In the wake of many business failures, we have criticized every player in the system except the one charged with insuring that these failures do not occur: the board of directors. They are elected by the shareholders as the ultimate governing body and charged with preserving the company and building it long term.
Many boards have abandoned the legal and fiduciary responsibilities. They have become more responsive to the CEO and the management than to the shareholders. In so doing, they abandon their governance role to get the company’s stock price up. They stop asking the hard questions about how the company achieves its numbers, whether it makes adequate investments to build for the long-term and whether its strategies are still valid and effectively implemented.
Our systems of governance must be reformed. This begins with having a “bright line” between governance and management. Boards have ceded their governance responsibilities to the CEO. Now they must reclaim it.
Here is a 10-step program to improve board governance:
- Create principles of governance. The independent directors of the board need to establish principles of governance that describe the functions of the board and how the board will conduct itself. The principles should be published for all shareholders to see, and each year the board should report to the shareholders, evaluating the effectiveness of these principles.
- Have truly independent directors. This is essential to effective governance. Boards need directors who have had no prior association with the company. To measure their independence, no director should receive any compensation other than standard board fees. Nor should any interlocking directorates be permitted between the CEO and any member.
- Select board members more for their values than their titles. Too often we choose directors for the positions they hold, rather than their commitment, availability, and competence as board the many member. Let’s take advantage of executives who have the time and inclination to serve on boards. Let’s also assess the diversity of backgrounds and experience we need on the board to provide sound guidance.
- Establish a Governance and Nominating Committee composed solely of outside directors. This committee maintains the principles of governance, nominates people for election to the board, evaluates existing directors, conducts the evaluation of the chairperson and the CEO, and develops a succession plan for the CEO, including the selection of new CEOs. This committee is charged with organizing the board and its committees, identifying independent directors to chair them.
- Elect a Lead Director. If one person is both chair and CEO, the independent directors must elect a lead director to organize them, insure their independence, and advise the CEO. I prefer that the lead director be the chair of the governance committee, as these functions are closely aligned.
- Qualify members of the Audit and Finance Committees to insure the veracity of the financial statements. These committees should meet privately with external auditors, the CFO, and internal auditors. Outside auditors should not receive any additional consulting fees from the company.
- Hire an independent compensation consultant. Neither the CEO nor any member of management should be involved in setting the CEO’s compensation, or board fees. My big concern with executive compensation is the grants made by compensation committees to executives who do not perform or who are terminated. These moves destroy the integrity of incentive systems. At the executive level, it should be “pay for performance.” Period.
- Meet regularly in executive sessions. This works best if the board meeting begins in executive session with the CEO, and concludes with an executive session without the CEO present. These sessions are much more open and often lead to rich discussions of the most vital issues. Of course, the lead director must convey the essence of the discussion to the CEO.
- Seek the right Board chemistry. Board members should respect each other, but not hesitate to challenge each other, the CEO, and members of management. At times, a single director must stand against management and the rest of the board if he or she feels that the company is headed in the wrong direction. Board knowledge and chemistry can be enhanced with off site visits to company locations and one extended meeting per year, preferably off-site, to review the company’s strategies in depth. These longer sessions give independent directors deeper insights into the business, and build relationships that are vital in crises.
- Reestablish the bright line between governance and management. Directors must step up to their responsibilities and establish that bright line between governance and management. Will this reduce the power of the CEO to manage the company? No. The best CEOs want to have a strong, independent board, and look to the board for advice and counsel, not just approval, on important matters. Having a clear line between will keep the board from usurping the CEO’s prerogatives just as it will constrain management. This will help restore the balance to decision-making and ensure stability.
To transform our systems of government, businesses, and non-profits, we need courageous, authentic, and visionary leaders and directors, not just people who react to events.