Board Development: A Dynamic Process To Enhance Board Performance

Monday, April 5, 2010 - 00:00

Recent events have placed increased demands on the boards of public companies, and investors, regulators and lawmakers are calling on boards to improve their performance in key areas such as strategy, oversight of risk management, succession planning and the nomination process. Rather than seeking to address each of the current challenges in isolation, leading public company boards - and company officers who support public company boards - seek to make enhancements that best address the unique priorities and circumstances of a particular board and company.

Effective boards use a holistic approach, by choosing enhancements that are synergistic and will produce the greatest benefits to overall board processes. Through such a holistic approach to board development, a board will not only position itself to respond to today's challenges, but will be well prepared for future challenges. This article will consider important board processes, not only for the sake of improving each of these processes, but also for enhancing the board's performance in all its endeavors.

Board Needs; Director Qualifications

There has been increased focus on the qualification of directors to serve on boards, with the SEC requiring companies to describe the experience and qualifications of all nominees and incumbents, as well as their skills and attributes. While there may be some tendency to focus on the biographies of individual directors, a board should begin with an assessment of its needs and skills, in the aggregate. Formally or informally, many boards develop a "matrix" or map of skills, through which they identify the most important capabilities that will contribute to the performance of the company. As the board proceeds to describe the qualifications of its members, the board can get a better perspective on where it is strong and any areas that require improvement. Just as a sports team prepares for the draft by prioritizing its needs at various positions, an effective board will always have a clear vision of the skills that its next draft choice should bring to the team.

Search and Nomination Process

Having reached consensus on the skills that the board will seek in adding members, the board will face the challenge of finding the right persons to fill these needs. While the search for the right new directors typically begins with current board members and senior officers discussing their own business contacts, many boards expand their reach through the use of a professional search firm.

The best professional advisors take time to understand the company, its industry, its strategy, and the culture and composition of the board, as well as the qualifications that the board is seeking in potential candidates. It is critical to have a detailed, prioritized description of the various qualifications and characteristics sought by the board before the board considers particular candidates. This description of candidate qualifications may also be useful in responding to questions as to how or why a nominee was selected.

As the nominating committee and board begin to meet with candidates, and as consensus builds around a candidate, the focus of the recruiting process usually shifts from a focus on objective criteria to a focus on intangible matters, such as chemistry and cultural fit. Since boards function as a collective body, one-on-one time with the chairman, lead director and other directors will be particularly valuable as directors assess how a prospective director will contribute to the board's work.

The board must also view the process from the candidate's perspective and be prepared to supply information for purposes of the prospective candidate's due diligence. Such information would typically describe the most difficult challenges the company and board are facing, as well as the company's approach to insurance coverage and protecting its directors.

Orientation Of New Directors

A comprehensive orientation process will provide new directors with a solid framework to begin adding value to board deliberations and is comprised of three parts - information, social integration and follow-up.

First, the new director will need comprehensive information about the company, its industry and its shareholder base. In addition to basic information about the company, new directors will need to understand the company's strengths/weaknesses compared to its competitors, the key drivers of financial performance, the structure of executive compensation programs, and the process for succession planning. Directors should also be briefed on applicable fiduciary standards and any unusual state law provisions. The orientation process for any new director should be customized to take into account the particular areas in which the director is expected to be active, as well as the director's own background.

Integrating the new director into the social fiber of the board is a critical aspect of the orientation process. Informal interactions will be important in building social bonds and conveying board culture and expectations. Finally, new directors will want to meet with the executive leadership team and those who support the board and its committees.

The last stage of orientation for the new director will be follow-up. The new director should meet with the chairman or lead director and relevant committee chairs several times over the first year in order to have an opportunity for feedback and questions. During this period, it will be important for the corporate secretary to ask if additional orientation would be helpful.

Ongoing Education Of The Board

In recent years, boards have moved from more formal, episodic educational sessions (for example, annual sessions on internal controls or strategy), to an approach under which the board receives briefings about critical issues on an ongoing basis. Rather than board education following a set calendar, boards now seek to make progress on their most significant issues at every meeting.

An effective educational program will include the right mix of presentations by company employees and outside experts, so that directors will benefit from a variety of perspectives on key matters. Directors may also benefit from peer-to-peer discussions with directors from other companies, at roundtable sessions or directors' institutes.

When directors participate in programs outside the company, it is helpful for the company's general counsel or secretary to get a sense of what the directors heard during the session. Management will occasionally join the director at these programs; in other instances, management may be able to review written materials and have conversations with presenters. Such interactions will maximize the value of what one director has learned to other directors and those who support the board.

