Board Operations

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the eighth in a series of articles that summarizes their principles.

Serving on a board requires significant time and attention on the part of directors. Directors must participate in board meetings, review relevant materials, serve on board committees, and prepare for meetings and discussions with senior management. Certain roles, such as committee chair, chairman of the board and lead director, carry an additional time commitment beyond that attendant to board and committee service.

Directors must spend the time needed and meet as frequently as necessary to discharge their responsibilities properly. The board of directors, with the assistance of the corporate governance committee, should consider the appropriate frequency and length of board meetings. Longer meetings may permit directors to explore key issues in depth, whereas shorter but more frequent meetings may help directors stay up-to-date on emerging corporate trends, and business and regulatory developments. When arranging a meeting schedule for the board, each corporation should consider the nature and complexity of its operations and transactions, as well as its business and regulatory environment.

The board of directors, with the assistance of the committee responsible for overseeing director compensation, should periodically review the compensation of the board in light of developments in the marketplace and the board’s needs. This review should include consideration of differential compensation for specific roles that carry more responsibility, such as chairing committees, acting as lead director or acting as independent chairman. The board should approve changes in compensation based on the recommendation of the committee. In determining director compensation, the board should focus on creating total director compensation that is reasonable relative to directors’ responsibilities and compensation at comparable companies. The board also should be comfortable that compensation adequately rewards directors for the risks associated with board service, as well as their time and efforts. Director compensation should consist of a mix of cash and equity. The board should consider paying the cash portion of director compensation in the form of an annual retainer, rather than through meeting fees, to encourage directors to view board service as an ongoing commitment and to foster a long-term focus.

Equity helps align the interests of directors with those of the corporation’s shareholders, but equity compensation should be carefully designed to avoid unintended incentives such as an emphasis on short-term market value changes. Corporations increasingly are providing the long-term equity component of director compensation in the form of restricted stock, rather than stock options, to better align directors’ interests with those of shareholders. The board should establish a requirement that directors hold a meaningful amount of the corporation’s stock for as long as they remain on the board.

Service on too many boards can interfere with an individual’s ability to satisfy his or her responsibilities, either as a member of senior management or as a director. Before accepting an additional board position, a director should consider whether the acceptance of a new directorship will compromise the ability to devote adequate time and focus to present responsibilities. Directors should notify the chair of the corporate governance committee before accepting a seat on the board of another corporation or assuming a significant new role on an existing board (such as a committee chair or lead director position). Some boards require the prior approval of the corporate governance committee before a director accepts a seat on the board of another corporation. Similarly, the corporation should establish a process to review senior management service on other boards prior to acceptance in order to consider the time commitment and review any potential conflicts of interest and interlocks.

The board’s independent or non-management directors should have the opportunity to meet regularly in executive session, outside the presence of the CEO and any other management directors.

» Time for an executive session should be placed on the agenda for every regularly scheduled board meeting. The independent chairman or lead director, as applicable, should see that adequate time is reserved for these sessions, and should set the agenda for and chair these sessions.

» To maximize the effectiveness of executive sessions, the independent chairman or lead director, as applicable, should follow up with the CEO and other appropriate members of senior management on matters addressed in the executive sessions.

Many board responsibilities may be delegated to committees to permit directors to address key areas in more depth as discussed above. Regardless of whether the board grants plenary power to its committees with respect to particular issues or prefers to take recommendations from its committees, committees should keep the full board informed of their activities. Corporations benefit greatly from the collective wisdom of the entire board acting as a deliberative body, and the interaction between committees and the full board should reflect this principle.

The board’s agenda must be carefully planned yet flexible enough to accommodate emergencies and unexpected developments. The chairman of the board should work with the lead director (when the corporation has one) in setting the agenda, and should be responsive to individual directors’ requests to add items to the agenda and open to suggestions for improving the agenda. It is important that the agenda and meeting schedule permit adequate time for discussion and a healthy give-and-take between board members and management. The board should work to foster open, ongoing dialogue between management and members of the board. Board members should have full access to senior management outside of board meetings.

Board agendas should be structured to maximize the use of meeting time for open discussion and deliberation. Highlighting changes relevant to recurring agenda items and distributing copies of presentations sufficiently in advance of meetings can facilitate review of materials prior to meetings and increase the time that is available for discussion and constructive dialogue.

The board must have accurate, complete information to do its job; the quality of information that the board receives directly affects its ability to perform its oversight function effectively. Directors should receive and review information from a variety of sources, including senior management, board committees, outside experts and the outside auditor, as well as industry journals, and analyst and media reports. The board should receive information before board and committee meetings with sufficient time to review and reflect on key issues and to request supplemental information as necessary.

Corporations should consider ways in which they can use technology, such as board portals, to provide directors access to relevant information on a timely basis. Technology can provide a mechanism for providing meeting materials, delivering real-time information about developments that occur between meetings and creating resources with background information and educational tools for directors to access at their convenience.

Corporations should have a robust orientation process for new directors that is designed to familiarize them with the various aspects of the corporation, including its business, strategy, industry, management, compliance programs and corporate governance practices. Common components of board orientation programs include briefings from senior management, on-site visits to the corporation’s facilities, informal meetings with other directors and written materials.

Corporations should encourage directors to take advantage of educational opportunities on an ongoing basis. Continuing education can assist directors in keeping abreast of issues and developments relevant to the corporation and enable them to address specific subjects in greater depth. Continuing education can take the form of participation in outside programs or “in board” educational sessions, led by members of senior management or outside experts and customized for the corporation. Many boards rely on a combination of the two methods by informing their directors of outside programs and holding educational sessions for the full board or particular committees on a regular basis.

Where appropriate, boards and board committees should seek advice from outside advisers independent of management with respect to matters within their responsibility. For example, there may be technical aspects of the corporation’s business—such as risk assessment and risk management—for which the board or a committee determines that additional expert advice would be useful. Similarly, many compensation committees engage their own compensation consultants. Situations where the board or a committee may decide it is appropriate to seek independent legal advice include circumstances involving conflicts of interest, external or internal investigations, and mergers and acquisition activity. The board and its committees should have the authority to select and retain advisers and approve the terms of their retention and fees.

— Steve Odland

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