Aboard chairman of a multibillion-dollar company stood up in front of
his peers at a dinner meeting and announced, “I don’t know what my job is.” A
CEO of a Fortune 500 company made a similar confession to dozens of other CEOs, stating, “I sit on the board of five other companies, and I don’t know what I’m supposed to
do as a director.”
With 150,000 individuals serving on boards
in the United States, it begs the question:
How many directors fully understand their
duties and responsibilities?
“The confessions by the chairman and CEO
surprised me, but I continue to hear the same
thing from directors time and again,” says
Paul Lapides, director, Corporate Governance Center, Coles College of Business,
Kennesaw State University. “A few years ago,
I argued that between 75 and 80 percent of
directors do not know the purpose of the
board, fully understand their duties or know
how to execute those duties. Today, that
number is much lower.”
Smart Business spoke with Lapides about
the characteristics of a great board, the
makeup of a dynamic director and how
directors can monitor themselves for continuous improvement.
What are the benefits of assembling a board
of directors?
Good boards have an interest in seeing the
company succeed. With a diverse set of experiences, directors exercise their individual
and collective knowledge, insight and judgment to increase the speed and improve the
quality of decision-making by the CEO and
other senior executives. Directors also come
to the board with relationships that can benefit the company. For example, a director’s
reputation can enhance the value of the company to shareholders, while also instilling
confidence in employees and customers.
What are a board’s greatest responsibilities?
The board’s overriding responsibility is to
promote and protect the best interests of the
corporation and its stockholders, while considering the interests of other external and
internal stakeholders, such as creditors and
employees. Legally, the board does this by overseeing and directing the conduct of the
company’s business affairs.
There are three main areas of responsibility
for a board of directors: hiring, retaining and
monitoring the CEO and other senior executives; overseeing the corporation’s strategy
and processes for managing the enterprise,
including succession planning; and monitoring the corporation’s risk and internal controls, including the ethical tone. In executing
these responsibilities, directors need to
employ a healthy level of skepticism.
What are the top characteristics of the most
effective board members?
The first is independence. An independent
director has no current or prior professional
or personal ties to the corporation or its management other than service as a director.
Independent directors must be able and willing to be objective in their judgments.
Directors should possess relevant business,
industry, company and governance expertise, reflect a mix of backgrounds and perspectives, and have unblemished records of
integrity. Other characteristics to consider
include time availability, interest in the industry and business, functional experience, previous board experience, access to capital,
and name recognition.
How can a board member monitor himself or
herself for continuous improvement?
While I have been concerned about directors who know very little about their job, I
have become even more concerned by directors who are overconfident, who say or
believe they are ‘great’ directors. Those who
know they don’t know can learn. The ‘great’
directors often get very sloppy. Being a director is not about greatness. It is about devoting
time and attention to listening, learning,
advising, adapting, inspecting and knowing
when to say ‘no’ or ‘not now.’ With this in
mind, all directors should receive detailed
orientation and continuing education to
assure they achieve and maintain the necessary level of expertise. Also, the board should
have procedures in place to evaluate on an
annual basis the board committees, the
board as a whole and individual directors.
When should an entrepreneur form a board
of directors?
The best time to start thinking about a
board is when an individual or group of individuals is thinking about starting a business.
While most people say they don’t know what
they would do with a board, how to organize
it or even what the business will be yet, this is
still the right time to start thinking about a
board. You may not need a ‘formal’ board of
directors yet, but you could benefit from the
wisdom of successful business executives,
company founders, and leading experts in
the industry or business you are considering
entering or have just entered. When looked at
this way, most people recognize that the time
for seeking out knowledge, insight and judgment is much earlier. Maybe it will be from a
few individuals, an ‘informal’ group of advisers, a more formal board of advisers, or a
board of directors. Advisers and directors
can make a tremendous contribution to your
success. In business, as in life, wise counsel
can help your plans succeed.
PAUL LAPIDES is director of Corporate Governance Center and a professor of management and entrepreneurship, Coles College of
Business, Kennesaw State University. Reach him at (770) 423-6587 or [email protected].