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Archive for the ‘Member Selection, Competencies and Commitment’ Category

Getting on Boards ~ Practical Pointers That Work

Do you think the average board can afford to pay a search firm $80,000 to recruit a director? Of course not.

One major shift is the impact of technology and diversification of boards on creating recruitment opportunities for new and often first-time directors.

Here are the opportunities and advice for becoming a member of a board of directors, based on recommendations I have given to directors, executives and boards.

1.      Network, network, network – and now “connect”

LinkedIn, online databases and other social media tools (e.g., groups) are now at least as —if not more— important as paper resumes, rolodexes, email, business cards and reference letters once were. Most prospective directors are 2-3 degrees of separation between themselves and the ideal board or decision-maker. Social media has enabled the playing field to become much more equal and accessible in linking supply (boards) and demand (directors), particularly for younger and diverse directors. Boards and directors would both be well served to use this new medium. It is efficient, effective and inexpensive.

Second, if you are aspiring to be a director, you should become known to advisory firms (law, accounting, consulting) as often they are asked to serve but can’t because they’re conflicted or it’s a liability issue: they can recommend you and look good. Advisors however are beholden to their clients, not the director. The person who best represents a director is the director.

Third, you should also be known by shareholders, who in the future may be nominating directors directly. See this new database for example.

But ultimately it is you who best represents your interests. The networking rests with you, not an intermediary.

Also, become a member of the ICD, NACD or IoD or one in your country (AICD, IoDSA, NZIOD, etc.). It is a wise investment, for education, webinars and networking.

2.      Target and tailor your search

Volunteer, advisory, charitable, hospital, university, college and government (“crowns” as they are called in Canada) corporations all have boards. There are 100s if not 1000s of boards, including in your local community, and they all need directors on an ongoing basis. Many have (or should have) online application platforms. See Ontario for example, or federal government boards. Registration is (or should be) free. Director associations also have online registries for members. See here and here. These are excellent as well.

Target your contacts – the top 25-50 best list say, who really know you and can vouch for you, to people they can recommend (often it’s the 2nd or 3rd degree of separation that counts).

Read papers and online as more and more board positions will be advertised, but again it is who you know and your networks that really matter.

Target boards with term limits, high turnover and diversity. Approach them directly, including being introduced to directors or the chair of the nominating committee on LinkedIn or otherwise, via your connections. You don’t need an intermediary to make contact with the right board or director.

Be patient, tactful but deliberate too, in promoting yourself, that you are available, have the time, and would be a good director.

Also, don’t listen to people who tell you that you need to wait to be “asked” to serve. This is a veiled attempt to suppress you. Position yourself to be in the right place at the right time (luck is preparation meeting opportunity).

2.      Manage your resume and profile

Your resume (or even LinkedIn profile) will get you the interview. Your interview will get you the position.

Most cv’s I review for directors can be improved. They are for hierarchical and command-and-control organizations and managerial positions, not a board of directors, which is a group of peers.

Good boards now have competency matrixes (I recommended this and we are one of the few countries with this requirement explicitly). The NACD has also endorsed the idea of a skills matrix. Boards want to see core competencies you bring to the table, and how your background and experience support these competencies. Prospective directors need to connect their portfolios seriatim to the competencies and other attributes looked to, for and by directors. The four most important are leadership, financial literacy, industry knowledge and softer skills such as impact, influence, teamwork, integrity, communication style, and a bias to learn. And leadership is by no means synonymous with “CEO,” but includes NFP, SME, professional, project and issue leadership as well. Bring your top competencies up front, and have no more than six to eight.

Also, leverage your contacts, languages and international experience, particularly in emerging markets or where the company and management team wants to be (in particular China and India). Don’t rule out serving on boards outside of Canada who seek trade or do business with Canada.

Attend conferences, speak, sit on panels and manage your profile so you become known in the industry or sector you are targeting.

