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Board Effectiveness

Educating Your Board – at Every Meeting

Increasingly, investors want to know what companies are doing to educate their boards – and look for that information in proxy statements. University law schools and business schools are offering multi-day seminars. Accounting firms and consultants offer on-line training. In addition, board education can also be happening at every board and committee meeting. But not in the way you are thinking.

For every meeting, management and board advisors prepare significant amounts of advance materials (often called “briefs”). Too often these materials are not as “educational” as they could be. Here are a few suggestions for remedying that:

  • Explain why the topic is on the agenda. Is it required to comply with a regulatory requirement? Is it driven by an internal process – like succession planning? Telling directors why they are being asked to address this agenda topic grounds everyone in an understanding of purpose. Write something like “The SEC requires that the Audit Committee at least annually review….” Also, explain whether this agenda topic 1) is “Offense” (growth-related) or “Defense (risk-mitigating) and 2) relates to Leadership, Strategy, or Execution  (Learn more about Foresight’s proprietary agenda topics hierarchy at foresight.board-ops.com).
  • Specify the desired outcome from the agenda topic. Review and discussion leading to advice to management? Alignment between board and management on strategy? Decision on proposed transaction? Telling directors what management, after consultation with the Lead Director or Chair, is looking to accomplish with the board will help to frame the discussion. Write something like “Following discussion, the committee will be asked to approve the updated executive compensation program and performance measures for the 2020-2022 performance period.”
  • Provide external context for the agenda topic. If other companies are addressing this same agenda topic in some fashion, note that and explain why they are. If this is a purely company-specific topic, say that. Say something like “As a result of our company’s 2019 acquisition of BBB Company, the company must decide/report/is subject to/whatever….”.  
  • Anticipate the question: “What are our peers doing about this?”  Whether the board is addressing a new corporate policy on hedging or a compensation program provision or almost any topic, management will be asked. Directors want to know what peers are doing – not to follow like lemmings but to understand the landscape of alternatives and practices being used by others in similar circumstances.
  • Help those drafting briefing materials to understand the board’s role. Help them to identify the information critical to the board decision-making. Sending 100 pages of dense data is unlikely to help the board make the best decision. Better to pick the key data points, explain why those are the key data points, and focus the brief on those data points that will enable the board to make the best strategic or leadership decision or to provide management with considered advice and insights.
  • If your company’s significant investors have a point of view on the agenda topic, include that information. If your investors have varying views, explain the reason for those divergent views, if known. This information may not be dispositive, but it should be provided.

Hopefully these suggestions are helpful to you. And, if you follow our suggestions, you and your board will be better prepared for board meetings and you can describe your improved approach to board briefs in your next proxy statement.

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Board Effectiveness

COVID-19 Response: Elevate Your Board’s Priorities

How to determine your board’s priorities during the COVID-19 pandemic? Your board had and still has three priorities:   

  1. Leadership – people questions
  2. Strategy – planning issues
  3. Execution – monitoring performance

What has changed is what your board should emphasize within those three priorities.

Your Board’s Leadership Priority

Leadership questions tend to be long-term. Example: Selecting the CEO has long-term (10-15 year) impact. But with COVID-19, some emphasis within the Leadership Priority has shifted as these other important Leadership decisions demonstrate:

  • What is your company’s executive succession plan – both emergency (e.g., CFO contracts COVID-19) and long-term (e.g., EVP of HR plans to retire in 3-5 years)? 
  • How should your board evaluate and compensate your CEO, including for your CEO and team’s handling of COVID-19 at your company? 
  • What are the risks in your company’s compensation system? How has COVID-19 changed those?
  • Does your board have the right combination of directors to oversee your company through COVID-19 and into the future? What tenure or age limits should apply to your directors? What perspectives or experience should be recruited? 
  • What workforce policies can help to build a specific corporate culture to best respond to new challenges?
  • What adjustments should your company make to adapt to COVID-19 workforce impacts including enhanced workplace safety due to COVID-19?

When making these Leadership decisions, your board is the main actor. Your management researches and advises your board on these questions.

Your Board’s Strategy Priority

Strategy questions (e.g., your company’s strategic plan) tend to have a medium-term time horizon (3-5 years). These questions require your board and management to work collaboratively. Your board cannot develop the first draft of your company’s strategic plan. Rather, management must propose a vision and path to move your company forward. Before approving your strategic plan, your board challenges management’s underlying assumptions, methods, and goals; debates the projected impact – including of COVID-19; and reviews every business unit’s major drivers. COVID-19 requires that your management and board revisit your company’s strategic plan in light of new opportunities, risks, and impacts. The desired outcome: your board approves an updated strategic plan that can carry your company through COVID-19.

Other important Strategy questions – with a COVID twist added – include:

  • How will your company grow? At what pace – factoring in COVID-19?
  • Into which new businesses or geographies should your company expand? Will COVID-19 slow expansion plans?
  • What are your company’s biggest risks (and how is your company mitigating them)? What additional risks has COVID-19 added or increased (and how will your company mitigate them)?
  • What new products or services should your company offer? Has COVID-19 reduced the viability of previously planned product launches? Are there opportunities for your company in COVID-19?  
  • Which of your existing products are at risk from COVID-19 or other product substitution, rather than direct competition? 
  • How have recent events changed your investors’ expectations regarding your company’s governance practices, employment practices – including equality, and ESG? Is your company adjusting to reflect those expectations?   
  • How well is your company engaging with the investment community and other stakeholders and adapting for COVID-19?

