Executive Leadership and Corporate Governance (Part Three)

My prior two Blogs dealt with the causes and ramifications of poor governance.  Today I will offer what I believe is the pathway to governance that helps an entity operate more than one standard deviation to the right of the mean, or in the top 15% of entities in its sector.  The observations I offer below are based on over 20 years of active governance participation that continues to this day – as an independent director on Boards of NFPs, privately held companies and publicly traded companies, so a rather broad sample.  The real world challenges and levels of risk exposure are different for Board participation in each of those groups, but the legal responsibilities are essentially the same for each group.

So, what steps should be taken to put your company or organization in the best possible position to have a high performance Board that, via a minimum of four scheduled Board meetings/year, helps create a measurable increase in performance and value?

First, as you might have guessed if you read my previous two Blogs on this subject, is to formally separate the top executive officer of the entity from the Chair position.  Having the Chair position filled by an individual who legally qualifies as an independent director eliminates the inherent conflict of interest that occurs when the Chair and the top executive officer are the same individual.  Also of importance is the fact that this is a great leadership move that signals ethics, transparency at the top of the entity and that true governance is likely to occur.

Second, select and elect directors so that a majority of the elected directors qualify as independent directors on a Board that will have from five to nine members.  The directors from the entity should be limited in most cases to the top executive officer and the top financial officer of the entity.  If the entity does not have a financial officer, one other senior member of the management team may serve on the Board, but that’s all, as Board meetings are not management/staff meetings, or worse yet, perks.  The directors that are selected for election should be selected based on needed silos of expertise, and diversity of all types should be encouraged so the Board is a microcosm of the entity’s customer/client base.

Third, establish formal committees.  The three mandatory committees should be audit/finance, nominating/governance and compensation.  Each committee should be chaired by an outside director.  Each committee Chair should lead his/her committee through the process of developing a committee charter that identifies the responsibilities and accountabilities of the committee.

Fourth, compensate the Board appropriately (i. e., treat as a value creating asset) and establish an annual budget that is specifically for the Board’s operations in the discharge of its governance responsibilities.  I will comment more on Board member compensation in a Blog next week.

Fifth, set up an entity wide whistleblower policy that is monitored by an outside agency.

Sixth, conduct annual reviews of each director’s performance, preferably through an outside firm whose specialty is providing that service.  This lessens internal politics and biases.

While there are several other steps to be taken to ensure that high performance of the Board is realistically possible, if an entity starts with these six, it will be light years ahead of most of the other organizations in its sector – specifically those privately held companies that need to position themselves for sale within the next five years.  After all, think how much more attractive (read valuable) a properly governed company is as an acquisition opportunity vs. one that’s poorly governed and whose performance is also substandard as a result.

Also, there’s a LOT of “how to do” for each of the above steps.  If you would like to have step by step guidance in implementing each of these steps, please contact me.

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