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

Advice to Boards: Renew Your Directors or Shareholders May Do It For You

Here is a top 10 list reflecting forty recent director and executive interviews and ongoing advice and assessment provided to activist investors and boards.

Infuse your board with a shareholder mindset and directors with value creation track records

“Too many service providers” … “with no industry experience” … “who have not run anything” and “who lack value creation experience” go silent when tough business decisions need to be made, directors say. They “cannot provide the hard core insights to the management team” other than “be careful.” They default to process, “flavors of the day,” and recency, rather than leading substance and strategy. Directors and executives describe such formally independent but experientially lacking directors as “immature,” “provincial,” and “naïve.” Management is more critical: They “lack depth” and “contribute nothing.” Trying to get them off the board, in the words of one director, is like “pulling teeth.”

Remove over-tenured directors and ensure committee chair rotation

Long-serving legacy directors and committee chairs are described as “tired” and “complacent” by fellow directors who have been there “much too long,” and block renewal efforts when “they are the most conflicted.” Research suggests that directors beyond nine years diminish shareholder value. Tough discussions are occurring in boardrooms. Conflicted directors should leave the room during the discussion, directors say. Long-serving directors are loath to give directorships up, arguing they are different. Fellow directors and investors are increasingly unpersuaded by self-interest.

Conduct an independent performance review

One answer, according to head of corporate governance at CalSTRS Anne Sheehan who served on a recent panel discussion with me, is to have independent director performance reviews, with expectations set at the outset, and link the results to renewal. Don’t rely on retirement age as a performance proxy. Directors and regulators are mandating independent reviews. Blockage by self-serving chairs and directors are increasingly falling onto deaf ears. The review should have consequences, which means removing directors who have outlived their usefulness. “Rigorous evaluation,” consistently is a theme in my interviews. If a board blocks independent critical review, or does not act on the results, investors will step into the gap, and it will be far more consequential, costly and adverse.

Engage directly with investors on board performance and composition

What investors want to see now is recent, relevant, validated industry experience contributing directly to the company’s value creation chain, by each and every director. If a board cannot lead a value creation model that is endorsed by major investors, including capital and asset allocation and performance, and what each director’s contribution is to that, the board is vulnerable. Few boards have conducted this internal review with the rigor that an activist does. Camera-ready boards are having structured meetings with long-term shareholders to listen, learn and act. Boards ignore investors at their peril.

Address director origination and its impact on independence

Assume that investors will ferret out any and all conflicts, including friendships. If a director has previous or current relationships, to each other or to management, they lack independence and will not ask tough questions, new research suggests, unlike directors who are recruited primarily on the basis of merit who are unknown previously to the board. These directors are “owned” is the common refrain. Current examples include reciprocity, favours and capture. These directors cannot push back as the cost is too great. They are part of management. Therefore, boards need to rid themselves of these directors and discontinue recruiting based on prior relationships.

Diversify your board to add value

Make sure your board is diverse, and underpinned by the skill sets needed. Many companies do not have board diversity policies. Defensive, perfunctory policies are not useful. The best policies are prescriptive, have measureable objectives, and define diversity, with increasing numbers that a board holds itself responsible for meeting and on which progress is reported. There are measureable objectives for gender, age, ethnicity that align with the company, its business, its industry, and the markets in which it operates.

Focus on company performance over governance box-ticking

Governance has been a cottage industry dominated by self-serving professional advisors and associations, many directors and investors have told me. The pendulum as swung so far, such that investor performance is either entirely absent or an afterthought rather than the primary focus. “You can tick all the governance boxes, and underperform your peers,” one director states. So-called governance awarded companies have even been rife with corruption. Conversely, you can have many governance boxes unticked and perform for investors. Good boards do not let the governance tail wag the performance dog. Investors want performance, not governance accolades. We know that governance rating agencies and proxy advisory firms have metrics that lack prescriptive validity. We see award-winning companies who have failed in their performance, subsequently being attacked by activists with share price appreciation soon following. Activists are unimpressed, and, increasingly, the governance community is questioning its own focus and priorities. One award winning company with a director who has seen the activist light remarked that his board could be “10 times stronger.”

