Bringing new directors on board

Proxy season often brings board shake-ups that result in new directors joining the board at hundreds of companies. When a new director joins a board, he or she must quickly be initiated on a range of business issues the company is confronting. Corporate Secretary spoke to a number of experts familiar with the ‘onboarding’ process about key considerations for orienting a new director when he or she takes a seat in the boardroom. 

Experts say there are several questions nominees for board seats should ask before accepting the position. At the top of the list, a nominee should ask the nominating/governance committee: ‘Why me? What do I specifically bring to the table that’s not already there?’ says Peter Gleason, managing director and chief financial officer for the National Association of Corporate Directors.

The board’s nominating and governance committee is usually fairly straightforward when letting a candidate know the particular skills it is seeking and why it believes he or she fits the bill, says Gleason. The company’s proxy statement often includes a skills matrix listing the capabilities the company already has – including those skill sets the existing directors fulfill – and those it is trying to acquire. In lieu of a matrix, the proxy statement may simply detail relevant skill sets within the individual directors’ biographical descriptions. 

Trey Muldrow, a partner in the M&A practice at Akin Gump Strauss Hauer & Feld, suggests boards may sometimes be seeking specific experience in a director that they do not already have. ‘If you have digital experience and you see there’s no one on the board with a comparable level of the same experience, and that’s a strategic imperative for the company in entering a new phase, you’ll understand what you’re expected to bring to the table,’ he explains. 

Lie of the land

Being aware of certain limitations among fellow board members may gird a new director for future efforts that he or she may have to make in order to garner support when trying to execute a strategy designed to take the business in a new direction, Muldrow adds. 

Conversely, an incoming director may not appreciate the intricacies of other directors’ experience, especially if their skills have not been adequately represented in the director biographies new directors receive upon joining the board, says Gleason. ‘Until you start having the dialogue with those directors, you may not know that a certain piece of their experience is relevant to the issues on hand,’ he notes. 

It’s also critical that an incoming director understand the full range of stakeholders he or she is serving. Susan Hammond, a principal at scHammond Advisors, says directors have to consider the needs of ‘not just the chief executive and the chairman, but also the employees and the customers. If there’s a problem, people will look to the board to ask what is being done about it. Stockholders are going to expect board members to have their finger on the pulse of what’s going on at the company.’ 

As corporate secretary at American Express for 27 years, Stephen Norman would meet with new directors to go over who the major investors were, how they voted and what the company’s proxy issues had been. ‘We tell them about vote totals in recent elections, recent issues we’ve had, and whether we’ve had any negative opinions from ISS – the whole shareholder relations panoply,’ says Norman. ‘And boy, are they interested in knowing the vote totals for recent years to see whether they’re getting into a contentious situation or one where shareholder relations are pretty good.’

Making connections

Hammond recommends assigning a ‘board buddy’ to an incoming director to help bring him or her up to speed more quickly on company issues. A board buddy should check in with the new director several days before a board meeting to ask whether he or she has reviewed the materials and has any questions about them that either the buddy or the chairman can address. Making sure in advance to get the back history on an agenda item as well as a sense of what will be discussed or changes that have occurred since the last time the item was discussed is helpful to ensure a new director understands the context around that specific agenda item. When attending a live meeting, the buddy and the new director should sit next to each other so the buddy can explain things that come up or answer questions, says Hammond.

Getting a grasp of the dynamics and interrelationships among board members is often complicated. In order to determine how independent directors are, any business relationships between directors and the company, for example, need to be disclosed under rules set by various stock exchanges if the revenues involved meet thresholds the exchanges have established, Gleason says. Voting patterns among directors are virtually impossible to discover, however, as votes are confidential and the board typically acts as a group when reporting the final decisions it reaches. The only exception may be if a director has not voted with the majority on a significant issue and wants his or her dissent noted on the record, Gleason adds. 

Asking how other directors joined the board can sometimes uncover interconnections a new director would not be able to glean from blurbs included in reports to the SEC, says Muldrow. Knowing whether some fellow directors have worked or invested together at previous enterprises can convey ‘a sense of how constituencies are established on the board’, which would not be apparent from the questionnaire that board members customarily fill out when joining a board, he adds. There may also be certain dynamics related to a fellow director’s tenure that are not immediately apparent.

Beyond the boardroom

Identifying where the substantive dialogue occurs outside the boardroom among directors will not be possible until a director joins the board. There is usually a smaller group of directors that gets together and ‘socializes a decision-making process’ before a formal proposal is made to the board, says Muldrow. ‘It’s worthwhile to ask the person who is supporting your candidacy where that happens just to make sure you’re not surprised, and you may want to make sure your voice will be heard’ – especially if you have been recruited for a special skill set, he adds. 

Gleason characterizes any pre-boardroom dialogue as ‘working the agenda, making sure you have support lined up for whatever the issue is’, but says this should not include substantive discussions. ‘If substantive dialogue is not happening in the boardroom, you have a breakdown of board communications,’ he says. ‘Debate and dialogue around the issues have to take place in the boardroom, even though you’re trying to ensure support outside the boardroom, and there has to be enough time on the agenda to do that.’ 

The board’s interaction with shareholders has become a priority issue with the surge in shareholder activism in recent years. Incoming directors need to be aware of who the company’s major shareholders are and whether any proposals have previously been made by them, says Gleason. A new director also needs to know the venue the board prefers to use to communicate with shareholders, whether there are any critical concerns major shareholders have that need to be addressed, what’s been done in the prior two to three years regarding any shareholder concerns, and whether those concerns have been resolved.

A thorough understanding

While the corporate secretary is usually the starting point for onboarding a director, for a comprehensive view of the organization, a director must spend time with the chief executive, the chief financial officer, maybe the chief operating officer and any relevant business unit leader who contributes in a significant way to the company’s overall revenue, says Gleason. He or she needs to fully understand who the key players are who may be in line for succession to higher executive responsibility levels in the future. 

To get such a thorough view of the company often requires going beyond the C-suite to talk to operating unit leaders. ‘You’ve got to get to know the people and the business itself and understand who’s really running the business and how they make money,’ Gleason says. ‘It comes down to spending time with the team.’

New directors should ask to see the company’s current operations, says Hammond. ‘If it’s a manufacturing company, I’d want to visit some of the plants, where the plant manager would walk you around, along with the board chairman,’ she says. ‘That’s more important than having the plant manager come in and do a presentation at a board meeting.’

At American Express, Norman would schedule one-on-one meetings between the new director and the heads of each business unit several hours before the new director’s first board meeting. ‘These meetings can’t be rushed,’ he says. ‘You have to do it in distinct seminars. You don’t want to blur marketing with PR, or compliance with litigation. You want the new director to get the full panoply of subjects, but you should try to dish them out separately.’ 

When senior managers are invited to present at board meetings, Hammond recommends a less formal environment so new directors can ask questions. A board presentation might also be followed by a lunch where new directors can get to know senior managers better and follow up on questions the presentation has raised.

‘Senior managers would benefit from knowing the backgrounds of new board members, as they could be a useful resource,’ she says. ‘New board members are brought on for specific reasons. There are times when new board members and senior managers need to know each other to benefit the company.’

Building those relationships can take time, and the initial onboarding process has to be fairly comprehensive in order to quickly prepare new directors to fulfill their oversight role. Incoming directors should also be willing to dive deeper in order to discover significant information about the company. This includes using social media sites and setting up Google alerts to make sure they know of any information transmitted online about the company, adds Gleason.