I am currently interviewing shareholder activists, hedge funds and private equity leaders on changes to public company boards to make them more focused on value creation and company performance. I am also interviewing leading directors and CEOs. My research reveals a disconnect between how many boards operate and how shareholder advocates believe they should operate.
For a board to operate effectively, it starts with an independent and effective Board Chair and Governance and Nominating Committee, which are the leadership and inner workings of a Board. It is here where governance accountability is established and good directors are selected, or not.
The focus since Sarbanes Oxley has been on the Audit Committee, and since Dodd-Frank on the Compensation Committee. But without an effective Board Chair and Governance and Nominating Committee, management accountability to the board, and board accountability to shareholders will be undermined.
If you want to make your Board more focused on company performance and value creation, ask yourself whether your Board Chair and Governance and Nominating Committee can answer "yes" to most of these questions, based on my interviews, in no particular order:
1. Has the Board set standards for a vigorous value creation process, and does its value maximization plan clearly and simply spell out key timelines, milestones, targets, and individuals accountable for each key plan component and specific results? (Is the board's plan as good as or better that what an activist shareholder can provide? It should be.)
2. Does each Director have the background into the company, the business model, the industry and markets to fully understand the value drivers and associated risks? (If not, does the Chair and Board have the backbone to replace those directors?)
3. Leadership goes well beyond whether the Chair is independent or not. Does the Board Chair possess the following attributes: Shareholder mindset, leadership, understanding of the value creation process and the capital markets, ability to view things holistically, an ethic of accepting personal responsibility, industry experience, and no desire for CEO role? (If not, is the Governance and Nominating Committee strong enough to recommend to the Board to replace the Chair?)
4. Do the Board and Board Chair have the will to hold management to account for results and the courage to act decisively when needed?
5. Does the Board ensure direct links to performance and value creation and the need to hit certain targets before any executive incentive compensation kicks in?
6. Does each Director have a meaningful portion of his or her own savings invested in the company?
7. Has the Governance and Nominating Committee recommended to the Board adopting shareholder accountability practices and removing entrenchment devices and other restrictions?
8. If or when needed, does the Board and each Board Committee utilize resources and advisors independent of management who represent the interests of shareholders?
9. Does the Board Chair and Governance and Nominating Committee look to shareholders for prospective directors, rather than to management?
10. Does the Governance and Nominating Committee ensure that all governance terms of reference been redesigned to reflect the Board's focus on value creation and company performance? (Many times these terms of reference written by management keep the board at bay.)
11. Does the Board Chair and other Directors engage regularly and directly with key shareholders, without the presence of management? (The vast majority of boards do not meet with shareholders.)
12. At these Director-Shareholder meetings, are the following matters covered off: Value creation and company performance; status of governance initiatives; board and committee composition and renewal; risk governance; and the governance of executive compensation?
If you answered yes to all questions, or even almost all, you likely have a truly outstanding Board Chair and Governance and Nominating Committee. You may even wish to apply for a governance award, here.
If you cannot answer yes to the majority of these questions, you have work to do.
Join me in my next blog where I will discuss "What makes for a high-performance Director?" based on about 30 interviews with shareholder advocates, search firms and members of the NACD 100 and Top 100 CEO listings.
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