It’s the rare engineering or construction firm that doesn’t tout its leadership ability and resources to tackle ever-more-complex challenges and deliver the highest quality and value to customers.
However, new industry research from management consultant FMI suggests that the governing boards of many firms, particularly privately held enterprises, may lack the composition, culture and processes to accurately critique management performance. They also fail to strategically address current and emerging issues that could affect a company’s future growth, if not its survival.
Conducted in collaboration with the Construction Industry Roundtable earlier this year, FMI’s online survey included 133 board members and executives representing a broad spectrum of firms, the majority privately held. Forty of the respondents participated in follow-up interviews.
The results revealed multiple shortcomings in board leadership, diversity and member preparation that can hamstring a company’s top decision-making body.
Often composed of individuals with similar backgrounds and perspectives, AEC corporate boards were characterized by survey respondents as more likely to defer to management on key decisions rather than challenging it, even though they are typically responsible for gauging the performance of top leaders.
Perhaps more worrisome is the finding that significant numbers of FMI study respondents report boards spending more time reflecting on past performance than planning for future results.
FMI Principal Michael Mangum is quick to note that these issues shouldn’t automatically imply that an engineering or construction firm is poorly managed.
“Firm leaders don’t know what they don’t know,” he explains. “They may not realize what a truly effective board can accomplish, or what they could be doing better.”
With most engineering and construction firms in private hands, owned either by employees or families, boards tend to be made up of company insiders.
“There’s a propensity among those who own a business to be reluctant to share information with outsiders,” says Hugh Rice, senior chairman of FMI Capital Advisors and a study participant. He adds that as a company reaches a certain size, and the number of owners grows, questions may arise about who’s looking out for the firm’s best interests.
“If everyone’s an insider, you’re missing out on opportunities to think outside the box,” he says.
“Challenges change as a company gets larger,” agrees Dave Nash, a former head of the Naval Facilities Engineering Command who has served on multiple boards of privately held engineering and construction firms. As such, he says, “there have to be changes to how the board functions.”
And that growth can happen fast, notes Gracon LLC Chairman Scott Lynn, “especially given the cyclical nature of this business.”
But because engineering and construction tends to be a laggard industry, Mangum adds, certain patterns can be hard to break.
“There are also few role models of firms that have taken a different approach, and sought to have more diverse boards,” he says, adding that “the precepts of a great board apply” regardless of the company’s ownership composition.
Behind the Curve
Although struggles with corporate governance aren’t unique to engineering and construction firms, correlation of FMI’s data with other surveys suggests that many industries do more to screen and prepare board members for their roles.
For example, only a third of the surveyed engineering and construction firms provide any kind of onboarding process—familiarizing board candidates with the company and their responsibilities—compared with 49% of respondents in a 2016 survey of privately held companies by the National Association of Corporate Directors. A similar survey by Stanford Business School the same year found that 73% of organizations onboard their directors.
And while employee evaluation is an internal staple of all types of companies, only 32% of FMI survey participants evaluate the performance of governing board members, compared with 59% and 44% of the NACD and Stanford survey respondents, respectively.
Some firms may see such preparation as unnecessary, since their boards are composed largely of current or past executives, construction industry veterans and other business leaders. Mangum calls the assumption that someone successful in business will be a high-performing board member “a myth” that is unsupported by research.
“A former CEO might be the best board member—or the worst,” he says. “There’s no guarantee.”
And because many boards are made up of what Mangum calls “Type A CEOs with a CEO mentality,” the group’s instinct may be immediately to tackle problems, making them a surrogate management team.
A diversity of outside experience and perspectives, Mangum says, is needed to innovate and address challenges objectively. The problem is hardly new to FMI survey participants, with only a handful reporting any ethnic or gender diversity on their boards. A mix of generational and industry experience is somewhat more prevalent, with respondents reporting 39% and 33% representation in those categories, respectively.
Although the FMI survey suggests that problems of limited diversity are well recognized—one anonymous FMI survey respondent labeled boards as being “a bunch of all white guys”—respondents lament a perceived limited population of qualified female and minority candidates.
