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Strong board is vital
Thursday, February 12, 2004
Birmingham Business Journal
Michael Baker
Benjamin Franklin once said, "We must all hang together, or assuredly we shall all hang separately."
A couple centuries, and several major corporate scandals later, this quote rings poignantly true. Never has it been more crucial for companies to build solid teams in order to build successful business ventures.
The board of directors, management and the CEO make up the team that is responsible for the success of a company. In the wake of the recent corporate scandals and the resulting Sarbanes-Oxley Act, corporate governance continues to occupy the headlines.
But what exactly is corporate governance? There are many definitions, but ultimately "corporate governance" is accountability and responsibility. Whether a company is large, small, public, private or nonprofit, strong accountability translates into good corporate governance.
The question facing today's public and private companies is: "What constitutes good corporate governance, and what should we be doing?" The answer lies with the team and, foremost, with the company's board of directors. The board may not be part of the day-to-day management team that runs the company, but it is the body that accepts the overall responsibility for the company.
Board of directors
A strong board contributes to the success of the company in the control it exerts and in value enhancement. The characteristics of a strong board are:
Independent:
Forget about friends or relatives. It is important that directors be outside the influence of the company and willing to challenge management. Independence in directors allows each member to see the big picture, enabling him or her to help envision the future of the company.
Experience:
Board members who have strengths in the areas that are important to the company are the most valuable. Experienced directors can provide invaluable guidance and, many times, even act more similar to consultants.
Separate chairman and CEO positions:
Having a chairperson of the board of directors that is separate from the CEO is important to keep personal and/or professional interests out of the equation. The chairperson needs to be completely unbiased and only concerned with what is best for the company.
An ideal board works closely with the CEO of the company and gives him or her support and direction. Equally important is a board that challenges the CEO to ensure that the company is being led in accordance with its strategic plan. Many boards are puppets and go along with whatever the CEO and management want, defeating the purpose of having a board in the first place. The CEO's job is to drive the company. The board's job is to guide the CEO.
Attracting directors
It is difficult to entice people to serve on a board in this volatile environment of scandal and prison sentences. Directors are nervous about the legal risks associated with board service and the personal financial implications. A frequent worry of board members is whether they might be sued and be held personally liable in the event of a negative judicial decision against an organization they oversee.
Here are a few examples of changes a company can initiate to make board service more attractive to potential candidates:
Directors and officers liability insurance (D&O):
The larger the organization and the wealthier the board members, the greater need for D&O.
The insurance is expensive for smaller companies and most plans provide only limited coverage. Companies should assess the cost vs. the benefit of the insurance. It also is a good idea to have the insurance proposal reviewed by a professional other than the person selling the insurance.
Run a tight ship:
The responsibility of today's boards has increased. Information, whether good or bad, is the key to a strong board.
The board should be fully informed of all issues by the management. Procedures need to be in place to make reports and documents available prior to board meetings. Running a tight ship will calm a potential director's fear of future legal problems.
Open house:
Invite a prospective director to a board meeting. Conducting a well-organized, productive meeting will shape how a candidate views your management.
Independent committees:
Public companies are required to have independent audit and compensation committees. Private companies are following their lead. The committees address sensitive issues of financial oversight.
Prospective directors will find comfort in knowing the committees are independent of company management.
The right fit
As important as it is to attract top-notch board members, it is even more important that a company choose a director who is the best fit for the organization. A company's board of directors is its soul and conscience; therefore, it must be comprised of highly ethical, forward-thinking members.
Here are some questions companies should have the answers to before selecting board members:
- How would you rate their willingness to serve?
- Time commitment?
- What additional responsibilities will your board members have?
- Do you need them to assist in promoting your company or identifying potential sources of capital?
- Are there any potential conflicts of interest with candidates?
- What expertise are you looking for in board members?
- Do they possess the qualifications required?
- Will the board be compensated for meetings or paid a director's fee?
Here are some of the benefits as well as some of the risks and challenges associated with directorship - both from the director's and company's perspectives:
Director:
Positives include compensation, new contacts, prestige and esteem, association with success and fun. Negatives include personal liability, reputation vulnerability, personal commitment required (time & money), shareholder battles and disputes, and unresponsive management.
Company:
Positives include enhanced credibility, outside expertise, connections and contacts, corporate governance, PR value, fiscal responsibility and mentors for management.
Negatives include indemnification costs, control issues, conflicts of interest, quality of candidates, directors becoming too involved and a lengthier decision-making process.
'Should I be a director?'
If asked to be director of a company, one must weigh the pros and cons very carefully. Start by asking yourself these questions:
- Why are you being nominated?
- Reputation?
- Skills?
- Contacts?
- What potential risks and liabilities would you assume?
- To what extent can a company indemnify its directors against claims?
- What is your reward?
- What are the dynamics of the board? Will I actively be involved?
- Meeting and interacting with board members will give you an idea of what to expect, and you may want to consider a trial period before making a final decision.
Bottom line
A weak board can be a waste of everyone's time and potentially pose financial and personal risks to its members. However, a strong board will provide invaluable assistance to management and instill confidence in the shareholders.
Board members will find service on a strong board to be a rewarding, challenging and fun experience.
Some people view corporate governance as more rules and regulations while others see it as an opportunity to build a better business. Implementing strong governance at the board level will improve corporate effectiveness and benefit everyone involved.
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