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Jun 15, 2014

Ensuring independence and the right skills on boards

Director self-evaluations and using outside search firms to recruit newcomers can minimize perceptions of clubbiness on boards, says Millstein panel

When it comes to characterizing how independent boards members are, describing board relationships as collegial has become something of a toxic term that governance critics and pundits often mistake for clubbiness among directors.

That was one of the observations shared by the former chair of a large corporate foundation who has served on several companies’ boards, on a panel called Director independence vs. the right mix of skills, at the Millstein Governance Forum held at Columbia Law School on June 13. She said she prefers to use ‘respectful and listening’ when describing a board environment where the members get along and are able to work well together.

What’s most critical is that a that ‘there’s a feeling in the group that they’re in it together for the good of the company rather than for their own interests,’ said another panelist, whose executive search consulting firm regularly conducts research into board and leadership matters. ‘The real issue is that there are shareholders who disagree with that and want directors who are willing to go to the mat’ with senior management or with each other rather than being overly inclined to accept senior management’s decisions or explanations without questioning.

In response to a question raising concerns about directors being all too quick to reach consensus, the former foundation chair agreed that boards sometimes cut short the vetting process when considering a business deal for fear of upsetting people by challenging the point of view of some directors.

Establishing a formal process by which directors are reviewed annually can help counter any tendency toward clubbiness, the panelist from the executive search consultancy said. When recruiting new directors, using an outside search firm to vet candidates is a good practice because it prevents any animosity that may arise from one or more directors opposing a board chairman’s recommendation, said a third panelist, who heads the board of a major securities processing firm.

As to what the corporate secretary or the board can do to assure investors or other outsides that the board is doing its job, the former foundation chair recommended posting the governance guidelines on the company website, as well as annual posting of directors’ self-evaluations. When directors don’t do a self-evaluation, people can ask to see conclusions of whatever internal overview process the board conducts for such directors, she added.

Yet most boards don’t have a process to evaluate the contributions of individual directors, according to the panelist from the executive search consultancy. And with only 7 percent of companies mandating that directors retire before reaching age 70, ‘we’re using retirement as a proxy for active refreshing of the board,’ she said. ‘Boards should feel pressure to evaluate directors.’   

An additional way to provide assurance to outsiders about the quality of the board is to offer brief interviews with individual directors under the investor relations section of the company website, as Microsoft does, suggested the panel’s moderator, a corporate secretary for a medical devices company.

‘It’s about sizing a person up. If you can spend 30 minutes with someone, you’ll know whether this person is intelligent or thoughtful,’ he said. ‘When we’re talking about independence, we’re talking about a mindset.’

In a nod to board diversity, the former foundation chair said the onus is on ‘directors who look and act different’ from the traditionally white male board demographic to gauge the comfort zone of their fellow directors and start participating immediately ‘because they know they were brought on for a reason -- to contribute and create value.’

As a newcomer ‘you can contribute by asking naïve and dumb questions because you can’t assume certain things have been considered by the rest of the board,’ she said. 

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary