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Future directors: Five key areas for questions

Tracy E. Houston //October 13, 2011//

Future directors: Five key areas for questions

Tracy E. Houston //October 13, 2011//

Being a director on board is a tradeoff. On the one hand, there is exposure to reputational and financial risk. On the other hand, there are benefits – tangible and intangible.

I often advise board candidates to take the career opportunity mindset of fit over status or honor. In the good fit mindset, questions are two-way and include a deeper dive into due diligence. In this era of increased scrutiny from regulators as well as shareholder activist groups, this is only prudent and reflects a knowledge of current challenges in corporate governance.

Moreover, the headhunters I work with provide feedback that candidates are asking more questions. In today’s world, making inquiries above and beyond traditional due diligence can assist the candidate in their decision making rationale. Here are a few areas to consider:

Succession Planning

This is a major role and responsibility for boards. Surprisingly, many of the corporate governance director surveys point to a large percentage of companies not having a succession plan in place for management or for the board. If there is not a succession plan in place, it can be a window into the will of the board to deal with issues that have some level of discomfort.

• Is there a succession plan in place for senior management and for the board?
• If not, why not?
• Has the topic been brought up previously and dismissed?

Board Culture

The boardroom has both leaders and followers and the roles interchange to form patterns that drive the deliberative process. This is very important for a new director to understand in advance. Leader-follower is a circular relationship where the power of both leader and follower to influence one another is a dynamic force. While popular media may paint a power picture differently, the framework of dominant leaders and complaint followers does not reflect the interdependence that is at the base of the relationship. Healthy dissension is the responsibility of the follower. At the heart of a healthy follower is trust of one’s self – not as right but as relevant. There are no leaders without followers.

• How does the CEO handle difficult but fair questions in the boardroom?
• Who guides or inspires the board? Who holds the institutional vision?
• When the board is not satisfied, how does the board use outside advisors?

Board Interconnection

In 2009 the SEC passed increased disclosure rules that require companies to disclosure more information on director background and experience. Companies are also required to certify if directors are independent of management. While these are important, they do not get at the heart of the interconnection of the board that may not require disclosure.

• How robust was the process used to identify current candidates?
• What are the current directors potential for conflict of interest in both business and personal life?
• What are the voting patterns of the board?

Special Committees

Special committees are formed to assist directors with their duties and can be formed for a number of reasons. Generally, they are not formed very often. An inquiry into what, if any, special committees the board has formed will be informative. With the current increase in the M & A market and the increased scrutiny around M & A transactions, this may be an area that the board has formed a special committee.

This becomes important when an inside director is involved at the board level on one side of the deal making table. It is important to get a sense of how the transaction was vetted and how the board ran the process. The special committee is set up to assure an arm’s length transaction. If there is any suggestion of conflict of interest it is very likely that it will draw the attention of shareholders and possible legal action.

• How did the board become comfortable with the deal and how it was fair to the shareholders?
• Did the special committee have the power to hire advisors?
• Did the special committee have the power to exclusively negotiate the transaction?

Shareholder Relations

The passage of the Dodd-Frank bill ushered in an era of increased relations with the company shareholders. Balancing major constituencies can be a challenge but great companies keep them in balance.

• How has the relationship with the shareholders changed in the last few years?
• How proactive is the board with shareholders via communication and steps to accommodate concerns and complaints?
• How does the board view the concerns, if any, from governance groups?

There are both risks and rewards in joining a board. Ultimately, the candidate has to calculate if the due diligence process brought a lot of data or quality information. Was what ‘really matters’ discussed in an open dialogue or was it a parade gown gala?
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