How To Recruit And Build A Better Board Of Directors

Abstracted from: Developing Strategic Boards Of Directors

By: Susan Shultz SSA Executive Search International, Phoenix, AZ

Strategic Finance - November 2003, Pgs. 22-27

Improve the board to improve the company. Directors make or break an organization. They have the power to decide the company’s fate, or they can passively sit by, rubberstamping their approval of a deteriorating situation. With many years of experience working with boards, Susan Shultz lists the top 10 mistakes that boards make when choosing members and outlines how to recruit good board members. Using Enron to illustrate, she offers a rating system based on the mistake list, which can test any board’s strength and level of commitment. On a scale of one to 10, a board scoring eight or more will add value to an enterprise; a board scoring five to seven points is on the edge; three to five indicates an inadequate or weak board; and a score below two is a failed board. Not surprisingly, Enron’s board scores two points.

Independence is a strategic stronghold.

Recruiting members based on relationships such as tennis partner or celebrity status, rather than on their strategic fit, is a primary mistake, according to the author. Packing the board with a majority of friends and colleagues reduces its independence and cultivates an environment of special favors and compromised objectivity. The most egregious example of this behavior is interlocking directorships. Enron was a prime exemplar of the practice. Many of its directors also sat on the board of a company in which Enron had invested $1 billion. The value of strategic, independent boards is reinforced by a recent study. It found that the success rate of 360 early-stage companies with independent boards is 70%, a far cry from the 20% rate of success for others in the study. In family-owned business, having a majority of outside directors is especially critical. They act as brakes on excessive personal benefits granted to family members. Another oft-made mistake is selecting too many paid consultants, especially ones who have a previous association with the company.

Avoid these mistakes.

Create diversity, the author advises, by moving beyond obvious criteria such as gender, age, and race, to including persons of different cultures and backgrounds. Good directors are a bargain, considering the work they do compared with their compensation. However, a board is no bargain when it rewards mediocrity and malfeasance, when it hands management a blank check, or when it just rubberstamps management’s decisions. Good directors are the watchdogs of company finances, especially executive compensation. Enron stands as the example of a board that was unable or unwilling to "just say no" to outrageous pay packages, including $1 million for an administrative assistant. Board members need information, good and bad, if they are to act in a responsible manner. If management filters the information flow or denies board members access to the employees outside of the boardroom, it prevents directors from exercising their mandate.

Recruiting the right way.

The author suggests seven guidelines for recruiting board members who will add value to a company. For example, create a charter that outlines goals, determines board structure, and includes governance guidelines. Prioritize strategic issues to determine the skills needed to deal with them. Profile each board position, specifying corporate expectations and listing necessary qualifications, to identify the right person for the job. Look beyond the board’s immediate network; at all costs, avoid recycling directors. Thoroughly interview candidates to determine their available time (board duties usually take 12 to 25 days a year) as well as their interest in issues facing the company. Check with colleagues on other boards to determine if the candidate’s working style would mesh with the existing board. Maintaining a list of potential candidates is always a good idea. When openings do occur, options and a selection process are already in place.

Abstracted from Strategic Finance, published by Institute of Management Accountants, 10 Paragon Drive, Montvale, NJ 07645.

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