Selecting and educating new board members

One of the most critically important processes a publicly held company can undergo is the selection of new board members. This once rather routine matter is now more challenging than ever due to enhanced shareholder scrutiny, more strict director independence requirements and a rise in the number of lawsuits filed against directors of public companies.

In addition, recently adopted SEC rules require proxy statement disclosure of the particular experience, qualifications, attributes and skills that led a board to conclude that its nominees should serve as directors. These developments underscore the need to nominate talented directors with significant expertise in several subject areas.

However, companies should not only be concerned with selecting talented nominees, but should also focus on educating new directors so they can properly exercise their fiduciary duty of care in overseeing the corporation’s operations, financial reporting and risks. Providing new board members with substantial training enables their skills to evolve just as their company’s business environment will certainly evolve over time.

In order to successfully recruit and develop board members, companies should create a comprehensive director nomination and orientation process. The corporate secretary, as the customary liaison between management and the board of directors, typically coordinates the actions of the board, management and a professional search firm in this process. Initially, a checklist and timeline that identify the steps necessary to properly execute the plan should be drafted and circulated by the corporate secretary (Timeline for board member nominations, below).

Timeline for board member nominations

The board nomination process should incorporate these important items:

*   Review potential conflicts and/or related party issues

*   Obtain EDGAR codes and file Form 3 with SEC (confirm if new director already has codes)

*   File Form 8K with SEC after director election (determine if a subsequent 8K is necessary)

*   Send welcome letter with director compensation and insider trading policy information

*   Issue press release and update company website following director election

*   File appropriate stock exchange notices in connection with director election.
 

To diminish conflict of interest concerns, the chief executive officer’s role in the nomination process should be minimized, particularly if he or she is also board chair. Depending on the board’s size, either the nominating and governance committee or the entire board should be actively engaged in directing the overall nomination process.

Either way, the process should be conducted so that management is facilitating rather than dominating it. Additionally, board meeting minutes should accurately capture the deliberations and diligence of the board in overseeing the process.
 
Identification and nomination

Generally, one of the first steps in the nomination process entails the assessment of the current board’s skills. In order to perform an assessment, a matrix is used to produce a profile of the competencies, skills and experience represented on the board. In the matrix, applicable attributes and skills are listed along the top, while the current board members are listed along the side. Thus, the matrix profile will highlight which talents and expertise are under-represented on the board. Based on the results of an evaluation of the profile and the company’s strategic objectives, the company can then determine its board member recruiting preferences and priorities.

Due to new regulatory provisions, boards should consider attributes that contribute to board diversity in addition to qualitative skills like accounting or marketing. The SEC adopted proxy disclosure rules in 2009 that require companies to describe how diversity plays as a factor in the board nomination process. These rules also require disclosure regarding how any board diversity policies are implemented and assessed. Therefore, if a board has developed recruiting strategies and measurable targets for achieving board diversity, it should be prepared to disclose this information in its proxy statement.

The SEC’s rules do not define the term ‘diversity’, and this gives companies discretion to decide whether diversity means differences in viewpoint, professional experience or education, or in areas such as race, gender and national origin. In light of these rules as well as studies that suggest a positive correlation between board diversity and company performance, diversity considerations should be incorporated into the nomination process.

A written director position description is another key element of the board nomination process. The position description clarifies board responsibilities, generally describes the company and sets forth the desired experience and background of potential board members.

After the board has evaluated the results of the matrix profile, the search firm will use it and the position description to arrange interviews, prepare preliminary evaluations, coordinate appropriate follow-up with potential nominees and submit final nominee recommendations to the board. The board (or a board committee) will further interview and then elect these nominees at its discretion and in accordance with the company’s corporate governance policies and practices.
 
Member orientation

The next significant step in developing a capable board involves providing new board members with the resources and information needed to perform effectively. The corporate secretary plans a board orientation program and creates a well-structured board manual. The board manual typically includes: the most recent proxy statement and annual report, corporate governance documents, a description of material business units, copies of minutes from the previous year, strategic plans, company history and financial analyst reports. The orientation program should be comprised of at least three sessions, with all directors invited to attend.

During the first orientation session, the new directors review fiduciary duties, the corporate governance environment and information related to the committees on which they will serve. As part of the second orientation, business unit leaders present reports describing the function, significant risks, priorities, recent successes and most substantial challenges of each unit. It is important for business unit leaders to communicate with board members at this session so board members can ask questions directly and begin to build relationships with executive management. To promote transparency and strengthen the independence of directors, board members should be informed that direct communications with the executive team going forward are welcome, preferably in conjunction with a courtesy notice sent to the CEO.

The third orientation session consists of a tour of major facilities, including call centers, manufacturing plants, service stations and subsidiary operations. The education and development of new and other board members should be supported continuously through attendance at outside seminars and conferences as well as by the delivery of internal updates regarding governance developments, company risks, business opportunities and changes in financial goal assumptions that are likely to affect the growth and value of the corporation.

Utilizing these board nomination and development techniques should produce a talented and educated board that is well prepared to direct the company in reaching or exceeding its goals regarding the creation of long-term shareholder value.