RSM Resources

Martin Coyne II retired at age 55 from his job as executive vice president of Kodak Corp.’s photography division. He wasn’t eager to return to 12-hour days, but he still wanted to put his management experience to good use.

Already a director on one corporate board, he joined the board of a second midsized company and serves as a senior advisor to two other companies.

"When I started out, it was more to keep busy than anything else," Coyne told The New York Times."I wanted to keep my brain engaged. But I quickly discovered you can contribute more value to these boards than you could doing a full-time job."

A growing number of companies are recruiting retired executives to fill positions on their boards of directors. Retirees can bring years of experience to the role of director and can often make more of a commitment than potential directors who hold full-time executive jobs. However, retired directors also bring potential risks.Whether you’re recruiting retirees or active executives to your board,you’ll find the process has changed if you haven’t recruited a director recently.

Shrinking pool of candidates

Companies are finding it more difficult to recruit qualified directors —particularly among active executives. Considering retired executives expands the pool of qualified candidates. A number of factors explain this shift:

Independence requirements. More board members are independent, whereas in the past they typically had an interest in the company as investors or senior managers. The New York Stock Exchange (NYSE) and NASDAQ both mandate boards of listed companies maintain a majority of independent directors. To be independent under NYSE and NASDAQ standards, a director must have had no business relationship with the corporation for a minimum of three years.

The Securities and Exchange Commission expects audit committee members to not only maintain independent status but demonstrate financial literacy. And the Sarbanes-Oxley Act of 2002requires at least one financial expert among audit committee members.However, many boards exceed that requirement by seating several.

Growing director responsibility and risk. Board search consultants tell Inc.magazine that half of all top board prospects decline offers. This is largely due to the increasing time commitments of board service and concerns resulting from high-profile instances of board negligence. Atone time, professional directors may have sat on seven or eight boards,but it’s no longer enough for directors to just attend meetings.Today’s directors are expected to talk with company officials, request information and act on their findings. Regulators may view failure to perform director activities as a breach of fiduciary responsibility — which, in extreme cases, could trigger penalties for civil and criminal securities fraud violations.

Restrictions on active CEOs. Another recruiting challenge may be the declining number of experienced board candidates among active CEOs. The third annual "What Directors Think" study, which Corporate Board Member conducted in 2004,found that 43 percent of CEOs and 20 percent of outside directors had limits on the number of board seats they could hold. That’s up from 33percent and 16 percent, respectively, in 2003.

Benefits and risks of recruiting retired executives

Retired executives can bring valuable years of business experience to your board of directors. They are also likely to provide unique perspective,a high level of management skill, a more flexible schedule, willingness to take on complex assignments, and, possibly, deeper experience in a needed skill area such as finance, operations, strategy or technology.

Roger Raber, president and CEO of the National Association of Corporate Directors, a not-for-profit group in Washington, D.C., says the role of director isn’t a good fit unless you bring broad business experience,which many retired executives possess.

"Frankly, if you don’t understand how a company operates, I don’t know how you can govern," Raber told The Wall Street Journal.

One way to keep experienced directors on your board is to extend your company’s mandatory retirement age. Industry experts are seeing boards increase their mandatory retirement ages from 70 to 72 and higher.

Another method is to allow your retired directors to serve on multiple boards.As long as these commitments are not with your competitors and don’t present time conflicts, having directors who serve on other boards simultaneously may benefit your company. Such directors may gain greater exposure to business issues and, possibly, training and development opportunities.

"By being on multiple boards, you see similar issues from multiple perspectives," Coyne says. "For example, I see Sarbanes-Oxley issues from the perspective of a public company that is forced to comply, and I can also see how it will affect a private company that might be sold to a public company. I often seethe same issue from three different perspectives, and it gives me an ability to assess and assist on an issue."

The risks of recruiting a retired executive for your board of directors include the possibility of developing an activist board and potential conflicts of interest. Activist directors — occasionally spurred by a combination of more-experienced directors and less confident senior managers — can be a liability if they attempt to exercise excessive influence or assume the duties and responsibilities of executive officers.

Conflicts of interest are a more common problem. For example, retired audit partners, in demand for their financial expertise, can’t serve on your board if their former employer is your company’s current or recent auditing firm. A conflict of interest may also arise if a retiree’s former employer is a potential client. A thorough due-diligence process during recruiting can identify many of these issues.

Tips for effective recruiting

Before recruiting new directors, savvy companies develop a strategic gameplan. Following are tips experts suggest for effective board searches:

Assess your needs.Before reaching out to potential new board members, assess the strengths and skill gaps of your current board. Determine what type of person would fit best and what you’d like them to add; this will give more direction to your recruiting effort.

Understand the time frame.Director candidates aren’t traditional job applicants; they’ll require a certain amount of courting. Your nominating-committee members should expect to attend a variety of meetings with each board candidate and,if necessary, travel to a candidate’s location. Industry experts recommend planning three months to identify and screen candidates,conduct background checks, and schedule interviews with other board members.

Consider working with a third party. Having a third party coordinate your search is an excellent way to manage expectations and keep the process focused. A third-party representatives eeks a good fit for both parties by understanding your company’s needs and effectively communicating them to candidates. A third party can also help you mitigate risk by identifying potential conflicts of interest.

Look out and down. If your board needs a specific skill set, look outside your industry or farther down the corporate ladder. For example, if your manufacturing company is branching out and needs marketing experience, you might look to the consumer segment for an executive with retail distribution experience.Searching farther down the management ladder to retired leaders of corporate divisions may also provide opportunities for a diverse mix of skills.

Get to know your candidates. Reference checks are essential to confirm independent status and avoid conflicts of interest. With experienced director candidates, focus on their board experience by speaking to other directors with whom they have served.Again, a third party may be able to help check candidates’ references.

Be prepared to sell the prospect on your company. Astute candidates will expect you to discuss director’s insurance coverage,your company’s financials and your business-management practices. Be candid about your company’s track record for ethical decision-making,because candidates likely will conduct their own due diligence.Articulate your expectations, but also demonstrate how the candidates can contribute to your board and reinforce their opportunities for personal and professional growth. Industry experts say factors most important to director candidates are the company’s reputation, their confidence in the CEO, time demands, and logistics such as meeting frequency and location.

Recruiting a director for your board requires significant effort. However, a thoughtful approach will lead to more qualified candidates and a more functional board that can make meaningful contributions to your company’s long-term success.