Executive Tools
- Executive Summary
- Self Assessment Checklist
Expert Practices Article
- Creating a Board of Advisors/Directors
- The Advisory Board
- Board Benefits
- What Happens in the Boardroom
- Duties and Functions
- Compensating Board Members
- Limits to Effectiveness
- Recruiting Candidates
- Insurance and Liability
- Committee Work
- The Future Corporate Board
Case Histories
- Keep Board Small and Always an Odd Number
- Use Board for Strategic Issues
- Invite Seasoned Business Leaders to Serve on Board
- Start Out with an Advisory Council
- Establish Clear Objectives and Expectations
- Comprise the Board Primarily of Outsiders
Tools & Analysis
- Self Assessment Checklist
- Top Ten Tools for Creating a Great Board
- Qualities of the Best and Worst Corporate Boards
- Top Ten Tools to Bring Any Board Up to Speed
- Top Ten Tools for Making Boards More Effective
- Nine Principles for More Effective Boards
- Ask Ten Questions Before Joining Any Board
Book List: Board of Advisors/Directors
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CEO Best Practice: Board of Advisors/Directors
Executive Summary
- The Advisory Board
- Board Benefits
- What Happens in the Boardroom
- Duties and Functions
- Compensating Board Members
- Limits to Board Effectiveness
- Recruiting Candidates
- Insurance and Liability
Creating the Board
In today's fast-changing times, corporate leaders and CEOs are
certainly in need of helpful guidance. Too often, they're isolated
in their decision-making process and suffer from a lack of seasoned
advice. According to TEC experts Kraig Kramers, Paul Lapides and
John Zaepfel, one solution to this dilemma (in addition to membership
in TEC) is creating a board of knowledgeable, well-connected peers
to help your business grow and prosper.
The choices -- an advisory board or a board of directors -- depend
on each company's individual situation. A formal board of directors
has legally defined responsibilities, foremost among them representing
a corporation's shareholders. A board of advisers can have a more
flexible mandate, offering assistance and management advice to the
owner/CEO without any binding legal authority.
The real value lies in bringing in men and women who have skills
that the company's management team lacks. "Look at your present
corporate make-up," Kramers says. "What's missing? Would
it help to have more input in marketing, technology or finance?
What about seeking assistance from people in other industries who
have faced and overcome obstacles similar to your own?"
All three experts stress: owners/CEOs who take the time and expense
to form a board should be absolutely committed to consulting it
on important issues. "It may be hard at first to listen to
objective feedback on your business decisions, but in the long run
this is preferable to blind allegiance from family members or employees,"
Lapides says.
The TEC experts offer these action steps for constructing a board:
- Admit you don't know everything. "You're an expert when
it comes to your own business," Kramers says, "but sooner
or later you see there's a great deal you don't know about trends
and market forces in the larger business world. That's where other
people come in, men and women whose skills and talents complement
your own."
- Develop a candidate profile. Create a profile of the individual
you're looking for, particularly the expertise and knowledge base
you feel are needed to address your company's challenges in coming
years.
- Ask for help. Solicit names from your attorney, accountant or
other professional advisers. Kramers suggests using the TEC Network
for suggestions on finding great board members.
- Look for a good mix. A healthy board of directors/advisors
often includes a legal expert, an accountant, a marketing professional
and financial advisor. Other good candidates are successful entrepreneurs
from industries completely different from your own who have "been
through the mill" and can look at your business with a fresh
eye.
- Be clear about what you want. Take time to talk with prospective
advisers. Let them know what your goals are. Make clear that you
don't want people to rubber-stamp your decisions. You're looking
for individuals who can challenge you and help your business grow.
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The Advisory Board
Unlike a formal board of directors -- whose primary function is
representing the interests of shareholders -- an advisory board
is designed to provide independent advice and counsel to the owner/CEO/management
team. Directors are elected, charged with fiduciary responsibilities
and must be covered by the business with some form of liability
insurance. Advisers don't come burdened with such risks and responsibilities.
Advisory boards vary in size from as few as two or three members
to up to forty. "The right size depends on your company's stage
of development, complexity of business and other factors,"
Kramers notes. "For most growing companies, an advisory board
of four to seven members is sufficient."
