Insider Advice On Building Effective Board Processes

Friday, June 21, 2013 - 13:07

The Editor interviews Mark Roellig, Executive Vice President and General Counsel, Massachusetts Mutual Life Insurance Company (“MassMutual”), and Mark Nielsen, Associate General Counsel, Chief Compliance Officer, and Assistant Secretary, Praxair, Inc. (“Praxair’).

Editor: How should General Counsels and Corporate Secretaries engineer their Board processes to ensure that all applicable corporate governance requirements are met?

Nielsen: The first step in structuring effective Board processes is to develop an annual calendar. It is very helpful to create an annual rhythm for the key issues that the Board and its Committees will need to address. When you consider the Board’s five basic areas of responsibility – (1) strategy, (2) review of performance and risks, (3) compensation, (4) governance, and (5) leadership selection and succession planning – it begins to become relatively apparent how to structure a Board calendar.

As a starting place, I would contend that you cannot really create a financial plan until you reach an agreement on strategy. So if your Company operates on a calendar year, strategy is best addressed in the late summer or fall and the resulting financial plans/budgets in November and December. Then, the year finishes and your Company compiles its actual results. Thus, January through March is a good time frame for reviewing your prior year's final financial results, completing your current year's financial plans/budgets, and addressing compensation for both last year's performance and next year's objectives. Governance issues may be best addressed in conjunction with your shareholder meeting in the March/April time frame. You might use the remaining meeting months (May and June in this example) to review particular business units, risks, and succession plans.

Editor: How do you make sure that no item legally requiring Board action is overlooked?

Roellig: We drive “mandatory” items into calendars and checklists for the Board and each of its Committees. Mandatory items flow from a variety of sources – the Company’s charter and bylaws, SEC regulations, stock exchange listing standards, the Company’s governance guidelines, and the Committees’ charters. The calendars and checklists should reflect all of the items needing to be covered and appropriate timing. So, taking just one of many possible examples, the Board needs to review annually outside activities of the directors in order to make a determination as to their independence.

Editor: So then you are ready to plan the next Board meeting?

Roellig: Yes. Once your annual calendars and checklists are established, you can be confident that you are ready to construct meeting agendas. The best starting points for agendas are the calendars and checklists of mandatory items to ensure you are covering the required activities either in the meeting or by informational materials, plus a review of the agenda for the corresponding meeting the year before. Then the particular business overviews or other items of significance need to be worked in. These are usually the “meat” of the agendas. Flexibility is always necessary, though, as the Board will need to address non-recurring and one-off items. For instance, the Board will need to review and approve actions, including large transactions and major projects, which exceed the authority delegated by the Board to the CEO.

Once drafts are prepared, the agendas should be provided to the Chairman, Lead Director, CEO, and Committee Chairs, depending upon your corporate structure, for their review and approval. After receiving everyone's sign off, your next task should be to notify the members of management who will be making presentations about their assigned topics and deadlines for completing draft presentations so that the draft presentations may be reviewed, assembled, and provided to the directors.

Editor: How far in advance of a meeting should the directors receive their meeting materials?

Nielsen: Most directors will expect to have a package of pre-reading materials delivered to them a week before each Board meeting. Traditionally this was accomplished via overnight delivery, but now, increasingly, companies are utilizing online delivery (and so-called “electronic board books”). Included should be the agendas, any resolutions, and most presentation materials. Let me emphasize: getting to the point of being ready to distribute these pre-meeting materials requires extensive teamwork and coordination.

Draft presentations must be received by the Corporate Secretary's office with enough lead time to allow for CEO review and approval. A legal review must also take place. This is the case because, more and more, Board materials are subject to regulatory inspection or discovery in later litigation or regulatory reviews (e.g., antitrust).

In order to ensure an adequate review period, you will need to establish firm deadlines for the submission of draft presentations. You will very likely need the CEO's support for firm deadlines because many executives will want the freedom to make revisions until the last minute.

Another task is to draft an explanatory cover page for any item in a Board or Committee book that is not self-explanatory. This page should crisply and simply explain why the item is being presented, what the written materials consists of, and what action the Board or Committee will be recommended to take. For example, if the Board’s annual self-evaluation process is an agenda item, the cover page should explain why a self-evaluation is being performed and how the self-evaluation has been done in the past, summarize the process for distribution, and outline how and when the Board or Committee will review the results.

