It is now generally acknowledged that most boards need more directors who are truly independent. But the very fact that new directors are independent implies that they are, unwittingly and to a certain extent, uninformed about the company and its business. Which is why the quality of the information they get from the company must be very high.
The recent crisis of confidence in corporate governance has focused attention on the “independence” of directors. The theory underlying the need for more independent directors is that individuals who are unconstrained by potential conflicts of interest will bring the sort of rigour and critical analysis required to limit recurrences of the debacles we have seen, and restore investor confidence.
There is clearly a benefit to the increased scrutiny that independent directors would bring to a board. While the definitions of “independence” differ (ranging from no benefits or relationships beyond directors’ remuneration, to limited additional benefits, to board-subjective tests of “relatedness”), all of them exclude directors who are part of management, as well as closely related directors—such as professionals, consultants, customers or suppliers — with outside interests so extensive that one could reasonably question their ability to be candid.
As corporations recruit directors who are less connected to the company, the question of how to prepare and permit these individuals to be effective assumes increasing importance. The issue arises in terms of equipping directors to function efficiently and allowing them to do their jobs and act as roving ambassadors for the company.
Independent directors who join boards typically have limited knowledge of the company and its industry. It is therefore important that recruits undertake their own due diligence, to learn about the company from the public record, to understand who the other directors are (and, to some extent, what the board dynamics are), and to appreciate the corporate governance culture and the nature of the tasks ahead. However, an organized orientation program can also be of great assistance to the new director. The program should include information about management and the board, the business and the industry, the board and strategic priorities, corporate governance policies already in place, initiatives under way, and the resources available to assist with these and other relevant board background questions.
Best practices include having a Directors’ Manual that provides background material that is always current and available to the new director. The manual can include: company and industry background; constating documents (articles of incorporation, share conditions and the like) and shareholder agreements (if any); recent public filings; organizational charts for management, the board and board committees; contact information for directors, officers and other key employees, customers and suppliers; copies of corporate governance mandates for the board and for board committees, including an express delegation of authority to management; copies of policies (confidentiality, insider trading, document retention, dealing with the media and codes of conduct); stock option plan information; analysts’ reports; directors’ and officers’ insurance information; and like material. Information in the manual can be supplemented by providing directors with organized access to appropriate members of management, including those who will play an ongoing role in briefing the board member (typically the CEO, CFO and/or the Corporate Secretary) and those who are involved in initiatives likely to attract board attention in the foreseeable future (such as VP Corporate Development or VP Sales). Site visits to key facilities provide the new director with a real context, and access to management, and to employees generally, in a less structured manner. Informal meetings with the Chair, individual directors or smaller groups of directors may also be helpful.
If a board is to bring a critical and constructive eye to its tasks, its members must be provided with suitable materials in a timely manner. This begins with an annual corporate agenda that cascades down to board meetings, committee meetings, informal discussions and, ultimately, a timetable for the delivery of information required to enable directors to function effectively at each of these events.
Underlying the very concept of an independent board of directors is the recognition that the board has a different agenda than management. While management’s job is to operate the business, the directors focus on stewardship and oversight (including not only the control elements of oversight but also the positive contributions of constructive advice). The board’s agenda should be established on (at least) an annual basis going forward. A corporate calendar should be created and used to schedule board meetings (at least one year ahead and on a rolling-forward basis). Board meetings are typically scheduled to coincide with predictable regulatory events (such as the requirement to deliver to shareholders and file with regulators quarterly financial statements, or to hold annual general meetings). If meeting dates are established well in advance, it is realistic to expect 100 per cent attendance by directors. Regular committee meetings can be scheduled to feed into the board meetings, with some topics to be addressed on a quarterly basis and reviewed at the relevant board meeting, and others to be addressed only on an annual or semi-annual basis (for example, options may be granted once or twice a year, and an overall management compensation review or nominating committee report might be a once-a-year occurrence). Many boards set aside at least one day each year for a dedicated strategic planning session; board activity may also be planned around the annual general meeting.
With meeting dates established, it is possible to know, well in advance, much of what will be required for each meeting. If a meeting is to be effective, it is imperative that it not filled with the endless management presentations of data that can be, and should have been, provided in advance of the meeting. Meeting materials should be prepared and delivered sufficiently ahead of meetings so that directors can read and absorb them, and so come to the meeting ready to discuss the action that needs to be taken.
Each board will determine for itself the nature of the material that is most helpful to its functioning. However, the following generalizations are possible: Board members should be expected to read everything that is given to them. Accordingly, material that is provided should be adequate to allow directors to function effectively, but should not be so detailed or dense that reading and understanding it is a challenge. The material must provide the directors with enough information so that they can deal effectively with the particular agenda item. In the case of ongoing corporate reporting, the material should be prepared in a consistent format, moving forward from previous reporting and drawing relevant comparisons. Thus, for instance, quarterly financial information can be delivered in such a way that it can be compared with budgets and relevant comparable periods (prior quarter, year to date, comparable quarter last year, last year to date, recent forecast, analyst expectations and the like). Material of this sort often breaks out noteworthy items, either because they are highly relevant to judging the state of the business or because they involve significant variations in some comparable factor. The item is then discussed separately in text. When this is done, directors arriving at a meeting to address this information can move immediately to a discussion of where the business is doing well and where it needs help.
Similarly, management initiatives that require board approval should be presented in the appropriate form. Many of the matters that must be brought forward to a board are fairly routine and can be presented as “consent items.” (Routine changes to signing authorities that might be required by virtue of changes in management personnel, or a change in the head-office location by virtue of a previously approved move, might be considered matters that require board authorization but do not require the board to spend more than the least possible amount of time on them.) Matters of this sort can be presented with the requested board decision stated clearly and with the rationale explained thoroughly. These items can be called quickly at the beginning of a board meeting and approved in the terms in which the formal resolution is set forth in the written materials. In this way, much can be accomplished in very little time.
