Category Archives: Board Level

Here you find our thoughts on reaching the top: the senior leadership team, or the board of directors, and what it means for your career.

Directorship: Handling the Risks in Serving

I continue to smile at the unbridled enthusiasm of professionals who jump to  say “Yes, I want to do that” when engaged in a conversation about board service.  It’s actually quite encouraging, considering the  personal, professional, financial, and reputational liabilities these people may have to put on the line.  Although the topic has been bantered around by current and prospective directors, there is a certain lack of depth in discussions about the exposures from joining a board that I find simply fascinating. Some directors have told me that, with the combination of the law of averages, consistently favorable Delaware Chancery rulings, and existing company indemnification policies and Directors’ & Officer’s Liability Insurance, a director has virtually all the protection anyone needs these days.  Generally, these do work in one’s favor,  except when they don’t.  In fact, understanding your potential risks/liabilities, whether it be  litigation, bankruptcy, permanent damage to your reputation, even criminal prosecution, and the  full extent of your coverage should be more important to you than the nuances of your board compensation.  Fortunately, with more issues arising to impact the health and well being of companies (i.e. cyber infiltration, social media, new sustainability issues, to name a few), more directors now appear to be focusing on the gap. But not enough.

Consider these cases:

A director of a foreign company board retired from his post.  Within two years of leaving, the company became embroiled in a heated legal battle in which the all the board members were also named.  The departed director signed in relief stating “I’m glad this is not my issue anymore.”  A few short weeks pass before he received notice he was also named in the suit.  What’s worse, he also learned he was liable for his own costs of representation. Concerned, he called the GC to ask why this was an issue for him and why he was being invoiced for legal services.  As it turned out, the annual D&O no longer covered him, leaving him fully exposed upon his retirement  Four years into the battle he was still trying to get coverage on the company’s policy – after paying out several hundred thousand dollars of his own money.

Another intelligent director we know served on a large public company board that has been the front and center of several cases.  When the first exposure hit the press, she counted back the date from her retirement.  She exhaled in relief to learn any personal responsibility she may have had (and yes, she checked her coverage years after departing to confirm that her protection was still in force), was well past the statute requirements.  Still another director we know shared that she has been named in litigation cases at least 17 times.

One director we know of has also suffered permanent reputational risk.  He has worked hard to recoup from the stigma of being on a board when the company collapsed due to fraud, He has served since on not-for-profit boards and donated large amounts of time and funds to good causes, as well as other types of “give backs”.  Still, the community and industry holds him, and all other board and senior management fully responsible, to this day.  When his name comes up in the course of conversation, board members bluntly shy away.

Another director on a public company board,  served for successfully for years with his fellow board members until faced with an unexpected legal challenge.  Addressing the issue, the directors went to work and brought in their own counsel.  Shortly after starting on the case they reviewed the D&O coverage and learned that existing policies did not cover the entire extent of their legal costs.  They eventually found out (and still bitterly complain) that they were personally out of pocket nearly $800,000.

The risks associated with board service will always be present (in addition to the rewards), and, in general you should look at these “risks” as typically having two components: likelihood (of occurrence), and impact (usually monetary).   In dealing with both aspects you (first) want to understand the risks you might be/are facing; (second) work to reduce their likelihood of occurrence through certain actions (control those risks); and (third) get help from others to soften the impact (insure yourself against the impact should they occur).

Understand your risks:

You need to assume that, as a board member of a public company (and many private ones) that the company’s risks are now YOUR risks too.  Any failure, and those affected will turn their eyes right to you and maybe your bank account.  Before, during, and after joining a board, understand the environment in which you’re working.  Do you have a pretty sound grasp of the company’s business, industry, and general operational/industry exposure? Does the company have large investors, or many small investors who could be easily hurt by a misstep? How volatile is the industry and the company’s business? How well do you know your board members (before, during, and after service)?    Is the top management team up to snuff?  Where does management need to be shored up or supported?  Are you able to clearly follow all discussions among your peers, and presentations given by management and outside consultants?  If so, great.  If not, you’d better be a quick learner.

Control risks (than you can) through your own actions:

To reduce the likelihood of getting into a lawsuit, always try to do the right thing as a director.

