RSM Resources

As corporate governance standards evolve,companies are increasingly recruiting independent candidates for their boards of directors. The days of cronyism are passing.

Companies such as General Electric (GE) are going beyond reforms mandated by the Sarbanes-Oxley Act of 2002 (SOX) to strengthen their boards’ oversight capacity. GE requires two-thirds of its directors to be independent, meaning, for example, the company does not employ them or pay them significant consulting fees. It also asks all directors to become more involved in the company. For example, GE expects board members to visit at least two company sites each year and limit participation on other boards, according to The Wall Street Journal.

Given that the role of corporate director is becoming more time-consuming and more accountable to regulators and shareholders, why would anyone want to accept the position? Experts say traditional enticements — including financial reward, professional development and recognition — remain valid. But potential directors should understand the responsibilities inherent in board positions and be selective about which roles they accept.

Changing boards, retaining rewards
With greater scrutiny on corporate governance, companies are finding it more difficult to recruit qualified directors. Board search consultants tell Inc. magazine half of all top board prospects decline offers.

One reason for the challenging recruiting environment may be the required activities for directors and officers under SOX. Failure to perform those activities may be viewed as a breach of their fiduciary responsibilities — and could trigger penalties for civil and criminal securities fraud violations. For example, failure to make required disclosures in a filing under the Securities Exchange Act of 1934 could be viewed as harmful to the company’s shareholders. Some practices, such as loans to officers and directors, are prohibited precisely to reduce conflicts of interest.

Another recruiting challenge may be the declining number, and increasing age, of experienced board candidates from the traditional pool of active CEOs. Many CEOs are under pressure from their own directors to sit on fewer boards. As a result, companies are looking beyond active CEOs to retired CEOs. They also are recruiting directors from active executives further down the corporate ladder who have the time, interest and expertise. Financial experience is particularly in demand, so companies covet CFOs and other professionals with audit or accounting skills for board service.

Some experts say awareness of the risks of serving on a board has increased more than the actual risks. SOX standards — including the requirement that at least one audit committee member be a financial expert— shouldn’t be a radical change for companies with solid governance practices. These companies likely have been embracing SOX principles, at least in spirit. Now they find these standards explicit and enforced.

Although they’re under the microscope more than ever, corporate directors still benefit from the perks and prestige that come with the role. They also continue to have the opportunity to make positive connections with fellow directors and executive leaders, and to add value to the organization.

Determine if the board is a good fit for you
If you’re asked to serve on a board of directors, experts say it’s in your best interest to conduct your own due diligence. Study how the organization operates, including how management has responded to various issues and crises.

Getting to know an organization includes reviewing its mission, operations, financial performance and board structure. You’ll especially want to know what sort of directors and officers’ liability insurance the company has to protect your interests. Consider reading the following materials about the organization to get up to speed:

• Annual report
• Most recent audited financial statements
• Biographies of key executives and board members
• Corporate Web site, marketing materials and employee communications
• Media coverage of the organization

To ascertain your comfort with the organization,try to understand the clients or constituencies and stakeholders the organization serves and determine to what degree they’re satisfied. Also consider the buzz in your own network. Finally, ask yourself if you can contribute to the organization’s success. If you can add value through a unique perspective or set of skills, you’ll likely find the experience rewarding.

Special considerations for privately held and not-for-profit organizations
Although SOX applies only to public companies, the heightened focus on corporate governance extends to the private and not-for-profit sectors.

Compared with boards of public companies, boards of privately held companies tend to act in more of an advisory capacity, and the participants may be less independent. Privately held organizations are closely identified with their owners, so potential board members may want to conduct due diligence on the owners and, possibly, key managers. Ask about the function of the board to clarify your prospective responsibilities.

It’s not necessarily a red flag, but you may find a less developed form of corporate governance in a private company, including a smaller and less defined structure, longer executive tenure, and overlapping duties among owners and managers. Many private companies just now are forming audit committees and building active boards, and some even are embracing the stringent standards SOX requires of public companies.

Not-for-profit organizations may be more likely to operate similarly to public companies than private ones. Historically,not-for-profit organizations has had less developed governance, but SOX changed much of that. Not only do these organizations recognize the benefits of choosing to accept the controls, policies and procedures of SOX as a way to increase donor confidence, but they anticipate SOX legislation will apply to them in the near future. As with a public company, be sure the board functions with some independence, with the majority of members not being responsible for day-to-day activities.

Tips for becoming an effective director
Once you accept a role as a director, take the following steps to help yourself succeed:

Limit commitments, focus and conflicts. Carefully monitor your board commitments. Don’t sit on too many boards or you may not have enough time to effectively participate in any of them. Also, consider your areas of expertise when accepting committee assignments and be sure they’re a good fit for your skills.

Remember, as a board member you’re independent of management. Keep management at arm’s length to maintain objectivity and stay out of trouble — cozy relationships can lead to actual or perceived conflicts of interest. Don’t meddle in the organization’s day-to-day operations. As a director, carry out your role at a strategic level, helping the organization articulate and stay true to its mission, vision and values.

Avoid conflicts of interest such as contracts that would enable you to gain personally or professionally from your role as a director. And maintain confidentiality by protecting sensitive information from anyone, including relatives, friends and colleagues.

Be prepared: Get to know the business. Effectively preparing for board meetings goes beyond reading your board packet and reviewing minutes from the last meeting. Learn the organization’s strategy and what drives it. Be sure you and your fellow directors have the opportunity to meet with key personnel, visit industrial plants or retail outlets, and even attend a training session for new employees.

Seek out mentors and educational opportunities. Identify an experienced board member who can provide feedback and advice. Following your first several board meetings, talk to your mentor regarding your performance. Whenever possible, take advantage of education, training and development opportunities the organization offers to increase your skills and the quality of service you provide.

Speak up if you disagree with the board’s actions. Silence may be, and frequently is, viewed as agreement with board and management action. If you believe that board and management activity or inactivity is not in keeping with its obligations, you need to articulate your position for the record in order to protect your own interests.

Given the increased pressures, carefully evaluate the boards you’re considering joining. However, don’t let the glare of the intensified regulatory environment blind you to the opportunities. As a director, you stand to benefit personally and professionally from your involvement while contributing to an organization’s strategic direction and performance.