Aboard chairman of a multibillion-dollar company stood up in front of his peers at a dinner meeting and announced, “I don’t know what my job is.” A CEO of a Fortune 500 company made a similar confession to dozens of other CEOs, stating, “I sit on the board of five other companies, and I don’t know what I’m supposed to do as a director.”
With 150,000 individuals serving on boards in the United States, it begs the question: How many directors fully understand their duties and responsibilities?
“The confessions by the chairman and CEO surprised me, but I continue to hear the same thing from directors time and again,” says Paul Lapides, director, Corporate Governance Center, Coles College of Business, Kennesaw State University. “A few years ago, I argued that between 75 and 80 percent of directors do not know the purpose of the board, fully understand their duties or know how to execute those duties. Today, that number is much lower.”
Smart Business spoke with Lapides about the characteristics of a great board, the makeup of a dynamic director and how directors can monitor themselves for continuous improvement.
What are the benefits of assembling a board of directors?
Good boards have an interest in seeing the company succeed. With a diverse set of experiences, directors exercise their individual and collective knowledge, insight and judgment to increase the speed and improve the quality of decision-making by the CEO and other senior executives. Directors also come to the board with relationships that can benefit the company. For example, a director’s reputation can enhance the value of the company to shareholders, while also instilling confidence in employees and customers.
What are a board’s greatest responsibilities?
The board’s overriding responsibility is to promote and protect the best interests of the corporation and its stockholders, while considering the interests of other external and internal stakeholders, such as creditors and employees. Legally, the board does this by overseeing and directing the conduct of the company’s business affairs.
There are three main areas of responsibility for a board of directors: hiring, retaining and monitoring the CEO and other senior executives; overseeing the corporation’s strategy and processes for managing the enterprise, including succession planning; and monitoring the corporation’s risk and internal controls, including the ethical tone. In executing these responsibilities, directors need to employ a healthy level of skepticism.
What are the top characteristics of the most effective board members?
The first is independence. An independent director has no current or prior professional or personal ties to the corporation or its management other than service as a director. Independent directors must be able and willing to be objective in their judgments. Directors should possess relevant business, industry, company and governance expertise, reflect a mix of backgrounds and perspectives, and have unblemished records of integrity. Other characteristics to consider include time availability, interest in the industry and business, functional experience, previous board experience, access to capital, and name recognition.
How can a board member monitor himself or herself for continuous improvement?
While I have been concerned about directors who know very little about their job, I have become even more concerned by directors who are overconfident, who say or believe they are ‘great’ directors. Those who know they don’t know can learn. The ‘great’ directors often get very sloppy. Being a director is not about greatness. It is about devoting time and attention to listening, learning, advising, adapting, inspecting and knowing when to say ‘no’ or ‘not now.’ With this in mind, all directors should receive detailed orientation and continuing education to assure they achieve and maintain the necessary level of expertise. Also, the board should have procedures in place to evaluate on an annual basis the board committees, the board as a whole and individual directors.
When should an entrepreneur form a board of directors?
The best time to start thinking about a board is when an individual or group of individuals is thinking about starting a business. While most people say they don’t know what they would do with a board, how to organize it or even what the business will be yet, this is still the right time to start thinking about a board. You may not need a ‘formal’ board of directors yet, but you could benefit from the wisdom of successful business executives, company founders, and leading experts in the industry or business you are considering entering or have just entered. When looked at this way, most people recognize that the time for seeking out knowledge, insight and judgment is much earlier. Maybe it will be from a few individuals, an ‘informal’ group of advisers, a more formal board of advisers, or a board of directors. Advisers and directors can make a tremendous contribution to your success. In business, as in life, wise counsel can help your plans succeed.
PAUL LAPIDES is director of Corporate Governance Center and a professor of management and entrepreneurship, Coles College of Business, Kennesaw State University. Reach him at (770) 423-6587 or email@example.com.