Board Membership 101: Financial Oversight

Board Membership 101: Financial Oversight

Chances are good that if you ask a stranger on the street what a board member’s most important job is, they’re likely to mention finances. Boards have long been seen as the “make it or break it” play callers for corporations that either boom or bust. Financial oversight, while closely related to fiduciary duties in general, calls for a board member’s attention to detail and ability to understand the current position of the company’s financial assets. Although every decision a board member makes may not be a financial one, all of their decisions will affect the financial future of the organization they serve.

Providing a company with great financial oversight takes serious effort on the part of board members. Here are some ways that they can excel:

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Board Membership 101: Policy Shmolicy

board member policy

Policy-making may not be the sexiest side of board membership, but it is an absolutely vital corporate director duty. Company policies affect every aspect of governance and decision-making—from CEO selection to board management guidance and beyond. In a time when expectations for board members are soaring, policy-making has also become a significant way to reduce risk.

According to Mitch Dorger, experienced CEO and governance consultant, boards should be creating a strong policy focus. He writes, “Clear, concise and current policies improve the overall management of the organization…By having these documented, …[the board] speaks with one voice—avoiding a problem that many organizations have with multiple sources of policy guidance.” Unfortunately, many boards struggle to maintain a policy focus. Dorger continues, “When I was still a chief executive officer, I led an effort to get my board to establish and document the policies that were needed to govern the organization…When I talked to the board about creating a policy focus, there was some confusion about what policies are and what they are not.”
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Corporate Titans Call for Better Governance in WSJ Ad

Corporate Governance

If you’re perusing the latest issue of The Wall Street Journal, take a moment to flip to the back of section A. You won’t be able to miss the full-page spread that was secured by 13 of the country’s most influential business leaders.

The ad, which is signed by people like Warren Buffet of Berkshire Hathaway and Mary Barra from General Motors, has one major purpose: to offer up commonsense governance principles “in the hope that they will promote further conversation on corporate governance.”

The article, which is also presented in full at www.governanceprinciples.org, begins by outlining how the future of the economy relies heavily on companies “being managed effectively for long-term prosperity.” It points out that millions of Americans’ retirement savings, college savings, plans to buy a home, and more are directly affected by decisions made by board members at major corporations. The authors continue by insisting that although they don’t agree on every single aspect of corporate governance, they can offer up six major principles on which they can agree. The principles are summarized in the main article but can be viewed in depth here.

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Board Membership 101: Evaluating CEO Performance

evaluating CEO performanceOnce a board has hired a capable CEO, it’s important that they continue to offer their guidance and support. For some boards, CEO evaluation is a bit of an afterthought. Stephen P. Kaufman, CEO at Arrow Electronics, describes his own first evaluation process as merely perfunctory. He explains, “The chair of the compensation committee would pop by my office for just 10 minutes after the year-end closed session of independent directors. He’d inform me that the board was happy that the company had made its numbers, thank me for my leadership, tell me what compensation it had approved, and express his regret that he couldn’t stay to talk.” In other words, as long as things appeared to be going well, the board merely patted him on the back and went about its own business. This model, however, does very little to thoroughly evaluate the CEO’s performance. While it focused on his ability to meet financial goals, it overlooked his influence on company culture, strategic planning, and other aspects of leadership that indicate the development of a well-rounded company.

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Board Membership 101: Hiring a CEO

hiring a CEOChief executive officer selection and succession planning are among the most important responsibilities for any board of directors. In fact, some business writers will go so far as to say, “choosing the next CEO is the single most important decision a board of directors will make.” Either way, most board members will tell you that finding and hiring the right CEO is a tall order. Directors know that a CEO’s influence and legacy can be felt for years after their departure—in both positive and negative ways, depending on the situation. In the ever-changing corporate landscape, CEOs will come and go, which is why it’s important for boards to create a reliable process for hiring a CEO for the organization they serve.

If the exiting CEO is merely retiring or moving on to another opportunity on good terms, it’s sensible to involve them in the hiring process. No one will understand the demands of the position quite like someone who has recently experienced them. If the board lacks confidence in the CEO, though, the lead director should take charge of the process.
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Board Membership 101: Strategic Guidance

Board Membership 101: Strategic Guidance

Leadership is the capacity to translate vision into reality.

He may not have known it at the time, but when Warren Bennis (American scholar and pioneer of Leadership Studies) penned those words, he was aptly explaining what strategic guidance means for the boardroom today.

Directors must be prepared not only to envision the future of the company, but also to find the best way to guide it into the fulfillment of that vision. To understand what strategic guidance means exactly, we must take a look at the two words individually.

Strategy

Crafting company strategy is an essential function of a board of directors. Simply stated, board members must bring their assortment of individual knowledge and experience to the table in order to seek out the best path forward for the business.

Strategic thinking takes many elements into consideration: goal setting, prioritization, realistic financial planning, and more. The expectation is that board members should be looking at the horizon rather than at the ground beneath their feet.
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Board Membership 101: Fiduciary Duties

Board Membership 101: Fiduciary Duties

The foundation of a board member’s service is their fiduciary duty to shareholders. Before we jump into what kinds of duties are involved, let’s look more closely at the word “fiduciary:”

fiduciary
(adjective): involving trust, especially with regard to the relationship between a trustee and a beneficiary.

It’s a word that we hear a lot in the corporate world, but its basic meaning often gets overlooked. Simply put, the word fiduciary is all about trust, and that’s exactly what’s required of directors under corporate governance law.

The Three Types of Fiduciary Duties:

  1. The Duty of Care

According to Investopedia, the duty of care “applies to the way the board makes decisions that affect the future of the business. The board has the duty to fully investigate all possible decisions and how they may impact the business. Because a company’s board of directors is tasked with making very important decisions, it is necessary that each member takes each issue seriously and adequately considers all options.”

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Board Membership 101: The Role of a Board of Directors

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 eight factors that outline the role of a board of directors.

  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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