Those pesky independent directors

Need some help with your director?

A young CEO recently asked for some advice. She had just signed off on a third party investment which came with the requirement to add

an¬†independent board member to the team. The CEO commented that “The dynamics and complexity of the boardroom has changed in a number of significant ways. I need some help in understanding what is unfolding.”

What are the key changes she described?

1) “The new Independent member has asked for a lot of background material about the company, our shareholders, suppliers, accounts receivable, contracts, payables, risks, issues and opportunities, personnel files, incentive plans – the list was long and the more I provided the more information I was requested to deliver.”
I respond: It is very important that a new member of the board come up to speed as quickly as possible. Much of the material that you have used in your recent due diligence will provide the Director with the necessary background for an effective Board orientation.

2) Prior to the meeting, a detailed agenda was requested that included a start, stop and time allocation for each agenda item. In addition, we were asked to categorize the agenda into:
a) Standing Matters (CEO Report, Financial Update, Pipeline Review),
b) Committee Reports: (Finance, Human Resources, Governance & Risk)
c) New Items: (For Information Only or Decision Required)
d) In-camera session (excludes CEO).

I respond: This is just common sense. Directors are busy and organized professionals. An appropriate, well constituted meeting agenda is critical to ensure meeting efficiency. The Chair of course will need to be strong to ensure that the meeting plan stays on track. An in-camera session without management is a must.

3) A couple days prior to the meeting a detailed board package of supporting materials was sent out to all members. Our new board member was looking for at least five days with the supporting materials. Twenty-four hours in advance of the meeting, the final materials were emailed or faxed. Our new member was happy that the changes to the final package were small.
I respond: Directors are appointed to help enhance management’s decision making. They will need to see a sufficient level of detail to understand the options and recommendations made by management. Given schedules and commitments five days is the minimum period of time to allow the member to read and absorb the materials. Often after the board package goes out there are critical updates that need to get sent – these updates should be sent no later then 24-hours in advance of the meeting and should not form the core of the agenda materials.

4) The meeting itself also changed quite dramatically. With all the materials sent out in advance everyone on the Board had a chance to understand where we were at. The board meeting dynamics now changed to a barrage of questions about the assumptions, the trends and associated conclusions related to the materials. I respond: Asking questions helps with the clarity and provides a real time mechanism to test the quality and validity of management recommendations. It is often stated that there are no “wrong questions” in the board meeting. Directors who don’t understand a particular point will most certainly speak up.

The Board of Directors are appointed by the shareholders and their purpose is to “enhance executive decision making”. They are bound by a duty of loyalty that demands that they act in the best interests of the stakeholders. Stakeholders include not only shareholders but customers, suppliers, NGO’s, employees, government agencies and others with a “stake” in the companies business. Their duty of care is to act in a matter that is consistent with what a reasonable person would do when presented with a similar set of facts.

Directors perform their duties by:
a) demanding a high calibre board package that contains the right amount of detail and is delivered in well in advance of the meeting;
b) asking lots of questions to improve clarity and test what if scenarios and;
c) digging into their wide and deep leadership expertise to help guide management.

The CEO who asked for the assistance left our session with a significantly enlightened view of that Pesky Independent Board member. Does it now make sense to you?