by Donna Hamlin

Created on: August 17, 2010

When A Board of Directors Malfunctions

Discussion of stronger governance standards is a hot topic these days. This is rightfully so, since the disclosure of many transgressions by corporate executives and "look-the-other-way" board members. It is one thing to conduct a root cause analysis of what went wrong when a board malfunctions, but that is often after serious damage has occurred. By then, there are plenty of auditors, lawyers, regulatory bodies and the press ready to investigate and "help." If board checks and balances are ill-defined or ill-managed, the odds of serious problems increase.

Better still, is to take a proactive approach focused on constant performance improvement.

Preventative Board Performance Improvement: Do's and Don'ts

The focus for change in board performance today targets the public companies, which, by law, must conduct annual board evaluations to assess how the board performs. Theoretically, this process should invite the board members to reflect on how they do, what outcomes they achieve and what changes they can make to improve. Further, the new Dodd Frank laws announced this month require disclosure of specific topics from the evaluations in annual proxy statements.  This evaluation can help, provided the board doesn't bias the process, as many do today.

Some do their own evaluation, which is simply not objective. If board members look around the table, all stand up and clap each other the back for their good work, there's little value to the exercise. Worse, some have the chair of the board interview the members and write the report. The value and the integrity of the report is highly questionable, especially if members are afraid to speak the truth, rock the boat or say what they really feel about the chairman!.

Others hire a third party to do the evaluation, but hire the wrong sort of group. For instance, if an executive search firm claims to offer board evaluation services as a line of business, it is a direct conflict of interest to their core business. How can a search firm evaluate the qualifications and skill mix of the board members and - without bias - say "You need a new member and we will do the search.?"  A company should hire an independent organization with no conflicts of interest to conduct the evaluation. The National Association of Corporate Directors and Intrabond Capital Corporation are examples of objective, conflict of interest-free organizations which can provide valuable evaluations.

A thorough evaluation should include analysis of several key areas, including: 1) board information management and timing, 2) board member composition and diversity, 3) board meeting effectiveness, 4) board accountability, 5) board committee effectiveness, 6) board member interaction and dynamics, 7) board conduct and ethics, 8) board evaluation of management, 9) management-board relations, 10) board leadership, 11) director self and peer evaluations, 12) board and company compensation policies, 12) board philosophy, 13) board potential for accountability and improvements, and 14) impact of board efforts on corporate performance.

An annual, objective check-up can go a long way to avoiding board hazards. A wise set of directors will take action to do the right thing. If you investigate and find a board which doesn't, raise the issue or give that company a wide berth!

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