Your role as a director should be oversight, not management. If you find that you are giving specific directives in how to conduct the company’s affairs, something is wrong. 

Get the best information you can (inside and outside of management, as a reality check) so you can grasp the risks and upsides in the business. Use consultants as you need, to understand complex business issues, proposals, innovations, and opportunities, among other things.  You should be comfortable discussing all points during board meetings.

Understand those around you so that you can have a positive and productive influence:

Don’t worry as to whether management likes you.  Ask them the tough questions, have a healthy level of  skepticism (without being abusive or negative — but don’t wimp out either). Your trust, and theirs is to be earned and built upon.

Does management have the right programs in place to deal with risks? Are there strong internal systems and controls? Has management identified compliance issues and risks such as, money laundering, bribery, data protection, security, crisis management, record retention, etc.

Does the board have the right programs in place? Does the board have a good system in place for addressing complaints – example:  if there are material weaknesses in the company’s financial structure, is there a system in place for  employees, vendors, or others report them directly to the Audit Committee?   How trusted is our whistle-blower program? Are whistle blowers protecting with anonymity from retaliation?

How well do you know those around you? What’s the CEO’s risk appetite? Do you have detailed understanding of each of the senior management team’s capabilities? How are they executing board directives? Are each of your fellow directors well-qualified?  Do they display integrity, good judgment, and are they engaged at all meetings? Do they welcome and openly engage in periodic self-assessment and evaluation?

Insure the risks you can’t anticipate.

Reducing the likelihood of things going wrong, doesn’t mean something won’t happen.  Board work and responsibilities are growing ever more intricate, in line with the increased complexity of running any business these days. What’s key is how to protect yourself against those who want to punish you for not doing your job the way they think it should have been done. Right or wrong can often become a matter of great, lengthy, and expensive legal debate.

You need to fully understand  your coverage and review it annually – at least. It’s important to understand what layers of protection have been put in place for you as a director of the company, so that you can focus your attention on doing what’s right for the company and stakeholders.  You should understand the company’s indemnification policy for directors, when it was last reviewed and updated, and by whom.  You need to understand the D&O policies in place, (in particular, Side A coverage).  For example: what are the individual and aggregate limits, how exclusions work, layering, whether advance payments are available for legal costs (lawyers like to get paid timely if you want to continue to be defended), and the effects of settlements on additional coverage,  just to name a few.

You also need to know how long you are covered for after service.  New regulations can extend your liabilities five years out.  Many companies don’t cover directors once they leave.  If necessary, supplemental individual policies should be discussed and considered.  In any case, getting legal and financial advice should always be sought, unless you’re already an expert in this area. Another tactic to consider with your advisors is the wisdom and prudence of sheltering your personal assets.  As the saying goes: “hey, you never know.”

Many directors face legal liabilities during and after their board service.  If it’s any comfort, the law of averages and your odds are still pretty good: most directors don’t get sued, and for those who do, most times their defenses prevail.   In closing, my best wishes and, as the saying goes: ” may the odds be ever in your favor.”

The “Digital Director” Dilemma

According to Darwin’s Origin of Species, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.’ (Megginson, ‘Lessons from Europe for American Business’)

The “Digital Director” Dilemma

It is an obvious statement that much has changed in the boardrooms of corporations in the past few years.  What’s not so obvious is that such changes sometimes lag far behind what is happening in business – be they large, small, public, private, or not-for-profit companies – as a result of rapidly evolving technology.  Along with the ubiquitous dependence virtually all organizations now have on technology, be it hardware, software, cloudware, netware, etc., has come an enormous uptick in unforeseen risks and vulnerabilities.

For years now, as it has been filtering upwards through organizations (from those at operations levels most immersed in the technology fields) to the C-Suite, most levels of management either gained or are gaining some grasp on what their businesses face or are about to confront.  But that understanding, more often, dies when it hits the boardroom.  While some astute portions of the director populace get it, and many are beginning to understand that what they don’t know can hurt them, there are directors who can’t  respond to a simple email.  Some still have their right-hand admins print out their emails so they can read them and decide how to respond through those same admins.  How easy, do you think, it is for them to grasp the concept of “social media” and its implications. And, if you read the quote at the top of this blog, how long can these directors be expected to last, let alone succeed?