Before creating an advisory board, however, an owner/CEO must be
very clear about what is expected from it. "Ask yourself: Do
you want these advisers to give you objective guidance or just blindly
endorse your decisions?" Zaepfel says. "Everyone's happy
when the board agrees with your actions. What happens if and when
their advice conflicts with what you want to do?"
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Board Benefits
To the TEC experts, the benefits of having a board of advisors/directors
are so clear-cut, there's little reason not to have one. A board
offers:
- In-house experience and expertise
- Enhanced corporate self-discipline and accountability
- Objective opinions
- Strategic planning and counsel
Honesty is another virtue offered by independent advisers, Lapides
notes. Unlike family members or management insiders who often comprise
membership on family-owned business boards, outsiders come without
any agenda or prejudice linked to the company's family origins.
Equally valuable is what a board prevents the CEO from doing. "An
informed board can save your company from making expensive mistakes,"
Zaepfel says. "A group of professionals with a broad range
of skills and know-how -- including, say, marketing, banking and
investment specialists -- have learned the hard lessons of running
a successful business. They can help your business avoid costly
pitfalls."
"One major obstacle to exploiting the value of a board lies
in the CEO's strong-willed personality," Lapides says. "Listening
is frequently a big challenge for business leaders. The CEO has
to develop a skill for listening and being respectful of other opinions."
Tips for effective CEO-board communication include:
- Keep the board informed. Even when the board isn't scheduled
to meet, send them information relating to industry issues and
specific company matters.
- Give the board time to prepare. By providing material ahead
of the meeting, you enable board members to move through the agenda
more efficiently and make the meeting itself more meaningful.
- Sharing significant information builds trust. Directors who
receive significant company data on a regular basis learn to trust
the CEO/owner. When information is withheld -- or board members
are constantly required to obtain it themselves -- trust gets
eroded.
- Set the long-range agenda. Identify the company's goals. Clarify
and define challenges and situations. Focus on priorities and
articulate your course of action.
- Motivate members. In your leadership role, you can inspire
advisory members, stimulate their desire to give all they can
and bring a shared sense of purpose to the group.
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What Happens in the Boardroom
Lapides suggests that each meeting have a special focus -- strategy,
financials, human resources, etc. -- with presentations made by
different members of the management team. "Be sure that board
members are prepared in advance by distributing relevant information
for them to study prior to the meeting," he advises.
The TEC experts offer other suggestions for preparing members ahead
of time:
- Mark the envelope "Board Meeting Notice." A good
way to get your board member's attention: place a red stamp reading
"Board Meeting Notice" on the outside of the mailing
envelope. Send this material two weeks ahead of the scheduled
meeting.
- Just the facts, please. The board meeting notice should list
times, dates, location and specific details about the upcoming
meeting's goals and objectives. Leave out "fluff" materials
or highly detailed page-after-page of numbers.
- Make a reminder call. A week before the meeting, the CEO or
a fellow board member should call each member and, if possible,
speak directly with him or her. It's a good opportunity to generate
enthusiasm for the upcoming meeting -- and in the process build
stronger rapport between members.
"In the meetings, do everything possible to schedule vital
matters first," Lapides advises. "Some items inevitably
get pushed back to the end, and they're always the first to get
lost when members have to rush to catch a plane or make another
appointment."
The TEC experts offer these guidelines to make the most of precious
boardroom time:
- Use a "consent calendar." Often, any number of items
requires formal board "approval," but do not in themselves
merit much discussion. One technique for handling these items
involves bundling them into a "consent calendar." Send
them to board members ahead of time, then have them approved all
at once at the meeting, thus saving time for more important topics.
- Reasonable limits on discussion. The board Chair or CEO may
find it helpful to set time parameters for individual topics under
review. This doesn't necessarily mean fiercely restricting each
discussion. Simply make clear to members that the board needs
to complete all items by a specified time.
- No dog and pony shows! Your advisers/directors are serious,
thoughtful individuals -- unlikely to be swayed by glitzy power-point
presentations or colorful audio-visual displays. Give them the
information they need to prepare themselves beforehand; anything
presented at the meeting itself should supplement this material
in a concise, efficient manner.
