They say failure is a great motivator. That was certainly the case with TK Kerstetter. After a tumultuous stint as a director early in his career, he decided to help other directors improve their skills. This experience inspired him to write a book on governance in the banking industry (more on that later), which led him to co-found this magazine in 1998 and ultimately pioneer the field of director education.
For the past three decades, Kerstetter has been a tireless advocate and defender of governance best practices, and along the way he has been instrumental in the creation of countless programs for the director community. DirectorHe has worked on a wide variety of events, from Yahoo!'s Boardroom Summit and Peer Exchange to the NYSE's Moving the Needle forum and Diligent's Next Gen Board Leaders event series. He also launched and hosted the weekly web series “This Week in the Boardroom,” which was later acquired by Diligent and renamed “Inside America's Boardroom.”
CBM I recently spoke with Kerstetter, who is retiring in 2023 but has agreed to co-chair our 20th anniversary Boardroom Summit in New York, about board education and the challenges facing the director community. Excerpts from our conversation have been edited for clarity and length.
Your passion for effective governance began when you took on your first directorial role. What did that experience teach you about governance?
I was president of a fairly large publicly traded community bank that was challenged by activist shareholders when it went public. This was a great learning experience for me. I was astonished at how little the board of directors at my community bank knew about fiduciary duty or FDIC regulations. I felt a lot of pressure to work with management and lawyers to address the situation, and the bank ultimately lost the case.
So I left banking and ended up going into writing. Ten Commandments for Bank Directors: The “Official” Guide That Regulators Don't PublishI then got so much interest that I opened the first official director training center. At the time, the savings and loan crisis was causing banking industry directors to be sued by the Federal Deposit Insurance Corporation. My business caught the eye of an entrepreneur who published Bank Director Magazine in Nashville. He invited me to move to Nashville, incorporate my training and conference business into the magazine, and run his magazine.
We launched a new banking program at a time when the banking industry was undergoing a lot of consolidation, and it was a huge success. So we thought, “If we can do it in the declining banking industry, why can't we do it in all industries?” Director.
Tell us a bit about the magazine’s expansion over the years – what do you consider to be the most significant milestones?
When we started, other industries that hadn't experienced the challenges that banking has faced saw little value in softer topics like governance. When I spoke at conferences in the late '90s, my talks were put at the end of the agenda so that people who left early wouldn't miss them.
That all changed in the early 2000s with the fraud and audit failures at Enron and WorldCom. Director On the map, these headlines appeared in newspapers' business sections as well as on the front pages. This caught the attention of Congress and led to the creation of the Sarbanes-Oxley Act of 2002. Director And that event is at the top of everyone's list.
All of a sudden, the budget was being used to support directors and management. I went from being the last speaker at the conference to being the first. Directors really got the message that they have a fiduciary responsibility to the shareholders and investors that they're there to represent and they have to be accountable.
Another breakthrough was the introduction of the Executive Summit. I knew the most valuable thing directors could spend their time doing was communicating with their peers in a confidential environment. I had to figure out how to make that happen. I also found that seven to nine directors in a room is optimal for meaningful discussion. Any less and not enough ideas come together. Any more and it takes too long for input to be expressed.
From there, the concept of Board Committee Peer Exchange was born, which resonated with directors who were trying to understand accountability and their duties. Committee Peer Exchange took off like a rocket. Within a year, two years, three years of the Summit, around 2004, we had over 300 chairs in 26 conference rooms at the Waldorf Astoria. There was an incredible representation of different sectors of business. That's when we realized we had created something special, and people started to copy it.
You’ve worked with directors in a variety of capacities for decades, including in governance-related roles at NYSE Governance Services and Diligent, to address the challenges of effective board governance. How has the role of a director evolved?
It's hard to tell how much engagement commitments have changed in 30 years. Everyone played their part. Congress, regulations, and the Delaware Court of Chancery dictated director behavior. At the time, the Big Four accounting firms were under a variety of pressures to ensure that audit committees complied. Everyone made their contribution. [change from] The committee used to be a good old boys' group that didn't get much attention, wasn't sued over, and nobody cared. [about].
One particularly interesting change is the role of committees and chairs. Now, board meetings are very busy and a lot of the work is done by committees. Chairs have to do a lot of work and stay on top of issues between meetings. So the process of recruiting and selecting the right people for chair positions is now one of the key success factors for the board.
