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Bridging Board Gaps – Study Group on Corporate Boards

I have been reading this very useful report by the Study Group on Corporate Boards (shared by Mike Brozzetti). The individuals involved represent quality, with eminent academics, board governance leaders, and former regulators. When they speak, we should listen – and they have a lot to say!

Not only do they discuss corporate governance and its requirements, but recommendations to upgrade and improve.

As usual, I will share my favorite bits, in the order in which they appear:

  • Boards must understand their purpose: to ensure that the corporations they serve create sustainable long-term value for shareholders.
  • Ask with every discussion: How will this decision affect long-term shareholder value?
  • As part of a “tone at the top,” boards must practice appropriate rules of engagement between management and the board – engagement that serves the long-term interests of the company and its shareholders.
  • When evaluating the CEO, ask: Does this person understand, respect, and foster the role of directors as guardians of long-term shareholder value?
  • Periodically ask: Does our leadership of the board and committees – in both the structure we use and the people we choose – give the board ownership of its agendas and meetings? If not, make appropriate changes.
  • Directors should periodically review the company’s information-reporting format and content to ensure that they adequately inform the board and its committees on all topics relevant to corporate growth and well-being.
  • Directors should also regularly receive a concise and comprehensible report in plain English on risks facing the company, in order of importance. Any additional information can be provided in appendices.
  • Make full use of available technology to improve understanding of the perspectives and sentiments of all shareholders.
  • Chairs should foster an environment of discussion and debate, recognizing the benefits of disagreement and dissent, when necessary, in achieving better decisions.
  • Engage in frank and meaningful discussion about the suitability of the current board composition for advancing the company’s long-term value, seeking the views of shareholders as part of this effort.
  • “Maybe we should rename directors ‘shareholder representatives’ – then they would pull up to the table in the right mind-set.” Ralph Whitworth
  • Generally speaking, in addition to making the fundamental corporate decisions that they are required to make by law, board responsibilities include:
    • Approving corporate goals, strategy, and planning
    • Monitoring and advising business performance
    • Controlling CEO and senior management compensation
    • Participating in and approving succession planning (including hiring, evaluating, and, when necessary, firing the CEO)
    • Taking reasonable steps to ensure appropriate financial disclosure
    • Taking reasonable steps to ensure that an appropriate risk management system is in place (and monitoring that system once it is in place)
    • Taking reasonable steps to ensure an appropriate ethical tone at the top
    • Participating actively in authorization of fundamental transactions
    • Self-consciously considering board governance
  • Regarding business performance and executive compensation, boards can make sure that the metrics used to measure and reward performance include long-term indicators and that the structure of compensation has a long-term focus.
  • “It all boils down to integrity. Do you believe your management team has integrity? If not, it’s time to change.” Jon F. Hanson
  • “..perhaps the single most important trait that every director must bring to a board is uncompromising integrity.”
  • “Boards only know what the CEO and CFO tell them. Nothing more. This is a significant problem.”  Richard Beattie
  • “It is important to build a relationship with managers beyond the CEO.” Eugene Ludwig
  • “Information is the lifeblood of effective governance.” Olivia Kirtley
  • Many governance problems have arisen from poor management decisions, hidden and often compounded through inadequate information disclosure to the board….. However, if the board relies solely on management reports, the risk is that information may be incomplete, filtered, or edited, even in good-faith ways.
  • Boards need to balance external and internal information, applying their wisdom and experience to recognize problems, develop solutions, and take (or direct) action.
  • “… boards can ensure that their companies are using the most appropriate solution – acquired or homegrown – for “enterprise risk management.” Directors can ask for regular reports on the “hot zones” of risk affecting their companies, calling upon advisors to help them in this regard. Reports should be brief; certainly a report exceeding 25 single-spaced pages would be too long under most circumstances. Directors can become familiar with these reports as part of their oversight of risk and compliance, and can even use the technology for themselves.
  • Without the constraint of a board looking out for the long term, management can take too many risks. The board can act as a valuable counterweight to excessive risk-taking by management.
  • “The key to a board’s informed decision making is that the directors should probe until they fully understand the issues, information, and advice presented, to the point where they can explain it to others.” E. Norman Veasey
  • “Dissent in the boardroom, expressed respectfully in the company’s best interests, is a healthy thing for effective board oversight. Diversity of viewpoints leads to more effective decision making.” Charles Elson
  • Every director must be capable of exercising healthy skepticism and constructive challenge to avoid the syndrome of groupthink. Each individual director who realizes something is wrong has an obligation to say so, and boards as a group need to encourage debate, not only in executive sessions but also at board meetings.
  • On a board that fosters debate, CEOs and directors will not feel pressured to make decisions that contradict their judgment or betray their values.

The entire report merits a careful read; but please pay special attention to the Conclusion section, which has a list of good questions every board should ask, and the quotes right at the end.

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