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Duties and Functions
In general, board functions include:
- Establish corporate objectives and policies
- Enhance CEO and senior management effectiveness
- Act as arbitrator between major stockholders (board of directors)
or during family control issues (board of advisors)
- Act during a crisis, such as the death or departure of a CEO
- Lend credibility to investors, customers and vendors
- Plan strategy development
- Make key introductions
All boards share certain responsibilities that should be clear
to each member when they agree to serve. These include:
- Attendance. At its most basic, members must agree to attend
board meetings and agree to take part in some committee work.
- Planning and support. Board members should be involved in reviewing
the company's fundamental purpose, priorities and goals. From
there, members should oversee and evaluate strategic business
plans, and support management in carrying out these plans.
- CEO monitoring. In publicly held companies, the board of directors
is legally responsible for selecting the CEO, approving executive
compensation and, if necessary, dismissing this individual. Regular
assessment of CEO performance is another key function.
- Finances. A formal board of directors approves a company's
annual budget and ensures that the company adheres to it. The
board can also contract for an independent audit; review financial
performance against budget, prior years and competition; control
investment policies; and manage capital or reserve funds.
- Board effectiveness. Board members should be able and willing
to assess their own performance. They must effectively monitor
themselves for results, practices and organization. A board must
govern itself.
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Compensating Board Members
"Board members deserve to be paid," Kramers says, "but
compensation should be linked to the company's performance. This
demonstrates that both sides have made a commitment to the value
and seriousness of the relationship."
Kramers suggests that typical advisory board member payment ranges
from $8,000 to $25,000 per member a year. Paying for travel and
lodging is customary as well. "I also recommend that members
purchase some form of equity participation, so that -- particularly
in public companies -- board members are involved in the same way
as shareholders are."
Zaepfel suggests that directors of publicly held companies be paid
per meeting, with a retainer in place (and stock options). Depending
on size, he says, payment usually ranges between $1,500 and $2,500
per meeting, with a monthly retainer of $1,500 to $3,000.
In many companies, Lapides says, compensation ranges from as little
as $500 a meeting to $5,000 to $6,000 a year (part retainer, part
meeting fee). "Stock options are acceptable, if the company
has a lot of stock options to offer," he says. "Board
members can buy a specified number of shares for a specified number
of years."
"Consider deferring the issue of compensation until after
you've selected a member," Lapides says. "Personally,
I don't like to see individuals join boards simply for the pay.
You want to see in that person's face that serving this company
is something they'll find fun and exciting to do. You don't want
to sell someone on joining your board. Share your business goals
and objectives and see if the person responds enthusiastically.
Many companies determine appropriate compensation after they form
an advisory board."
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Limits to Board Effectiveness
In general, the primary reasons for a board's lack of effectiveness
include:
- Incompatible or disruptive personalities. Board members are
human like the rest of us. They don't always get along. Even a
board made up of skilled, experienced individuals is of little
value if members can't work together for the good of the business.
- "Too many cooks." When a board has too many members,
some of them inevitably "take over" by virtue of their
strong personalities, and seek to dominate the others. In these
cases, the business loses the benefit of what the more passive
individuals might have to offer.
- Insufficient compensation. It's proper and necessary to compensate
advisors/directors for their contributions to the board. Make
sure fees for board members are appropriate, or you may find yourself
with a board of less-than-dynamic quality.
"Very often, you don't have to look any further than the CEO
when a board isn't functioning," Lapides says. "One common
problem is a lack of communication. Board members can't provide
value to the business if the information they receive from the CEO/owner
isn't timely, honest or broad enough."
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Recruiting Candidates
"The best candidates combine solid business thinking, personal
integrity, an ability to analyze problems and who also want to work
with others," says Zaepfel. "They should be able to speak
for your customers so the focus stays on doing everything possible
to give people what they want now and in the future."
Other advice:
- Look for a track record. "Broaden your candidate search
to include at least one CEO or senior executive who have expanded
their own business by at least two or three times," Zaepfel
says.
- Appeal to a candidate's sense of challenge. The challenge of
serving on a board and helping a business grow isn't so very different
from building your own business. Seek out people who respond enthusiastically
to the intellectual challenge of bringing a company to a higher
level of achievement and success.
- Choose someone who's confidential by profession. Attorneys,
accountants and recruiters are frequently a wise choice as advisory
board candidates -- both because of their experience and knowledge,
and because they're bound by their positions to confidentiality.
