The Board: Be The Very Model of the Modern Board Director
A board is a board and all boards have dynamics, but what are the dynamic of yours? Directors need to actively learn and engage continuously, but where does the power lie and will it permit true debate? Does it concentrate on itself or on the good of the company? Does it understand the company strategies and challenges at hand?
The board, and a company, can be like a hive, busy with itself. Myopia can set in. The individual director has the perspective of the board room but loses vision and loses touch with the reality of shareholders, competitors, governments and courts.
How good is the board and how well does it work? Is it structurally sound and functionally processing? How often do the committees meet and how good are the reports which flow up? How good is the Audit Committee in their all important oversight?
Does the Board work at the right level? Does it give strategic guidance and mind the tone at the top? Or does it meddle at the microlevel in every day affairs? Is your Board alert to risk and contingencies and work prudently or does it chose a blind eye in the spirit of boosterism? Does it give too free a rein to management? Or does it crush management with dictats from behind a door closed to executive management?
Do the members of the board have an authentic voice? And do they get the information they need from management and from Compliance and the all important Audit Committee? Public or private, it all matters to you, now and in the future.
Board dysfunction is all too common, sometimes seeming the rule and not the exception. Dysfunction fogs perspective as directors grope around in competition for the top, or drifting in a stupor.
Is this a vanity board with directors chosen for appearance of expertise or the board chosen for detail in directors’ resumes? Where is the power on your board and in your company and how does it perform? Does it encourage discussion and expression of contrary opinion? Does it pretend debate and then rubber stamp its own positions with support of captive factions? Does it deal appropriately with inattendance and misconduct of its own or does it excuse these as offset by good intentions?
© Copyright 2007. 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.
Given boards’ new attention to the nature and management of risk, lawyers can be a valuable countervailing force for ‘prudence’ in the face of the prevailing forces for justification of risk, often any, all, and high risks (”have to take risks to make money’). The view that lawyers should not sit on boards is a comparatively recent one in my experience, initially driven from the perspective of the lawyer director concerned with being later seen as having rendered legal advice to the board and being conflicted out of work for paying legal clients by board service. The view became common wisdom rather suddenly post-Enron, as I recall.
It would be interesting to get deeper into this study and analyze what the researchers were actually tracking. For instance, did compensation rise as lawyers joined the board, or did companies seeing compensation rise amid SEC attention to this detail, decide that it would be prudent to add corporate and tax lawyers to the mix?
It can take some courage to serve on some boards as a lawyer, presumed ‘negative’ and ‘business-sense impaired’, and as a lawyer be conditioned to being the voice of ‘prudence’ and ‘complexity’: boards which have ‘drunk the kool-aid (TM)’ can make it very tough to soldier through the politics of not being perceived as [or not being marginalized falsely as] ‘negative’ or ‘disruptive’ or ‘dissenting’.
© 2013 S. Caroline Schroder. All Rights Reserved.
Thoughts on the Stakeholder Model for Boards
The stakeholder model further politicizes the board room. By natural extension, one would have to include customers, suppliers, creditors, regulators, and the community at the table. Each would want a say, a division of the pie, the defense of its own interests. This is not the purpose of the board. This skews debate, choices and performance. The only measure which has ever worked over time is heightening the liability of the board. That brings focus. More than transparency, more than abstract accountability, the board must understand what is going on in the company and its markets on a functional, strategic and ethical basis and take ownership of the problems and the solutions. The board must understand fiduciary duty and the consequences if it does not act for good of the whole.
© 2009 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.
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?