Using American Idol as the model. Several months before the election, ‘auditions’ would be held in each of the offices. Potential board members would be put in real board room situations and they could demonstrate their talents showing how they would behave as a board member. The best part would be the judges – three shareholders that doled out their frank opinions on the prospect’s talent.

To make this work the judges would need to have criteria to evaluate the candidates. Here are some suggested guidelines:

1. Did they show up for the audition? If you cannot make it to board meetings, don’t apply. This is the equivalent of remembering the words to the song on American Idol.
2. Were they prepared to discuss the items on the agenda?
3. Did they demonstrate that they fully understood all aspects of the company’s business – marketing, project management, human resources (policy and benefits), financial reporting, risk management, and strategy?
4. Were they willing to challenge other board members so that they fully understood their opinions? Not attacking them personally, but challenging their opinions.
5. Did they share their thoughts in an open and candid manner?
6. How well did they handle the questions others had of their own position?
7. Were they willing to work as part of the team?
8. Did they understand their role as a board member, as opposed to their manager or shareholder role?
9. Did they look out for the company’s interest and not that of their own department, office or personal stock holdings?
10. Were they willing to challenge the CEO if necessary?

After seeing each audition, the judges might have the following comments. Remember the judges on American Idol can be brutal – especially Simon:

Candidate 1

“When you started off you didn’t seem to have a full understanding of the firm’s financial position, but you asked the right questions and didn’t stop till you got it. That’s good; you’ll need that if you get on the board. I would have liked to seen a little more backbone when dealing with the CEO. Remember, he is accountable to the board for the success of the company’s operations. The board is there to look out for the shareholder’s interest. Finally, don’t get so defensive when people ask you questions on your opinion. It is okay. If you are going to work together as a board you need to be willing to challenge and be challenged. It is not personal! I think you could make a great board member if you keep working at it!”

Candidate 2
“It seemed like you did not really want to be on the board. You showed up – that is a good start – but after that you just sat there. When issues were being discussed it seemed like you were in a trance, or sometimes you even pulled out calculations for a design project. The only time I saw you show any excitement was when they brought in the donuts. And man, the look on your face when Julie challenged the CEO on the performance of the new office, you looked like you wanted to crawl inside your calculator. You’re a great engineer, but I don’t think you are board material. Get out of the way and let someone take that seat that will do the job.”

Candidate 3
“Your behavior was terrible. From the very beginning, it was clear that you were only interested in how the board decisions were going to impact you personally. You should be looking out for the company’s interest – not your own. And the way you cowered around the CEO made it clear that you would not be willing to stand up to him if the need arose. And dude, did you even read the board package before the meeting – you were fumbling to keep up for most of the meeting?”

The best candidates from each round of auditions would be brought to the corporate headquarters for the finals. Over a four week period famous board members from corporate America would be brought in to coach the finalists – helping them to polish their skills. Shareholders would then evaluate the candidates as they were run through new board scenarios – using the company email system to cast their votes. The grand finale would be held with the whole company in attendance. The finalists would show their stuff and the shareholders would cast the final votes. The winners would populate the open board seats – and they will have earned the right to occupy this valuable real estate in the board room.

Of course it is folly to think that such a system would be used for board elections in engineering and architectural firms. However, a good governance model needs to have well qualified board members at its core. Board members need to take their positions seriously, realizing that they may need to acquire new skill sets to do their job well. Too often the election of board members is seen as a cozy arrangement with senior management and board members are there until they retire. This leaves shareholders feeling like the system is unfair. And it is the appearance of an unfair governance model that starts to foul the relationship between the board, shareholders and management. One result is that new owners do not feel comfortable buying shares and the ownership transition process can be derailed. Another result is a tension in the office that makes it difficult to work together effectively.

To avoid these problems, board elections should be based on a nominations process that considers the best candidates in the company for the open seats. This does not always correspond with their position on the organizational chart. While the CEO, and perhaps a few other senior slots, are typically standing positions the other seats should be open. It is more likely that the shareholders will believe the process is fair when the board nominates well thought out slate and presents it to the shareholders. The more transparent the process the more trust will be developed between the shareholders and the board.

Once on the board, each board member should be evaluated to ensure that they are performing well in their role. Those that have performance problems should be coached and if needed removed from the board at the next election.

Imagine Simon Cowell (the brutally honest judge on American Idol) sitting in the back of the room during your next board meeting waiting to give his assessment of your next board meeting. Would you feel a little different about how you performed?