Conduct a thorough transparent director competency review, and act on the results

The director competency matrix belongs to investors and directors, not management. A matrix can be back-doored and manipulated, resulting in a complacent board. An inclusive, dynamic, objective, peer-to-peer, validated matrix review will generate development opportunities, remove directors who are lacking, and generate desired skills in the next directors. Regulators are calling for curriculum vitaes, interviews, and want to see each director is fit for purpose. Boards are wise to ensure that matrix design and administration is expert, free from management control, and reflects investor input.

Focus on softer director attributes

Skills I have recently developed for directors include: integrity, teamwork, communication and commitment. If only one director does not possess these, a board can be poisoned. These attributes can and should be recruited for and validated. A director who is lacking and cannot improve should be promptly replaced. The best boards are embarking on this review.

Display leadership and integrity

Lastly, ultimately, board renewal is about leadership and integrity. The Board Chair position is rapidly maturing. Directors who dig in and entrench are placing their own interests ahead of those of the company, resulting in grave disquiet. This is an integrity issue. Entrenched directors should do the right thing when it is time to go. Activism has become mainstream and shareholders may have much greater power in the future than they do now to propose effective and remove ineffective directors, if directors do not do it themselves.

Proposals to Strengthen a Board’s Role in Value Creation, Management Accountability to the Board, and Board Accountability to Shareholders

There have been a handful of activist threats to Canadian companies recently.

What these engagements have drawn focus on are defects in public company governance, including the skill sets of existing directors, the board’s focus on value creation vs compliance, and the very ways boards function and operate, particularly compared to private equity boards.

What follows is a series of recommendations that could apply to any public board: to make it more focused on value creation; to strengthen real director independence, including from management; to strengthen management accountability to the board; and, perhaps most importantly, to strengthen board accountability to shareholders.

These recommendations are expected to form a journal article I am authoring, and will be incorporated into a case on Canadian Pacific I am co-authoring. I will post the journal article once it is published, but I thought I would post the recommendations below, for commentary and criticism, particularly from my LinkedIn Group “Boards and Advisors.” (I have not included the supporting rationale/commentary for each recommendation, which will appear in the journal article; however, most of the recommendations are rather self-explanatory on their own.)

The recommendations are based on, in no particular order: interviews with activist investors, private equity leaders, directors and CEOs; advisory work with regulators; assessments of leading boards; expert-witness work; academic and practitioner literature and regulations in other countries; director conferences and webinars; lectures I have delivered to the Institute of Corporate Directors and Directors College; discussions in my LinkedIn group, Board and Advisors; and a book I am writing including with Henry D. Wolfe and Frank Feather entitled “Building High Performance Boards.”

Several recommendations may result in significant restructuring and change in how a public company board operates, functions, is composed, engages and focuses.

What follows is a listing of the recommendations, organized into three groupings, as follows:

I.           Increase Board Engagement, Expertise and Incentives to Focus on Value Creation (proposals 1-19)

II.         Increase Director Independence from Management and Management Accountability to the Board (proposals 20-30)

III.       Increase Director Accountability to Shareholders (proposals 31-38)

We will now begin with grouping I.

I.          Increase Board Engagement, Expertise and Incentives to Focus on Value Creation

1.         Reduce the size of the Board.

2.         Increase the frequency of Board meetings.

3.         Limit Director overboardedness.

4.         Limit Chair of the Board overboardedness.

5.         Increase Director work time.

6.         Increase the Board Chair’s role in the value creation process.

7.         Focus the majority of Board time on value creation and company performance.

8.         Increase Director roles and responsibilities relative to value creation.

9.         Increase Director compensation, and match incentive compensation to long-term value creation and individual performance.