3.      Get educated on governance and serve for the right reasons

If you have been out of school for 20 years, get some governance education. The world has changed, and this field is turning over constantly since 2002. The Institute for Corporate Directors, Directors College, and the National Association for Corporate Directors offer excellent programs. There are excellent programs at Stanford, Harvard, Kellogg and The Directors’ Consortium. Spend the time and money to become current, and be seen to be. Also, join a LinkedIn group, such as Boards & Advisors. (It’s free!)

Don’t worry about money when serving on boards. Most directors serve to contribute, network, make a difference, have fun, stay young, and learn. The experience you gain can be leveraged into larger paying boards later.

 

4.      Prepare for the interview

Your interview and references will get you the board position.

Take the interview very seriously. Every word coming out of your mouth matters and will be scrutinized. You will probably be interviewed by two or more directors or the nominating committee. Prepare a binder with highlights and stickies. Bring it to the lunch or meeting. Know the business; know the company and management team; know the accounting and measurement issues for the policies and estimates; know the competitors; and know the top strategic issues. Show you will hit the ground running and add value. If the board is important to you, take at least a full week to prepare. It will make a difference and will be noticed.

And have references and sponsors that can absolutely go to bat for you (who have known you for 20 years, who may not necessarily have profile).

5.      Negotiate effectively at all stages

 

Being asked onto a board is a bit of a dance. Create a demand and don’t look desperate: position yourself as a valuable commodity who can contribute. There are certain questions you should ask however to determine the right fit. See my article here.

6.      If you have been on the board over 9 years, it’s probably time to go

 

Now it’s time to address current directors. It is very hard for shareholders to “fire” directors at present, but this too will likely change in the next few years.

At present, what is holding board turnover and renewal back are directors who place personal interests ahead of those of the organization. This is an integrity issue. No director is irreplaceable. If a director has been on the board over nine years, regulatory best practice is that that director is no longer regarded as independent. Such directors need to do the right thing and step down to make way for succession and renewal.

This means chairs have to have tough “let’s have a chat or take a walk” discussions with these directors, and lead by example. If the chair is the problem him or herself (more than five years, let’s say), then a group of directors or the chair of the nominating committee should “have a chat” with the chair. Lifetime appointments and directors serving 10-25 years are blocking renewal of new directors. Succession planning and term limits should be explicit to avoid directors who stay on way past their best before date and create uncomfort for colleagues and prospective directors. This is not a discriminatory issue but is a matter of renewal and good succession – the same as the board requires for management. Boards must lead by example. Management knows when a board is dated and is less useful to them.

7.      Choose your first board and industry wisely and invest the time

Your work on your first board will determine your second, third board and so on – like your degree after college gets your first job, and your performance then on after is what matters.

The first few boards are the hardest, take the most time, but mean the most.

Count on spending 200-300 hours all in, per board, especially if you are not from the sector. This figure may be across all boards, from public companies to not-for-profits. The risks, obligations and liability may be no different.

Don’t over extend or over promise; the directors on your first board will be your referees for your second: so choose wisely.

On your first board, have mature confidence, leadership, judgment and contribute and communicate. Be polished and a team player; but be independent, competent and rigorous.

8.      Be mentored and leverage onto other boards

Lastly, find a mentor and get candid data on your performance, right down to tone, words, preparation, style and contribution.

Go from not for profits, to health, education and government boards, to private boards, to SME traded, to traded large over 4-8-10+ years: have a governance trajectory.

Above all, be positive and patient: the whole field is changing.

 

How to do a Proper External Governance Review

Several memories stand out in my mind. One was the dominant CEO who kept interrupting me to tell me how effective he and “his” board were, despite the results of my assessment (the board was in trouble with regulators and the CEO later resigned). Another was a very rich and famous director asking me to leave his office when we debriefed on the peer review, which indicated how his colleagues thought his contribution was (he too resigned). Another was a director who actually resigned from the board ahead of time when he found out I was going to do the review. Another was a chair of a governance committee who viewed my questions and then decided against the review (he was later in the news for conflicts of interest).