I would be interested in your comments on board performance. What have you seen as good and bad examples? Your can leave your comment with a ‘screen name’ if you like to keep your anonymity. If you are concerned about how it will appear – do a test comment.

Last week I had an opportunity to visit India. I went as part of the Virginia Trade Delegation. There were nearly 100 of us on the trip with companies ranging from business people like myself exploring the market to better understand the opportunities to large companies such as GE seeking to ink million dollar deals. We visited three cities - Delhi, Chennai and Mumbai.

First I have to say that I was very impressed with everyone I met there. My goal was to better understand the design community in India as well as the infrastructure market opportunities. During my visit I met with department heads from IIT (the premier engineering schools in the country), outsourcing companies, and large engineering firms such as Tata Consulting Engineers. There was nothing in my visit that made me doubt the quality of professionals in the country.

That being said, I did learn that there is no professional exams in the country for engineers or architects. The qualification is based on the degree you receive. The engineers are in the process of implementing a registration system based on the US and UK systems. While there are many excellent schools in the country, there is also a proliferation of private schools cropping up. When I say private, I don’t mean Yale or Grinnell private, I mean for-profit colleges. I was told that the quality of these schools varies significantly. On one trip through the rural country side I was amazed at the number of new campuses (usually 2-3 story buildings) rising out of the wheat fields. American universities also see India as the next frontier. Carnegie Mellon University in Pittsburgh offers students a Carnegie Mellon degree in conjunction with the Sri Sivasubramaniya Nadar School of Advanced Software Engineering. They do most of their program in India and conclude with 6 months in Pittsburgh receiving a CMU degree.

I was struck too, by the enthusiasm that was exhibited by the young people I met. Whether they worked for large multi-national companies like Siemens or were building outsourcing companies, they were sharp men and women that spoke about the opportunities they saw for the future.

The poverty is overwhelming. As you drive through the cities you see shanty towns, trash in the streets, and livestock roaming. Cities such as Mumbai have nearly 12 million people. The land mass of these cities is not large - the horizontal density is amazing. High rises are starting to dot the skyline. The middle class is moving up, but the poor are not. The problem gets worse as people move from rural areas in search of work. All of this taxes existing infrastructure. It was not uncommon to see new buildings being constructed with shanty towns in their shadows.

With annual growth rates of over 9%, the need for new infrastructure is huge. One area in particular is aviation. In the last few years, the domestic aviation market has blossomed. The flights we took domestically on Jet Airways were fantastic. Service was better than all US carriers, at competitive rates – hot meal (temperature and spice wise) and linen napkins. However, as this market has expanded the infrastructure is just beginning to grow. Delays are routine. I read several estimates of the need for $300 billion of new infrastructure over the next five years.

Many people think of India as call centers. But that is yesterday’s story. Today large companies such as GE, Microsoft and IBM are building large resource bases in the country to do the work similar to their counterparts in the US. IBM, who left India in 1978, is back. They are one of the top 4 employers in India with over 50,000 employees (up from less than 10,000 3-4 years ago). Indian based firms such as WIPRO and INFOSYS are becoming international powerhouses in the areas of BPO as well as R & D, with similar size work forces.

Closing thoughts for design firms and India:
• Global sourcing of design work is a reality. In the long-run you need for figure out how your firm is going to participate.
• There are significant opportunities for design work in India. However, given the complexities of the political system and the challenges of building in a densely populated country, US firms will need to team with local players to be successful. For US firms to play, they need to bring an expertise - they cannot be generalist.
• There is a lot of talent in India. While the initial phase of global sourcing focused on cost, the current advantage is built on talent.
• If you are going to outsource work to India (or any other country) you need to tighten up your project management system. It is one thing to send it down the hall, or to the next state. Sending it half way around the world, means that you need to have clear understanding of what is expected and a well documented process for producing the work. Firms that have attempted to outsource without meeting this requirement have been found quality and profitability to be lacking. Improving your project management will also provide you with a competitive advantage on all your work. Those firms that don’t outsource will find themselves stuck with bloated production processes that will become unacceptable in the marketplace – in terms of fees and time to deliver.

I would be interested in your thoughts on India as well as any experiences you have on outsourcing.

