Boards – 2012 To Do List

Of all the topics that boards are currently considering as part of their 2012 to do list (i.e. better risk management, taming executive compensation, more constructive engagement on strategy) I think that there’s one major topic missing….that is, the board’s separate-from-management ”accountability for the performance of the organization”. Shareholders need to start seeing an Annual Board Performance Report…..just as they do with with Management’s Annual Financial Report to the Shareholders. That way, shareholders can get some sense as to whether or not the board was doing its job as “governors” – which is an activity separate and distinct from management’s.

Moreover, when a company’s performance goes well, the board get’s to take credit along with management – and often does. But when a company fails, it’s almost always only management who pays. They get fired – and typically with millions in severance. Directors, however, need to know and demonstrate to shareholders that there are “job related consequences” for them – along with management – when company performance fails. They too should be replaced….and even volunteer to do so. Now that’s accountability!

9 Responses to “Boards – 2012 To Do List”

  1. Norman Marks says:

    I think I agree, but first we have to define what would be in the report.

  2. Alan Brett says:

    In the UK, where the roles of the Chairman and CEO are combined, this effectively already happens – the annual report includes the Chairman’s letter as a separate section from the CEO/Finance Directors reviews. Further, in relation to corporate governance, some of the more progressive UK companies are also introducing the corporate governance section of the annual report and the remuneration report with a letter from the lead independent director and the chairman of the remuneration committee respectively, setting out how the Board/committee performed their roles.

    Unfortunately, too much of the US disclosures seem to be written by corporate counsel, which is not helpful to the majority of shareholders.

  3. Great idea and great discussion Alex. Once proxy access becomes as common as majority vote requirements, that will add pressure on boards to disclose more of what they do (or fail to do).

  4. James Roth says:

    I’m not sure I agree, only because I doubt that anything published would be meaningful. The financial report deals with objective facts (and we know how even these can be manipulated to make things sound better than they are). What the board does and, more important, how they do it are so broad-ranging and inherently subjective that I suspect weak boards would make themselves sound strong. Readers would not be able to tell how strong or weak a board is from the report.

    There could, of course, be a letter evaluating the board from an independent assurance provider, the obvious candidate being the external auditors. But the conflict of interest involved makes it highly unlikely that such a report would be meaningful.

    I’m afraid the best thing is board self-assessment with meaningful input from internal and external auditors, the result of which would almost have to remain private for participants to be candid.

    • admin says:

      James, I think it would be fascinating to read a report from any board which says, “the company’s performance was lousy due to bad management but we (the board) did a great job”. The key here is for the board to step up their accountability. My view, after working with hundreds of directors, is that boards should voluntarily publish their annual “board evaluation” (tied to their board charter, of course) with commentary on the good and bad scores and also show trend lines on key board performance indicators over time. Is this the perfect solution? Probably not. But definitely a start. And a lot better than what investors/stakeholders have right now, which is nothing.

      • Alex Todd says:

        Chris, one way boards could be motivated to do this, is if their tenure/compensation were contingent on an external board performance review. Perhaps shareholders should withhold their votes (in a majority voting scenario, as Jim mentioned) without a board performance evaluation. Jim, I don’t believe proxy access is a prerequisite.

      • James and “Admin”, I agree moving in this direction is a great idea, though I share James’ concern that any published report would be so watered down, or “self-promoting” as to be meaningless, and perhaps even misleading. A good start would be to get Boards to understand that they need to go beyond “Self-assessment” and use a reliable 3rd party to assess the skills/competencies on the Board, provide a “gap analysis”, and path forward for a strong Board succession plan…this could of course be rolled down to the entire senior executive team. My opinion of Board “self-assessment” is a bit like me waking up in the morning, looking in the mirror, and seeing a striking resemblance to Brad Pitt! Not too well grounded in reality I am afraid!
        A 3rd party assessment (such as provided by our Talent Management division, iDestiny) can and should be grounded in real metrics, utilizing research-based tools covering such areas as a personality inventory, leadership style inventory, analytical tests, structured interviews, customized leadership dilemmas and business case scenarios. These measure Critical Competencies: ✓ Adaptability ✓ Decision Making ✓ Social Effectiveness
        ✓ Business Proficiency ✓ Leadership Competence ✓ Strategic Aptitude. Then the results include a Developmental Action Plan for the individual and a Leadership Effectiveness Assessment for the Board, with clear, concise and actionable feedback.
        Sadly, this kind of process is rarely followed by Boards of public companies, let alone private. I assure you, those that do, see measurable positive results!

        • Dear Thomas

          I agree with your views. In the UK Boards are governed by various Codes that range from “Comply or Explain” being an industry requirement. Board Evaluation or Board Effectiveness Review have become “requirements” that are totally resisted in most companies.

          Our concern about self evaluation is –
          - The choice of questions
          - The rating of answers
          - The answer content multiple choice is the style
          - The quality of the answers
          - Confidentiality
          - Ability to deliver the message objectively and competently
          - The risk the messages are not accepted
          - Nothing happens
          - A head rolls …

          Therefore an external process is risk free in comparison to the above and is cost effective and brings experience with it. The concerns by Boards is all perceived.

          Genius Methods runs Board Evaluations and we find that without fail the value accepted by the companies way outweighs the cost of the exercise. Our process is very thorough, rigorous and totally transparent. Tailored and aimed at the “softer” issues – for example leadership, debate, decision making, risk culture, risk maturity, strategy, process, governance, succession planning, communication, crisis planning and more … We all handle self evaluations, peer reviews and the review of the Chairman.

          The provider of services to this market is growing rapidly in the UK and it is for the company in question to understand the different USP’s of each provider and find the one that matches their style, maturity and personality to ensure that the value is extracted.

  5. The problem of board communication has major hurdles in the U.S. If you are interested in the topic, I wrote an article last year suggesting that boards of U.S. companies should publish an annual Directors Discussion and Analysis (DD&A) and describing what topics it might cover and how it might work. The article, entitled, “Should Directors Have a Duty to Inform?” can be found in Duke Law School’s Journal of law and Contemporary Problems, Spring 2011 issue, at Director communication with shareholders remains one of the most intractible governance problems.

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