I have seen all kinds of data – directors who fall asleep at meetings. CEOs who pound tables. CEOs who funnel information. Directors who are out of their depth. Directors who despise other directors. Bullying, cliques, factions, sexism, conflicts and denial. The most fascinating to see is the body language, process, relationships and dynamics – this can make or break a board regardless of structure and protocols. An intransigent CRO or ineffective risk committee chair can take a company down. I have also assessed some of the best performing boards – led by terrific leaders who spend enormous effort at getting the directors and process just right. Some have won national awards over the years they are this good.

So I have learned a thing or two.

First, why would any board do an “external” board review to begin with? Simple. Self interest. Boards assessing themselves are analogous to students marking their own exams. It’s an inherent conflict to assess your own work. It’s even worse if management facilitates (which happens most of the time a “self” review occurs) as they have the most to gain by a soft review.

Mainly, however, external board reviews are often poorly done. Why? What makes for a good external board review? Four key elements.

Who is your client?

Your client is not the CEO. Your client is not the general counsel, nor the corporate secretary, nor any manager for that matter. Management should not unduly influence you. If you conduct a governance review properly, the board’s interests could – and sometimes should and will – be adverse to those of management, whom the board controls. So you cannot act for simultaneously opposing interests. If you or your firm does business with management, or seeks to, or has done in the past, you are conflicted and should not do the review, no matter how you try and justify it.

Your client is also not the chair of the board. A good board review will assess the chair’s performance and he or she is likely the problem if the board is poor.

Your client is the chair of the governance committee (or its equivalent) and the committee as a whole, who ultimately reports to shareholders, similar to the auditors being accountable to the audit committee. If you do not work directly with and for the governance committee, the review will likely suffer or fail.

Garbage in, garbage out

Next, the review itself. The vast majority of approaches are superficial, do not reflect best practice, use the wrong scale, and are heavily biased. Unfortunately, these “surveys” get perpetuated and become the lowest common denominator. They are highly imprecise and lead to misleading results. There is a false sense of reality when the board “agrees” or “strongly agrees” to a majority of ill-defined performance metrics. The analogy to “happy-face” questionnaires is “pat-on-the-back” interviews. The tough questions are not asked. Garbage in, garbage out.

The review becomes a one-sized-fits-all, check-the-box pain, no better than those of external proxy advisory firms and rating agencies. Directors are skeptical, rightly so because what really matters is not being measured and what doesn’t, is.

The board of a bank is not the same as the board of a hospital or high tech start up. Reviews need to be best practice, highly customized and rigorous. They need to span silos. Lawyers, accountants and HR advisors don’t have competencies and market permission in cross-silos and default professionally to their own. The result is even more compliance box ticking.

Importance of 360 feedback

If a board is stale, management knows. If a director is not performing, directors know. Each director and reporting management should opine on other directors. The learning and self-development here is tremendous and counteracts a board or director thinking it, he or she is better than others do. It is very difficult if not impossible to do a peer assessment internally. Directors default into collective group-think (read: denial) because their responses will be seen internally. A good peer review will include self, peer and board assessment, so each director knows how he or she performs relative to his or her own perception, other directors and the board as a whole. The peer review becomes a developmental and recruitment tool.

Reporting and debriefing

The vast majority of reporting to shareholders by listed companies on the results of board reviews is superficial, wholly inadequate and boilerplate. Companies have a vested interest in making it this way. This will not change without greater prescription and enforcement by market regulators and shareholders.

Perhaps the weakest link for a board review however is internal reporting, implementation and action taken based on the review. Feedback should be provided to each individual director and debriefings should occur to discuss development, priorities, committee and board reform, and tough discussions – such as leadership and behavioural change and director retirement. A good review effects behavior. Some of the areas include knowledge of the business, judgment, communication, integrity, constructive challenge, willingness to act, thinking skills, financial acumen, interpersonal/teamwork and commitment. These are very specific skills that each director needs to possess for the board to be effective. One director can unduly effect an entire board dynamic and decision. Governance committee chairs and I have had tough but candid discussions and coaching with directors based on these outputs. It is not easy, but without proper data and leadership, directors on the receiving end either refuse to acknowledge or do anything about it.

