Boards Behaving Badly
When boards behave badly, it's usually difficult to detect. Like an accident on the side of the road, where you know you shouldn't look, but can't help it, overt bad board behavior is voyeuristically fun to talk about but terrible to experience. You rarely get bad behavior like a CEO jumping on the table to make a point or a director throwing a chair and walking out of the room. Bad board behavior ranges from serious — conflict of interest and failure to act as fiduciaries to dysfunctional: where a board lets the CEO do whatever they want, or swinging the other way to diving in the operational minutiae.
Having a well-functioning board takes a village; it requires vigilance from the directors, the nominating and governance, audit and compensation committees, general counsel, CEO and the chairman. All have a critical part to play and failure to do so can be damaging or even catastrophic for the shareholders and company.
Directors have individual responsibility for a well-functioning board by ensuring that they are bringing value to each meeting. This requires advanced preparation, circulating questions in advance of the meeting, communicating with the chairman and CEO if there are concerns around any issues and staying abreast of the industry trends and unique business challenges. In addition, directors themselves need to be fully apprised of their fiduciary responsibilities and disclose anything that even gives the appearance of a conflict of interest.
Directors are also collectively responsible for a high-functioning board, including:
- Ensure that the CEO is growing shareholder value.
- Conduct a CEO and board evaluation each year.
- Provide candid feedback and insights to the CEO and chairman, as needed.
- Strive for continuous improvement in the boardroom and business.
Effective committees can make or break a board. Not only do well-run committees allow the board meetings to function more smoothly and at the right level of detail, but a poorly run committee can miss a critical event or insight. Although all boards are unique, this article addresses those committees most common on a board.
Nominating and governance committee
The nominating and governance committee addresses both board composition and good governance. Board composition may be one of the most important factors in a high-functioning board. In the 2020 PWC Corporate Governance Survey, 49% of the respondents indicated that at least one director on their Board needs to step down and 21% say that two directors need to go. However, in that same survey, only 12% had planned on making a change in the following year. This is a direct indication that nominating and governance committees could do better. Many directors become friends; they are respected executives, current or retired, and many boards become too deferential to their directors and don't demand enough from each contributor. This is one of the core responsibilities of this committee. Set expectations and don't wait for the term out of a low performer. It sends a subconscious message to the rest of the board and management team that mediocrity is acceptable.
Good governance also means that the basics are covered:
- Oversee CEO succession.
- Annual evaluations for the CEO, board and individual directors.
- Reviewed and updated board and committee charters.
- Job descriptions and accountability for CEO, chairman and directors.
- Education and clear expectations around the fiduciary duty to shareholders and conflict of interest.
- Set a board cadence to ensure that all aspects of the business get addressed in a regular cycle.
Audit and risk committee
The audit committee's job is a big one but critical to the company's overall success. Not only does it ensure that the financial team and the company's subsidiaries are operating ethically and that the internal and external auditors are up to the job.
The audit and risk committee ensures:
- The integrity of the financial statements, reporting processes, and internal controls of the company and its subsidiaries.
- The company complies with legal and regulatory requirements related to the production of timely and accurate financial statements.
- Monitors the performance of the company's internal and independent auditors.
- Ensures the quality and independence of the company's independent auditor.
- Monitors the established ethical standards and behavior against those standards.
- Monitors the enterprise risk management program.
The audit and risk committee has a tough job as it works to validate the work of the internal finance team and auditors and the external auditors and is only as good as the information they get. That means that the CFO has a big job ensuring that all of the information from their team is as accurate as possible.
Compensation and talent committee
Boards need to make talent, culture, and talent retention through compensation initiatives a top priority.
- Oversee and update the company's compensation philosophy and policies.
- Review and approve the compensation programs developed and administered by senior management which are designed to support the company's strategic goals and objectives.
- Monitor executive team performance and succession.
- Monitor high-performers in the organization to ensure a sustainable talent pipeline.
- Ensure company principles, values and intentional company culture permeate the entire organization.
- Conduct annual review and approve corporate goals and objectives relevant to the CEO's compensation, evaluate the CEO's performance in light of those goals and objectives, and set the CEO's compensation levels based on this evaluation.
- Ensure the long term and short term incentive programs align with the overall company objectives.
