Board Membership 101: The Role of the Board

Role of the BoardPresent day corporate directors are faced with increasing responsibilities, expectations, and risks. Over the last twenty years, government standards for board oversight have grown more stringent than ever as the role of the board evolves.

But why exactly do boards of directors exist, and what role do they serve in business leadership? Ultimately, boards exist to provide strategic oversight for a company and to protect shareholders’ financial interests.

In order to accomplish those goals, individuals who wish to serve on a board must be willing to take on the responsibilities expected of a director. Below, you’ll find the eight basic functions of a board.

  1. Provide strategic guidance.

Literally, board members are expected to provide the vision, mission, and goals for an organization. Metaphorically, they’re also responsible for the “big picture” vision for the company: where is it currently headed? Where does the company want to go from here?
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Cyber Security Becomes a Boardroom Priority

Internet security concept open red padlock virus or unsecured with threat of hacking

Data breaches from cyber attacks have wreaked havoc on major industries in recent years. Prominent companies like Target, Anthem, Home Depot, JPMorgan Chase, and EBay have all been affected by targeted attacks. These attacks, which typically put individuals’ private identification numbers and payment methods in jeopardy, come at a great cost to corporations. The Ponemon Institute found that, on average, each individual data loss costs a company approximately $154. Multiply that number by 83 million users, and JPMorgan Chase’s recent loss totaled in at around a staggering 12.78 billion dollars—and that’s just a rough estimate; the number is likely higher.

Obviously, these high-profile hacks and breaches have pushed cyber security to the forefront of board members’ concerns. According to PWC’s most recent Corporate Directors Survey, board members are becoming more engaged with IT strategy—namely cyber security risks. The study states, “83% of directors describe themselves as at least ‘moderately’ engaged with overseeing the risk of cyber attacks.”
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Board Tenure: To Limit or Not to Limit?

Board Tenure: To Limit or Not to Limit?Statistically, executives tend to linger once they begin serving on a board. In fact, the Wall Street Journal reports, “At 24% of the biggest U.S. companies (S&P 500), a majority of the board has been in place for at least 10 years…It is a marked changed from 2005, when long-term directors made up a board majority at 11% of large companies.” Moreover, some of those long-tenured directors have been serving on boards for upwards of 40 or 50 years.

The conversation about board tenure is a somewhat new one. For decades, seasoned board members have been considered a major asset to corporations—especially at companies where growth has been consistent. As activist shareholders put more pressure on boards and the call for board diversity (of all kinds) grows, though, companies are beginning to consider the potential benefits of board term limits. In 2012, board turnover hit a 10-year low—forcing companies to face the dilemma of simultaneously seeking diversity while also having very few board positions to fill.

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The Case for the Millennial Board Member

millennial board member

With the median board member age hovering around 63, it’s safe to say that the Baby Boomer generation is well represented among corporate directors. Generation X also fills its fair share of boardroom chairs. But what about the Millennials? You may be thinking, “There’s no way that a Millennial could be prepared to help lead a corporate board; they’re just too young.” However, the truth is that some Millennials are reaching their mid-30s and bringing some truly extraordinary accomplishments along with them.

Starbucks was one of the first prominent companies to take a leap of faith on a youthful board member. In 2011, they replaced outgoing Sheryl Sandberg (COO of Facebook) with 29-year-old newcomer Clara Shih—except Shih wasn’t exactly a “newcomer.” She had already become the very successful and self-made CEO of Hearsay, a booming social media marketing company. Now, five years later, it looks as if Shih has proven her aptitude by helping to successfully guide Starbucks into the ever increasing mobile and social media realms—all while not fitting the standard board member profile.
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Research Shows Board Service Supercharges Careers

Vector illustration of the businessman superhero - stock vector. EPS 10 file.

Just last week, we discussed how public company board membership comes with increasing personal risk these days, yet executives are still doing their best to secure those coveted positions. You might be asking, “Why?” Why would a well-paid executive spend extra time “on the clock” for a company other than their own? According to a recent study, there may be a clear answer: board membership helps advance executives’ careers and enhances their earnings.

The study, which was conducted by four academic researchers, utilized a sample set of 2,140 high-level executives at S&P firms from 1996-2012. The researchers matched the executives who were serving on boards with executives in similar positions at comparable companies who had not served on a board. The results were definitive. In the researchers own words, “We found that serving on a board increases an executive’s likelihood of being promoted as a first-time CEO to an S&P 1500 firm by 44%–and even if they weren’t promoted, we found that serving boosts an executive’s subsequent annual pay by 13%.”

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Corporate Director Role Brings More Risk & More Pay

corporate director pay

These days, executive level compensation is the subject of countless headlines. With CEOs earning wages in the tens of millions, people have a lot of opinions on the matter. Accordingly, the compensation for corporate directors (or nonexecutive directors) has also been rising. In fact, a recent article in The Wall Street Journal asserts, Pay for nonexecutive directors of S&P 500 companies rose nearly 50% between 2006 and 2014.” That’s quite a leap!