Yet others feel that diversity of expertise should be an equally important consideration in targeting prospective board members. Financial management and technology experience are among the most oft-cited and desirable skills for outside directors, but opinions are mixed as to whether construction industry experience is a must.
“It’s essential to have on the board, but not necessarily for each member,” Lynn says. “Those from outside the industry may not have a level of understanding, but their perspective can still be valuable.”
Kim Petersen, former CFO at Pankow Builders, counters that “people with a construction background may lead you down the same path, which may not be best” for a firm.
Alicia Harrison, a retired bank executive who serves on the board of Ryan Cos., didn’t find her limited experience in the firm’s primary business to be a detriment. Harrison, an FMI survey participant, says her selection came after the company’s nationwide search for “a woman from the Southwest with banking experience” yielded 20 candidates.
Although Harrison had some personal and professional experience in real estate, she received some onboarding that brought her up to speed on the company’s projects and financials.
“At meetings, we’re always educated in some way about construction through presentations on things such as specific projects or geographic activities,” she adds.
More recently, Ryan has added to its board construction technology entrepreneur Danielle Dy Buncio, who Harrison says brings a perspective “three generations younger” than Ryan’s other board members, but also adds important familiarity with current and emerging technology.
Leadership Is Key
Perhaps not surprisingly, says FMI’s Mangum, the effectiveness of a governing board correlates directly to the effectiveness of its leadership.
“If you have leadership open to communication, challenging people and being challenged, you’ll have good discussions,” he says.
Often, however, the company’s CEO doubles as its board chairman, creating a situation that can dilute the candor needed to tackle difficult issues, particularly executive performance and compensation. Indeed, FMI’s survey found that 43% of boards do not participate in risk planning, while 35% do not participate in succession planning.
“If everyone is working for the person at the head of the table,” says Rice, “they likely won’t question them or what they’re doing. Avoiding those conversations could be disastrous.”
Nash encourages the boards he works with to separate those leadership roles, “not because the CEO is bad but rather to provide both cover and accountability.”
San Francisco-based corporate governance consultant Kris Veaco says clarifying the roles of management and the board is a shared responsibility.
“Board members should be asking themselves if the relationship is healthy—are they able to get information, ask questions and get follow-up,” Veaco says.
Nash agrees. “If a board is serious about doing better, it needs a lot of introspection,” he says, adding that training from a qualified corporate governance consultant “can help with benchmarking and understanding what other companies and boards are doing.”
A Price To Pay
Understandably, the process of enhancing a board’s effectiveness is neither quick nor easy. In 2001, Gilbane Building Co. transitioned its governing body from an advisory board to a formal board of directors, starting a process that Chairman and CEO Tom Gilbane says continues to evolve, including opening its membership to those outside the industry and incorporating strategy, acquisitions and succession into its ongoing agenda.
“I don’t know if we’ll ever get to the level of using the board to full capacity,” Gilbane says, “but the reviews and feedback on our top people—including myself—have been a big help.”
Gilbane adds that he doesn’t wait for scheduled meetings to consult with the board.
“If an issue arises where someone has specific expertise, I’ll call them up,” he says. “It’s good to have that outside perspective and knowledge.”
There may well be mistakes along the way. Petersen recalls how Pankow sought to broaden its board horizons by adding two members based on the East Coast. Travel time and other complications limited their participation and effectiveness.
“As a result, we now look for board members from the West Coast, which makes it easier for them to visit our jobsites and meet with our executives,” he adds.
But these insights and expertise come at a price, Petersen warns, and small to mid-size engineering and construction companies must be ready to pay it. “I heard of one company that tried pay its directors on an hourly rate,” he says. “If you’re doing that, you may as well hire a consultant.”
The risks of not addressing potential corporate governance shortcomings are many, says Mangum. Along with surrendering the ability to perform at the highest possible level, companies “become inwardly focused and lose the opportunity for fresh thinking.”
Lynn adds that a limited ability to strategize could also leave a firm ill-prepared for an economic downturn, something younger managers have yet to recognize or experience.
“It’s going to happen, and a good board can help the company be prepared,” he says.
The leadership approach that worked during a previous business crisis may not succeed again. As Nash puts it, “It’s not a good idea to assume things will work out.”