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SPEAKING OUT

This is director election season, so it’s an appropriate time to talk about how directors are being selected these days-and, perhaps more importantly, how boards are organizing themselves to get the most out of their directors after they have been elected.Most companies and board chairmen have substantially the same goal. They want a contributive board …

This is director election season, so it’s an appropriate time to talk about how directors are being selected these days-and, perhaps more importantly, how boards are organizing themselves to get the most out of their directors after they have been elected.

Most companies and board chairmen have substantially the same goal. They want a contributive board with good balance in age, background, talents and relationships. While this is very easy to say, it is really much harder to accomplish.

For starters, experienced outside directors are hard to find. CEOs and COOs who have the time and yen to serve are too few to go around. Actual and potential conflicts of interest abound, not only through product and global diversification, but also with virtually all bankers, lawyers and consultants. If your company has any profitability, location, liability or potential tender offer problems (and who doesn’t), the director finding process is even tougher.

There are a number of companies left where director recruiting is still arbitrary and informal. The CEO powers in his friends and so do the continuing outside directors. The board members all belong to the same clubs and go to the same resorts. There may be a nominating committee in position, but this does not necessarily mean that much has changed; the CEO still chooses the committee and has brief meetings only when a director opening occurs.

Fortunately, at more and more companies, it appears that the outside directors are now playing a much broader and stronger role in determining the make-up and structure of the board. They see the need to get involved.

Recently, in a seminar sponsored by Boardroom Consultants, I chaired a panel of experienced directors who examined the role of the nominating committee. There was surprising consistency as to what a nominating committee can and should do. Oh, there were the usual caveats, of course, that certain situations require special handling-leveraged buyouts, closely held and small companies, turnarounds, etc. For the most part, however, our group held firm in the belief that the nominating committee should definitely be involved in these major areas:

  • Work with the CEO in developing an ideal profile for the board as regards age, talent and experience.
  • Draft a specification for the new director slot being filled.
  • Involve itself deeply in the subsequent search and interviewing effort, including the hiring of an outside recruiting firm.
  • Formally recommend director candidates for CEO, board and shareholder approval.

Having concerned itself this far in the make-up of the board, our panel members reasoned that there were further areas where a board committee could make a useful contribution, such as suggesting age limits and perhaps, director pension plans; appraising director compensation and benefits, including stock options when suitable; reviewing with the CEO the board committee structure and appointments thereto; and discussing with the CEO ways in which the board can become more participative and useful in its review of critical corporate issues.

To perform such a role, this committee should more logically be named the committee on board affairs. Consideration should be given to having committee membership limited to three-year terms and appointing a new chairman annually to assure fresh viewpoints. The CEO might not be an official member, but should sit in on virtually all sessions (as he does with the audit and compensation committees) and should have a strong input as to what the committee finally decides to recommend.

Although there is nothing particularly new in the above points, what does seem to be new is the actuality of broader-based initiative and participation in the whole area of who directors are, what they do and how they relate to the chief executive.

There are plenty of critics who say, “It’s about time!” Note some of our speak-up institutional and pension fund investors, for instance. They take their director election votes very seriously and have no qualms about harassing beholden boards.

Or, take Prof. Jay Lorsch of the Harvard Business School in his current book, Pawns or Potentates: The Reality of America’s Corporate Boards. Although I thought his book was excessively academic, he nevertheless echoed the often expressed sentiments that our corporate boards are personally structured by CEOs who then convert them into do-nothing, ceremonial discussion groups.

One way, certainly, to help change this publicized perception, is to appoint a committee on board affairs at your company, urge them to think positively, and then listen to their suggestions. You might be pleasantly surprised.


Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear teaches at Columbia Business School where he is Executive-inResidence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Crane Company; Scudder Capital Growth, Equity Income, Development, International and International Bond Funds; Korea Fund; Medusa Corporation; WICAT Systems Inc; and Welsh, Carson, Anderson, Stow Venture Capital Co. He authored the recently published book, How to Turn Your MBA Into a CEO.

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