The boardroom! The name conjures up a circle of grave-faced,
silver-haired businesspeople in suits, meeting in exclusive
conclave to exercise two broad sets of functions: to advise and to
govern. Elsewhere, Professionelle has looked at how
women can take a seat at the boardroom table. Now, we're going to
look at exactly what happens once you've taken your seat.
The informal board of advisors
Perhaps a firm is just starting out, and is run by a sole
trader. Or maybe the owner runs it in partnership with others. In
general, these arrangements won't need a formal board unless the
owner/s want to list the company, but, unless they're bent on
making all their mistakes alone, they'll still need the advice -
and the Rolodex - that a board can provide.
New Zealand entrepreneur and doctor Miriam Martin founded her
hugely successful medical personnel recruitment agency Kiwisstat/Ausstat in
1999. As a private company, hers doesn't need a formal board, but
Miriam has found it invaluable to have an informal board of
advisors, whom she pays by the hour. She says:
It's been really good to have people critique our
decisions every couple of months. It's added a dimension of
robustness to the business.
How do companies choose advisors? James Currier, who founded the
social networking company Tickle (and sold it to Monster Worldwide
for $US100m) said:
My selection criteria were based on several
factors. Number one was personality fit - meaning can we get along.
Number two was does he or she have relevant experience…. Number
three was can this person introduce me to people I want to work
with and/or do business with. That is a sub category of personality
because if your personalities match, it is likely that the people
they introduce you to will also match. But, it is also a matter of
how big their Rolodex is. 1
The formal board of directors
A listed company needs a formal board of directors. When going
public, the company's founders need to decide who should be on the
board, where they should come from, and how many appointees there
should be.
1. Executive directors and non-executive
directors
Ideally, the board will comprise both directors who are
executives in the company (for example, the chief finance officer)
and directors who come from outside its ranks. The former type are
referred to as executive directors; the latter are called
non-executive directors, external directors or outside directors.
If you're intent on becoming a director, the route you take will
depend on whether you intend to be an executive director or an
independent. If the former, you'll be aiming for a C-level role
with board representation; if the latter, you won't necessarily be
on a corporate track, but may, for example, be an accounting or
legal professional.
There is an increasing trend towards non-executive directors.
Their presence is perceived to strengthen the board: while no
director should be beholden to a particular constituency,
non-executive directors are seen as less likely to bow to anyone's
will. Venture capitalists, who represent investors with a
particular time horizon, and executive directors, who tend to side
with their boss, the CEO, can be seen as less independent.
Research has found that the incidence of fraud decreases as the
number of non-executive directors rises 2, and the New Zealand
Securities Commission recommends an "appropriate balance" of
executive and non-executive directors for New Zealand companies
3.
2. No one size fits all
It's not just who sits on your board, but how many you have
alongside you at the table that counts. In the US, the size of
boards has shrunk from an average of 16 in the 1980s to a mean of
ten last year, while a recent Egon Zehnder survey of North American
and European directors determined that 14 seats at the table were
thought ideal. No one size fits all, and any decision on size means
weighing competing considerations: too small a group, and you
foster group-think and close off a wider range of opinion; too
large, and discussions become unwieldy and factions form.
3. The chairman of the board
The CEO will always be on the company's board; should he or she
also be that board's chair? National practice varies widely. In the
US, the roles are usually occupied by a single person; in the UK,
the reverse is the case. Here, the Securities Commission takes a
dim view of joint responsibility, stating that "[n]o director of a
publicly owned entity should simultaneously hold the roles of board
chairperson and chief executive (or equivalent)." 4
Structure of the board
To discharge its functions effectively, the board should have at
least three committees. Check the sidebar
for more detail on these:
- audit committee: responsible for liaising with the internal and
external auditors and promoting integrity in financial
reporting
- compensation commitee: responsible for setting and reviewing
the CEO's total compensation package
- nomination committee: responsible for nominating new directors
to the board
Further committees may also be adopted as appropriate to enable
the board to work effectively.
To advise and to govern
The board has one advisory function: it offers expert
advice to management, enabling management to run the company better
than it could on its own.
Next, it exercises four governance functions.
First, it hires top management, especially the CEO. When Hewlett
Packard was searching for its penultimate CEO, it was looking for a
change manager who could make the numbers. Carly Fiorina, who had
been just that at Lucent, fit the bill. But hiring the CEO is only
part of the task: the board must evaluate the CEO and, if
necessary, fire her - and you can read about Carly Fiorina's
perspective on that aspect of her tenure at HP in her
autobiography, Tough Choices.
Secondly, the board votes on major operating proposals - capital
expenditures, for example, or mergers and acquisitions. If you're
familiar with Carly Fiorina's tenure at HP, you'll remember that
her board split over her proposal to merge with Compaq in 2002.
Thirdly, the board must vote on major financial decisions, such
as issuing stocks and bonds, and determining dividend payments and
stock repurchases.
Finally, and importantly, the board must ensure that the firm's
activities and financial condition are accurately reported to its
shareholders.
First days
There's no one answer to what you, as a new director, might find
on your first agenda. In part, it depends where in the year you
come in and also on what issues the board happens to be examining.
One thing you should not see are topics and tasks that should be
carried out by management. The distinction between governance and
management is a vital one for any new Director to grasp, but it's
too wide a topic to cover here.
It will have to be the subject of a future article!
Sources:
- Michael Roberts, William Sahlmann, Sasha Novakovich, How Serial
Entrepreneurs Build and Manage a Board of Directors in a
Venture-Backed Start Up, HBS Case 9-808-163, Rev. July 1,
2008.
- Board Composition and Corporate Fraud", Hatice Uzun, Samuel H
Szewczyk, Raj Varma. Financial Analysts Journal. Charlottesville:
May/Jun 2004. Vol. 60, Iss. 3; pp. 33 ff.
- Corporate Governance in New Zealand - Principles and
Guidelines. A Handbook for Directors, Executives and Advisers.
Securities Commission, March 2004, section 2.1.
- Ibid, section 2.5.
- The Determinants and Effects of Board Nomination Committees"
Winfried Ruigrok, Simon Peck, Sabina Tacheva, Peder Greve, Yan Hu.
Journal of Management & Governance. Dordrecht: 2006. Vol. 10,
Iss. 2.
Acknowledgement
Nicola Rowe currently divides her time between the UK, where she
is a director of the Ashridge Strategic Management Centre in
London, England, and New Zealand, where she has a business strategy
consulting practice. She worked for many years for The Boston
Consulting Group in Germany and Switzerland, advising clients in
the pharmaceutical and media industries in Europe and North
America. In 2008, she lectured courses in international business
strategy and in corporate governance on the MBA programme at the
University of Canterbury. Visit Nicola at her Strategynut blog
where she comments on business strategy and governance topics.