Conclusion: Canada ahead of US and UK but they are catching up

To Canada’s credit, we have had to explicitly recruit and assess individual directors on the basis of competencies and skills since 2005. We have also not had enormous financial failures or bailouts. The US and UK have. Imagine that – up until the financial crisis, you could sit on a risk committee of a US bank and not know anything about risk or banking. The US changed its rules since then, mandating that directors need to disclose their qualifications, which is not quite the same as directors being assessed. (Lawyers will skillfully list bullet points about past job titles.) In the UK, their Code has changed stating that for all listed companies, external board reviews have to occur at least every two or three years. This is a step in the right direction.

The Boardroom of the Future: Changes that will reshape corporate governance

A global “mega-cap” company recently asked me to submit a briefing on how a boardroom of the future will look. This is an abridged summary of my report.

Democratization of governance

Your shareholders will nominate and elect your directors by electronic voting directly on your website. They will base their vote on the accomplishments of each director and track record of acting in the best interests of shareholders and the company overall.

Electronic registries and meetings will be the primary basis upon which shareholders select directors to your board. Director competencies will be fully disclosed.

Diversification of boardrooms

Your board will be 40% to 50% women and have far fewer CEOs on it in the next five to seven years. Your directors will be independent experts within their relevant strategic domains, will be quick studies, and will have access to the best learning of the company. They will request an Office of the Board be established. Board tenure will not exceed 9 years.

Corporate reporting

Reporting to shareholders will be fully integrated and online. Non-financial risks and internal controls will be independently assured. All reporting will be accessible, complete, accurate and independently validated.

Technology

Your board will be paperless and directors will have access to any piece of information they need to oversee and advise management. Technology will be used to attract and communicate with international directors. Risk appetite frameworks, established by the board, will translate into clear incentives and constraints using integrated firm-wide information systems.

Executive compensation

Executive compensation will be established by shareholder-directors. Professional standards will be imposed on any consultants retained by these directors. All compensation will be fully risk-adjusted and linked to performance. Current models and methods will change significantly.

Office of the Board

An Office of the Board will be established. It will house independent staff and resources available and accountable to the board and paid by the company.

 

Regulation of corporate governance

The unprecedented intrusion into the governance of companies will continue until most or all of the above reforms are implemented.

Conclusion

The above changes are significant and will fundamentally change the way directors are selected and how boards control management.

What Does it Take to Be a Corporate Director? The minimal requirements will surprise you

What are the requirements to be a director of a major public corporation, where you are required to oversee and approve complex financial statements, compensation packages, business risk appetite, internal controls and regulatory compliance? It will surprise you to know that the requirements are minimal.

To be a company director, you need to be over 18, not insane (or at least found to be insane by a judge), and not bankrupt. That’s it. You can sit on a major board of directors, and not know anything about the company, its industry, or even know how to read a financial statement.

When you see an accountant, a doctor, an engineer or a lawyer, that person has a rigorous code of professional practice with which he or she must comply, ongoing professional development obligations, a common body of knowledge as a barrier to entry, a body of peers that oversees any complaints or misconduct, and must pay an annual fee in order to practice.

There are more than 22 million private and 17,000 publicly traded companies in the US. Each of these companies requires a board of directors. If the average board size is nine directors, that means that there are about 150,000 directors of publicly traded companies alone, and several million directors of private companies.

Perhaps we should require more of directors as fiduciaries. They oversee the management of major corporations that, if or when they fail or engage in inappropriate or illegal conduct, the consequences can be disastrous. There is ample evidence that directors did not (and do not) fully understand the risks and products they were approving of investment banks. At a recent directors conference in Washington, Michael Oxley, co-drafter of the “Sarbanes-Oxley Act,” admitted publicly that even he did not understand what a “synthetic CDO” is.

Director industry associations are not the answer. These bodies are well meaning and professional, but are voluntary and member-accountable and have no sanctioning authority. Codes of conduct are perfunctory at best and the vast majority of directors who attend educational offerings are a slim minority of the total directorships. The people who do not attend are the ones who should.

After Enron and WorldCom, requirements of financial literacy and expertise were introduced within audit committees, which has resulted in their professionalization. Perhaps it is time to implement similar requirements for compensation, governance and risk expertise. This would also help to diversify boards and retire directors whose skills are outdated.