10.       Enable Director access to information and reporting Management.

11.       Enable Director and Board access to expertise to inform value creation as needed.

12.       Require active investing in the Company by Directors.

13.       Select Directors who can contribute directly to value creation.

14.       Revise the Board’s committee structure to address value creation.

15.       Hold Management to account.

16.       Disclose individual Director areas of expertise directly related to value creation.

17.       Increase Board engagement focused on value creation.

18.       Establish and fund an independent Office of the Chairman.

19.       Limit Board homogeneity and groupthink.

We will now continue with grouping II.

II.        Increase Director Independence from Management and Management Accountability to the Board

20.       Increase objective Director and advisory independence.

21.       Limit Director interlocks.

22.       Limit over-tenured Directors.

23.       Limit potential Management capture and social relatedness of Directors.

24.       Decrease undue Management influence on Director selection.

25.       Decrease undue Management influence on Board Chair selection.

26.       Increase objective independence of governance assurance providers.

27.       Limit management control of board protocols.

28.       Address fully perceived conflicts of interest.

29.       Establish independent oversight functions reporting directly to Committees of the Board to support compliance oversight.

30.       Match Management compensation with longer-term value creation, corporate performance and risk management.

We will now conclude with grouping III.

Increase Director Accountability to Shareholders

31.       The Board Chair and Committee Chairs shall communicate face-to-face and visit regularly with major Shareholders.

32.       Communicate the value creation plan to Shareholders.

33.       Implement integrated, longer-term reporting focused on sustained value creation that includes non-financial performance and investment.

34.       Implement independent and transparent Director performance reviews with Shareholder input linked to re-nomination.

35.       Each Director, each year, shall receive a majority of Shareholder votes cast to continue serving as a Director.

36.       Make it easier for Shareholders to propose and replace Directors.

37.       Limit any undue Management influence on Board – Shareholder communication.

38.       Limit Shareholder barriers to the governance process that can be reasonably seen to promote Board or Management entrenchment.


There have been significant changes to corporate governance in the last few years. Most notably, boards and regulators are now dealing with a defective legacy of independent directors who do not possess the relevant expertise. The scholarship has never supported independent board or separate chairs and the causal relationship to corporate performance. Regulators and most recently shareholders are now are focusing on competencies.

Second, there has been an under-emphasis on strategy and value creation by many boards, at the expense and crowding out of compliance obligations. Shareholders are now addressing this shortcoming.

Third, there is a movement towards shareholders exerting ownership rights to effect the governance of the company and select and remove directors who can address the earlier two points: competencies and skills, and fulfillment of the strategic and value creation role of the board.

Fourth, there is the real perception that directors are beholden to management.

I have addressed in the above recommendations all four defects in the current governance model for public companies: (i) directors selected primarily with a view to formal independence; (ii) not addressing fully the strategic and value creation role of the board; (iii) shareholders having greater say on directors and value creation; and (iv) making boards more independent of management, and management more accountable to boards.

I am happy to respond to any of the above.

Richard Leblanc, PhD

The demise of the “blue chip” director

These are disguised but true stories.

A director who has never operated a plant or worked in the company’s industry chairs the board’s health and safety committee. Internal controls are missed and poison in the company’s products kills several customers.

A director from the food industry chairs the bank’s risk committee. The director does not understand complex derivatives. The bank loses hundreds of millions of dollars in risky trades. (This happened twice, in two different banks. In the second bank, which lost billions, the risk committee chair was from a museum that received donations from the bank.)

Many directors on this third board have no experience in the company’s industry or in the complex overseas markets in which the company operates. The company has alleged widespread bribery, for which the industry is notorious. The CEO is arrested and the company’s brand is splashed all over the news.

This director chairs a company’s strategy committee but has never worked in the industry. The company loses 75% of its stock value. It takes the company years to finally bring industry experts on to the board, but it may be too little too late.

Many directors on this board have never worked in the industry and do not understand financial reporting necessary to sit on this board. They do not recognize potential fraud and inappropriately incent management. The company goes from an iconic Canadian brand to almost nothing. Shareholders lose billions.

