By its very nature, the relationship between boards of directors and executive management can be awkward. Chief executives are required to deliver accurate information about performance, risks and succession to the same directors who determine their salary and whether they will continue in their jobs.
Meanwhile, independent directors often don’t possess industry-specific expertise. And the time directors and senior executives have to spend together is limited.
The result is an “effectiveness gap” that can be a barrier to performance.
“We have to figure out a way to overcome the gap in order to more effectively move the companies forward,” said Peter Gleason, managing director and CFO of US-based National Association of Corporate Directors (NACD). The organisation partnered with consulting firm McGladrey for a series of round tables with executives and directors aimed at finding ways for the two groups to better work together. Here are four solutions they found to address common barriers to effective oversight by boards:
Shorten those PowerPoint presentations
A frequent complaint of directors and executives alike is that they simply don’t have enough time together to cover all the important issues.
This is true despite a time commitment on the part of boards that has increased dramatically over the past ten years, according to Gleason. Three-fourths of individuals representing US public and private companies and not-for-profits participating in a recent Deloitte survey reported that their boards met at least six times in the last fiscal year either live or by teleconference. Full board meetings last at least six hours for 41% of respondents in the survey.
Gleason said improved preparation is one way to make better use of time spent together. That means that executives need to get material to board members to review thoroughly before meetings. If this happens, executives can shorten their PowerPoint presentations and spend more of their valuable time with directors in constructive dialogue.
It’s ideal for directors to get information pertaining to the board meeting a week ahead of time, said Jim Ladd, CPA, CGMA, who has held multiple director positions. Even so, he said, it’s not unusual for executives to show the same slides at the meeting they had already sent to the full board, and sometimes even to just read the slides to the board.
That can limit meaningful dialogue. A best practice is to highlight just the key points on the slides, said Ladd, who serves on the boards of Emeritus Corp., Seattle Children’s Hospital, and Sparling Inc.
“Sometimes deadlines are tight, and sometimes the board doesn’t get the information a week ahead of time,” Ladd said. “They get it two days ahead of time. And people are flying in. That can be an obstacle.”
It’s also important to make sure the agenda allots enough time to discuss all of the important issues. The length of sessions should be adjusted to accommodate the number and depth of items that need to be discussed, according to McGladrey National SEC Practice Leader Phyllis Deiso, CPA.
“I sometimes see agendas that are so full that it is absolutely impossible for those committee members to have any robust or meaningful discussion,” she said. “So agenda management is really important.”
Tap multiple sources
To ensure information is communicated appropriately, it is important for directors to have exposure – in a candid and open environment – to executive management, and perhaps a level below, Deiso said. The NACD says directors should have unfettered access to any employee in the company.
It is also important for directors to have access to risk-management mechanisms through multiple sources, Gleason said.
“There are other people in the organisation who have information,” he said. “And structures in place have to make sure that information about various risks makes its way up to the board of directors, and they may not come directly through the CEO.”
Aerospace and energy technology provider Woodward provides its board with access to information from various sources, according to Larry Rittenberg, CPA, who is a member of the board. When Woodward implemented a complex IT system, the IT director made a presentation to the board and the audit committee. The board asked how the system would be controlled and what it could accomplish. Rittenberg had also asked for – and received – additional information from the head of internal audit. And when Rittenberg became chair of the board’s audit committee, he asked the chief executive to spend time with him. The chief executive obliged without hesitation.
“I would hope all boards would be like that,” Rittenberg said. “I’d like to think the CEO would say, ‘Yeah, this is important, I’d be happy to spend some time.’ ”
Boards are often ill-equipped to discover information about the organisation from external sources, according to Deiso. She said directors need to be familiar enough with social media to be aware of what’s being said about the company outside the boardroom.
According to Deiso, the orientation process should train new board members to discover that external information. “Boards need to be equipped with the tools that they need to do their jobs effectively,” she said.
Take a hard stance on “soft” data
The financial reports of a company’s performance and projections are typically seen as a priority and regularly presented to board members.
But financial reports often only tell a part of the company’s story. Non-financial or “soft” data related to processes including customer relations, research and development, logistics, shipping, IT, internal controls and legal matters often are more difficult for directors to acquire, according to an NACD white paper.
Executives have such non-financial metrics at their fingertips but don’t always report on them because they are not typically measured against them, Gleason said. He said directors need to ask for metrics such as turnover rate, safety measures, customer satisfaction ratings, product quality information and diversity information within the organisation.
When directors find metrics that are troubling, Gleason said, they should base at least a small portion of top executive compensation on improving those numbers. “And I guarantee you,” he said, “you will get a lot of information.”
Rittenberg, though, said the board shouldn’t have to tack on additional compensation for a job he believes the chief executive should already be doing.
He said board members need to do their part with regard to research by spending independent time reading everything they can about the company. Rittenberg reads what analysts say about Woodward and keeps up with trends in the aerospace industry that might affect the company. And he said a chief executive should be willing to give board members more information while being open to their guidance.
“If you picked a good CEO – and you have to be willing to say sometimes that you haven’t – that CEO will want insight and analysis and perspectives from the board,” Rittenberg said. “And you need a board who will speak up.”
