The Board and Best Director Practices
How many of us have seen the private company, or even public company, slowly suffocate under the chummy leadership of the same old board, consensus perpetuated by familiarity, insularity, and, too often, fear not of change but of loss of personal control? How do does a board best change the guard? The best practice is to develop a standardized, even-handed approach to cycling directors off the board with practicable term limits, discreet personal polling for continued interest and time commitment, frank board self-evaluation of appropriateness of backgrounds for company and industry sector insight, and grace in acknowledging contributions before the board while privately indicating that the time has come.
The most graceless practice is to simply leave a director off a slate, with or without fanfare. The worst is to do so in order to eliminate directors who have simply disagreed with the dominant director or faction or to perpetuate only those directors who serve the social, financial, or political ambitions of members of the board, particularly while not removing directors for failure to be prepared, failure to attend, or for repeated advocacy unsound, unethical or even legally or financially indefensible positions. The worst practice of all is to not to remove a director who really should be removed, including for habitual failure to be prepared, subtle self dealing, or abuse of power or influence that may or does embroil the board or management or the company itself in imprudent activities or turmoil, including litigation.
© 2013 S. Caroline Schroder. All Rights Reserved.
Boards Do Get to Rely on Management
Critics of boards sometimes dig in deep, demanding that boards must “ensure that what they have been given is accurate and comprehensive and if they cannot do this, then they cannot serve on the Board.” That’s telling them, it is. But it’s wrong.
Taken literally, this would even be functionally impossible except in the smallest owner-managed business and should be clarified for U.S. law at least: Directors individually and boards as a whole do not have a duty to go around the public corporation investigating the details and accuracy of the information they are given by management; they have no obligation to go around management’s backs to cross-check or obtain the base information from sources independent of management. Boards do have a right to rely on management’s information, including financial information, whether that information comes from within the public corporation or from outside professionals hired by the public corporation. On the other hand, the board does need to probe further if the management reports are unclear or data susceptible to different interpretations; if the management information, reports, and analyses repeatedly prove to be incorrect, inadequate, or worse, over and over again, then the board has a duty to figure out why and do what they need to make sure that management is indeed giving them adequate and correct information, replacing management if they must. Clearly the board can’t rely on information they know to be wrong, but they do have a right to rely on management. Getting risk management down to the weed level and to understand interconnections and root issues with high accuracy is thus very important for the quality of the judgments made by the board.
© 2013 S. Caroline Schroder. All Rights Reserved.
Boards and Risk Committees
Whenever boards constitute a new category of committee, there is always anticipation that the new committee will encourage new expertise, focus, and relief for the rest of the board. However, what usually has resulted has been a natural proclivity to defer to the members of any specially constituted committee. These days, overwhelmed by the sheer amount of information and the imposition of so many new oversight mandates. Meanwhile, risk is so often inherently nebulous and risk management results so often wrong that other directors might likely detach altogether, only reinforcing board-wide myopia.
Risk committees would seem vulnerable to hyper-focus and not being able to think beyond familiarity, habit, and its own hot buttons. One dramatic failure derivable from the Beaumier/DeLoach list of risk committees would be that of the Duke board, would it not? Even if the Duke board made the correct decision in ousting Johnson in the wake of his Crystal River disaster, it failed spectacularly in failing to assess the risks of the ouster, reputational and otherwise. Moreover, many of the risk committees mentioned in the article focus on highly specific risk assemblages, highly specific to the company: HSE, technology, and innovation; those are important risks for each of the companies, but do not yield a complete picture of risk. While it continues to be perplexing that financial industry and other boards could claim that no one understood the CDO risks and the ‘mid-noughts’ boom turning into bust despite clear warnings from prominent prognosticators such as Roubini, Hubbard, and Stiglitz, it’s not clear that risk committees would do better than the rest of the board at thinking beyond familiarity and habit and risk hot buttons.
© 2013 S. Caroline Schroder. All Rights Reserved.
Get Your Board’s Ear to the Ground
Try as they will, boards are very often reactive, behind times in the course of company flow. Even as they look forward planning strategy and assessing risk, they are basing their analysis on assumptions drawn on the past. They do not have the pulse of current reality; they do not get quick word from the front lines. Counsel used to give them this, but for complex reasons counsel has been left trying to figure out what is happening on the front lines while all too many evade them. Overcome this problem. Get your board’s ear to the ground. Get employee representation on the board. Employees should have a role.
It is important to recognize that such a role need not and should not be that of one more stakeholder seeking to carve out its own share of the pie but of a critical participant in the function of the company seeking to contribute to guidance of strategy, compliance and risk assessment. Employees can be of tremendous importance in bringing strategy and optimism back to reality. Very often even the employees at the lowest level in the company will have very good insight into what is exactly wrong or right with the company and will have a strong sense of the company’s trend—into success or into disaster. That is not to say that someone from the mail room or the shop floor is ready to sit on the board, but the COO or a representative from, say, the front lines of Sales or the all watchful Human Resources or Regulatory Risk, can contribute hugely to the process. What is needed is someone who sees, hears and understands the realities of product and production, raw competition, regulatory intent, customer demand and oncoming technology. It is at the interfaces that companies can learn first of production and supply errors, spillage and shrinkage, new corners of competition, and customer satisfaction, unfilled need and disappointment.
