You could be squandering one of your company's most valuable assets
The history of corporate America is lately more one of failure than of success. And for every great failure, we have seen a regulatory response: 1929 stock market crash – SEC created. Bank failures – creation of the Federal Deposit Insurance Corporation. Savings and loan crisis of the 1980s – the Financial Institutions Reform Recovery and Enforcement Act. Enron/Andersen/WorldCom – SOX. Compensation abuse – compensation discussion and analysis disclosure. Fannie Mae/Freddie Mac – Federal Housing Finance Agency. Lehman/AIG/Merrill/WaMu/Citi – Troubled Asset Relief Program and Term Asset-backed Securities Loan Facility.
Some of these failures resulted from fraud, some from risk not adequately managed. Yet we all know there will be more excesses, more failures and thousands more pages of legislation that will still not stop these downfalls from recurring. True, SOX has led to some beneficial changes in board operations, examples being majority independence and audit committee financial expertise. And new legislation for say on pay, shareholder access and increased disclosure on the risks of pay practices may further strengthen governance.
Starting in the wrong place
But these changes do not get to the core of the problem, because crafting laws to fix the perceived causes of a particular failure misses the point. The real issue is that the basic system of board governance that state corporation laws established long ago no longer works well (if it ever did). While they required corporations to have boards and board committees, the statutes stopped there. They did not tell anyone how to run a truly great board that shareholders can rely on to lead a company successfully, or how to avoid the fraud or uncontrolled risk taking that will ruin it.
Merely telling directors to be fiduciaries is not helpful, nor has case law on the business judgment rule been very instructive. Put another way, corporate law has left corporations and boards to figure it all out for themselves with precious little guidance.
Some companies get it right: they establish a framework of mutual respect in which their board and management teams work collaboratively with a continuous self-improvement ethic intended to serve well their collective boss: the shareholders. But others, left to improvise, hire directors whose primary credential is being well known, give them an alleged business reason to network regularly at nice venues, and hope they don’t ask too many questions. Management members tell them just enough to make them feel they know what is going on, but not nearly enough to make them as nervous as they should be.
This is what most boards would doubtless still be doing had SOX not filled in some of the gaping holes left by the minimalist state corporation laws. Even with SOX, however, some management teams probably still do only what is necessary to tick the right boxes, and in reality consider their boards an unnecessarily intrusive aspect of their jobs.
This kind of attitude causes management to miss the opportunity to deeply engage some of the smartest and most experienced people associated with the business. It also leads to a failure to extract the wisdom and creativity resident in a collective asset that costs most big companies more than $2 million a year in compensation and meeting costs. How many other resources cost a company so much and are then expected to act like oil paintings?
A wise management team will want to mine the intellectual property inherent in its board. The most worthwhile CEO will regularly seek counsel from the board, to make sure the directors know what his or her concerns are and to engage them in thinking about the next freight train barreling toward the company.
Maximizing board dynamics
While we should not give boards too much credit, a big problem with our system remains that we are not giving them enough credit, and we have been leaving a lot on the table by not getting the best out of them.
So what can you do to avoid being the next corporate disaster? Sometimes a corporate secretary needs to be provocative and stimulate conversation about steps management and directors should be taking to enhance the effectiveness of the board – given recent events (and recorded history), it is hard to argue that how we have done things in the past has produced optimal results. The following are techniques designed to create board dynamics that give you a better chance of success.
Keep the board small, no matter how big your company. Can 15 people really have a meaningful discussion? How much total time does each member of a big board talk for during a meeting: five or 10 minutes? Is that worth $250,000 a year?
Ethnic and gender diversity are important, but substantive diversity is critical. Many boards consist only of luminaries from other industries. Do they really understand the complexities of the company? Do they have the experience and technical abilities to effectively strategize, innovate and manage risk? Do they have contacts to help win clients? Stars are OK, but if you must put one on your board, get one who knows your business.
Diversity of skill sets is vital, and directors’ abilities must reflect the drivers of the business. If the company is in the technology sector, get a tech expert. If you are moving into new markets and need marketing and branding, find someone with those skills. A legal and financial expert will fit on almost every board.
Set specific business objectives for the board’s delivery of tangible value each year. You couldn’t imagine not doing this with your senior managers, but how many companies do it with their directors? They should be partners in developing and executing corporate strategy.
Get inside their heads
Conduct mandatory open-ended sessions where directors raise what they want to discuss. What’s keeping them up at night? What are they seeing at other companies (or in the news) that the company should be worried about? Maybe directors could submit questions ahead of time, or you could assign to each board member a specific subject that is important to the company and make him/her responsible for bringing related ideas and developments into deliberations.
Following management presentations, allow open time for discussion, reactions and the questions that can lead to quantum leaps in creativity. In the absence of such extras, the tendency is to use all the time on the agenda for presenting, and the chairman will feel pressure to move to the next agenda item. This devalues what should be the primary objective of the presentation: to engage the board in a discussion and get its guidance.
Give board members meaningful exposure to your people, customers and operations. Make sure it’s not always the same management people talking to the board. Encourage directors occasionally to attend some internal business meetings (like the big annual sales conference). Get directors out visiting customers, or have customers give a presentation to the board on their experiences with the company.
Have directors meet with investors. Pick the toughest and crankiest investors, and let the board hear what’s on their minds and what they expect from their investment. Better to hear it now than when they advertise in the Wall Street Journal during a proxy fight.