The median pay for directors in 2015 was $255,000 a year, which doesn’t sound quite as high as you might expect given that they’ve seen a 50% raise in a single decade. When you consider that a director might spend about 5 hours per week on board related activities, the number becomes more impressive, though.

So why the sharp increase in compensation for board members? For one, the role has become more demanding in recent years. After the passing of the Sarbanes-Oxley Act in 2002, standards for board compliance were enhanced with stricter guidelines for reporting among public companies. Therefore, many board positions call for longer hours and deeper involvement. In addition, the rise of shareholder lawsuits has made the corporate director’s seat one that comes with more personal liability. For these reasons and more, the corporate director role comes with more than just the gratification of sitting on an S&P 500 board—it also comes with a greater amount of responsibility. Many of the largest companies are willing to pay substantial figures to have the world’s most accomplished leaders serving on their board.
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Shareholder Activism: What Board Members Need to Know

Shareholder ActivismShareholder activism plays a pivotal role in the evolution of corporate America’s public companies. In fact, the listed companies that shareholders targeted in 2013 “had an average market capitalization of $10 billion.” That’s some serious power when it comes to influencing major corporations in the United States.

But what does shareholder activism really mean? To put it simply, shareholder activism occurs when an individual (or an entity) uses their equity stake in a corporation to put pressure on the company to make specific changes. The modifications these “activists” seek can vary in degree and in the hostility of their delivery.

On the relatively lighter end of requests, activists might urge companies to adopt environmentally friendly policy changes. On the moderate side of financial reform, they might seek compensation reviews or a cost-cutting analysis. And on the most extreme side of shareholder influence, activists could seek a complete board of directors overhaul—a proverbial “wiping of the slate” at the highest level of corporate leadership. In addition, shareholder activism can come in various forms: litigation, proxy battles, publicity movements, shareholder resolutions, simple negotiations with management or board members, and more. For an in depth analysis on the types of shareholder activism, check out this report from PwC.
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Want to Be on a Public Company Board? Not So Fast!

public company board

Securing membership on the corporate board of a publicly traded company is no small feat. In fact, based on recent calculations, there are only about 70-80 board openings for NASDAQ-listed companies in the United States annually. That’s just a handful more people than were accepted into the NBA last year!

Historically, corporate boards have favored a very narrow type of board member: former CEOs from Fortune 500 companies or prominent CFOs who can be labeled an “audit committee financial expert” in adherence with the Sarbanes-Oxley Act of 2002. These kinds of board members have long been identified as the “gold standard” for corporate director appointments.

However, the public company board membership selection process has become increasingly competitive over the past couple of decades. Former prominent CEOs and CFOs can no longer expect to slide easily into board membership at public companies. Boards continue to place value on more modern types of expertise—think entrepreneurs or tech experts. More than ever, executives with unique backgrounds have a shot at obtaining the most exclusive of board appointments. But in order to have the very best chance at one of these opportunities, we encourage you to follow this advice:
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The Benefits of Diversity in the Boardroom

DiverseOver the last two decades, corporate board diversity has been growing steadily. In 2015 women held nearly 18% of the board positions at Fortune 1000 companies—a percentage that has doubled over the last 20 years. As for racial minorities, they hold about 15% of board roles in Fortune 250 companies and are continuing to make gains. Regardless of where the current statistics fall, though, the bottom line is that studies show diversity brings many benefits to the boardroom. We’ve compiled a few of these benefits to share with you:

  1. A diverse boardroom provides a diversity of thought.

All board members bring their own personal background and experiences to their position in the boardroom. Each individual mind is capable of offering unique ideas, solutions, and strategies. For boards with a more diverse membership, the breadth of personal experience is wider and more comprehensive.

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Does Your Board Need an Entrepreneur?

Young business lady is thinking about spreading her business

Board members tend to have lots of experience in at least one of these three areas: financial expertise, industry-specific knowledge, or operational management. Over the past couple of decades, though, companies have become more interested in diversifying their boardroom—both in race and gender as well as in expertise. Today, you’ll find individuals with backgrounds in marketing, IT, and human resources in addition to the “classic” board member tracks. The latest trend, however, is adding someone with an entrepreneurial background to your team of directors, and we’re big fans of this movement.

Here’s what entrepreneurs can bring to the table:

  1. A focus on long-term, strategic thinking.

Boards are constantly being pulled between short term goal-oriented oversight and long term, strategically focused planning. Entrepreneurs are generally going to default to strategic thinking and will help pull your board out of conversations that should be left to your company’s C-suite. Entrepreneurs are the true “visionaries” of the business world and offer a complementary element to boards that already favor members who are well-versed in risk management or short term, operational guidance. This isn’t to say that entrepreneurs will always be right about their theories or suggestions, but their presence alone will force more conservative members to tackle some out-of-the-box thinking.

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