Full access – without overstepping
Directors’ access to employees can often cause rifts with management. Chief executives sometimes want to limit that access, Gleason said, to avoid having multiple directors constantly asking, for example, the director of finance for information. Gleason suggests that directors inform the chief executive when they are communicating with employees in order to avoid overburdening those employees.
It’s also important for directors to get to know possible chief executive successor candidates within the company personally, Gleason said. This could mean understanding what motivates them. He said it’s important to understand not just how those top officers do their jobs, but how they might interact with the public and employees.
“Getting to know those people without some sort of barrier that is set up by the CEO, I think, is critical,” Gleason explained.
Ladd said some executives are confident enough that they encourage some interaction between board members and senior executives, at meetings and in social situations. But the social mingling is more of an opportunity to get to know possible succession candidates than to get important data about the company.
According to Rittenberg, Woodward sometimes brings division managers to dinner with the board when it gathers for meetings. And if board members express an interest in meeting with some of the employees in charge of lean manufacturing, for example, the chief executive will arrange to make them available to present at a meeting in the near future.
The chief executive is open to questions from board members, too. “I don’t think anybody ever impinges on their time needlessly, but if there’s ever a need to talk to the CEO, we do so,” Rittenberg said. “The CEO sends us monthly reports of what’s happening in the organisation. And he says at the end of every email, especially, ‘Please call if you have any questions.’ ”
Tips for securing a director’s role
Peter Williams said he was lucky when he decided he wanted to pursue a non-executive director (NED) role.
He had been in a senior finance/CFO role for five years at UK department store Selfridges, where he later served as chief executive. The Selfridges chairman saw that taking on a non-executive directorship would broaden Williams’ perspective and benefit the company.
The chairman helped Williams find what he was looking for.
“He knew all the head-hunters and executive search firms,” Williams said. “Their approach to finding good people will often involve contacting people, such as company chairmen, to see whether they know anyone who is appropriate for such roles. I would say that it is crucial to be recommended or endorsed by such a figure to get a role as an NED.”
Williams has gone on to serve as an NED for betting processor Sportech, British motor racing commercial arm Silverstone Holdings, online retailer ASOS and UK cinema operator Cineworld. But others with finance backgrounds are not as fortunate when they search for director positions.
Although demand for finance talent on company boards is rising, getting a seat on a board is a challenge. First-time candidates for board positions often run into the same problem as first-time job-seekers. Companies are often looking for people with experience, but inexperienced candidates have to start somewhere to get that experience.
“It’s not easy,” said Peter Gleason, managing partner and CFO of the National Association of Corporate Directors (NACD). “But the interesting thing is, once you get your first board, it’s easy to get your second board. But breaking through to get your first board is a bit of a challenge.”
Just as inexperienced job-seekers entice employers with their academic credentials, would-be board members and NEDs can use education to their advantage. Organisations such as the NACD in the United States, the Non-Executive Directors Association (NEDA) in the UK, the Asian Centre for Corporate Governance & Sustainability and the Institute of Directors in India offer training to those who want to sit on a company board.
“Having the knowledge puts you ahead of others that don’t,” said Maureen Errity, CPA, director of the Deloitte LLP Center for Corporate Governance.
In addition to educating yourself, experts advise finance professionals who are eager for board appointments to follow these strategies:
- Tailor your curriculum vitae (CV). Many companies use skills matrices when they select board members, Errity said. Obtain a copy of a matrix and highlight the way your skills meet their needs. Do they need an audit committee member? A compensation and nominating committee member? Which committee could you sit on? Tell them in your CV.
- Network. Engage everybody you know and tell them you want to be on a board. Selling yourself requires courage, but it’s essential.
- Seek out a search firm. They can provide mentoring and help match people with board seats.
- Target your search. Understand what kind of organisation you want to serve. Public or private? Large or small? In which industry? Make it something you’re passionate about, because you will spend a lot of time with it if you get selected.
- Get onto director registries. The NACD, NEDA, the Institute of Corporate Directors in Canada, the Institute of Directors in New Zealand and equivalent organisations in other countries have comprehensive registers of members or allow members to post their CVs on their sites. These are used by recruiting companies. Executive recruitment firms may also have registers of directors.
- Manage your expectations. This strategy goes along with targeting your search. If you are a CGMA designation holder with a focus on small-cap companies, don’t expect to get asked to sit on the audit committee of a large multinational corporation.
- Consider a not-for-profit board. It’s a good place to start if you have never been on a board. You will gain valuable experience and expand your network. But there are differences, especially because fundraising often is a main duty for not-for-profit board members.
Finance executives have a lot of meaningful expertise to contribute to boards, Williams said.
“NEDs are there to ensure good governance and the good running of the business,” he said. “They are there to challenge the numbers and shake the tree a bit. Finance people are well-positioned to do this because they have such a strong numbers background.”
But it takes some work – and often, some luck – to land a spot on a board.
Governing for Performance
Board members get frustrated when management doesn’t provide enough strategic information, and executive management may consider board meetings to be a chore, according to the CGMA report Governing for Performance.
The report explains that the board should provide effective direction for management and create a performance culture that takes account of risks, and that non-executive directors and executive management should have open communication. The report describes a “supportive challenge culture” as the appropriate tone for an effective board and provides issues for boards to consider to enable effective corporate governance.