April 23, 2014

Ten Guidelines for More Effective Boards

Anatomy of Effective Boards

In a previous post I shared five maxims for prospective board members, based on a presentation by Paul O’Neill, the former Chairman and CEO of Alcoa, and U.S. Secretary of the Treasury in 2001-2002. Mr. O’Neill spoke last month on The Anatomy of An Exceptional Board at an event hosted by the Pittsburgh Chapter of the National Association of Corporate Directors. Effective boards simply get more done.

Mr. O’Neill is a strong advocate for good governance, and in his talk he put particular emphasis on the need for companies (or nonprofit staff) to provide information to board members as a cornerstone for board engagement and effectiveness. Below are ten of the recommendations Mr. O’Neill offered companies to ensure they get the most value from their boards.

  1. Limit the number of directors to between 11 and 13. Boards, and individual board members, he suggests, are less effective when boards are too large. He says he was on some boards with more than 60 people.
  2. When recruiting new board members, ask why you want this particular person on the board. Companies should recruit board members who fill a particular need in terms of expertise, market knowledge or other experience lacking on the board.
  3. Give board members time to review board materials prior to meetings. Mr. O’Neill suggests that board materials should be available the weekend before the meetings so that there is no excuse for board members to be unprepared.
  4. Don’t “brief” the background information, and ban powerpoint presentations from board materials. The worst board meetings are those where management read the words on a powerpoint that was sent ahead of time to directors. As Mr. O’Neill put it, board members are highly experienced, capable people, who can read.
  5. Provide a rolling 12-month calendar for your board. People need to know when board meetings are going to take place.
  6. Don’t be afraid to ask a board member to resign. If it turns our you made a mistake in recruitment, or a board member is no longer making a contribution, they should step down.
  7. Give board members information they need to succeed. Don’t avoid telling the board your deepest concerns, or when things aren’t going well. Its okay for management to tell the board things you are proud of, but the board can’t help you overcome challenges if they don’t know the difficulties. “If you only tell them the good news, then shame on you and shame on them.”
    • Provide current competitive analysis. Among other factors, Mr.O’Neill says he wanted to know the cost competitiveness of any company across product lines.“If you are not the lowest cost producer, what ability do you have to improve that position?
    • Give them opportunities to learn about your operations. Mr. O’Neill suggests giving board members a chance to see where the real work is being done. He says he enjoyed striking up conversations with workers, which eventually gave him a chance to ask those people  ‘what really “bugs people” about working here?’ Those individual opinions may not always reflect a universal reality, but it gives an idea of what is going on in the operations.
    • Board members should talk to suppliers and customers. Its useful to know how customers feel about being customers, and understand supplier relationships. If customers or suppliers are dissatisfied, there may be different perspectives that board members can provide management to address potential issues and head off bigger problems.
  8. Don’t avoid telling the board your deepest concerns, or when things aren’t going well. Its ok for management to tell the board things your are proud of, but the board can’t overcome challenges if they don’t know the difficulties. “If you only tell them the good news, then shame on you and shame on them.”
  9. Never surprise your board or take positions that preempt their authority. Mr. O’Neill cites an example of a manufacturing company that was planning a $500 million acquisition. During a board meeting he asked managers several questions about the acquisition that they couldn’t immediately answer. Nevertheless, managers said they needed the board’s immediate approval because they had already issued a press release announcing it. This, Mr. O’Neill says, is unforgivable. Shortly thereafter, he resigned from the board.
  10. Provide financial education if you need your board to sign off on SEC documents. He notes that there is no requirement that board members have a certain minimum level of financial literacy, but it is not reasonable – or responsible – to ask people to sign off on financial disclosures that they may not fully understand.

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