- To locate potential board members who are "the right fit,"
the TEC experts suggest the following guidelines:
- Match strategic goals with strategic individuals. Are your
expansion plans likely to involve new initiatives in human resources,
technology issues, raising capital, etc.? Knowing your long-range
goals helps guide you toward the type of people with experience
and knowledge in these areas.
- Don't be afraid to ask for help. If your own search doesn't
prove fruitful, consider going to a professional recruiter. They'll
conduct an assessment of your company and suggest candidates who
will likely make a good match.
- Good talent doesn't come cheap. You don't want to choose someone
who's in it just for the money, but remember that men and women
with proven experience and skills expect to be reasonably compensated
for their time and efforts on your behalf.
- One director can lead to another. So you've landed an outstanding
individual to serve on your board. "The next logical step
is asking this person for other recommendations," Lapides
says. "A valuable board member brings his or her own network
of contacts and is likely to know others who specialize in areas
you're interested in."
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Insurance and Liability
"Good insurance protects directors' personal assets against
liability sustained in the course of their duties," Kramers
says. "Implied in this is the understanding that the director
or officer has acted honestly, in good faith, and with a commitment
to what's best for the company."
The most common type of coverage is called Directors and Officers
(D&O) insurance. "This protects directors from having personal
liability in the event that the business is sued," Zaepel says.
"For advisory boards, preparing a letter of indemnification
is a worthwhile precaution."
Some guidelines to keep in mind when assessing D&O liability
policies offered by different insurance carriers:
- Learn about the carrier. Take time to investigate the insurance
carrier's reputation and track record, including (a) number of
claims defended; (b) financial strength; (c) payout history; (d)
defense attorney profiles; and (e) record of reimbursement of
defense costs.
- Know the terms. Ask for an executive summary of the policy
and an expanded definition of all terms. Also inquire about exclusions.
- Look at D&O coverage separately. Even if you're considering
the purchase of D&O coverage as part of an overall corporate
insurance program, examine this part as a separate entity. It
may work better for you this way.
- Keep your options open. There's always the possibility that
premiums will go up at each annual renewal period. One way to
avoid this financial trap is buying a multi-year policy to lock
in coverage and rates beyond one year. Kramers adds: "Even
if they cost the same, different D&O policies provide amazingly
different coverage and loopholes. Get an expert to look closely
at your policy and its exclusions."
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The Future Corporate Board
As for the outlook for corporate boards of directors, the TEC experts
have these predictions:
- Greater familiarity with technology. Board members, like executives
everywhere, have to keep pace with changes in technology. Expanded
knowledge in this area (and with issues relating to the global
marketplace) will help them advise CEOs on future changes.
- More diversity of skills, experiences and people. "The
typical board of directors will no longer resemble a country club
environment where all members look alike," Zaepfel says.
"A board lacking the diversity of minorities, women and younger
executives simply won't work."
- Demand for specialty skills. The resource pool of qualified
directors will continue to be fairly small, but demand will grow,
especially for individuals with specialized skills who offer valuable
input on board commiteees.
The TEC experts identify these likely trends for advisory boards
and boards of directors:
- Outside directors will gain prominence, surpassing the number
of insiders on boards
- More retiring CEOs will leave company boards. Presently, only
some thirty percent of American businesses require a retiring
CEO to vacate his or her board position.
- Boards will increasingly conduct formal CEO performance reviews
and board self-evaluations. This practice will likely become standard
practice within the next five years.
- Directors will be required to own a specific dollar amount of
company stock, as a way of enhancing their personal commitment
to the business.
- More board meetings will take place without the presence of
the CEO. Companies are recognizing that, in the present fast-paced
environment, board members can contribute even if the CEO is busy
elsewhere.
"Boards throughout all types of business are moving in the
right direction," Lapides says. "Especially in start-ups
and companies forming boards for the first time, leaders understand
the value of getting objective, knowledgeable guidance. Traditional
companies are still struggling with the need for outside board members
-- up to eighty percent of private companies don't have any! --
but the writing is on the wall. Advisers bring guidance and direction
to a business. The only other place you'll get that kind of help
is in your local TEC group."
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