So now, as an answer to this problem, many are bandying about a special kind of director: “Digital Director.” So what, exactly,  is a Digital Director ( DD)? Ideally, this is a candidate with all the traits that make for a good director plus having strong knowledge of the current state of technology (i.e. cloud computing, social media impacts, etc) and risks (i.e., cyberattacks, cybercrime, intellectual property theft, etc.).  This is the new “Uber-Director” the one who will save the board from ignorance and irrelevancy.  Of course, this raises some questions: Is the DD readily available? What other impacts can the DD have on the Board? and Is (s)he really needed? What’s their impact on strategy? etc.  These are just a few questions to start the ball rolling further along.

Next: Is the DD readily available?

How easy is it to find the DD? The answer is: not so easy. Think about the populace from which we prefer to draw our directors — the 50+ year old business veterans: those, whose long and varied experiences have grown and honed a “big picture” view of things.  What needs to be considered is that these professionals did not grow up comfortably immersed in the technologies of today (like almost any 20+ business newbie). The digital age sort of seeped up around them.  Some few embraced it early on, some are trying to catch up or not look stupid, others are lost and clinging to the rocks of what they knew early on in their careers.

Fact is, there just aren’t many directors with strong “current” knowledge of the digital world, let alone those the additional needed skills and experience to have impact strategies  guide businesses.  Which means, that, if everybody wants them, there will soon be a whole crop of “over-boarded” directors (good, bad, or indifferent).  Which, in turn, will soon mean that your particular board cannot expect much from them. So what is the alternative? Settle for less? Recruit new board members steeped in technology but light on strategic operational business and governance experience?  While this may be the expedient solution, the tactic in and of itself leads to other board issues.

What impacts can the “new” DD have on the Board?

First off, the board gains asymmetries that will reduce the entire board’s effectiveness in discussions and decision-making.  A new knowledge expert, with no close seconds, will often go unchallenged by peers in discussions and decisions on technologies for the firm. At the same time, this new DD has to catch up on all the other skills to be able to contribute in any other discussions. That lost multiperspectivity can lead to group-think and other board dysfunctions.

In addition, having a knowledge expert allows those so inclined to “skate” and not advance their game. One can hope that the DD will educate and advise all the other board members, but this is a very rare expectation sought in new recruits.

So, coming from the first two the last question (at least for now) is…

Do boards really need a Digital Director?

The answer is: it depends.  It depends on what knowledge the board members collectively have and each individual’s base understanding of technology as a tool and how it does/will impact the firm.  It depends on the potential for damage to the firm from the board’s not understanding its technology risks.  It depends on how quickly a new Digital Director can be educated and integrated as a full contributor into the board.  And lastly, it depends on how quickly and firmly all other directors bring up their technology “literacy” so that vigorous, useful discussions and effective decisions can continue to be made to protect the firm and its stakeholders.

Board Evaluations

Board Evaluations

According to a 2011 PWC 2011 study, 94% of public companies regularly conduct an evaluation of their board. Since the NYSE requires all its listed companies to conduct some form of board evaluation (NASDAQ does not, but recommends it as good governance) this number is not a surprise. Unfortunately, both listing agencies are silent as to what an evaluation should be, what form it should take, or how one should be conducted. Small wonder therefore, that an “evaluation” can take almost any form, from an informal discussion about how the group is doing, through to a full, detailed, peer-to-peer or 360 assessment. For some directors, such “under-the-kimono” looks can be quite uncomfortable.

I meet with many directors, and have had numerous one-on-one conversations. Always implicit is the expectation of confidentiality about their experiences and expectations. The topic of their peers’ performance in the boardroom is often brought up in discussion.  It’s interesting to note what an individual director thinks about how productive self-evaluations are, or how much the needle has actually moved (and what’s involved in developing and conducting a productive evaluation).

I’ve seen and heard all sorts of approaches.  Many board members put on a brave face, go through the motions or adopt a “let’s get it over with ” check-off-the-box approach. Those who do it regularly conduct it the same way over and over again. Occasionally one finds some conducting reviews with moderate substance or thought. Some few bring solid thought to the questions posed, follow up on findings, and use the results to ignite positive advances.

