Finding the Right Director
“Corporate governance” as a buzz word in the Anglo-commonwealth world found its roots in a number of scandals which hit during the 1980’s. Along side these scandals was a significant increase in the nouveau riche executives who were generously rewarded by so called “i ndependent” remuneration committees with packages that were considered extravagant. Shareholders and the public in general were nervous. In the United Kingdom, these phenomena led to various Committees (Cadbury in 1991 and Greenbury in 1995) which established “Codes of Best Practice”. However, neither went far enough to curb the overpowerful executives and to empower the corporate investors.
In the United States, there have been glaring examples of the failure of directors to appreciate or discharge their responsibilities. The most noted
poster boys of “bad Governance” are Enron, WorldCom, Xerox, IBM, and Tyco. Additionally in Canada, law suits against directors which were previously unheard of, now are commonplace.
To stem the crisis of confidence in th e corporate world, the United Kingdoms established other Codes and reports which sough to introduce more
meaningful and effective internal controls in the corporate environs and thereby reduce the instances of wrongdoing by corporate executives.
So, what are the new rules of corporate governance expected to achieve? Enhancement of shareholder and stakeholder value, control of financial,
business and operational risk and reducing the cost of capital This is achieved by:
- Selection of the right candidates for directorship
- Training and proper orientation of new directors
- Effective communication
- Curbing the power of the CEO
- Change in behaviour
- Devotion of time
- Evaluation and Improvement Plan.
The remainder of this article will focus on the first of these which is the “Selection of Directors”. Good directors bring good judgment to their jobs
together with a commitment to spend the time that is required and a willingness to ask questions. Where good directors are selected then with
proper training and orientation, effective communication, those persons will devote the time necessary for the business of the company, be able to curb the power of the CEO, and generally to manage the company so that it will be a benefit to all stakeholders. Traditionally, the director’s role tended to be narrow and was seen as merely to:
- Provide legitimacy for business purposes
- Provide stewardship to the organisation
- Provide advice on a range of issues
- Provide networking contacts
- Provide supervision to management
However, the role has now been expanded and while the precise role of the board will vary depending on the company’ stage of development most
- Creation and maintenance of satisfactory governance structures and procedures
- Participation (in an active manner) in the selection, evaluation and compensation of the Chief Executive Officer
- Assist in the creation of appropriate management structures, including the selection, review and development of senior management personnel,
- Participating in the design and implementation of compensation and general human resources policies,
- Participating in strategic planning and in monitoring the performance of management against plans,
- Contributing directors expertise to th e solution of specific issues facing the corporation,
- Assisting in understanding the principal risks of all aspects of the business of the corporation and in satisfying itself that there are appropriate systems in place to monitor and manage these risks,
- Assisting in the communication of corporate policy and events, including advising on the nature of dissemination and participating in the actual dissemination to particular communities,
- Providing broadened representation (of interested parties, including owners, creditors, suppliers, geographic regions, gender, minorities and
others) and sensitivity that comes fr om this sort of representation,
- Assisting in management succession planning,
- Assisting in directors’ recruitment and succession planning, and
- Enhancing and monitoring the performance of the board and of individual directors.
It is therefore imperative to select the right persons for the board of directors. Each time there is an opportunity to r ecruit a new director to the board, those responsible for identifying potential candidates should consider the following factors:
- The existing composition of the board-are there any skill sets that are currently lacking?
- Does the company have plans that would benefit from the board input that it does not currently have?
- Are there directors who plan to step down in the near future whose skill sets will need to be replaced?
- Does the person have experience with comparable stage companies?
- Can the person develop strong working relationships with the other board members and relevant members of management (typically the
CEO and/or CFO)?
- Is there a balance of personalities represented on the board?
- Does the person exhibit good judgment, integrity, competence and a public conscience?
- Is the person able and prepared to devote the time required?
One of the primary factors in identifying a suitable director is the business experience that the person has and how this would helpful to the company. For example, the company may need speci fic experience in the industry in which it operates (e.g., finance, energy generation or real estate development). Management experience may also be desirable, or experience in financial reporting or strategic planning. If a candidate has board experience, inquiries should be made about whether he or she has contributed effectively as a member of those other boards.
The personal attributes of a candidate is an important factor. The board should make enquires about and be comfortable with a candidate’s reputation. The person should have a high ethical standard and should have no relationships that would be adverse in interest to the company’s interest. The board should be confident that the individual will act in an independent-minded manner and has the temperament what will allow him or her to act effectively on the board. The candidate must also be willing an d able to commit the tine to be an effective member of the board. He or she will be required to attend board meeting as well as committee meetings on which he or she serves. The candidate must appreciate the compensation arrangement for directors of the company.
Boards need to take into account whether they will be able to satisfy the legal and regulatory requirements with respect to board membership. The individual must be considered “fit and proper” to hold the position of director, regardless of the qualification and experience of the individual.
As recent corporate scandals have proven, qualifications and experience are only the beginning of good corporate gove rnance. It is critical that director understand their roles and responsibilities have the commitment to exercise their best sense of judgment. Only then will they provide valuable service to the stakeholders of the companies which they manage and avoid the risk of financial and personal embarrassment.