Keeping the Board Informed

Given the accelerated pace of the business world and new ways of communicating, the process of keeping directors informed has moved from the periodic distribution of "board packages" to ongoing dialog between management and directors. Many board leaders report that they have multiple conversations with senior management between meetings, and management often provides updates on current issues through informal board briefings.

Those who support the board have become proactive in distributing relevant information between board meetings. At a minimum, material developments (both positive and negative) should be promptly communicated, if possible, before there are media reports of these developments. In addition, boards often appreciate receiving regular batches of key analyst reports and media reports about the company.

Access To Management

A new trend is emerging with respect to the board's access to and discussions with management, as directors are seeking ongoing contact with an increasing number of members of management, at a variety of levels. Directors may want access to several levels of the company's organizational chart in certain critical areas (such as strategic development or financial reporting). Effective access to the right members of management creates a win-win-win situation for the company as it provides the board with valuable information, promotes a sense of contribution among employees, and supports the board's succession planning process.

Appropriate "gate-keeping" controls will improve the process for both directors and management. For example, if one director schedules an in-depth session with the controller, and asks for a breakdown of profits that is different from what is regularly reported at board meetings (for example, organized by different geographic areas or different product groupings), it is helpful to send the data to all directors, so that all directors have access to the same information. Having the corporate secretary educate management as to the information that is already available to the board will also make the interaction more effective. The "gatekeeper" function, however, should not get in the way of directors having the ability to assess potential leaders in one-on-one and informal settings.

Board Evaluations

There are a number of effective formats and processes for board evaluations, including evaluating the board as a whole or individual directors; using an outside facilitator, one of the board members or a member of management to conduct the process; and using a written questionnaire, one-on-one interviews or a group discussion. The most effective process may change from year-to-year for a particular board, depending on whether it is seeking comprehensive information (for example, after several new directors have joined the board) or merely a "bring down" of the prior year's process. Accordingly, it is critical that the governance committee take time to evaluate the best format and process as it plans the evaluation process each year.

In order to maximize the benefits of the evaluation process, there must be time for the board, as a whole, to digest the results and then agree on follow-up steps or changes that are most likely to enhance board effectiveness. It is also critical for the evaluation process to feed into the nomination process, as the output of an effective evaluation process provides a map of the skills needed by a board at a given time, as well as suggestions for the board to improve its operations. Finally, the process provides an opportunity for feedback from board leadership to a director who might contribute more by improving his/her attendance or participation style.

Director Succession Planning

Recently, there has been intense focus on succession planning for management, however, succession planning for directors and board and committee leadership is equally important. In addition to considering the board's current needs, the board must ask itself how it will be composed in the next five or ten years, which should be driven by expectations as to what the company will look like in that timeframe.

Board succession planning should also cover planning for emergencies. This includes depth of critical skills and attributes so that the board continues to function optimally even when a board leader leaves the board unexpectedly, which can occur for a variety of reasons ranging from political appointments to death.

Part of effective board evaluation and succession planning processes involves helping a director realize when it might be time to leave the board. The reasons vary, from a lack of interest or time, to physical incapacity or a controversy that impairs the director's ability to add value at a given time. For some boards, a mandatory retirement age or a term limit has been a workable process, while other boards have found these led to the loss of a particular skill or attribute at a time that was not optimal for the board.

Supporting Board Development

Corporate secretaries, governance officers, in-house and outside counsel, financial advisors and investor relations managers can greatly contribute to the development and operations of the board. They may add the most value when they are able to view the board from some distance, which can help the board with its own sense of perspective and self-awareness. Rather than being passive and responding to requests from the board, those individuals who support the board should be proactive and regularly contribute to better board operations. Over time, trusted personnel may add the most value to the board when they effectively challenge existing processes and bring fresh approaches to the board.

Effective support will facilitate the board being well-informed and having a "360-degree" vision, particularly in bringing visibility to emerging issues. Those who support the board must stay up-to-date on matters such as shareholder priorities and emerging issues among institutional investors; SEC staff interpretations as well as rule changes; the views of RiskMetrics, Glass Lewis, the Corporate Library, Governance Metrics, and the governance arms at S&P and Moody's; and the practices and trends of other companies in their industry. Key inputs into these matters will include benchmarking with peers and outside experts, conversations with representatives of institutional investors, and staying current through educational programs and periodicals that focus on board matters.

Jeffrey M. Stein is a Partner at King & Spalding LLP, practicing in the areas of corporate governance and finance. Susan E. Wolf was most recently VP-Governance, Corporate Secretary & Associate General Counsel at Schering-Plough and is currently consulting with public companies on a variety of governance and disclosure projects.

Please email the authors at jstein@kslaw.com or susan.ellen.wolf@verizon.net with questions about this article.