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 Primer on boards of directors
April 2010
SHARING OPTIONS:
Businesses and their shareholders are rewarded for serving
customers at a selling price the customer values above the cost the business
incurred. Accountability for achieving this is fairly simple when the business
managers are owners. When the owners are remote, away from operations and often
rather passive, it quickly becomes more complicated.
Lately, boards have been put under additional stress from
rules that add liability and cost, but contribute nothing to good governance,
which requires strong values, not rules. In the life science arena, there can
be additional ethical challenges with respect to clinical trials and
communicating adverse events.
What do they know and when do they know it?
What is the source of all this angst? For one, board members
often don’t have time to serve on boards. Likewise, busy executives don't have
time to fully engage and inform their own board. Quarterly board meetings come
up quickly in the face of day-to-day operating challenges. This is especially
true for small public companies without staff to assist with board
relations.
Risk management
I like this quote from Harvard economics professor David
Laibson: “There’s a fundamental tension, in humans and other animals, between
seizing available rewards in the present and being patient for rewards in the
future. Now we want chocolate, cigarettes and a trashy movie. In the future, we
want to eat fruit, to quit smoking and to watch Bergman films.” The other side
of this is the long-held notion that what can enhance company value in the
short term can hurt it in the long term, and vice versa.
Why serve?
These days, active industry executives have time demands
that make board service for other firms hard to justify. Recently retired
executives can productively serve in this role, but in many cases have taken
the assignment too lightly. Many serve on boards to give something back. Others
serve to learn something, network with top people and stay sharp from the
analytics. In life sciences and other knowledge-based firms, directors are most
likely to learn new science/medicine that can benefit patients. That does drive
many of us.
Who should serve?
For public companies, there are special qualifications
required for the audit committee that are very important to the Securities and
Exchange Commission (SEC) and various stock exchanges. Beyond that, I’ve always
felt that a board should largely be of outside experts given that insiders are
available to the company day in and day out.
Who appointed who?
In principle, a board represents the interests of
shareholders and selects the management team. For most small companies, the
board is founded by the very same management team. Thus, there is an ambiguity
where honest governance becomes uncomfortable and difficult.
The board that ratifies the selection of the CEO and CFO or
the director of a museum will say, “They’re our choices. It wouldn’t be right
to doubt them by meeting with other operating managers or visiting disparate
facilities in order to get a feel for operations.”
Should board members also be obligated to be owners so they
act in the interests of owners? This sounds promising at first, but in many
cases, executives and directors have made short-term decisions that advance
their ownership stake while destroying value for the longer term.
Board size, operations knowledge and meeting frequency
Boards can be too large. Meetings can be too long and too
infrequent when shorter and more frequent is better, especially for startups.
At very least, directors should be active communicators between meetings and
should get to know more than a handful of top executives. Directors should be
encouraged to visit operations, visit with key customers and attend the
occasional industry trade show.
I realize this can be tough when time and resources are
limited. It should be clear that understanding your trustee role makes it more
fun and adds a great deal to your value.
Most who know this turn down requests to serve, because they only wish
to serve well.
There is no perfect
solution, but employees and shareholders should pay attention to the board and
not be a stranger.
A board perceived by you to be too aloof may well be one
you’ve never approached. Have you attended an annual meeting? Have you toured a
company you partly own? Do you know that boards of public companies are obligated
to make it very clear how you, as an owner, can provide input?
Conclusion
My experience is with small firms and small nonprofit
agencies, but there is plenty of trouble at large firms at well, where
directors receive lucrative fees. A recent provocative book suggests this is
money for nothing. If you work for or lead a large company, you will enjoy
reading Money for Nothing: How the Failure of Corporate Boards is Ruining
American Business and Costing Us Trillions,
by John Gillespie and David Zweig. I’m glad to see the matter getting
attention. Let’s hope boards will get to work and avoid window dressing
directors who retired from politics, athletics or Hollywood. A sweeper from an
Olympic curling team may be just what is needed when the bull droppings get too
deep. An engaged board can be very helpful to employees and shareholders alike,
but the assignment is part-time, and that limitation must be kept in mind.
Peter T. Kissinger is chairman emeritus of BASi, CEO of
Prosolia in Indianapolis and a professor of chemistry at Purdue University. Back  |
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