How would you characterize the current board landscape? A rubber-stamp board? A jackal in disguise? One that offers poor director’s pay? Lacking in insurance? One that is made up of a dictatorial chair and financially illiterate members? A divided board with backstabbing members?
If any of these scenarios sounds familiar, do not fret. Getting the right mix of directors onto a board is a challenge indeed.
How can a company attract and retain the best team of directors?
Thankfully, there are guidance and best practices available.
The first step is to prevent the “bad and rotten apples” from getting into your basket.
Certain minimum qualification requirements to be a board director are already mandated by the Securities and Exchange Commission (SEC), at least for public companies.
One can certainly go beyond these minimum requirements, especially if one deems it necessary for business.
Say, for example, that you are considering several board appointments in organizations that are responsible for investing large public funds.
It would be plainly irresponsible to appoint a board director who has no experience in investments.
At a minimum, financial investment experience should be an added requirement for board directors in these types of organizations.
Beyond satisfying minimum requirements, a company should also have a clear policy on background checking of new directors.
It would be disastrous for a company to enlist the services of a new director who has previously been involved in a controversial—if not criminal—activity.
On the other hand, there is also a need to get the right mix of talents for a company to continue to achieve higher levels of performance, particularly in specialized industries.
Hence, it’s a good idea to sign up a number of directors who are experts in areas where the company wants to succeed or perhaps dominate. For example, a company involved in innovative IT products may want to have a board director who is a recognized IT expert in the industry.
The level of understanding that the industry expert can share with other board members will definitely make a difference when making important decisions.
There is also the added problem of attracting qualified board directors.
Smaller companies that cannot offer competitive board pay will definitely be on the losing end.
Providing board director insurance is another challenge. With the increasing number of financial scandals and corporate failures rocking the business community, many qualified directors are now demanding insurance cover.
How can a company address these challenges? There are a number of options, in addition to offering competitive board pay.
A company could offer stock compensation to directors or perhaps implement a profit-sharing scheme, i.e., paying out a certain percentage of net profit to members of the board.
With respect to profit-sharing schemes, a corporation should be careful in ensuring that the scheme is based not only on quantitative measures (e.g., achieving revenue targets) but also on qualitative factors (such as age of receivables, collection turnover, number of customers).
Once the directors are in, another challenge is to ensure that they understand the inner workings and operations of the company so they can make the right decisions.
A current best practice is to provide intensive orientation seminars to new board members.
Another option is to involve board members in immersion field trips accompanied by key company personnel so they can gain further understanding of the company’s culture, people and activities.
In a nonprofit organization where I serve as board trustee, it is customary for a current trustee to conduct one-on-one briefings of incoming trustees.
Although the practice may be adequate considering the small size of the organization, it may be necessary to improve this practice in the future by conducting formal briefings by key personnel as well.
Moving forward, companies should also ensure that their board directors get continuing professional education. Board directors should be encouraged to attend necessary training.
The company may want to sponsor personalized training programs for its directors to improve their knowledge and to ensure that they are abreast with latest developments in their industry.
These programs should be part and parcel of the training calendar that the company designs for its employees.
(The author is the head of Punongbayan & Araullo’s Advisory Services Division. P&A is one of the country’s largest audit, tax and business advisory firms and is the Philippine member firm of Grant Thornton International Ltd. Send comments or questions to Juancho.Robles@ph.gt.com.)