Personal Lessons From The Boardroom

I started serving on corporate boards over a dozen years ago. Since that time, I have served on seven public company boards and have also served as an independent director for numerous private companies going through financial restructuring proceedings. Through these experiences, I participated in numerous and varied governance issues, including CEO transitions, company sales and acquisitions, activist engagements, proxy contests, and cybersecurity matters, as well as many opportunities for the board to favorably impact the long-term success of the business.

I have learned several common themes that apply to every company and every board. Following, I share some of these themes.

Boardroom culture, relationships and capital partners can all impact outcomes, either positively or negatively.

Boardroom culture matters. Culture in the boardroom is paramount. Creating an environment that fosters and encourages open debate, discussion, transparency of information flow and that reflects diverse perspectives among board members makes a huge difference in the quality of decisions. Board members must feel comfortable having candid discussions about difficult issues and know that their views will be respected. Failing to create and foster that culture in the boardroom can harm both the decision-making process and the overall health of the company. Situations involving dissident directors, directors with personal agendas, and some who just do not fit within the group culture detract from the decision-making process. Getting boardroom culture right is highly important and ultimately drives the best outcomes for the company and its stakeholders.

The relationship between the board and CEO matters. This may sound obvious, but how the board relates to the CEO and vice versa has a meaningful impact in how boardroom decisions are made. An investor friend of mine once described the relationship between a board and the CEO as like an orchestra. When the strings are tuned, and everyone plays their part, the music is beautiful. If off-tune or one of the musicians is offbeat, you can immediately hear it. The relationship between boards and CEOs requires mutual respect and the ability to respectfully disagree. Regardless of those disagreements, both are ultimately part of the same team and must communicate with a single voice. The best board/CEO relationships appreciate this dynamic and embrace it.

Who is in your capital structure matters. Having the right capital partners has a material impact on the long-term success of the company. I observed this during my three decades as a restructuring professional and firsthand in the boardroom. When things are going well, seemingly everyone on the street wants to loan a company money, make investments, and provide capital advice. Circumstances and fortunes can change, sometimes rapidly, though. When they do, you learn quickly how your financial partners behave and how they will treat you when the chips are down.

Understanding what could happen in a downturn and how your financial partners might react is very important to the long-term viability of a company. It is incumbent upon boards to look beyond just the economic terms of any financial arrangement and understand the nature and culture of the capital partners. How do they manage situations when events do not go as planned?

Executive compensation is an art and a science. In my service to public company boards, I have served on numerous compensation committees, including as the committee chair. The role of the compensation committee chair is perhaps the hardest job on a corporate board. It involves negotiating a delicate balance between the expectations of the executive team and those of investors to create and maintain a pay system that effectively and appropriately aligns with short-term and long-term performance.

Executives, particularly those of publicly traded companies, are under tremendous scrutiny and pressure to perform in both the short term and long term. They reasonably expect to be paid commensurate with their performance. It is the responsibility of the compensation committee to balance that expectation within the boundaries of the pay structure, company strategic initiatives, performance metrics, and the designated peer group to align with incentives. It is a delicate balance to get it right, but it is essential for the long-term performance of the company.

Board members who have meaningful equity stakes in the company tend to focus more on long-term strategic performance.

Directors should hold a meaningful equity interest in the company. Board compensation is usually comprised of a mix of cash and equity, with a slightly larger equity component than cash (the cash portion is usually just enough to pay taxes on the annual granted equity).

Board members who have meaningful equity stakes in the companies they serve tend to focus more on long-term strategic performance because their interests are more aligned with shareholders. Boards should implement policies requiring directors to hold meaningful equity positions and even purchase new shares in addition to annually granted stock. While directors are fiduciaries to the companies they serve, as a practical matter, those who have meaningful “skin in the game” are incentivized to make decisions as “owners” rather than just as “advisors.”

Be thoughtful about activism. There seems to be a general consensus in corporate boardrooms that shareholder activists are bad, and activist overtures are typically unwelcome. Having served both on boards on the receiving end of activist initiatives and also as the board appointee for activists, I appreciate the merit of certain activist overtures and strategies, depending on the circumstance.

While boards (and management teams) generally bristle when they receive the first correspondence from an activist, there may be a valid underlying reason for the activist’s interest. Activists generally do not target well-performing companies. In many cases, a target company may be objectively underperforming, either absolutely or relative to its peers. The company may also be struggling under a combination of inefficient capital structure, ineffective capital allocation, entrenched management (or board leadership), an outdated strategic plan, or long-standing operating inefficiencies.

Boards should be informed, realistic, and reflective to constantly self-evaluate the company’s performance. The challenge for boards in dealing with activists is that resolution will nearly always require compromise, which usually means unanticipated change. Boards need to be flexible, realistic, and pragmatic when dealing with activists and work toward negotiated compromises when appropriate. Boards should be cognizant that the most successful and constructive activists usually have deep operating experience and resources. They can understand and appreciate the nuances of running the business. A well-functioning board should not be surprised by an activist overture, should be prepared and self-reflective, and should be pragmatic and flexible.

The board’s job is to grow the business, not promote the stock. One of the board’s primary duties is to maximize value for shareholders (and other stakeholders), which is not always perfectly reflected in a company’s short-term share price. As a result, boards are often under pressure from third parties to provide long-term financial guidance to demonstrate the future growth and earnings potential of the company.

