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Managing the Board of Directors

I like writing. I hate looking for a publisher. Then I thought, hey, that's why I have a blog. So, here you have the first in an occasional series of articles:

Managing the Board So You Can Manage Your Company

The board meeting went well. The board had moved through the agenda quickly and easily. Even the motion to recommend a bylaw change to expand the size of the board and establish committees sailed through. The CEO left the meeting feeling good. Any bylaw change approved by the board almost assuredly would be approved by the shareholders. More board members would provide greater expertise for management to draw on. Committees would allow management to get board assistance without forcing all board members to invest huge amounts of time. The CEO was looking forward to the advantages the expansion would bring. Heading to her car, she saw a knot of board members talking at the other end of the parking lot. She waved, thinking nothing of it.

The trouble started the next day. One board member called to inform the CEO of the concerns that he and a few unnamed other board members had. Was the CEO trying to dilute their power? Did she have nefarious plans that she wanted to hide from the entire board by assigning tasks to committees? The board member assured the CEO that he trusted the CEO, it was just these other board members that were concerned.

Days of discussion followed. By week’s end, the proposed bylaw change had been abandoned and, instead of recruiting new expertise to the board, the CEO spent the next month preparing and submitting reports to the board to show that nothing was amiss. An opportunity had been squandered.

After Enron and the other assorted corporate scandals, many board members have taken the charge to oversee the corporation too seriously, interfering with day-to-day management. As one CEO put it, “you’re basically doing two jobs – managing the company and managing the board.” This irregular behavior distracts management from the job of running the company. It can and should be halted as quickly as possible. Otherwise, in the end, it is injurious to the company itself. That same CEO added, “unfortunately, the board doesn’t have the stomach for what’s good for the company in the long term. You’re dealing with their immediate gratification need which isn’t always best over the long haul.” This article gives management the tools it can use to regain control.

The board must function as a whole. The board should be provided with written information well before any board meeting and all issues should be discussed within meetings among the board members as a whole. Management should refuse to engage in substantive discussions outside of board meetings. The head of the board should encourage board members from engaging in outside discussions. Matters too intricate or specialized for full board discussion should be assigned to a committee. Minutes of committee meetings should be disseminated as part of the board information.

Although board members are entitled to review any information pertaining to the company, requests for information should be disclosed to the entire board and copies of any information provided should be disseminated to the entire board in advance of meetings. “The best surprise is no surprise,” said David Levy, Director of Financial Aid at the California Institute of Technology and member of several non-profit boards. Joseph Troy and William Gould, in their treatise, Advising and Defending Corporate Directors and Officers, note that there are limits to this power. Specifically, board members are required to treat confidential information confidentially; the director is not allowed to use his right for a private purpose that conflicts with the company’s interests; and there are reasonable time constraints on their exercise.

Company bylaws provide procedural guidelines that can quiet unnecessary disputes. Closely-held companies are particularly guilty of putting the bylaws on a shelf and never returning to them. Most bylaws contain set rules as to the responsibilities of various positions, resolving many nascent power disputes. Bylaws also contain standards for removing a board member; identification of cumulative voting requirements that may enable some board members to retain their seats regardless of behavior; and prescribed dispute resolution methods.

One may be surprised at how correcting procedural sloppiness resolves a lot of problems. First, proper procedure contains the problem and keeps it from distracting management. Second, many people who have no trouble bending the CEO’s ear in private are less willing to gripe before a full board.

What will remain are substantive problems that really do require resolution. Doing so can and should benefit the company as a whole. First, identify the issues and line up the players. One should be looking for board members who are neutral on the matter. One or two of the most respected neutral board members should be enlisted to lead the discussion. Guidelines for the discussion should include:

· No personal attacks.

· Everyone gets a chance to speak without interruption.

· The leader should keep a list of issues as they arise so they can all be addressed.

· Resolutions should meet the needs of the company, not the needs of the board.

In the event that internal board discussions cannot resolve the matter, outside consultants can be brought in. They generally fall into 4 categories: trainers, strategic planners, counselors and mediators.

Trainers teach basic skills and board duties. Trainers can put on a single session on topics as basic as running an effective meeting or as advanced as restructuring board committees. Usually, trainers are brought in within a retreat setting rather than as part of a regular board meeting.

Strategic planners can help when a board disagrees about the direction of the company. Strategic planning is a complex process and a board should expect an initial time investment of at least 100 hours over 6 months. However, done properly, a strategic plan can provide a road map to keeping the board focused for quite some time.

Counselors are best when personal disputes between board members interfere with company business. Choose one that has a background in organizations. Some will do one or two-day sessions designed around teambuilding skills. Others have specialized approaches. In their book, Hats Off to You, Ernest A. Doud, Jr. & Lee Hausner, Ph.D., recommend that one
Make[s] sure the person you select:

· Understands both the [personal] and business implications of your conflict

· Is someone with whom everyone has good personal chemistry;

· Is someone you trust!

Finally, mediators are a good choice when board members have serious substantive issues that need to be resolved. A mediator can take the various factions from problem to solution, encouraging the board to come to a firm agreement. Some mediators will assist in drafting the agreement in a form that will bind the board. Depending on the nature of the dispute, that form can consist of board resolutions, resignation of a director, the buyout of shareholders that form the backing for a particular position or a myriad of other creative solutions. As with the choice of any other professional, the mediator should have a strong background with corporations and boards and, if possible, familiarity with the substantive area of the problem.

Above all, management needs to keep its focus. A board problem must be resolved as efficiently as possible rather than ignored. Management cannot afford to get embroiled in a dispute, choosing sides and getting caught up in the emotions that will run high. A company’s bottom line will be improved with a board that provides the proper amount of guidance and oversight instead of interference.

For more information, contact Justene Adamec.

Posted by Justene Adamec at September 24, 2004 11:56 AM | TrackBack