For more substantive business issues, management recommendations should be provided in a decision-ready form. This includes, again, an expression of the decision requested of the board (including the wording of the relevant resolution), together with an explanation of the background, the alternatives management has considered, the pros and cons of each, and the reasons for management’s recommended course of action. Material of this sort permits the board to spend its time discussing issues that emerge, rather than absorbing background. Presentations at the meeting can therefore provide context and vitality (as well as showcase relevant management team members), and can also be focused and brief.
While it was always the case that boards should be rigorous in requiring suitable background, recent shareholder, regulatory and legislative scrutiny means that boards will insist on a better trail of reporting and documentation. The detailed operation of, for example, audit and compensation committees, is beyond the scope of this paper, but each of these committees is now (or soon will be) required to undertake specific tasks, to report on those tasks and, consequently, to be subject to comment (positive or negative) on decisions that will be more transparent than ever. Thus, compensation committees are now more likely to insist on documented, comparable market survey information (including, perhaps, information from independent consultants), while audit committees may well seek third-party confirmation of management’s claims (and even the auditors) about the efficacy of internal controls. More generally, corporate governance committees or boards are required to undertake reviews to ensure compliance with new legislative, regulatory and shareholder governance requirements. Considerable care must be exercised to channel these processes through internal or external counsel in order that the reports that emerge maintain a claim to solicitor-client privilege.
The nature of the material provided has direct implications on meeting planning and procedures. Obviously, spontaneous meetings should be kept to the absolute minimum, as they make it difficult to prepare material sufficiently in advance, and create a corresponding need for contemporaneous explanation of background. Also, 100 per cent attendance at meetings of this sort is unlikely.
Meetings should have an agenda, and the agenda should be respected. Many boards use meeting templates for (at least) their quarterly meetings. The templates itemize the topics that will be addressed, the order in which they will be addressed and the times that are to be allowed for each topic. An effective Chair of the meeting will try to ensure that the meeting moves along in accordance with the time specified in order that all of the business can be addressed.
While each board should determine its own processes and approach, the following items should be considered for inclusion in any template. A suitable officer (typically the CFO) should provide a certificate with respect to compliance with a number of legislative/regulatory matters. A certificate of this sort generally provides full protection to directors in respect of various potential withholding, tax, wage and environmental liabilities (where “due diligence” is a defence). It is becoming increasingly common for the certification to address directors’ and officers’ insurance issues. In this regard, directors are coming to appreciate the subtlety of the coverage provided by various policies in different circumstances, and the need and ability to maintain coverage after departure from the board.
Including a “risks in the business” section (in board templates) is a highly effective board-focusing technique. This sort of section requires management to list the current and long-term issues that concern the business, and to specify what is being done about them. The topic provokes interesting board discussion and allows for comparison over time, to assess the evolution of risk and the measures being taken to address it. A meeting template will usually include a financial presentation (typically led by the CFO) and a business overview section (typically led by the CEO or COO). Apart from specific business that will be addressed as required on a meeting-by-meeting basis, many boards also find it useful to include a presentation by some other member of management at each meeting. This allows the board to receive detailed background on some aspect of the business and to deepen relationships with management. It also provides management with the opportunity to interact with directors, (a part of management development) and to confirm the board’s interest in their area.
A typical template today will also specifically provide for an in-camera (or executive) session of the board. Routine sessions of this sort avoid the embarrassment of calling them only when issues about management are the only items on the agenda. They also give a board a few minutes at the end of each meeting to reflect on the nature of the meeting, the nature of the materials that were provided and whether and how improvements can be made.
Meeting minutes are important. They should be prepared fairly expeditiously after each meeting in order that important points are not lost. Minutes should also be extensive enough to record decisions taken and important considerations that are requested or appropriate to be on the record, but should not be so detailed as to cause embarrassment in the future. Minutes are, ultimately, not privileged and may be subject to discovery and litigation. Minutes should be circulated to committee members and ultimately to the board as a whole (excising as necessary sensitive personnel information that is not of general board interest). It is also helpful to include a section at the end of the minutes that addresses the follow-up that is requested and notes the identity of the individual responsible for that follow-up. A section of this sort permits for an easy comparison.
Directors are ongoing consultants to, and roving ambassadors for, their companies. As people who have chosen and been chosen to provide their time and expose their reputations on a basis that would rarely pass a risk-reward evaluation, it would be most unfortunate if they are not regularly provided with information that will permit them to be as helpful as possible. This includes relevant industry and company-specific media and analyst coverage, as well as invitations to relevant company and industry events. Directors should also receive all press releases and filings in a timely way: Quite apart from the legal or regulatory requirements, leaving a director “out of the know” is embarrassing and may be wasteful. Many boards follow the very useful practice of holding directors’ dinners the evening before board meetings. These dinners can have a theme and a guest speaker to focus discussion. They often serve both to enhance board dynamics as well as to provide an informal forum for the exchange of suggestions.
Much of the board-informing burden falls on the Corporate Secretary, whose job has taken on increased importance as boards have become more independent.
Independent directors can be valuable to the companies they serve, but only if those companies take seriously their responsibilities to provide appropriate, useful and timely information. An informed director is the first step to becoming a useful director, one who can exercise business judgment and common sense. As more independent directors begin to appear on boards, the task of making sure that they are properly informed becomes critical. Companies that want to be leaders in corporate governance today must have a board that highly effective and well informed.