The general counsel's role is to manage both legal compliance and corporate governance while balancing the need for company performance and corporate integrity. The general counsel interacts at all levels of the business and supports the company's growth while ensuring that all actions are ethical and legal. The general counsel provides meaningful support to the chairman and CEO in the boardroom. Ensuring that the board meetings are meeting legal and governance standards,
Often acting as the corporate secretary for the board, the general counsel advises the directors on how to legally perform their duties and ensures proper corporate records that reflect the actions taken by the board. In addition, the general counsel provides insight on:
- Board composition and competencies
- Selection of external advisors
- Crisis management
The general counsel also reports on enterprise risk management activities to the audit and risk committee and assists the nominating and governance committee on sound governance practices.
An invaluable member of the board, the general counsel, works closely with the CEO and chairman to ensure that all activities meet the highest ethical and legal standards.
The CEO is ultimately responsible for the company's performance, culture, talent, ethics, values and strategy; the CEO also plays a critical role in an effective board.
Reporting to the board of directors, the CEO is responsible for the company's overall success, leading to long-term, sustainable growth, meeting all profitability targets, driving succession at senior levels. The CEO is the ultimate decision-maker for the business and is responsible for developing and executing an enterprise strategy for both near- and long-term profitable growth. The CEO leads the long-term strategic thinking and fosters an environment of success through accountability, teamwork and transparent communications with the board, the management, the enterprise and the shareholders.
- Provide leadership in setting and refining the mission, vision, strategic plan and annual operating plan in conjunction with the chairman of the board and the board of directors.
- Implement strategic and operating plans to profitably grow the business, meeting or exceeding both near and long-term income and cash flow objectives.
- Lead and drive succession planning at senior levels, including identifying any inside CEO successors, ensuring that the organization is developing succession-ready executives for all senior roles.
- Attract develops and retains top talent to build the next generation of operational and management depth to support business growth.
- Ensure the company operates in compliance with applicable laws and regulations and in accordance with the highest ethical standards.
Being defensive, resisting board feedback, failure to disclose information to the board or stacking the board with friends and business partners are ways that a CEO can foster a dysfunctional board. However, the CEO can play a meaningful role in ensuring that boards perform at the highest levels. Working closely with the chairman and general counsel, the CEO will:
- Set the agenda.
- Work with the executive team to set expectations on board presentations and discussions.
- Crafts the advanced board materials.
- Report to the board on significant company matters.
The CEO can also play an important role in ensuring that the directors have the information they need to discharge their fiduciary duty. In addition, the CEO works with the chairman to craft board meetings that bring strategic value to the management team.
The chairman of the board is the presiding board member. The chairman is responsible for promoting the functioning of the board effectively, efficiently and harmoniously. The chairman is responsible for fostering excellent relationships among the board, management, shareholders and other stakeholders.
The primary functions of the chairman are to provide leadership and direction to the board, facilitate the operations and deliberations of the board, and the effectiveness of the board's functions and responsibilities. Working closely with the general counsel and CEO, the chairman plays a critical role in setting the tone and expectations for board meetings. With responsibility for crafting sound agendas and board meeting facilitation, a board meeting will only be as effective as the chairman.
The chairman of the board has an important role in representing the board and is responsible for the following:
- Communicate with board and shareholders, including at and between board and shareholder meetings.
- Work and collaborate with the CEO.
- Communicate effectively with all stakeholders
- Coordinate with the CEO to ensure that the board, shareholders and other stakeholders are up to date on management strategy, plans, operations and performance.
- Provide leadership of the board and arranging for it to review and monitor the aims, strategy, policy, and directions of the corporation and the achievement of its objectives.
- Communicate with the board to keep it up-to-date on major developments, to avoid surprises through timely discussion, and ensure the board is provided with sufficient information to permit it to make major decisions in a considered manner.
- Work closely with all committees to ensure timely accomplishment of all committee and board duties.
- Facilitate a candid and full discussion of all key matters that come before the board.
- Ensure management is aware of any concerns the board or the shareholders might have.
- Review any change in individual directors' circumstances and determine whether a director's other commitments conflict with their duties as a director of the corporation.
A well-run board takes a village. When a board behaves badly, it represents a multi-system failure. Each director, the committees, the CEO, general counsel and the chairman all have responsibilities for the board's success. The work of the committees supports that of the general counsel, CEO and chairman, and each can flex to offer additional support during a challenging time or significant business or board issue. A well-run board with effective committees may not make the news for doing things right, but when a board behaving badly gets into the headlines, that's the kind of publicity no one wants.
Meghan Juday is chairman of the board of IDEAL Industries.