In the past, chairmen were chosen based on who had the most tenure and time to do the job, but that's no longer the case — just ask David Calhoun of Boeing, who went from chairman to CEO and then found himself in a pretty tough spot.
The other thing is that everyone is clamoring for board transparency. Investors, media, everyone wants to know what's going on, they want full transparency. That was good in the beginning, but then people started asking for strategic plans to be shared, even though it doesn't make sense to tell your competitors exactly what you're going to work on. The pendulum swung a little too far. The bright lights were good in the beginning, but I think the needle moved a little too far as people kept asking for more and proxy advisory firms and activists kept investigating. Now it's coming back the other way, which is good.
You have been instrumental in working to bring diversity to boardrooms through initiatives such as the “Moving the Needle” event and the Next Generation Board Leaders initiative, which you introduced while leading NYSE Governance Services. What was the catalyst for these initiatives?
Moving the Needle was a response to the lack of qualified minority and female candidates for board positions. We knew there were great candidates. So the question was, “How can we use the NYSE platform to upend that narrative?” One of the benefits I've had in the jobs I've had is that leaders have always thrown all the rope on deck and said, “Do what you think is right, but don't hang yourself.”
We came up with the idea of inviting hundreds of talented women and minority candidates to the exchange and inviting heads of nominating committees to meet with these people. We got a tremendous response from the candidates and a lukewarm response from the nominating committees. But we published a guidebook with 220 talented women and minority candidates and short biographies, and sent it to every listed company. For a while, we also kept a record of those who attended who were appointed to boards. One of the most amazing stories is from Sharon Bowen, who is now the independent chair of the NYSE.
“Moving the Needle” was our wake-up call to “no longer listen to the myth that there are no women or minority candidates.”
The idea of next-generation directors came about when I was interviewing Caroline Tsai, who now serves on the Coca-Cola board but was 36 years old when she served on three boards. She told me that most of her colleagues were 20 to 25 years older than her. This made me realize that we needed to figure out how best to bridge that gap so that boards could be as effective as possible.
I called Julie Daum at Spencer Stuart and asked, “Would you be interested in working with me on an effort to not only educate boards, but also bring together directors in their 30s and 40s and train them to be more effective?” We launched the Next Generation of Board Leaders in 2017, which has been the most fun and interesting project I've ever taken on. I can only hope that they learn as much from me as I have learned from them about how to view the coming decades. Their thought process has been very enlightening, especially for me as a father of two daughters the same age as them.
What do you see as the biggest challenge for corporate boards going forward, and why?
For forward-thinking directors, this time could be one of the most challenging due to technology issues like AI, quantum computing, and evolving cyber risks. We have always faced such challenges, but I don't think we've ever faced challenges that are this different from the ones these directors have faced in the past. Veteran directors have never had to deal with these issues, so they don't really have the experience to fall back on. In a way, that makes them less valuable, because in the past, it was experience that allowed them to share their added value.
Does that disqualify them? No, because they still have a lot of experience to share on other topics, but they need to be knowledgeable enough that companies know what to do on those topics.
That's a big mountain to overcome, so what follows is some serious consideration of who has a seat in the boardroom.
You see, nominating committees and boards are good at making assessments but not so good at acting on those assessments. But who sits at that table is going to matter more than ever.
I feel for the executives who have to learn all they can about AI and quantum computing. We already know how hard it is to get a grip on cyber risks when we don't know where they come from or what they do. And these risks are only going to get harder. [emerging] technology.
What makes a good board?
Continually enhancing shareholder value over the long term is the hallmark of a good board. Overseeing an environment of accountability, trust and candor is certainly important, as is constructively engaging management in all aspects of the company. All of these elements would be expected to be part of the definition of a good board.
But to me, a good board is one that is constantly evaluating how it can improve every aspect of its duties and responsibilities, and making changes as needed. Never be satisfied with the status quo because you never know what's going to happen next.
The best example of this is the subprime mortgage [collapse] The 2008 and 2009 crises happened when everyone was rich and happy. No one was paying attention to the risks that nearly destroyed America. Great boards are never complacent. They always look to the future, assess how to prepare and adapt, and pursue those changes.
