PLI - Roundtable Good Communication Between Board And Management - The Key To Effective Corporate Governance

Monday, August 1, 2005 - 00:00

The Editor is honored to report on the discussion among Janet M. Dolan, President and Chief Executive Officer, Tennant Company and board member of Donaldson Company, St. Paul Travelers Company and United Way of the Greater Twin Cities; James T. Hale, immediate past Executive Vice President, General Counsel and Corporate Secretary of Target Corporation, and board member of Tennant Company, Carlson School of Management and Ordway Center for the Performing Arts; and Stephan G. Shank, Chairman and CEO of Capella Education Company, Chancellor of Capella University and chairman of the Corporate Governance Committee of Tennant Company, at the Second Annual Directors' Institute on Corporate Governance: What Board Members Need to Know to be Effective Today & Tomorrow, hosted by the Practising Law Institute. To access the full program, visit www.pli.edu.

Editor: Why is communication key to effective corporate governance?

Hale: A company can have all the processes in place for complying with SOX and other regulatory requirements, but without good communications between its board and management, none of the processes will result in good governance. Let me give you four examples - two bad and two good.

An example of bad communication is fully scripting a seven-hour board meeting, leaving only ten minutes for discussion. Another is management's including a lot of advance material and plenty of time for discussion, but making up its mind on every issue in advance and not listening to the board.

An example of good communications is the CEO's taking notes on the board's suggestions, following up on them and reporting the results at the next board meeting. Another is having executive sessions immediately following board meeting to build the board's suggestions into the company's business plans.

Dolan: One of the best reasons to maintain good communications is the 95:5 rule. About 95 percent of the time, anyone can do your job and the board's job. The other five percent are the "bet the farm" activities. That's when it's essential to have established good communications so that the board and management can work cohesively through the period of crisis.

Shank: The very design of a board is built around several concepts that do not work in favor of the individual director. On most boards, a director has difficulty acting as an individual because most decisions are made through a process of consensus building. In addition, no matter how much expertise one director has, the management will have more knowledge of the company's day-to-day operations. You have to work hard to create a mode of interaction that helps directors move beyond the individual disadvantages to be able to contribute the value that their outside perspectives bring.

Editor: How do you set the agendas for board meetings?

Dolan: Rather than starting afresh before each meeting, we look at the building blocks to our company's success - IT planning, HR planning, new product development, our position vis-à-vis our competitors, and the like - that need to be before our board on an ongoing basis. At least one is on each meeting's agenda. Another source of input for our agendas comes from the regular feedback we get from our directors on what they like to see in their board packets.

Editor: What are some of the major advantages of executive sessions?

Shank: Greater use of executive sessions coupled with separation between the role of the CEO and the chairman help boards to function with more impact. Executive sessions help the board to bring the visions of its individual members into a coherent focus so that they can speak with one voice. Providing a good forum for talking about sensitive topics, executive sessions can be used to air conflicts. If a maverick director consistently drains the time, energy and attention of the other directors, executive sessions provide a low-profile forum for managing the maverick.

Editor: What is the value of advance materials?

Hale: Advance materials give the board and management a common focus. If the directors learn that they are expected to read the materials in advance, you can move to more substantive discussions.

Shank: A lot of experts on a board like to wander into details. Segregating the advance material to be discussed from an appendix with detailed attachments communicates a structure that helps steer the meeting to a higher value discussion with more strategic direction.

Dolan: A common industry complaint is that board members are given too much financial data. The data needs to be put into the context of the business by providing competitive analysis and other reference tools.

Hale: I agree with Janet. It's well and good to send out financial statements showing that store sales have increased by five percent, but it's more helpful to know that your figures are twice those of your competitor. The reverse is also true. The board wants to know if the figures are way behind their competitors' before the company is hammered in the press.

Editor: How do board and management collaborate in setting strategies?

Dolan: Boards should insist that a strategy be of a longer range than one year. You need a thread of consistency so that you can compare the plan against your current position from year to year.

Filters are needed. Management can use a matrix like "pearls and dogs." This helps them focus on the risk/reward assessment.

You should share with your board initiatives that did not make the list. The board adds real value when a director asks what is not there. We live in a fast paced, global world. The more we can vet plans internally, the more likely we are to succeed.

Shank: If the board is properly structured, it includes members with different backgrounds that are important to the company so that they can contribute outside perspectives that challenge management.

Hale: To preserve the right balance of members representing different industries and talents, a board may set a policy requiring members to resign if their principal employment changes. When the board receives a resignation, it needs to step back to ask if the person had been doing a good job.

It is important to involve the board early in strategic discussion. Smith v. Van Gorkum, 488 A.2d 858 (DE 1985) stands for the proposition that you better not go to the board with no notice and tell them that you need a vote for selling the company.

Equally important, you do not want a split vote in the board. Split votes can be avoided by going to the board early so that if it is clear that the board is not supporting you or that there is a substantial minority; you can tailor your strategy without the embarrassment of being voted down.

Editor: What is the key to effective CEO succession planning?

Shank: Most companies do not have candidates waiting to be nominated. A contingency plan should be ready to prepare the board for taking a more active role in holding the organization together until a new CEO comes aboard.

A true succession plan requires good communication with the current CEO beginning with an understanding of how long the CEO's tenure is likely to be. It also requires a process for the board to interact regularly with potential internal candidates so that board members can form their own judgments about each candidate's potential to become a CEO.

Dolan: Succession planning is an important responsibility of the CEO. The first thing a new CEO should think about, when appointed to the position, is who his or her successor will be and how to groom him or her effectively. I have been on boards that have brought in outsiders and on those where an insider is selected. While both processes worked, selecting the insider is often better for the organization. The insider's institutional knowledge makes for a smoother transition.

Editor: What are the important elements of a CEO performance review process?

Shank: First, avoid surprises. You should have a shared understanding of how the process should work and what the board's expectations are of the CEOs performance. Start with performance goals submitted by the CEO but responsive to the issues the board is concerned about.

The process needs to be formalized. Most companies have a set form for individual evaluation of the CEO submitted by each of the directors which is then compiled by the lead director. That is taken back to the executive committee for discussion. Then that is reviewed with the CEO and used as a basis for setting his or her compensation.

The more that performance standards can be measured, the better communication and matching of expectations are going to be. Feedback to the CEO and a matching of expectations should not be a once a year thing. The vehicle of having a process with a feedback session to the CEO every quarter of how it is going and what we are concerned about is also an important part of the process.

Dolan: Having no surprises should be the theme of this discussion. The CEO needs to seek input from the board of how the management team is performing. The CEO is the conduit for very important confidence building for the whole organization. The organization's future depends on how well the CEO understands the board's perspective and on building a good working relationship with the board.

Hale: It is important to create a culture in which constructive criticism is expected. If you have an environment in which the CEO or any manager in an organization expects to receive nothing but praise, it can be destructive when criticism is given. We try to indicate specific times in the year when constructive criticism is going to be given.

Editor: How does the communication change when the board begins to lose confidence in the CEO?

Hale: One of the reasons for succession planning is that sometimes the board decides that the CEO should leave. Boards and CEOs alike want to avoid this. An environment that has regular executive sessions can go a long way in addressing the problems early so that the situation can be saved.

Shank: That is not a good place to be because the board has to be concerned with dealing with the ultimate situation with the CEO and with continuity and confidence of the organization. The more the executive session and the periodic feedback to the CEO can be used as a vehicle to face difficult issues, the more easily the board can get the CEO to a point where he or she understands that severance is going to come. It can help the severance to take place in a way where the damage can be managed.