My impression is that most boards consider evaluations uncomfortable and a waste of time.  It still amazes me when others, to minimize their “pain,” prefer to use the same approach – and questions – year after year. Unfortunately, as the saying goes: if you always do what you’ve always done, you’ll always get what you’ve always gotten. That, of course, may get you a pass while the winds are blowing in your favor.

Why does this go on?  I suppose it comes down to how much pain is perceived or expected from the effort, and how much personal risks stack up against anticipated rewards. Few directors can argue against being better engaged and more productive in their roles and a greater asset to the CEO, management, and stakeholders.  Frankly, wanting to do almost nothing with regards to evaluations, while creating the perception of actually doing something (some call it “pure theater”), is the preferred option.  These days, with a myriad of complex issues around strategy, technology, financial oversight, risk, compensation, compliance and the potential liability associated with a misstep, how many board members are going to publicly admit what they don’t do or know?

Granted, there are many board members who do understand the value of the effort and are more than willing to go through with it for the right reasons.  Many will use the process solely to solve a particular problem, such as removing a difficult board member.  And, then there are those who see and glibly vocalize about the value of a substantive evaluation, but will only reluctantly get involved with the process, all the while trying to avoid focusing on outcomes, root causes, and improvements.  My impression is that this last group is the largest.

So, how can we work to overcome that mindset, and make the world of board governance at least a little better? Perhaps more detailed listing requirements?  Hasn’t worked well so far, as there is no push for further clarification of what a “board evaluation” really is.  Directors’ and governance organizations and associations?  Again, no. Boards see those groups being more motivated by wanted to sell more services or to push for conformity (one-size still does not fit all).  Education on evaluations and their benefits is better than nothing, but does it really drive improving individual and board group performance?

Based on many recent governance “evolutions,” the best hope is pressure from shareholders for reporting transparency.  Reluctant boards and directors will take notice when shareholders start demanding basic information on board performance from the directors they elect, and pressing for accountability. But again, at what price?  When the risks associated with doing the bare minimum grows greater than the pain of the effort to actually improve, evaluations will take on a more universal importance.   Shareholders (led of course, by institutional and other large investors) need to ask more pointed questions, such as:

  • What evaluation method did you use this year?
  • What methods changed from last year?
  • Did you use outside assistance?
  • How were results measured?

And, most importantly:

  • What governance and performance improvements did you put in place since the last evaluation?

Happily, as I alluded to earlier, some forward-thinking boards are already doing this.  However, until shareholders and investors see these answers, in proxies and corporate websites’ governance sections, the question of the board performance evaluation will remain far down on the agendas of too many corporate boards.

Executive pay: Be careful what you wish for

One can sense change in the air as sentiments on CEO and executive compensation becomes an even bigger front-and-center issue during proxy season this year.  Global economic uncertainty certainly has not helped perceptions of some high-profile pay packages.  Pay for performance?  “What performance?” many are asking these days, especially pension funds and other groups where average-wage workers predominate.

In the US, the Dodd-Frank Act required boards to provide greater transparency, and by giving shareholders a nonbinding say-on-pay vote, offered boards a more precise touchstone as to what shareholders are thinking.  Prior to this year, smaller companies (with a public float of less than $75 million) were exempt from adhering to separate shareholder advisory votes.  With this gone, smaller companies will now come under scrutiny, adding to the concerns of those directors.  Simple, direct, plain language on how executives and directors are compensated will also increase scrutiny because, after all, disclosure is exposure.

Like the US, the EU is also addressing issues of accountability vs performance bonus payouts.  Just last week, the European Parliament and EU States reached an initial agreement that would restrict bank executive bonuses to a “fixed” salary with flexible pay (a.k.a. bonus) fixed to no more than twice their fixed salary — and only with shareholder approval.  The rationale behind this proposal is to increase the financial ‘cushion’ for institutions and to discourage the high-risk behaviors of the past.  Regional and global economies have had their challenges, and individual household financial pressures have increased over the years.  Watching how companies are paying their leaders, especially in the financial community, has caused unrest among many labor and investment groups.  We’ve seen increasing resistance to the remuneration of our financial and business leaders, giving EU leaders new strength in approving new rulings to restrict banker bonuses at twice their base salary.

