Bridging Board Gaps
is a 60-page report produced by a group of directors, business leaders, academics and former government officials that attempts to address board governance challenges following the 2008-2009 financial crisis.
[caption id="attachment_1165" align="alignright" width="173" caption="Charles Elson, Chair of John L. Weinberg Center for Corporate Governance"]
Produced in the same vein as the National Association of Corporate Directors’ many Blue Ribbon task forces, the Study Group on Corporate Boards was chaired by Charles Elson, the chair of the John L. Weinberg Center for Corporate Governance at the University of Delaware; Glenn Hubbard, dean and professor of finance and economics at Columbia University’s Business School; and Frank Zarb, senior advisor of Hellman and Friedman and non-executive chair of Promontory Financial Group and former chair of the National Association of Securities Dealers. Elson also sits on The Conference Board Governance Center Advisory Board and sat on the Advisory Group for the Center's Task Force on Executive Compensation in 2009.
, which was sponsored by the Columbia Business School and the University of Delaware’s Alfred Lerner College of Business and Economics and funded with a grant from The Rockefeller Foundation, was designed to “show how boards can fulfill their potential in various critical areas.” The report goes on to state, “After discussing dozens of general governance topics, we identified seven core problems. Then we drew solutions from the laboratory of real life, based on our own experience.”
The seven areas and corresponding recommendations are:
- Purpose: Boards must understand their purpose – to ensure that the corporations they serve create sustainable long-term value for shareholders.
- Culture: As part of a “tone at the top,” boards must practice appropriate rules of engagement between management and the board – engagement that serves the long-term interests of the company and its shareholders.
- Leadership: The default for board structure should be the independent Chair. However, there are circumstances when a board may legitimately choose to join the roles of CEO and Chair. In such circumstances, we recommend a lead director empowered to call meetings and generally act as a first among equals.
- Information: Directors should periodically review the company’s information format and content to ensure that they adequately inform the board and its committees on all topics relevant to corporate growth and well-being.
- Advice: Directors should not hesitate to use third-party experts to advise the board or a board committee in important matters where they believe that outside advisors would improve the quality of the board’s decision.
- Debate: Chairs should foster an environment of discussion and debate, recognizing the benefits of disagreement and dissent, when necessary, in achieving better decisions.
- Self-renewal: Boards should institute a regular, formal process for board and director evaluation. This process should be legally encouraged and protected – and balanced with term limits based on company needs.
Charles Elson took some time out of his schedule last week to chat with me about the Bridging Board Gaps
report and the Study Group on Corporate Boards. Below is his Q&A session with me.
What is the story behind the formation of the group of professionals that was brought together to address governance failure and board best practices as part of the Bridging Board Gaps report?
It was Frank Zarb’s idea. He believed post Dodd-Frank, we needed to look at the board function. We thought bringing such a group together would be effective.
When did you put the group together?
It was prior to the passage of Dodd-Frank. We got the grant from the Rockefeller Foundation about a year and a half ago. The commission took about a year to get its findings.
What do you see as the major takeaways from the report?
There are four:
Why were the recommendations broken down into those seven areas?
- Dissent is appropriate.
- The default [for board structure] should be the split chair and CEO.
- The board, when it feels it is necessary, should utilize third party advisors when appropriate.
- There should be term limits in addition to director evaluations.
It [the recommendations] went around the table. We had about 10 or 15 recommendations to start with. Alexandra Lajoux [NACD chief knowledge officer and secretary for the Study Group] listened to the discussion and took notes. We took those and whittled them down to the seven areas of recommendations: purpose, culture, leadership, information, advice, debate and self-renewal.
How does the report differ from those that preceded it, such as the Blue Ribbon task forces of NACD?
It’s based on the 1996 NACD Blue Ribbon Commission on Director Professionalism report on board structure and function that among many things said boards should consider designating a nonexecutive chair or other independent board leader. [The report further stated that if they do not make such a designation, they should designate, regardless of title, independent members to lead the board in its most critical functions.] The new report brought up points made in that report. We felt that since that report, there is a need to recognize the gaps between governance ideals and governance realities. And now we need to bridge those gaps.
What kind of marketing has been done to get the word out about the task force report and what else is planned?
We sent it around and had interviews like this one. It’s a voluntary group. There’s no legal requirement for companies to use the report’s recommendations. We hope boards will use it, though. It’s getting into the “water supply” that will make it work. We hope the judiciary, investors, and regulators pick it up and use it [when making a decision].
What went into choosing the members of the task force?
Well, these are people the three of us [including Frank Zarb, and Glenn Hubbard, dean and finance and economics professor at Columbia University’s Business School] knew. (That group of 23 includes several prestigious directors and chairs, such as Richard Beattie, Richard Daly and Olivia Kirtley; former Delaware court justices William Allen and E. Norman Veasey; former SEC Chair Arthur Levitt; former U.S. Treasury Secretary Paul O’Neill; and heads of the NACD – Kenneth Daly – and the Society of Corporate Secretaries and Governance Professionals – President and CEO Kenneth Bertsch and Chair Paul Washington.)
Deborah Wright, a member of the Study Group and CEO of Carver Bancorp, is quoted in the report, “Many directors I talk to about board service today believe that expectations of board members are increasingly inconsistent with a model based on part-time service. At some point, the gap must be examined and addressed.” What do you think should be done?
Directors are always going to be part time. If not, they would be managers. It’s a tough balance between oversight and management. Anyway, there has to be good debate on boards, use of third party advisors and term limits.
While Sarbanes-Oxley dealt with financial statement fraud and accounting manipulation and Dodd-Frank deals with fiscal crisis and systemic risk, what do you think the next wave of federal regulations will address?
I believe regulation has made the situation worse. Federal regulation makes the focus more on compliance and less on engagement and oversight.
Of the many reports that are out there on corporate governance, there is one that should be included in your “must read” pile this summer.