In Canada, prior to the arrival of a shareholder activist compelling necessary board change, this board did not even have a single director (other than the CEO) with experience in the very industry in which the company operates. The stock is now up 30%.

There are several other examples. In all of the above, the boards supposedly looked “great.” They were composed of high-profile, so called “blue chip” directors – former politicians, ambassadors, company CEOs, presidents, consultants, lawyers, academics and so on, yet there were all abject failures.

In Canada, as in several other countries, you do not have to understand the business to sit on the board. Shockingly, in Canada, a director does not even have to be financially literate (at least initially) to sit on the audit committee of a public company. Yet we expect these directors as fiduciaries to oversee shareholder investments and the company’s best interests. The requirements for being a public company director are astonishingly minimal.

The vast majority of directors are selected on the basis of formal independence, yet the academic evidence runs counter to this. I recommended to the Office of Superintendent of Financial Institutions in a study I was asked to do, that boards of financial institutions should have directors with industry and risk expertise. This is now the law in Canada – but it took until 2013. The SEC in 2009 (post financial crisis) enacted a law, citing my work, that directors had to be selected on the basis of qualifications, skills and competencies.

One reason activist directors are frustrated, they tell me, is the astonishing lack of experience directors have, from the industry that is necessary for the company’s strategy, and with solid track records of value creation. They, and the media, are now scrutinizing the background and expertise of directors. This is a welcome development. There needs to be a fundamental change in the way directors are selected, and the ability of shareholders to remove directors who do not have the background or experience.

The three most important attributes for a director are knowledge of the business, financial acumen and backbone. Most directors are not selected on this basis. If you do not have this, directors sit in meetings without any ability whatsoever to contribute meaningfully. Most of the time, they are silent, pretending to understand. They are out of their depth and taking up a valuable spot.

Contrast this with directors who are selected properly, not on profile, pedigree or prestige, but on mindset, experience and strategic track record. These directors are a pleasure to see. Management has to bring their “A” game for these directors. These directors ask question after question after question, weighing in with their enormous experience (often much more than management) and telling management what to think of, what the flaws are in their thinking, and how to perform better and recognize opportunity to add value. These directors hold management accountable and have the heft to do so. They know what questions to ask and when to act. They have “been there, done that.” When necessary, they tell the CEO which way to part his or her hair. There is no ambiguity in these boardrooms who is in charge. Management is accountable to the board and the board to shareholders.

Sadly, these latter directors and boards are in the minority.

The Battle for CP ~ Welcome to the Great (and Cozy) White North, Mr. Ackman

By now, you may have heard that Canadian Pacific CEO Fred Green, Chairman John Cleghorn, and four other CP directors have resigned or will not stand for re-election, to make way for Pershing Square’s Bill Ackman and a new slate of CP directors – and a new approach to corporate governance in Canada.

The Pershing Square bid is the perfect storm for what is wrong with Canadian corporate governance: (i) the lack of attention to strategy; (ii) the lack of shareholder accountability; and (iii) the lack of directors with domain expertise. It represents a tipping point for any board in the way it does – or should do – business in Canada.

Lack of Attention to Strategy

The “Dey” Guidelines are now almost 20 years old. They are outdated. Much has changed in corporate governance. Canada needs revised and updated guidelines to the 2005 National Policy, which incorporated many of the Dey guidelines. The Dey guidelines from 1994 contain six words on strategy: “adoption of a strategic planning process,” which is inherently ambiguous. The 2005 National Policy is not much better, adding that the board must approve a strategic plan at least annually. (Emphasis added).

This approach to strategy is wholly inadequate, and the consequences are obvious. In an Institute of Corporate Directors session I facilitated of ninety-four directors last week, when a question on the board’s role in strategy was asked, two panelists deadpanned “we do it in a superficial way” and “it doesn’t happen.” Boards have become obsessed with compliance at the expense of value creation for the company and shareholders.

