I recently had the privilege of attending the Directors Dialogue Dinner, hosted by Drexel University, which brings together more than 200 of Philadelphia’s business leaders. This year’s keynote speaker was Jack Brennan, Lead Independent Director of General Electric Co, Director of LPL Financial Holdings Inc and Guardian Life Insurance Co, and Chairman Emeritus of The Vanguard Group. Jack discussed the importance of corporate governance in a conversation facilitated by Bill McNabb, Chairman and CEO of The Vanguard Group.

With more than four trillion in assets, Vanguard owns between five to ten percent of every listed company in the U.S. and one to two percent of every listed company in the world. As such, the company places a high value on responsible corporate governance, so that its investments perform well and it meets the needs of its stakeholders.

While there are a variety of factors that encompass effective corporate governance, Mr. Brennan and Mr. McNabb spoke extensively about the importance of diversity as both a corporate governance and corporate performance issue. Mr. Brennan emphasized that, in his opinion, more diverse boards tend to perform better and that the GE board specifies cognitive diversity as one of the most important criteria for new board members. Mr. McNabb agreed from the perspective of an investor.

While an organization certainly benefits from having a team of people who approach things differently in terms of the ways in which they think and act, functional diversity is also an important consideration. Nominating committees often specify that they are looking for sitting or recently retired CEOs or COOs. As we all know, CEOs and COOs rise to that position through different functional areas. Some come up through the financial area, some come up through sales and marketing, and others through technology. Before searching for a candidate, the search committee needs to specify which functional area(s) these CEOs or COOs should ascend from on their way to becoming CEO. The goal is to have a board that is well balanced from an experience and functional perspective, so that its members collectively possess skills that complement one another and so that the board can become more of a strategic asset.

During the Q&A, I asked Mr. Brennan and Mr. McNabb if they considered functional diversity when recruiting new board members. Mr. Brennan, being a “spreadsheet fanatic,” talked about how he makes a spreadsheet of the functional backgrounds of his current directors and of candidates to make sure that the functional expertise is considered and not duplicated too often. Mr. McNabb goes through a similar process when looking for new directors for Vanguard.

The lesson here is that the search process should begin by taking inventory of the functional expertise of the current board. Identify areas of duplication or gaps in experience and build these considerations into the specifications of new potential candidates.

Once you identify and understand the mix of functional strengths among your current directors, you’re in a better position to recognize what additional functional expertise would complement the existing board. It is important to recognize that I’m not advocating for the “expert director” or anyone who has only a functional specialty. I am suggesting that as you look for strong business generalists, you should consider their functional strengths and their background in order to achieve the best balance and the highest possible value from your team.

Ultimately, you want to build a team of directors whose functional expertise and industry expertise complement one another so that you have diversity of gender, race, ethnicity, and functional background.

This can be a daunting task for the nominating committee, who often relies on the rolodex of existing board members and service providers for potential board candidates. Using a search firm to facilitate the analysis will give you a firm grasp on the functional experience that will complement the existing board, while greatly expanding the field of possible candidates, and it will bring objectivity and professionalism to the follow-up process.

This will help transform your board into a more strategic and competitive asset. For more information about Howard Fischer Assoc. and our board and executive search capabilities and experience, contact us at search@hfischer.com or 215.568.8363.

Howard Fischer, Founder, President and CEO