As a number of large companies had moved their corporate headquarters to Switzerland to gain better tax advantages, such moves may turn out to have been in vain.   As of March 1, 2013, the Swiss endorsed a new a plan (Minder Initiative) with even greater restrictions on how both executives and directors are compensated. This includes binding shareholders’ says on compensation, bans on bonus awards for executives signing on to or leaving a company, and annual re-elections for all directors.  Violators will face stiff penalties: three years in prison, and  fines of up to the equivalent of six years’ salary.  The proposed plan (also dubbed the “rip off initiative” by the media), would entitle shareholders to block salaries, ban golden parachutes, and require more transparency on loans and pensions granted to both executives and directors alike.  Such regulation would impact on all publicly listed companies based in Switzerland, and would be expected to be implemented by 2014 – 2015.  The UK has also been working to increase transparency for shareholders while putting some restraints on how performance bonuses are doled out.

The above only scratches the surface of the issues on executive compensation. There are positive ways to build compensation plans and incentives for good performance. Ideally, good performance should not need to be encouraged solely by financial incentives. From where we stand, the efforts of different governing bodies in responding to investor and shareholder concerns seems well intended if they succeed in shedding more light on the business behaviors of executives and directors, and encourage good governance. We can always hope that the good folks spearheading these initiatives are not doing this for the pay alone, but are working towards what they are convinced is right.

We’ll have more to say on this over time, so stay tuned.

What is Diversity and Do Boards Really Care?

With this post, I’m probably jumping into a boiling cauldron of trouble with some people. As most involved in some way with governance already know, there is a huge push, domestic and international, to recruit women to boards. The topic of diversity on boards (and even in the workplace) evokes a lot of emotion. In the boardroom, when directors are asked independently if diversity is important, I’ve heard:

  • It’s important for many reasons (none specified, though)
  • It’s important, but it takes five to six years to make an impact on a board
  • I think so, but our board is still all male and will probably be slow to change
  • Or board doesn’t care and it’s not a topic of discussion
  • Diversity of thought is more important
  • Do you mean male/female? I’m not in favor of quotas you know
  • We’ve tried, but we can’t find any
  • It took us two years to find a diverse director the last time around
  • I’m the lone female on the board and I’m concerned that when I leave, the issue will be moot . . .

On and on and on . . Of all these comments, the one with the most legs seems to be “Diversity of thought is more important.” However, it is more difficult than it seems to achieve this while demonstrating that such diversity exists when speaking to stakeholders. But more on that in a moment.

When speaking with executive management on board diversity, replies from women typically differ from those of men. Men most often respond positively, but then add a caveat such as: but we’re really more concerned about finding the right person. A good percentage of women in management quietly state (as long as the conversation is confidential — they say “don’t quote me”) that their CEO and Directors don’t care and aren’t concerned about the issue of diversity in the boardroom. Those who believe they already have a diverse board, on average, tend to be quite cognizant of the diversity differential.

Some, or all of the above, may make some of you squirm, or at least feel a wee bit uncomfortable. For me, (as a female, a director, and a board advisor) that’s not the case at all. I see such conversations as opportunities to learn what’s important to boards. Unfortunately, it seems to me that, at this point in time, diversity doesn’t rate front-burner status with a number directors. This is because, thus far, when all is said and done, much more has been said than done.

Why?

Contrary to what they say, many believe that like-minded members reduce distracting contention, work to move agendas along faster, and amplify individual members’ strengths. Of course, it also amplifies their weaknesses. Uni-dimensional perspectives, and blithe collegiality, have led countless boards into groupthink, overconfidence, and an unfortunate inability to see risks, issues, and opportunities before (or after) they arise, or to fully grasp their impacts.

True diversity in the boardroom is not just a US-centric challenge. Many foreign companies are helmed by (I like to think, saddled with) homogeneous supervisory and advisory boards. In many cases, this reflects the homogeneity of the societies within which they conduct business. Fortunately, the US is far from a homogeneous country, so this is no excuse.

Back to “thought diversity.” How do you achieve it? It’s easy to make a board look diverse: find a few different colored faces, add some vowel-ending names, one or more women, and … voila! But, if all of these new additions grew up in the same culture, were educated alike, have the same values and interests, where will the real, new perspectives come from? As companies grow and diversify, their boards need new and varied ways of thinking about the business. New opportunities can often be found by viewing the same landscape through different perspectives. Different perspectives develop from experiences and values gained through living in environs and cultures, with all their unique challenges, as natives, not visitors.