Don’t run your committee meetings at the same time so only a few directors are at each one. State corporation statutes, the NYSE and NASDAQ all require separate committees, but in today’s intertwined and complicated world, they are anachronistic. Some focus from individual directors is a good thing on specialty topics like accounting and compensation, but every board member needs to have the full perspective of the issues that are often relegated to committees. If you run your committee meetings sequentially and invite all board members to attend even if they are not committee members, all directors will get the entire picture. At the very least, send all your committee materials to all board members.
Don’t go too far afield
Conduct board meetings on site and avoid holding meetings in hotels or resorts. The board members need to see your offices, and your people need to interact with the board. This will do wonders for perceptions all round and will give the people in your shop a feel for your corporate governance. You will likely save some money in the process, too.
Have board members lead a ‘town hall’ meeting for staff, or think about bringing some junior managers to observe parts of the board meeting and allow discussion of what’s going on in the minds of the staff.
Ensure directors really have time to attend meetings, do their homework and are available for occasional value-added activities. Beware ‘over-boarding’: there are some extraordinary people who can pull it off, but they are harder to find than people think.
Pay the board only (well, mostly) in restricted stock. Options are alright, but remember all the trouble those got everyone into? Don’t let equity vest for three to five years; people who sit on boards generally don’t need more cash. Alternatively, give them the ability to take it all in stock, and establish binding ownership guidelines to encourage them.
When conducting annual board self-assessment, anonymously survey senior management members at the same time. Ask them about their views of the board’s performance, the quality of their interactions with the board and what the board can do to add value to the enterprise. Don’t use multiple-choice answers: ask probing, open-ended questions requiring narrative answers that will elicit what management really thinks. At the end of it all, have the board chairman report back to management on the results.
Keep them in the loop
Give board members direct access to the company’s intranet so they can stay abreast of internal company news. Alternatively, put someone in charge of sending the board a summary of important internal news items every few weeks to keep them connected to day-to-day operations. Additionally, create a secure working group website just for the board where you can post information that will help board members to stay current on open board issues and company activities.
Have a one-on-one induction session for each new board member. Send out orientation materials and conduct a session in person. Highlight what they need to know most: insider trading and blackout procedures, accounting policies, media relations and the like.
Make sure the CEO, CFO and general counsel understand their responsibility to tell the company’s story – the whole story – to the board. If managers delay giving the board bad news because they fear the reaction they will get, you can bet the board will still hear it eventually, by which time it may be out of control. The board should celebrate honest mistakes as long as it is informed promptly, and management can explain the lessons learned and what new preventive measures have been implemented.
Challenge the general counsel or chief compliance officer on the effectiveness of the ethics and compliance program. Creating a culture of ethics and compliance is an art, not a science, and there is no standard playbook to follow, so make sure your general counsel or chief compliance officer tells you a story that makes sense. Better yet, ask him or her to get a peer review of the ethics program, or an independent verification such as Ethics Inside certification. It is important that your program meets Federal Sentencing Guidelines if one of your people goes rogue.
Make your board a model of fiscal prudence and sustainability. People in your company will see the hypocrisy if you are pinching pennies among the staff and holding a board meeting at the Four Seasons. Appearances mean everything where the board is concerned. The rest of your people will behave the way the board does; if the board spends wisely, so will they.
Make a big deal about how the board uses new video conferencing technology to avoid some in-person meetings and mandates double-sided, black-and-white-only copies in its board books, or has gone entirely paperless and is using electronic board books. It will be infectious.
Always be in the market for new board members, so there is a pipeline of candidates. These days it can take a long time to find someone your board is comfortable with and who is willing to serve. Establish a grid of attributes that you want collectively maintained on the board, and then fill it in according to what your current directors contribute. Use the gaps to determine the attributes you require in your next board member.
Put their thinking caps on
Regularly conduct joint strategy sessions among the board and senior executives. This will align their views (or at least bring any differences that need to be resolved to the surface), and it’s great for succession planning to give the board direct familiarity with your senior team. And who knows? With all that wattage in the same room, you might even come up with the next iPod.
Actively include directors in crisis planning. Disasters can be physical (think Hurricane Katrina), financial (AIG), ethical (Siemens) or executive (McDonald’s lost two CEOs to illness in quick succession), and those are just some of the more obvious ones. How will you engage the board during a crisis? The federal government can’t bail out everyone.
Make sure you are proud of your compensation system. The current financial crisis has taught us that throwing oodles of stock at your senior management does not prevent disaster. It is not enough to set pay and perks according to what your independent compensation consultant says the other guys are doing (also called ‘benchmarking’). Each board needs to determine what will work best for the company’s own staff and unique business – and don’t forget the shareholders. What will really motivate people to show up every day and do their best for the absentee owners? What will serve to retain top talent? What will promote intelligent risk taking – not too much, not too little? And consider this sacrilege: maybe it’s not just about the money.
Vigorously probe the company’s risks, and what management is doing about them. Have ongoing, robust discussions among the board and management about what (and who) could really cause the company’s downfall, and how to avoid it. The world is a dangerous place, so don’t let that nice conference room lull everyone into a false sense of security.
Management is not an island
Whether any one of these ideas will work for a particular corporation will depend on culture, both the board’s and the company’s. Remember: management is not an island. The best management team will figure out how the board can contribute to the company’s prosperity and sustainability in ways no one else can. Given how quickly long-standing and storied firms can fall apart, can you afford not to? If you are not trying to creatively and assertively extract all the value you can from what is probably one of your greatest untapped assets, you are leaving the company’s special sauce hermetically sealed in the back corner of the warehouse.
The point is to figure out how the board can really add value to the company, and make sure it does it. Board members should be viewed as partners in the development of corporate strategy and operational excellence. If your management sees the board as a
necessary evil or an intrusive annoyance, that is the wrong attitude – and a big problem.