Those of you I have worked with, or spent much time talking with, know that I believe green is an emerging market for design (A/E) firms. While it is becoming mainstream in architectural firms, it is emerging for infrastructure and water resource projects that engineering firms design. Over the last year there has been a significant change in the national dialogue on green. People like New York Times columnist Thomas Friedman has been plugging green as the new red, white and blue. Ex CIA head John Duetch (now MIT professor) just came out with a statement about the continued world leadership of the United States and climate change. “If the United States or any other OECD country that is a large producer of greenhouse gas emissions is to retain a leadership role in other areas, it cannot just opt out of the global climate change policy process,” he wrote. Jim Woolsey, also ex CIA head talks about climate change in terms of national security and energy dependence.

But it is not just political ramblings. The business community is stepping it up as well. Fortune just released their first Green Issue. And the March issue of Harvard Business Review has an article on climate change entitled - Completive Advantage on a Warming Planet. All of this tells me it is really time for the design community to step up to the plate and realize that they are one of the main players in this emerging market - it is your domain to prosper in. The discussions are all about water, air, soil and how people live. In the HBR article they point out that “Companies that manage and mitigate their exposure to climate-change risks while seeking new opportunities for profit will generate a competitive advantage over rivals in a carbon-constrained future… Your company needs to beat competitors in two areas: reducing exposure to climate-related risks and finding business opportunities within those risks.”

Lately, I have found that design firms I work with on strategy are really start to think about this. They are starting to realize things are changing and they can get ahead of the pack by being innovative. There are some interesting examples in the marketplace. David Evans and Associates in Portland recently started a separate company to work in renewable energy. R. W. Beck started Beck Disaster Recovery to deal with the challenges that communities face in adapting to climate change. It is time to get innovative in thinking about new markets - not just hammering it out for your share of existing markets.

One of the biggest barriers that I find engineers have to this kind of thinking is the mindset of “we have always offered sustainable solutions, but clients are just not interested.” Or, “we already do that.” What I have found is that many firms do already offer many of the services, it is about packaging them well and adding the missing pieces to come up with a competitive service offering.

Do you have examples of what design firms are doing to identify opportunities? Share them. Or thoughts you have about the role of design firms in this arena.

Over the last few years several of my clients have begun offshoring their production work to other countries where they can find abundant talent for lower fees that they would pay in the United States. On one hand it seems to make sense that in a global market, the work will flow to where the talent is and where it can be done for the lowest cost. Of course this assumes equal quality. On the other hand, when work goes overseas it means less work here (however if we have trouble finding talent at home, that might be a good thing). But it also means that the production work that was usually part of the training process for young engineers is gone.

This April I am going to India. My goal is to learn about the design industry in India. Indian firms are not just interested in doing the production work for US firms. They also have billions of dollars of infrastructure to build in the next several years. If you know of a firm in Delhi, Chennai or Mumbi that you think I should visit let me know.

What are your thoughts on offshoring? Is it a good thing, a bad thing? What do you think the future is for offshoring?

The key to building a design firm that has longevity is to have a strong ownership culture. One of the keys to creating a culture of ownership is good governance. However, this is on area that many firms stumble. I see a lot of what goes on inside design firms and I am surprised with how many struggle with this is issue. Wonder why?

It is a real challenge in design firms to create a good governance model. The same people that own the firm typically run the firm. So the three hats - owners, board, and management - are worn by the same people. To be successful requires that there is always an awareness of what hat you are wearing at the particular time. In addition, the roles associated with each hat must be

I think one of the reasons is that there is not enough discussion about this in the industry. While there are a lot of books on corporate governance, for the most part they are written for publicly traded companies and often don’t translate to closely held private firms. I would like to hear your thoughts on governance in design firms. What do you think makes for good governance?

Some questions might be:
•How important is it to have a credible, fully functioning board?
•Do boards seem too cozy? The same guys run the firm are on the board.
•Does the quality of your firm’s governance model impact your decision to buy shares?

How much is good goverance worth? I would be interested in your thoughts about good governance and a strong ownership culture.

This blog is a new feature for my website. After fighting it for the last few years, I have now become convinced of the value of a blog. I would like to use this blog to share my thoughts about straetgy, governance and sustainability for design firms and communitites. I hope that my friends and clients will be willing to share their thoughts and comments.

I would also be interested in any comments you have on the blog in general. So it is with great enthusisum that I begin and look forward to discussing issues with you.

My name is Doug Thompson and I am a management consultant focused on green strategy and governance of professional service firms. I have started this blog to share my thoughts on issues related to straetgy, governance and green thinking. If you are interested in joining the conversation, please post your comments - they can be left annonymously.

My consulting practice website is www.thompson-strategy.com