When I first joined a board of directors (which was way back when I was using a Bowmar calculator), I began a journey of learning about boards of directors. I’d like to share some of those lessons with you because they are even more relevant today.

I was honored to be nominated, and then was thrilled to be elected. I thought that being a director was sort of glamorous and that the experience of rubbing shoulders with pillars in the business community would be kinda neat … that was, until I went to my first board meeting.

I sat for four hours listening to management pontificate about how great they were. I watched two older directors sleep, another work on papers concerning his own company, and two others listen but not really participate. Nobody asked any questions, but just kept nodding their heads up and down as management told us that everything was hunky dorey.

The second meeting went the same way. Needless to say, I was disappointed and was becoming frustrated.

By the third meeting, I felt well enough informed to speak up. Are our sales growing as fast as the market is growing? How is our profitability relative to our peers? And how is our productivity? Management couldn’t answer, but promised to at the next meeting. I was subtly but pointedly reminded by the chairman that "rookie" board members are to be seen, not heard.

At the fourth meeting, management showed reports that illustrated the company was not growing as fast as our market was growing. Even worse, our profitability and productivity were lagging behind our peers. Management assured the board, however, that the company was making a profit and that was most important. By my definition, however, the company was going backward. Everyone was surprised, because the group of people sitting around that table was impressive. They were all experienced and successful business icons who should have known better.

What was the problem? It wasn’t the lack of brainpower around the table. It was simply that the directors weren’t engaged in the business, and the chairman either didn’t know how to get them involved or didn’t want any outsiders to be critical of him and his management team.

Since then I have had the honor and privilege of serving on over 30 boards, mostly public companies and some private and non-profits, ranging from a few million to several billion and in a broad range of industries, chairing over half of them. And, the same lessons that I learned back then ring even truer today because of our litigious
society. It’s not just a "good old boys" club anymore. If you are a director, you must not allow yourself to become bored in your board duties. The following are some of my observations about how a director can make a difference:

Characteristics of First-Rate Directors

First-rate directors exhibit certain personal qualities: independence from management, the capacity for objective judgement, and a responsible commitment to shareholder value. In other words, snoring through board meetings is not acceptable. Nor is coming to the meeting unprepared, treating it as a social event, or expecting to be spoon-fed.

The ability of directors to utilize these qualities to effectively handle a potential crisis is especially important. Directors should be so independent of management and capable of objective judgement that they are able to make tough decisions about important issues like divestitures, major layoffs, or bankruptcy if necessary. These
qualities are particularly critical when the company’s situation requires firing management, as is often the case in a crisis, and especially if it is the management team and / or executive that the director played a part in choosing.

First-rate directors take their responsibilities seriously. They are committed and engaged in their duties, and take the time and give of the energy required. Time and time again, we’ve seen with the boards of directors of our clients that independence, good judgement, and a sense of responsibility can mean the difference between consistent growth or crisis.

Director’s Duties

Business school professors and authors have a variety of views as to whom a board’s responsibility should favor. Some say boards should maximize the investments of the shareholders. Some say boards are responsible to shareholders, customers, employees, suppliers, and their communities.

In 1996, the Japanese Ministry of Finance conducted a survey of executive attitudes toward stakeholder capitalism and found a big contrast between France, Japan, and the United States. When asked if the company belongs to all the stakeholders or to the shareholders, 22% of French executives, 3% of Japanese executives and 76% of American executives said that the shareholders own the company. When asked if it is more important for the company to offer job security or to pay dividends, 22% of French executives, 3% of Japanese executives and 89% of American executives said it was more important to pay dividends.

While the professors go on debating, this survey reinforces my real-world experience that American boards of directors focus primarily on maximizing and protecting shareholder value. Directors are the stewards of the shareholders’ money and have a responsibility to protect their investments as though they were their own.

Indeed, our judicial system has defined the fiduciary relationship that a board of directors has with the corporation and its shareholders. If a shareholder sues the board of directors for neglecting their duties, the conduct of directors is measured by the courts by whether he / she acted in good faith and with due care and if he / she was loyal to the company. For this and other reasons, don’t ever let the CEO stack the board to his / her
favor by nominating their friends to the board.

Directors also have the duty of disclosure, which means they are required to disclose to their fellow board members when they have a potential conflict of interest and are also required to disclose all material information within the board of director’s control when it is seeking shareholder approval on recommended actions.

In certain circumstances the fiduciary responsibilities of a board of directors are broadened beyond the company and its shareholders. For instance, directors typically do not have a fiduciary responsibility to the company’s creditors. However, the opposite is true when the company becomes insolvent. The courts have ruled that upon insolvency the creditors’ rights become prime, and therefore directors have a fiduciary relationship to the creditors at that point.

And last but certainly not least, directors must act with confidentiality. Disclosing inside information to any third party will land you in a crowbar hotel, so boards should have written policies about their expectations for keeping inside information confidential.

If this sounds like a land mine of legal mumbo-jumbo, you can still sleep pretty well tonight. Boards of directors are actually fairly well protected, because unless a shareholder can prove the board has done something grossly negligent or with willful disregard, the courts may apply the "business judgement rule" which protects all routine board of director decisions assuming a director performed his / her duties independently, with due care and in good faith.

Characteristics of First-Rate Boards

First-rate boards establish key corporate policies regarding the conduct of the business and then ensure compliance to those policies. For example, they insist the company has internal systems to ensure legal compliance and that when problems are detected, they are dealt with swiftly. They also ensure the company has credible and timely financial reporting that supplies them with necessary information to monitor performance and
vital financial trends. They insist management sets reasonable budgets and then sticks to them. Being disciplined in these areas will not only help companies avoid trouble, but if trouble does strike, these systems will help directors make decisions quickly and rely more on facts and less on personal judgement.

New rules by the Securities and Exchange Commission and the leading stock exchanges (called the "blue ribbon committees") during the past several years emphasize the responsibilities of boards to oversee the auditing and compensation processes. Basically, the rules require that the audit and compensation committees be composed of outside board members and operate independently of management.

That’s not enough, though. Good boards go beyond the oversight of compliance systems and financial reporting to ensure the company has a vision, mission, and corporate values statement. They also oversee management’s strategies, business plan, and the market assumptions from which they are built. By understanding these key
financial assumptions, competitive factors, and market trends, boards are in a better position to effectively judge management’s strategies and business plan and to provide ongoing measures of performance.

Good boards ask tough questions … they insist that management talk about their progress toward the strategic plan and external opportunities and threats to the plan at every meeting, instead of only once a year. At my church recently, the minister had a saying in his sermon that I believe should be the mantra for every board: "If you do not stand for something, you will fall for everything." Good boards make the strategic plan their benchmark.

A potential fall-out from boards becoming fully engaged is becoming too engaged. Good boards stay above the operating-level decisions. Otherwise, management will most likely end up following the board around like the guy at the circus who follows the elephants around with a broom and shovel!

Being a director is a great honor and comes with great responsibility. If you are a director simply to return a favor to a friend or are thinking that it would just be a cool thing to do someday, think twice. Being a board member cannot be boring and if you are caught sleeping at the wheel, it can be an awfully expensive lesson.