How to Assemble the Perfect Board
When it comes to corporate governance, there’s no one-size-fits-all solution. But factors like board composition and the decision to utilize or eliminate earnings guidance are important decisions every company must make, particularly when it comes to positioning their board for short- and long-term success.
How To Pick Your Board Members
Ron Poelman, senior of-counsel attorney at Jones Waldo and Chairman of the Board of the National Association of Corporate Directors Utah Chapter (NACD Utah), says board composition is the foundation of everything. Ideally, he says, you’ll want someone with some accounting or finance experience. Then you’ll want someone with marketing and sales experience. Then you’ll want someone with technical software experience. “Having the right mix of people on your board is really important. One thing I advise is to first start with a list of the ideal expertise [you want] on your board… then try to create a board that covers all of those.”
Robert Gross, principle and founder of Robert C. Gross Associates and President of NACD Utah, says what is most important in terms of board composition is what is best for the company itself. A retail company, for example, needs a very different board composition than that of a financial services company. “Gender diversity and ethnic diversity are also becoming more important,” he says. “You can think of [board composition] in two regards. One is based on skill set and one is based on demographics.”
A board should also have a good mix of insiders and outsiders, Mr. Poelman says. It should be made up of some who work at the company and some who don’t. That way the company benefits from inside intelligence and outside perspective. “Insiders are involved in the personal relationships of working together every day and office politics, but outside independent directors don’t live in the tree, so they can more easily see the forest,” Mr. Poelman says. “When you have a mix of both, the best decisions are made.”
Finally, the number of board members makes a difference as well. Three members is the bare minimum, Mr. Poelman says, and beyond seven can make it difficult to reach consensus. Odd numbers help with that conundrum. If it ever comes down to a vote, majority rules.
Don’t Forget To Think About Your Long Term Goals
You can guarantee that different board members will have different interests. “The day of moms and pops and retail investors owning the majority of public companies is long over,” says Mr. Gross. “Some investors are interested in short-term share prices, short-term market value, and short-term profitability. They think in terms of short-term because they’re interested in ownership of stock. But there are others who buy companies to own companies. When you serve as an owner and hold stock for [a] long period of time, you begin to think long-term.”
While public companies can be open to scrutiny from those concerned only with their short-term performance, Mr. Poelman believes boards can find a way to optimize companies for the long-term.
“Public companies have a quarterly reporting system, and it’s hard when your stock price goes up and down based on your quarterly performance,” he says. “[If] you want to invest in opening in a new market, you have to hire people, buy equipment, [and] get facilities. Because you’re spending money on building that future market, your quarterly results go down and then your stock price goes down. It’s really difficult being a glass house as a public company with quarterly reporting. It’s hard to focus on the long term, but the best way to do that is to communicate to shareholders. Say ‘We are going to spend all of this money up front to make this investment because we think it’ll pay off. It’s going to be expensive, but we believe the future is bright.’ My best advice for boards is to communicate to shareholders and tell them what’s going on.”
Use Your Board Meetings To Discuss The Future, Not The Past
“Board meetings should be mostly about the future, not the past,” he adds. “Boards should not focus on short-term objectives unless it’s a critical issue. The day-to-day should be handled by company officers, like the CEO and the COO. The most important thing a board does is hire and manage great officers. Those officers should then execute on a short-term basis the long-term strategy that’s developed by the board itself.”
Mr. Poelman says some companies have started to eliminate earnings guidance, but he believes if companies don’t tell their shareholders what their strategy is and what their projections are, those shareholders won’t be willing to make future investments.
“If you have plans to significantly upgrade tech infrastructure and that’s going to hit your short-term earnings but pay off in spades in the future with increased efficiency, tell people that’s your strategy and then give your shareholders the earnings guidance for the year,” he says. “Tell them you’re going to make less money this year but let them also see your projections for the next year when you’ve made that investment and the efficiencies are coming out.”
Mr. Poelman says even if there’s a 10-year horizon on an investment, it’s important to be transparent so shareholders know if they are investing in a long-term growth project. Some may be willing to take the ride, while other investors may be short-term players looking to invest in a different company that will be more profitable over the next year.
“If you don’t tell people what your strategy is and what your projections are, how can they make a good investment?” he says.
Don’t Forget The Nuances Of Board Staggering
The concept of the staggered board was implemented as an anti-takeover measure, Mr. Poelman says, but that trend is now going away.
“The staggered board was put in place so somebody might be able to come in and buy a company in the public market, but it would take them some time to be able to replace the directors because there would usually be just one-third of the board reelected each year, but [staggering] is now rightly going away,” he says.
This doesn’t mean boards shouldn’t have regular replacement when it’s needed, Poelman says, but if a company finds a good director, they should keep that person for as long as they are willing to serve. Good directors are hard to find.
“To find a director who has all the interpersonal skills along with business intelligence is hard to find,” he says. “The directors who are really contributors, you want to keep them forever. This idea of having a regular rotation doesn’t make a lot of sense. Should there be some regular review of the board and who is on it and who is putting in the work? Yes. Is new blood a good thing once in a while? Absolutely. But you want to keep the good people as long as you can.”
Mr. Poelman adds that the Baby Boomer generation is the one to look to for finding good directors. “Every single day 10,000 people turn 65,” he says. “The bad news is they are all retiring, but the good news is they are living a long time and are available and have tremendous experience. Why not use them as much as you can? There’s a great opportunity to use these older, wiser and more experienced directors.”
Mr. Gross says another issue with staggered boards is that it makes it difficult for shareholders to send signals to management about their overall feelings of the company. “That’s been one of the fundamental changes to boards since Dodd-Frank was adopted by Congress in the last administration,” he says. “It’s hard to say if it’s working better, but it’s more transparent to shareholders. They now have the ability to look at each director and size up the total package.”
“There are also entities, like proxy agencies, that make recommendations to shareholders on director elections. They will make an analysis of directors who have previously served and recommend which ones should be retained or not. Companies that have previously had staggered terms are taking time to adjust. This change provides better transparency to shareholders and essentially that’s the shareholders way of controlling management.”
Mr. Gross adds that in the nonprofit world, staggered boards are still very much utilized. “Staggered boards are still very much in use with nonprofit boards, and the reason for that is [that] it’s so important that you don’t lose all the expertise at once,” he says. “You want to maintain continuity and experience on the board. It’s difficult for nonprofits with larger boards to stagger terms of directors. With many nonprofits, there are no inhibitions to serving multiple terms, but staggering does give them the ability to bring in fresh eyes and ears and plan for succession to achieve continuity.”