Boards of directors: Go against conventional wisdom (Part 1)

Boards-of-directors-Go-against-conventional-wisdom

Clever boards and nominating committees are going to have to assemble a cadre of senior executives who can stand up to increasingly watchful shareholders and other activists. A series of legal changes that will make it easier for shareholders to nominate top executives are gaining momentum in the United States.

This includes the modification of Delaware’s labor legislation which tends to introduce the reimbursement of expenses related to the appointment of directors by shareholders in the statutes of companies. A proposal from the SEC and a federal law called “Shareholder Bill of Rights” proposed by senators Charles Schumer and Maria Cantwell gives power of appointment to shareholders holding at least 1% of the shares of a company.

Regardless of why or how these changes become law, they reflect dissatisfaction with the way appointments are currently handled in companies. Boards of directors have always avoided objectively evaluating the members of the management committee because this would risk calling into question a certain number of loyal and above all long-term management positions on the fact that they must free up their seats for newcomers with much more relevant experiences.

Retirement age has traditionally been the first reason for the departure of managers and the opportunity to bring in others with skills and experience that are much more in line with the strategy and business model of companies. In the absence of imminent legislation, it is a weapon that will not last very long and the nominating committees would be well advised to do even better by doing their own analysis in order to take the necessary decisions at the right time in the right timing. This analysis should make it possible to make the appropriate changes within the steering committees.

Take a good look at your board

Admittedly, shareholder activists can always nominate candidates for board positions, regardless of the quality of the board in place. But the hardest part is fighting a protest when the team of activists seems much more qualified than yours. The part of the analysis that the challenger will take into account before launching his attack will be the vulnerability of the team in place: Is it the lack of industry experience, the inexperience of the CEO, other administrators , other experience related to business, industry and growth strategy? Are there directors whose background seems inconsistent if not embarrassing?

How many people have served in this direction for 10, 20 years? And what about the other governing boards they’ve served? Isn’t this the classic problem of contemporary administrators who sit on so many boards of directors that one wonders if they will really be able to devote their attention to the business of a particular company? The composition of the board of directors must be of the same type as that reserved for the compensation of directors, ie must be subject to the same attention and the same analysis.

So what should a nominating committee do? This will very quickly become a big emotional problem for the board with the fear for some directors of being singled out by the process and fired. Three exercises can help you pass this exam. To be continued………….

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