Whenever difficult market conditions arise, boards can come under increasing pressure to make changes. Oftentimes, this involves adjustments to board composition. Corporate board members should embrace the need for evolution in leadership, even if it means they may have to exit a board.
As recession fears mount and companies try to process how the policies of the Trump administration may impact their business, there is an increasing possibility that boards will be pressured to add or subtract directors. In some cases, shareholders may want the board to add directors with specific skills that can help them through rapidly changing market conditions or who are in better alignment with shareholders’ or management’s views on how the company can achieve maximum growth.
We are seeing signs of this already. Sleep Number Corp. recently agreed to a board restructuring that involves the staggard retirement of five directors. Stadium Capital, its largest shareholder, was prepared to run a slate of candidates against the current board during elections at the upcoming annual meeting but withdrew its plans once several directors agreed to step down. In a statement, the company said the repositioning of the board “aims to create a smaller, more agile board focused on strengthening company performance and profitable growth.” Alexander Seaver, co-founder and managing partner of Stadium Capital said, “Sleep Number’s board and leadership team are taking difficult, but necessary steps to position the company for success… we believe this new leadership team is focused on the right priorities and can accelerate Sleep Number’s transformation.”
Although Sleep Number is a relatively small company with a $142 million market cap, larger companies can expect shareholders to ask for changes to the board and company leadership this year as well. Here are some scenarios that might spark a change in board composition this year, which might mean certain directors should consider leaving their current board:
Lack of agreement on strategy between the board, shareholders and the management team. If a director is not aligned on strategy with the rest of the board, the CEO, and the largest shareholders it may be better to step down voluntarily or retire than be removed by shareholders in a proxy fight. When a director disagrees with the direction most board members agree with, they will need to be tremendously persuasive and diplomatic if they want to change minds in a way that does not ruffle too many feathers. Leaving a board with a positive impression as a director who respectfully offers constructive critiques is preferable to leaving a negative impression as a director who is disagreeable and obstructionist.
The board requires a skills and experience refreshment. Current market conditions have increased pressure on boards. Frequent communication between the board, management and shareholders can help relieve some of the potential blame that boards tend to receive when companies face difficult economies. However, after those critical conversations occur, a change in board composition may be inevitable—and each director may need to face the possibility that they may no longer be a fit for their current board. New skills and experience may be needed to accelerate the company’s growth. Once the direction of the company has been agreed upon, directors can honestly assess whether they have the skills, experience and insight to contribute significantly to the company’s future success. If there are any doubts, it may be best for directors to step down and find a board position at a different company where their skills and experience may be more in demand.
Change may be inevitable. Read the room. Boards that have shown limited financial performance in recent years have little leverage to resist calls for changes in board composition. Companies will be pressured to make changes or shareholders will revolt. Directors run the risk of appearing clueless if they defend a poor record too strongly. Negotiating changes to the board in an effort to move the company forward may be part of a turnaround plan that satisfies most stakeholders. Each director will need to understand that they themselves may be removed from the board as part of those negotiations. Instead of waiting to be removed, consider moving on with time well served. Seeking a greater challenge on a different board that needs your expertise might be more rewarding that fighting to stay where you may not be appreciated.
