Thoughts for the Prospective Director
The year ahead promises to extend last year’s interest in risk oversight, a longtime dusty corner for most boards, while also extending that long-term trend, short-termism, and the chronic runner-up, innovation. Once proxy season is finally over, U.S. boards will get back down to the rest of their detail and back to the business of the business. Although a board’s role is properly oversight and review, boards have been worrying about the fundamental parameters of policy, strategy, and opportunity in recent years. The same dynamic matrix of state and federal laws that drives different rules for different categories of boards across different industry sectors nonetheless sparks new general trends in governance every few years. Prospective directors might prepare points on how they could bolster a board with their unique experience and perspective in one or more of these areas.
Boards are, of course, not guarantors of company performance, (however shrill various disgruntled stakeholders’ voices have become from time to time). Boards do have a right to rely on management…until, of course, they can’t. It is that “when” of when they can’t rely which is, of course, the (complicated) rub. Best considered in the context of specific situations, this rub is one of the many reasons a prospective director must inquire about D&O insurance before joining a board and continue to be aware of D&O long-term.
Given the activist pressures on boards in recent years, prospective directors are likely to be confused about the role they seek, and, at times, even whether they want to seek the role at all. The differing demands of state and federal laws on different boards can add a daunting uncertainty for a director. Moreover, although SOX or Dodd-Frank may not apply to a specific company, the laws, regulations and stock exchange rules wash through all boards. The board a prospective director sat on years ago may be little preparation for the board environment that director finds now. The right balance between engagement and intrusion was always difficult to achieve; fear always prompted boards either to detach or to intrude. That balance is at least as fuzzy now but subject to much more debate, scrutiny, and costs.
In recent years, boards have been overwhelmed with the sheer bulk of internal and external information and the new “expertise”. What do boards need to know and how much can they reasonably be expected to learn to make decisions? Where once the rationale behind choosing CEO’s and others of a certain level in business and the professions was that such directors would come to the board largely trained and know generally what each other knew, the rationales and prospective directors’ backgrounds have changed. Now business and the professions are highly specialized. As specific experts are imposed on boards, care must be taken to make sure that all directors on a board are making decisions based on equal knowledge and understanding of the industry.
Specialized expertise on the board is not enough. In order to comment on strategy, let alone risk, and to prevent crisis, the entire board must understand the business of its company. All directors are likely to be confused, even about comparatively minor decisions, if knowledge is not equal across the board. Board judgment and decisions being what they are in the evolution of a company, the effects of such confusion are cumulative. Disasters such those HP has experienced over the past once-improbable decade are reminders of the difficulty of understanding the business amidst a changing industry sector. A board must have very deep understanding if it is also to be prepared to step into the fundamental crisis where senior management itself must step aside.
Today’s prospective director thus will find a complicated board environment even if the director is not new to boards. The large public company requirements up the ante for all boards. Therefore, the prospective director must be prepared to accommodate the latest governance trends, all of which currently aspire to a certain perfection in board action and foresight and board expectations of senior management: Long the ideal, board and senior management must achieve stability but must also take risks; both board and senior management must be reliable but must also embody ambition and innovate out of stasis. Senior management compensation long deemed an efficient tool is now subject to minute scrutiny. The board must effect all while not taking over the strategy or the plan–or displacing senior management until such time as it must replace senior management.