When you consider the functions of a Board of Directors, you’re reminded that they are a select group of individuals with the skills and expertise to oversee management activities. Board members are chosen because of their understanding of the specific business or its industry sector; their business acumen; their financial or legal training; their ability to reach a consensus with fellow Board members in the oversight of corporate activities; and/or their ability to work closely with the management team. Whether they are recruited or they volunteer, we should not lose sight of the fact that these individuals spend increasing amounts of their time serving as Board members; and that they must perform their duties in cooperation with the management team.
The priorities from the perspective of the management team should be:
Does the Board member have the right skill set?
Do Board members contribute to the oversight process; i.e., are they engaged?Are Board members appropriately rewarded for their time and effort?The priorities from the perspective of individual Board members are:
Does management run the company without incurring undue risk?
Is management committed to the strategic plan of the Board?
Does the company continue to be viable and strong?The relationship between Board members and the management team is at times symbiotic. Neither can perform their own role in the corporation without the other and it must be a mutually beneficial relationship.
Management Priorities
The management team should constantly be on the look-out for potential Board members who can serve the company objectively. Typically, Board members are selected from the local community, the industry, or even from the ranks of retired company officials. These people should have an understanding of company activities and ideally know what makes this particular company successful.
While the Board members are certainly evaluated on their attendance at Board and Committee meetings, they should also be evaluated by the level of attention they pay when at these meetings. A simple check of the level of engagement is whether their Blackberry is shut down as the meeting starts. A more convincing test would be each member’s level of contribution to the deliberations of the Board.
Board members take time out of their daily activities to serve on the Board. An appropriate level of compensation should take into consideration their opportunity costs or what they could be earning if they were not attending a Board meeting.
Board Priorities
What is the management team doing to effectively advance the company, build value, and maintain financial stability. Is the management team incurring undue risk? This can mean different things in different industries. For financial services, it might mean compliance with all regulations. In the manufacturing sector, it might mean maintaining strong relations with labor groups. The management team must constantly assess whether it can achieve the Board’s strategic plan without compromising the intrinsic value of the company.
With regard to the strategic plan, Board members want to know whether management can support and achieve the plan that they’ve established. The management team implements this plan through a variety of tactical measures and these become the method upon which the Board evaluates management team effectiveness.
And, the number one priority for the Board, does the company remain viable and strong? Virtually everything that the management team does is evaluated by the Board. Board members have a duty to constantly check in with management, to see if assistance is required, and to report back to fellow Board members that they’ve fulfilled their oversight obligations with management.
The relationship between the Board and management is complex. Each side has the responsibility to consider the other’s performance and to constructively work at improving their own performance. The management team typically has a description of duties and responsibilities as well as annual performance objectives and Board members need to annually evaluate management’s performance. The Board members have a charter and a strategic plan and should periodically assess their own effectiveness. Common sense would suggest that Board members and the management team all have a vital stake in conducting evaluation sessions and assessing Board effectiveness in the best interests of the company.
By Paul Gavejian - Managing Director of Total Compensation Solutions
- 914-730-7300 www.total-comp.com
Now Available TCS' 2010/2011 Board of Directors Compensation Report