Guidance can be challenging, and the longer the term of the guidance, the more likely it may prove to be inaccurate. Boards and management teams should take measured views on guidance, adjust it when appropriate, and be cautious. So many things can happen or change in a company over even a short period of time, much of which might be out of the control of the company, that it is very difficult to accurately predict long-term performance.

Consistency of guidance breeds credibility in the market and ultimately reinforces trust with shareholders and other stakeholders. Long-term performance usually drives improved share price over time in a way that is more durable and sustainable and supported by business fundamentals.

Board meetings need more open discussion and less scripted presentations. In preparing for a board meeting, management teams and advisors generally prepare extensive written materials that are distributed to directors in advance. This is generally very helpful for board members so that they can be informed and reflect on the agenda topics before the meeting.

That said, the time during which a board meets as a group is very valuable and limited. I generally see two types of presentations in board meetings. In one, the management team pages through every slide with minimal commentary, which usually takes a lot of time and leaves limited or insufficient time for open and candid strategic discussion.

In the other, the team assumes every director has read and thoughtfully considered the written materials in advance of the meeting. Rather than page through, they focus on discussion of a few high-level strategic issues. The meeting is less scripted and more of an open and candid conversation among directors.

Obviously, the latter approach is preferable. The most productive board meetings focus primarily on strategic issues and discussion, and open, respectful debate of ideas without a strict reliance upon the written materials. Of course, there are always a variety of governance and compliance/administrative matters for the board to address, usually at the beginning or end of the meeting.

However, the bulk of the meeting should be discussion-based, focused on company strategy, growth initiatives, operating and strategic goals and challenges, and an objective review of performance relative to strategic plans. Senior management should drive this discussion, and be prepared with recommendations, but also listen, and solicit, and be prepared to incorporate input and feedback from all directors.

Shareholders will be concerned if they only hear from board members when there is a crisis. It is better to regularly build and maintain open lines of communication.

Board members should communicate with long-term shareholders. This is valuable for several reasons. It is important for directors to have good working relationships and open communication with large shareholders. This builds trust and understanding of the investors’ perspectives and ensures that shareholders feel they have appropriate board access. Moreover, if a company ever faces an activist overture, proxy battle, or other third-party initiative, it is always better if there is an existing relationship and line of communication between the board and the most significant shareholders.

Those relationships need to be established and built over time. Shareholders will undoubtedly be concerned if they only hear from board members when there is a crisis. It is better to regularly build and maintain open lines of communication with large shareholders so there is an existing relationship of trust if and when an issue arises.

Boards should designate individual members for shareholder outreach, who should be advised to “listen more and talk less” when engaging with shareholders and be properly trained on confidentiality and nondisclosure rules.

With experience and guidance, directors are able to engage in meaningful discussions with large shareholders within the boundaries of these rules and gain valuable feedback from investors while building relationships of trust that could be helpful in a corporate crisis.

Think twice about board term limits. Many boards consider mandatory retirement based on age or other limits to long-term board service. My experience is that rigid rules for board terms often miss the point and could be harmful.

Most institutional investors and proxy advisors focus more on aggregate board tenure than individual board terms. According to a report from Spencer Stuart, for example, the average tenure on all S&P500 boards currently is 7.8 years. From my experience, longer-serving board members generally have deep knowledge of the company acquired through service. They offer continuity and stability and have historical perspective that is helpful to the board and senior management team.

Concern around longer-serving board members generally exists when they:

• Fail to demonstrate independent views and perspective and instead become too dependent on the majority view in the boardroom.
• Become too close to the CEO, such that personal relationships cloud professional judgment.
• Let skills become outdated or demonstrate a lack of preparation or passion for the role as
• Fail to keep up with relevant technology and business changes that are critical to the company’s performance and success.

In my experience, overall board composition matters most, including diversity, average tenure, alignment of board expertise with company strategy, approach to corporate governance, and stewardship of company performance. In some cases, significant, periodic changes to board composition may be required. However, inflexible term limit rules that do not correlate with shareholder returns may actually be harmful to a company rather than corrective.

If it is clear that a director is not working out or is no longer willing or able to contribute effectively, it is incumbent upon the board to have the hard discussions and, if necessary, take appropriate action. Ultimately, boardroom culture and the ability to work together, as well as with the senior management team, matters most in the boardroom. Tenure is often an asset in this regard.

Board service is a significant time commitment. Many years ago when I first started thinking about joining a public company board, I met with a local CEO who encouraged me to pursue board work. At the time, he told me that, in his experience, it basically entailed a quarterly get-together coupled with a nice dinner at a fancy restaurant.

None of my boards have ever been like that. There is always some crisis to resolve, a transaction to evaluate, or a sensitive matter that requires attention. As board members, you have to be available whenever needed. Further, if you have a good relationship with your management team, they want to talk to you between meetings and seek your perspective. Those are the fun and most rewarding parts of the job, but it is much more than just getting together four times a year for a nice dinner and chat.

It is all about strategy and execution. That is easy to say, but as everyone who has run a business or served on a board knows, it is hard to do, particularly over the long term. Lots of things happen in businesses, circumstances change (often quickly), and flexibility and adaptability matter. If you have the right board, the right boardroom culture, the right leadership team, the right governance structure, and the right capital partners, you are much more likely to be successful over the long term.

Serving on a board requires a unique combination of skills, diplomacy, experience, and approach. The lessons above can make the difference between a successful board and a challenged board. Ultimately, experience and pattern recognition matter, and ex- tensive preparation and applying good judgment and a listening approach will generally tilt the scale in the right direction.