The strengthening of professional requirements for company directorships should be self-evident. As someone who teaches and advises in the field and has an obligation to keep current with emerging developments, given the significant rate of change in the last ten years, I could not imagine how a director of a company could remain current without ongoing requirements rather than passing familiarity or osmosis (I am speaking here of directors who have chosen not to upgrade their education). I often notice a disconnect – to put it mildly – between the resources and expertise that management has and those of directors.

Professional qualifications, a code of professional practice, peer review of misconduct, and disclosure of director expertise are all areas that would strengthen the governance of corporations.

15 Questions to Consider / Ask Before You Join a Board

As shareholders begin to develop strategies to nominate directors (see e.g., a new CalPERS database) and as regulators begin to diversify corporate boards (see my previous column), directors are increasingly being asked to serve on boards for the first time.

I have been asked several times for the list below on the “due diligence” that a new (or even seasoned) director should employ when being asked to join a board.

The questions below help to focus the director and the company on a beneficial fit.

Here is my list, in no particular order, designed for both for profit and not for profit boards.

1. For director insurance, ask to see the policy and have it independently reviewed, including scope and depth of coverage, exclusions and indemnities. Assume the worst case scenario.

2. Ask about donor stewardship assurance (not-for-profit boards), conflicts of interest, internal policies governing self-dealing, asset treatment, ethical compliance, expense reports for staff, gift policies, related party transactions and reputational-related risks.

3. Ask to see all important reporting (financial, budgets, by-laws, strategic, risk, operations, resource allocation for programs and administration, beneficiaries / stakeholders, governance) as part of your consideration.

4. Talk to current and past directors if possible (including the CEO/Executive Director).

5. Who chairs the board? What is his or her leadership style, commitment to effective governance? Are there factions, cabals or undue influence, by a particular shareholder, director, manager, donor or other stakeholder for example?

6. Ask what your roles, responsibilities and expectations are, both generally (as a director), but specifically (your expected contribution). Are donations or fundraising expected, in the not-for-profit context?  If so, what are expectations, so you know what you are signing on to.

7. What competencies and skills do you possess that would contribute to your effectiveness as a director?  What contribution does the board think you could make? Is your directorship tied to your professional role at your firm (assuming you are not yet retired)?

8. How many board meetings are there? Length? Location? Frequency? Committee meetings? What is the tenure? Reappointments?

9. Is there any pending or past litigation? Tax arrears? Wages? Infractions? Staff difficulties? Red flags? Problems or issues?

10. What are the quality and ethics of the Executive Director and the management team (including CFO, internal audit if it exists)?
This question is very important.
I would also do online searches. Consider background checks if you are unsure or see red flags, which itself should be cause for concern. If the directorship is important and the board really wants you, consider having the company provide independent assurance.

11. How is the CEO or Executive Director assessed? By whom? How is compensation for him/her and staff established? Are there conflicts between volunteers or operational roles and director/governance roles, in the not-for-profit context?

12. Does the organization have a whistle-blowing procedure? What are the ethical reporting procedures to, and oversight by, the board?

13. Does the board assess its own performance?
Including that of the chair and individual directors?

14. What are the professional development and learning opportunities on this board, particularly if you are not from the industry or sector?

15. Lastly, make sure all approvals/sign-offs occur by your home company, so if anything goes wrong, you are covered.  Make the case for serving on an outside board to your current organization on the basis of professional development, networking, learning, brand and reputation development, for you, your organization and the board.  Count on spending 200-250 hours per year at least, even for a not-for-profit board.  Your responsibilities are no less in the not-for-profit context.

Do your homework

When I ask directors of one of their regrets as a director, an answer I hear is “joining the wrong board.”

If a company is unable or unwilling to answer the above questions, on a confidential basis, that should tell you something.

Once you join a board, it is much more difficult to extract yourself if you have made a mistake. Joining the wrong board can involve time, unnecessary distraction, and can even put your personal assets and reputation at risk. The main person to protect your interests is you. The above list is worth taking note of.


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