Getting the Board to listen is more difficult. With heightened requirements of compliance, directors have come to see so much volume of information and have come to confer so often by different technologies that too many have come to view themselves as all knowing, all expert, and all masterful when the reality down in the trenches is very different. Directors will routinely say that they have done their homework, they have considered everything, when in reality they do not know what is missing from the data. Until it is too late, they do not want to hear what would upset the model, second guess the strategy or break down consensus. This is why anonymous tips are discounted as aberrations, whistleblowers are denigrated as cranks and prophets of losses are dismissed as wrong.
An employee voice as a persistent check on reality would be invaluable to the board. Not only do directors need to visit the front lines as ordinary people and see reality for themselves, they need to think of the whole as a community of interest not as an exclusive realm or a club which they run for mere growth of shareholder value. From where in the organization the employee representative would come should depend on the product, supply chain and markets. How much happier would HBOS and possibly the financial system be had they listened to Paul Moore?
© 2009 S. Caroline Schroder. All Rights Reserved.
Director Directions: The Basics
Woody Allen said that something like 90% of life is just showing up. Just showing up was always necessary but not sufficient for a board director. Now it can be fatal. Whether you sit on the board of a public or private company, you understand that the rules of oversight and compliance make the liability flow to YOU . You need context awareness: you need to know where you are personally in the world of your own board.
From the good board and healthy company to board dysfunction and company morass, is, in fact, a slippery slope and disturbing changes can happen quickly. Board service requires constant reorientation, as well as attention, as board, management, entity and the business environment change. Boards conduct their own director orientations, but let us orient you and re-orient you in this new landscape. Every new board director needs orientation – and then re-orientation again and again as the terrain and horizon change.
For you the threshold issues are:
In what terrain do you find yourself? How does your Board behave? Who are you? Let’s ask over and over: What do you watch for, what questions do you ask? What red flags do you watch for? How do you proceed? What information do you need? How good is your D & O insurance
and what did you agree to? Do you continue to think about indemnification, D & O, mutual defense agreements and all the other critical factors as business and your board and liability evolve.
And what do you do, say and write? Or not?
How do you modulate your voice so that you are heard for real? How do you get the information you need? When do you debate and —- when should you resign?
Every new director needs ongoing independent orientation, guidance as to how to fill the role responsibly and constructively for the shareholders, not the board, not management and not oneself.
© Copyright 2007. S. Caroline Schroder. All Rights Reserved.
Trouble On Board
We know what worries you in the night, you who are still willing to serve on boards: participation, privilege, common interest agreements, indemnification, and disinterest, the brave new world for boards. Confidentiality of the board room is no longer a given. Protections from personal liability cannot be assured. Board dysfunction did not end with Enron. HP is not the exception in board dysfunction now. Power struggles, personal agendas, imprudent behavior and worse pervade enough boards. How do you protect against it, spot it, deal with it, solve it? The truth may not even be clear until disaster strikes and challenges the depth of wisdom and balance of the board. And so it runs through your head in the night: “What if ?……”
You read enough in the financial press alone to fuel a restless night, without there being even a hint of warrants for your executives’ arrests: Boards spying, harassing dissidents, hanging the future on a pretext, like the Mob. It is reason enough to examine the real worth of your D & O and the quality of the organic structure and functional processes of your boards at depth–_and to look carefully before you decide to accept a nomination.
Is there trouble in the company, is there trouble on the board? Have the lawyers been talking about a memorandum from someone named McNulty? It would seem that it does not take much for there to be trouble on and for a board these days. Managements fabricate numbers, CEO’s lie, directors plot, directors leak, GC’s hire outside counsel on the basis of luxe marketing indulgence from law firms, board leadership and processes spin out of control.
A board is a board —-and boards as a class do indeed present the same merits and demerits over and over, company to company, very much mixed between good boards and bad boards, but now trouble has come and you are about to find out which your board is. What if there are more problems? What if today’s problems actually ran deeper than the board knew yesterday and what if the problems run even deeper tomorrow?
How many years have you been on this board and how many transactions have there been? How many executives have come before the board? How many other people have been in the room or on the conference call? Will all these half remembered people and incidents, and what you said, and what you jotted in the margins of reports come back to haunt you, second guessed by regulators, litigators, judges? Could you piece it all together by yourself? Who will defend?
There used to be a common interest agreement for your previous board. You don’t have one now. In case of dreaded litigation, there will be no checking who said what when to whom……….even now with this week’s events you lose the details of words and actions. You strain to remember the chronology of convoluted events which unfolded through a glass darkly.
You had taken to speaking in the board room, fulfilling the role of the active conscientious director. You spoke your mind. You had conversations with the GC. It always felt like private conversation. Now they tell you it was not. What did you say? What did you mean? What did they think you meant when you saw what information when? Could you piece it all together on your own?
And, good grief, who would pay? Tyco, Enron, Oracle, Worldcom: Millions of dollars not covered by D & O were paid out of the directors’ own wallets. Maybe those really aren’t the ordinary cases, but some of their directors were doctors or academics and not career business people at all. Might lightning strike you?