After an unprecedented year in business, directors striving for better governance in '09 might want to adopt these three proposals
By any standard, 2008 was a jaw-dropper of a year. In the past few months we've witnessed things that seemed improbable just 12 months ago: the failure of Lehman Brothers, the fire sales of Bear Stearns and Merrill Lynch (MER), and the bailouts of AIG (AIG) and the U.S. auto industry. So what lessons can boards of directors take away from this annus horribilis? Here are some suggestions for New Year's resolutions that directors might want to consider:
Resolution No. 1: Engage the Entire Board in a Comprehensive Strategy Review
The world has changed in the past few months. If your board was really on its game, it would've made time on your board agenda in the third or fourth quarter for a comprehensive review of your corporate strategy. This doesn't mean a brief update from the CEO on "How might the financial crisis impact our business?" It means taking the time to get input from all of the directors on their perceptions of:
where they see the company's strengths and weaknesses relative to competitors in this changed environment; what they see as the key challenges and risks now facing the company; what modifications they view as appropriate to the corporate strategy—and what concerns they might have about strategic implementation going forward into 2009; and what opportunities for the company they might see arising from the change in financial conditions.
Most CEOs vastly underleverage their boards on strategy issues. In tough times, it's tempting for a CEO to want to "tell" directors what changes will be made strategically rather than solicit their perspectives and expertise. However, if you have gathered a team of directors into your boardroom who have solid business experience and relevant backgrounds—and you've taken the trouble to educate them well about the particulars of your business—this is the time to realize the fruits of your investment and use the board as a helpful resource and valuable sounding board in a tough business environment.
This isn't to suggest in any way turning strategic decisions over to the board; strategy is the mandate of the CEO. However, CEOs who have made the effort to draw out board perspectives on key strategic underpinnings typically generate valuable new ideas from doing so and ultimately achieve genuine alignment between management and the board on strategic issues. That can be invaluable in a challenging business environment.
Resolution No. 2: Ensure that the Full Board Is Updated by Its Committees on Risk and Compensation Issues at Least Once a Year
Two key issues stole much of the governance spotlight in 2008: risk and executive compensation. In most cases, the oversight of financial risk issues is delegated to the Audit Committee or a special Risk Committee (Lehman Brothers, for example, actually had a Risk Committee, although it only met twice in 2006 and 2007). At least once a year, the committee with risk responsibilities should do a full-scale review of key risk issues with the entire board. To prepare for this session, the committee chair should send an e-mail or place calls to directors who are not members of the committee asking what they see as the key risks facing the company and which of those they have particular concerns about.
This way, the committee chair can ascertain that the working session will address concerns of noncommittee members. Moreover, this exercise often surfaces concerns on which the committee may not have been focused, yet which deserve attention.
Executive compensation has become such a heated topic that it, too, deserves an annual review. Most boards have a practice whereby the Compensation Committee chair provides an update at board meetings on key developments in this area. While this practice is a good one, it's simply not enough in an environment where this issue is under such unprecedented scrutiny.
Once a year, the committee—and its compensation consultants—should provide a working session for the full board on all aspects of the executive compensation programs, including the committee's philosophy on pay levels and peer groups, short- and long-term incentive plans, stock options, and other equity-based pay vehicles as well as pension, benefits, and perquisites. Moreover, a session of this nature should be included in every new director's board-orientation session regardless of whether he/she is becoming a member of the Compensation Committee.
Resolution No. 3: If Important Skill Sets Are Missing from Your Board Table, Go and Get Them
It's the responsibility of the Nominating/Governance Committee to optimize the composition of the board. If there is relevant experience or important skills needed at the board table (as in the case of boards that lack a single director with industry experience other than the CEO), this committee owes it to the shareholders to address this situation and needs to make this a New Year's resolution for 2009.
Don't fall prey to articles proclaiming there are no good candidates to serve on boards; directors' colleges are full of people dying for their first board seat. A recent series of interviews we at the Hay Group undertook with CEOs on succession planning underscored their desire to place top internal candidates on outside boards as part of their grooming process. One of my clients recently recruited four absolutely top-notch directors on its own, using the company's internal legal and HR staff to research candidates rather than a headhunter. Their addition has had a dramatic impact on the board's overall performance.
If there are directors who have no place on the board, the committee needs to step up to deal with this thorny issue. Business writers had a field day lampooning the composition of the Lehman Brothers board, including the Broadway producer who'd been on the board for 23 years and the former actress who retired in 2006 at the age of 83. If you have similar issues, it's time to engage the Lead Director or chair of the Governance Committee in a "tough" renomination conversation. Your shareholders deserve nothing less. They also deserve processes for impactful board evaluation, as well as individual director evaluation. And if you don't have these, or what you have isn't delivering, make that your New Year's Resolution No. 4.
Boards came under a lot of criticism and scrutiny in 2008, which is unlikely to abate in 2009. But many did an admirable job in helping to steer the corporations they oversee through some very rough waters. These resolutions can be a good start to 2009 for those boards that are committed to providing outstanding governance in the year ahead.