The research – from Ernst and Young, Egon Zehnder and McKinsey for example – confirm that a more engaged board under a private equity governance model will outperform their public company peers, by a factor of three to one. This outperformance under a Bill Ackman model cannot be ignored by public companies. For academics who desire to show a more causal link between governance and performance, as do I, it should not be ignored either.

The deep dives and due diligence conducted by Pershing Square – over 100 pages in total – should be conducted by boards if they are doing their job, and wish to keep hedge funds from knocking at their door. But there is code like “nose in fingers out” or “micro management” used by Canadian CEOs and directors themselves that keeps directors from performing their strategic role.

The evidence of CP is a case example: Seven COOs and CFOs were replaced in the last five years; CP has consistently underperformed across its peers, including its Operating Ratio; and yet CEO Fred Green met 17 of 18 objectives set by the CP board. And the board moved those targets, resulting in the cost of management as a percentage doubling.

Public company boards need to be much more engaged in strategy, and demanding of management. As reported in the Journal of Applied Corporate Finance, value may be “left on the table” ~ which would invite sophisticated investors like Bill Ackman to come in.

I have reviewed public and private plans by activist shareholders and private equity firms and there is no comparison to the often “superficial” (to use a word from above) approach to strategy typically taken by public company boards. There is absolute clarity under private equity what management is held responsible for, and variances to be reported in advance to – and understood by – the board. Boards of this caliber are much more engaged and focused on shareholder value. No stone is left unturned.

Lack of Attention to Shareholders

Second, many public boards in Canada do not meet directly with shareholders, or if they do, it is behind closed doors – the “cozy” Canadian way. Bill Ackman did not accept this and was unwilling to compromise or go away. This cozy environment has to change, including shareholders asserting themselves much more. And lawyers cannot unduly influence this communication.

Most importantly, Canadian shareholders should have proxy access, or the right to nominate directors of their choosing and put those directors on to the proxy circular, which is another American development that makes sense. It should not take Pershing Square, a 14% shareholder of CP, CP’s largest, a long, protracted, expensive proxy battle to implement governance change. Vote counting, majority voting, plurality voting, etc., are window dressing. Shareholders should have the right to nominate directors to boards and fire directors who do not perform, with ease and transparency. The threshold should be low, or even based on the company’s largest shareholders.

In addition, Canadian directors need to have a % of their net wealth at stake in the boards on which they sit, for true shareholder accountability and alignment. This does not mean directors receiving shares for board service, but actually issuing a check from their savings. The CP board owned 0.2% of stock and it was given to them, not bought. If one director, had $100M of his or her own wealth invested, the CEO would be replaced, Pershing Square said.

Lack of Attention to Domain Expertise

Lastly, the entire board of CP, other than the CEO, did not have rail experience prior to Pershing Square’s involvement. This is a direct consequence of the Dey guidelines from 1994, even though the research does not support independent directors and firm performance. The reason is that if directors do not understand the business, or industry, they are under-engaged in strategy and even their ability to monitor is compromised. They don’t understand. Look at the board of JPMorgan, which lost $2B last week. Other than the CEO, not even a single director has banking experience. If a director does not have experience in the sector, they cannot identify the risks.

Pershing Square’s directors have been selected on the basis of railroad expertise, restructuring expertise, shareholder representation, entrepreneurial culture and a culture of equity ownership and shareholder value creation. What a breath of fresh air. Boards would be wise to take a page from the Bill Ackman playbook, or shareholders should themselves.

And, most of the above Pershing Square directors are from Canada. The notion that we have a talent shortage is a myth. If the board’s desire is for a “CEO,” then there may be a shortage, but the evidence from Stanford University is that CEOs do not make better directors. There is plenty of talent in Canada, and boards need to reach into the C-suite and into shareholder communities. And they need to diversify to mitigate groupthink. The directors exist. My own database contains hundreds.

The Need For New Guidelines

Shareholder accountability, strategic engagement, and director experience and skills, all point to shortcomings that are non-existent or short-changed in the Canadian corporate governance landscape. This is exactly what Bill Ackman brings to the table. Welcome to Canada, Mr. Ackman.

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.


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.


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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