11 Sep. 2017 | Comments (0)

 As a veteran corporate director and professional turnaround manager who has earned a good living resolving corporate crises, I have long been puzzled as to why it appears that many boards do not seem to fully grasp the job they are there to do. Thus, it does not surprise me that the proxy advisors involved in The Conference Board’s recent roundtable that gave rise to Gary Larkin’s report “Just What is the Job of the Corporate Director?” also seemed not to be clear.

That does not mean, however, that we should not all be trying harder, first to define the role and then to execute it to the highest possible standard. And just because the proxy advisors may have too much power and not enough understanding does not mean their comments are not both important and relevant to the constant improvement of corporate governance.

First, the definition. Though Larkin notes that perception has changed as the shareholder mix has shifted from retail to institutional, the fundamental premise of the role is timeless. The board of directors is charged with protecting the health and longevity of the corporation. Management may come and go, but the board endures, even as its members shift. This concept is not hard to grasp if one looks at the corporation as a living being and adopts the notion that the directors are its parents.

Taking that definition to heart is an imperative for every director determined to up his or her game in the face of challenges from proxy advisors and, of course, the challenges faced while conducting business. When boards understand their job individually and as a group, it becomes manageable to address the concerns expressed in the roundtable and far beyond.

The March 2017 roundtable of proxy advisors repeated a concern that many have about the rate of board refreshment, higher director age, and predominance of white males on public company boards, or, in a delightful expression, boards are too “male, pale, and stale.” While perhaps understandable, as it is difficult when running a major company to risk what feels like valuable stability by adding to the board unfamiliar people who are harder to assess. Risking serious instability, however, by perpetuating a stagnant board is unforgivable.

There may be reasons that adding new faces at this moment is not a good idea. If so, state what they are in the proxy solicitation materials. If not, set forth the approach to refreshment – director performance, term limits, director age – that your board believes will best serve the health of the company. The report cited the GE approach, which lays out simple rules – annual performance evaluation by the lead director as well as retirement age of 75 and a 15-year tenure limit, both of which can be overridden by the board in its judgment. Not so hard, and a public company board unwilling to make such policies public and follow them deserves the criticism it gets.

 

The report discussed the many forces directors must be prepared to address, including increased regulatory pressures following accounting scandals and the financial crisis, geopolitical risks, IT governance and cybersecurity risks, shareholder activism, and beyond. To my mind, the key to grappling with these successfully is for each director to see the role as an active one, not passive, and for board leadership actively to cultivate the muscles of the board.

 

Directors are far from stupid, but they can be inordinately influenced by the need to stay within group communication norms to be heard. Being the sole director who questions preparedness on a particular topic risks personal credibility: such a person can easily be dismissed then and forever as an outlier. To be heard, one must work from within the patterns established by the group. Board leadership, therefore, must build an environment in which every voice can be heard and actively asking questions is the norm.

 

I have been in multiple boardrooms in which every word was choreographed by the CEO, and every minute of board time occupied by densely filled PowerPoint presentations. I have also been in too many situations in which discussion is cut short as a director has “to catch a plane.” Given the time, effort, and money that goes into organizing board meetings it strikes me as absurd not to allow enough time to complete the proceedings. Beyond that, the remainder of the board behaves as if that is acceptable and the meeting stops.

 

These are not the behaviors of directors that see themselves as actively responsible for the health of the company. The particular challenges will shift, but not the board’s ultimate responsibility to determine the needed course of action. Sometimes this will require providing extra support to management, sometimes it will require challenging management, and sometimes replacing management. But the focus must be relentless regarding protecting the company, and through doing that, its shareholders.

 

For much of my 25 plus years as a director, a director’s expressed desire to hear from shareholders has met with derision, as how could management trust mere directors to know the difference between shareable information, and that which cannot be shared? While it is an imperative that the company be seen to present one vision, it is a design flaw to think that directors should not hear from shareholders directly. Thus, it is major movement forward that management, directors, and shareholders can now finally speak – and on occasion directors and shareholders can speak – without management present.

 

This communication is incredibly valuable, and creates a further hazard against which to guard. The wishes and concerns of some shareholders are not the wishes and concerns of all shareholders, and boards need to keep in mind that distinction. The reason that shareholders need boards in the first place is that they cannot all sit at the table and consider all available information. So, they delegate business judgment to elected directors, who are to consider the best interests of the whole by tending to the health of the enterprise.

 

Several members of the roundtable commented on the kind of expertise needed on boards. I believe that there is a distinction between the expertise a board needs to call on, and the expertise it needs have seated in the boardroom. An expert on compensation matters may not have other expertise the company needs in a board member, and their particular expertise may not apply to the company’s situation. Boards generally do not want to create situations in which one member is perceived as the subject matter expert, as that limits their ability to seek broader or more targeted knowledge and creates a potential silo. Far better to determine specialized expertise needed for the company, engage that expertise, and leave it behind when no longer needed or outdated.

 

Finally, a word on crises and where was the board. Following the precept of Hyman Minsky, the economist who famously posited that stability breeds instability, we know that crises will occur. As we scurry to learn from the latest disaster, we know another unforeseen version is in the offing. The board’s role in protecting the company, its child, in a disaster, is unique. Directors must together rise to the occasion, protect or relieve management, and take the necessary actions to put the company back on course.

 

Codifying the types of crises and possible responses is one way to prepare. Taking care of the obvious is another. The battle-ready board needs a clear order of battle, or communications plan. It also needs ammunition, which in most cases means it needs to be sure the company has liquidity. Too many companies have disappeared after finding to their surprise that all their debt, for example, rolled over on one day, the worst possible day in their business cycle.

 

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.

 

  • About the Author: Deborah Midanek Bailey

    Deborah Midanek Bailey

    Founder and president at Solon Group Inc. and principal at Prevail Investments LLC, Deborah Midanek Bailey has also served as director, lead director or chairman as well as committee chair (audit, com…

    Full Bio | More from Deborah Midanek Bailey

     

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