Men and women, by the very nature of their different sex, will have some different perspectives. Is that enough? Depends on how many women are added to the board, and the ability of their male incumbents to accept and adapt to them. One of the most striking comments I’ve heard came from a friend (a minority male, actually) who said: “I’ll always have an easier time than any female, because I’m firstly, male, and foremost, ‘one of the guys in the locker room.’ The men in the room are far less guarded in what they might say when I’m at the table.”

Once there’s an understanding as to why a board needs to be diverse (particularly in thought or perspectives), bringing it to the table becomes easier. One director recently told me that, beyond his accomplishments and competencies, the Chairman was interested in his service because of his Latino heritage, and experience working in international markets. That board understood it needed a director whose upbringing and experience would provide additional insight into the values and needs (of at least a portion) of its employees and customers, and how to better conduct business in those fast-growing markets. They understood that the company needed new perspectives to thrive.

So, how does a board find directors who truly have both valued skills, experiences, and variety in their perspectives? We will begin to address that in my next post.

Succession and Due Diligence

Succession and Due Diligence

Over the years, I’ve worked hard to try and let nothing surprise me. Still, a few things always slip by. Where I am most often surprised is in the ways that boards and directors dance around or ignore “due diligence.” I’m still fascinated to watch (and hear through others) how often boards fail to conduct reasonable or even minimal background reviews on the individuals they bring onto their boards. In addition, that same intrigue extends to why so many director candidates don’t check out the other members they’re being asked to serve with.

Granted, board succession practices have not truly advanced much. Many corporate boards, be they public or private, still believe the best source for new directors is to start with their members’ networks first. This ignores the logic that the more you exhaust such networks, the smaller and less fruitful they become. Others still use “the links” or other social outlets as the best way to identify prospects, particularly those who could be “collegial and cooperative” in the boardroom. Directors have often told me they’ve seen or made selections on the basis of a relatively short casual discussion.

When the thought of diversity comes into play here, the approaches they take can also be somewhat. . . odd, considering that these are experienced, distinguished professionals. I’ll share a one example: the Nom/Gov Committee Chairman of a significant public company was dining with a group of about 30 other professionals – maybe five of whom were “diverse” relative to the rest of the group. At one point, he walked from table to table with a marker pen and his business card flipped over asking if anyone knew any women who could possibly serve on an industrial company’s board (withholding his company and specific industry to protect their reputation). Note, the typical business card is a rather small serface on which to take detailed notes – especially with a marker. He also shared that his board was coming down to the wire on getting this done for the company, too.

When when it comes to doing your “due diligence” on those candidates you do find appealing, you might find it helpful to learn why they serve on a board or would want to serve on yours. How they answer can be a confirmation, a revelation, a learning opportunity, or even a deal breaker. We’ve heard such comments as: “I have a lot of extra time,” . . . “It would be a great opportunity for me professionally,”. . . “I’d like to add to my personal vacation travel fund so that such expenses don’t come out of my retirement savings,”. . . “I like being on boards”. . . or . . .”I want my next board to be with an $ XX billion company” (which in this case was significantly larger than the he was on, and the one being discussed).

On the flip side, before joining a board, find out why the other directors are there. What drew them to service? What makes them stay? What is their next personal or professional objective? What do they like best in serving here? And so forth. From the prospective director’s point of view, understanding this lays the groundwork for assessing some of the professional and personal risks in serving on that board. From the board’s perspective, understanding the answers to such questions, and others, gives a better picture of why and more importantly, how the new candidate will serve.

Board service is a long-term commitment that can present very positive or negative outcomes for a company. Knowing what you’re getting into, or with whom, on both sides, is important to you, your colleagues, the company, management and stakeholders served. The complexity of conducting thorough due diligence is much more detailed than what’s just been outlined, but it illustrates how important the process is, on both sides. Doing so helps everyone involved build a clearerer picture on who is and who will be, an exceptional addition to the board. In moving forward on your next board decision, we wish you a positive and productive time together – director, board, company and stakeholders.