One other critical step in preparing for each Board or Committee meeting is to cover the full meeting materials with the Chair. You want the Chair to understand each presentation’s substance and its purpose (for discussion, for information, for a decision, etc.). The Chairs should be sharp and prepared. To facilitate this, management should assign an executive to serve as the "liaison" to the Committee Chairs – the Chief Financial Officer should be assigned to the Audit Committee Chair, the General Counsel to the Governance Committee Chair, the head of Human Resources to the Compensation Committee Chair, and so on. These management liaisons should schedule a meeting or conference call with the appropriate Committee Chair to ensure that the agenda and materials are reviewed and understood, leaving sufficient time to make any changes requested by the Chair.

Editor: So, after all of this preparation, the meeting date finally arrives. What pieces of guidance would you offer on running a smooth meeting?

Roellig: Several. One important tool for ensuring a smoothly flowing meeting is the Chair's agenda. This agenda is slightly different from what each Board or Committee member receives because it includes annotations. The annotations should be in a different color and in bold if a vote is required. How many times have you heard in your meetings, "do we need to vote on this?" Your Chair should be able to answer herself, rather than deferring to the General Counsel or the Corporate Secretary. For each topic, the Chair’s agenda should make clear what is going to happen and what action, if any, is necessary. For example, an annotation might state, "Mr. Jones will provide an overview of proposed changes to the Committee charter that are being required under new NYSE listing standards. These changes need to be implemented by year-end. This item is for discussion purposes and will be voted on at the next meeting."

Similarly, when a Committee meeting is concluded, the Chair should be provided with notes for her report to the other directors at the full Board meeting. It is difficult for the Chair to take notes while running the meeting, listening, contributing to the discussion, and ensuring all agenda items are properly addressed. The Corporate Secretary can therefore be of great help by providing notes detailing what happened and what action, if any, the Board should be requested to take. Providing a draft Chair’s report also assists from a governance perspective because it allows the Corporate Secretary to ensure that items needing to be reported to the Board are in fact covered.

The draft Chair’s report should consist of clear bullets with a highlighted color if the Committee is making a recommendation to the Board for a vote on a particular item. My view is that these notes should be written in a conversational style (no acronyms or "wherefores") so that the Chairs can simply read them if they prefer – many do.

The Chair's reports also serve another important purpose. These reports become the skeletal structure, together with the resolutions, for the Committee minutes.

Editor: Speaking of meeting minutes, how would you describe the purpose of the minutes? What should the Secretary be thinking about in drafting the minutes?

Nielsen: Boards and Committees make their decisions through resolutions, and so one obvious purpose of the minutes is to document those decisions. An equally important purpose is to memorialize the process followed to get to those decisions. To serve this purpose, the minutes should carefully describe the information considered (not "relied upon," but "considered, among other things") by the Board in reaching a decision. In this way, the minutes will demonstrate that the Board and Committees have complied with their duty of care and duty of loyalty. Other discourse not linked to any specific decision should be addressed in a relatively perfunctory manner (e.g., "The Board then reviewed current trends being faced by Business Unit X, as well as various operational plans to respond to these trends."). There is no need to be specific with numbers or indicate results are up, down, surprising, etc. 

Editor: This guidance applies to the Committees minutes as well?

Nielsen: Yes, although I would argue that the Compensation Committee presents something of a special case. Because compensation decisions are subjected to heightened scrutiny, I have several additional suggestions in this area. I suggest that you reflect the processes, consideration, questions, and discussion (not necessarily the substance, but how it was occurring) for the elements of executive compensation, bonuses, bonus plans, short and long term incentive plans, option awards, executive change in control or other agreements (including the key provisions). You want to document that the Committee was aware of, considered, and discussed with its independent consultant these key elements. The final decisions on numbers or agreements can be attached as exhibits – you do not want to indicate that the Committee approved the recommendation without there being complete clarity as to what the exact recommendation was. Also, when a bonus pool is established, it is best to reflect the dollar value as compared to having it calculated outside the room by management (you simply do not want to be later having to figure out adjustments that were or were not made). The minutes should reflect the opinion of the independent compensation consultant. The Board in its business judgment can rely on experts. When that reliance is important, make sure it is documented.

For this reason, the minutes should normally state that the independent compensation consultants "advised the Committee that in their opinion the proposals are reasonable and consistent with benchmark practices."

Finally, all minutes should be drafted with the view that they may be published on the front page of the newspaper, or turned over to plaintiffs' attorneys or prosecutors. So my overall advice is to be careful.