Your Board’s Execution Priority

Execution agenda topics tend to focus on tactics and results. The time horizon is short-term — this quarter, this year. Profitability and disclosure are typical execution agenda topics. Right now, your management is spending a good deal of energy on COVID-19 and equality. Here, your management is the main actor, running your company. Your board operates with their “noses in but fingers out,” monitoring performance. The board receives and reviews scorecards, including COVID-19 impacts, and watches carefully and questions where warranted.

Your Board’s Three Priorities Inform Each Other 

Each of your board’s three priorities (Leadership, Strategy, and Execution) inform the other two. For example, Execution agenda topics inform your board’s evaluation of management’s ability to deliver generally and specifically in the face of COVID-19. Certain Strategy agenda topics inform the evaluation of your management’s ability to think longer-term and to set a course that will guide your company through and beyond COVID-19. Some Leadership agenda topics determine which strategies have realistic goals in the face of COVID-19 and guide your board as it sets performance metrics for your management compensation in the Execution priority.

Upcoming Board Meeting Agenda Should Prioritize Leadership and Strategy

By overemphasizing Execution agenda topics during this COVID-19 crisis, your board and management might skew your board’s time-horizon to the short-term. Thinking that your board should focus solely on COVID-related agenda topics will starve the Leadership and Strategy agenda topics that will guide your company during COVID-19 and generate long-term success for your company. 

The Foresight® Solution

Using Foresight to plan your board and committee meeting agenda can help your board and management identify and elevate your board’s priorities and the agenda items that can drive your company’s success – in the face of COVID-19. Foresight’s agenda planning tool can also help you avoid misspent board and management time as well as highlight gaps your management and board should address to gain the maximum impact from your board’s efforts during these challenging times. For additional information about Foresight, click here: https://foresight.board-ops.com/

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Board Effectiveness

Skating to Where the Puck is Heading: Succession Planning

COVID-19 has reinforced the importance of ongoing executive succession planning as well as board succession planning. What follows are some suggestions for making that ongoing planning happen – starting with agenda planning. These suggestions apply to public and private companies.

Planning the Board’s Role in Executive Succession Planning

Putting executive succession planning on boards’ annual agenda calendars ensures that boards addresses this topic. An opportune time to take up this topic is following the board’s strategic plan review, so the succession planning process considers the company’s strategic evolution.

But succession planning is only one element of boards’ larger Human Capital Management processes. The board can also play a significant role in ensuring rigorous performance assessments (especially C-Suite assessments), coaching and mentoring, and career planning processes. Also, directors can serve as coaches and mentors for high potential executives or rising stars. Career planning is especially critical to advancement of women and minorities – as a lack of rotations with significant P/L responsibility often impedes progress toward C-Suite and the CEO role. 

Planning the Board’s Role in Board Succession and Refreshment

Getting the time on the agenda is a critical first step to board succession planning – which involves planning for both individual directors and the board as a whole.

Just as executives’ annual performance assessments are important to executive succession planning, annual director assessments are important to board succession processes. Annual assessments can reveal directors’ untapped strengths or aspirations as well as weaknesses that need addressing. Once recognized, untapped strengths and aspirations can be factored into committee assignment planning and committee chair rotation planning (it’s good practice to rotate committee members and chairs roughly every five years to maintain a sense of director equality and shared responsibility).

For identified weaknesses, an astute Lead Director or Governance Committee Chair can work with the director to develop a training plan (then share that plan with the governance committee or board). It can be as simple as spending more time with relevant company executives or on location to learn more about the company, attending a director education session at focused on a substantive area in which the director is weak. Behavioral issues can require one-on-one discussions. If another year passes and those weaknesses remain, the governance committee or board will face a tough decision as to whether to renominate the still weak director.

Increasingly, investors are interested in how boards conduct these annual assessments and what action boards take to address identified shortfalls. The desired information is easy to include in the proxy statement.

Committee assignments and rotations should appear as an agenda topic on the governance committee’s annual agenda calendar. Identifying and developing committee members and chairs to facilitate timely rotations is another pillar of board succession planning. Assume that all directors are capable of contributing to any committee; a doctor who leads a health care facility has experience in process management and controls that can benefit an audit committee.

Director recruitment planning is another element of board succession planning. As the company evolves, the board should too. In hockey, one skates to where the puck is going; the board should be building its future self for the future company. Increasingly, investors want boards to be diverse and include a mix of relevant experience (not to be confused with expertise), competencies, and perspectives. Investors want to understand the rationale for why the current director mix is appropriate and how they factor diversity into recruitment.

Some investors are also pressing for term limits or other means for boards to foster refreshment. Investors are interested in learning about how boards are planning to ensure that the future director mix will be appropriate for the future company. And boards are recognizing that board refreshment is the new normal. Effective recruitment planning does not just happen – it needs to be on governance committees’ annual agenda calendars.

In sum, directors and boards should be lacing up their skates and taking on the sometimes difficult topic of succession planning.

For additional insights into director succession planning, see Board Development and Director Succession Planning in the Age of Shareholder Activism, Engagement and Stewardship by Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on Friday, June 7, 2019 at  https://bit.ly/3cxKV1Q