1. Recruiters almost exclusively consider former and current CEOs as serious board candidates...
   

1. Fortune Magazine, 9/30/14
   

This is all wrong. Let’s consider the kinds of people that belong on a BoD, and how and where to find them.

We know who doesn’t belong:

1. ❖Old actors, the architect for the company offices, and the headmaster of the CEO’s kids’ school, as at Disney
   

2. ❖The retired CEO (who needs or wants him around? it’s mostly “him”, too)
   

3. ❖The current CEO, as we have argued elsewhere.
   

Ok then, who should activist investors want on a BoD? How do we find these individuals? If we look critically at the desired traits, we arrive quickly at portfolio managers themselves, or people like them.

The Right Background

Various sources list a wide range of suitable attributes. We’ve sorted them out here, listed in ascending order of importance.

4. 4.Collegiality, cultural fit: Enough said -
   

3. 3.Industry experience and expertise: We think that companies overvalue this. Companies recruit executives for necessary industry know-how. Directors need just enough to critique executive decisions and proposals. Smart directors can learn what they need in a short time.
   

2. 2.Financial skills: This includes both basic financial accounting and corporate finance. Directors need to know both the basic language of business, and the principles by which companies allocate capital and measure the outcomes.
   

1. 1.Investor orientation: Directors must, above all, have the same interest as the shareholders they represent - maximize the value of the investment.
   

Where to Find Them

A PM represents the first choice for many BoDs. They have the financial skills, and own a bunch of shares. They also know (or can learn) enough technical stuff to oversee executives. If you own a big slice of a portfolio company, a PM should consider seriously becoming a director there.

Suppose you need more than just yourself, for multiple BoD positions at a company. Or, you don’t have enough shares to justify the time, or just don’t have enough time. Where should an activist investor find directors?

First, we’d ask the PM at other large shareholders. They have the requisite financial know-how, and own a bunch of shares. In a proxy contest, this assures that you’ll gain their votes, too.

We also look for former finance executives of the portfolio company or its competitors. They have the accounting and corporate finance background, and industry know-how. Retired company executives probably have a bunch of shares, too. They may lack practical independence from current company executives, even if they meet the technical definitions, so go this route cautiously.

In more significant situations it makes sense to retain an executive search firm. While these firms generally work for anyone, the major ones with BoD search practices don’t typically work for activist investors. We activist investors spend enough on these projects without having to pay their extravagant search fees. These firms also bring that dreaded CEO bias.

Consider your favorite boutique firm, though. They have plenty of contacts, eagerly work for investors, and don’t charge quite as much. Seiden Kreiger seems to have a speciality in working with activist investors.

Avoid Current and Former CEOs

They are strongest where it matters least, in collegiality and cultural fit. They became CEO somewhere because of these traits. Most rose through the ranks of a company due to their innate ability to appease their superiors.

As we’ve shown, we investors don’t need industry experience and expertise as much as we need financial chops. And, outside of CFOs (and even among many of them), senior executives lack sophisticated accounting and corporate finance skills.

Even worse, current and former CEOs empathize strongly with a portfolio company CEO. They’ve been there, know the challenges, and understand how companies really work, right?

We don’t care, or shouldn’t. Empathy and understanding compromises the most critical attribute, alignment of interest with investors. We welcome an annoying individual who can learn about a business quickly, knows finance, and owns a bunch of shares.