Balancing Division of Board Labor with Overall Director Responsibilities

Eric Geringswald is Director of CSC® Publishing at Corporation Service Company. This post is an excerpt from the 2015 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

In this year’s Foreword, Dougherty argues that an increasing complexity of corporate governance and the growing list of action items assigned to directors has led to a division of labor that leaves some directors uninvolved or unaware of important board activities and responsibilities.

The Culture-Structure Interplay

We tend to think of board structure in relation to its stock exchange-mandated board committees, or other standing committees, including Audit, Compensation, Nominating, Governance, Finance and M&A. Much of the Handbook is taken up with discussion of those committees and related director duties. Deservedly so.

But there is a predicate question and, I submit, a related concern that should be addressed, at least annually, regarding board structure. That is the interplay between board structure and board culture, which manifests itself, for good or bad, in many ways. The board’s division of labor across its standing committees facilitates decision-making in our world of audit, compensation and governance complexity. But in the process, there are manifold opportunities for some directors, who are not on one committee or the other, to get “left behind” other directors in their exposure to, and grasp of, key risks, opportunities and even basic operational desiderata. Much of the responsibility to avoid that eventuality rests mutually with the respective committee chairs (whose regular reports to the full board and committee minutes must be robust) and with those directors not on a given committee. The latter should from time to time attend committee meetings or otherwise become sufficiently informed of each committee’s work that they are both comfortable that its work is being well-handled and also educated enough about its process that they can intelligently assess the reporting-out by the committee chair.

So far, so good. Where does culture come into it? Insofar as standing committees are concerned, there is a beneficial dynamic of self-interested mutuality: most directors will likely be on some committees and not others, so all share the need to inform those not on their committees and be informed by other directors about committee work and output for standing committees they are not on. However, the risk—the rub if you will—comes when the ongoing work of the board over the year requires on an interim basis that one or more small groups of directors take on projects or follow-up work between board meetings to address matters that arise outside the scope of the standing committees. Examples range from a subset of directors being asked to meet with a new board candidate as part of board refreshment due diligence to a working group of directors being asked to review with HR the strength of mid-level management talent in order to assess internal candidates’ top-tier potential to a project team asked between board meetings to help assess whether the company should bid for a firm that has become the subject of takeover bid by a competitor.

A significant difference between the cultural reinforcement of standing committee participation, on the one hand, and, on the other hand, the one-off working-group inter-meeting follow-up team, or interview task-force, is that there is not the structural incentive for mutuality of coordination in the latter which self-interest (if not collegiality) prompts in the former. This can be a problem in two respects. First, directors not included on the inter-meeting working group can feel, or be, left behind—rendered out of touch with the subject matter of that project.

Of course, there are some occasions when a director should be excluded, for example if the director is recused due to a potential or actual conflict of interest. But where that is not the case, a board can risk becoming balkanized if some but not all directors are involved or at least not kept very much up to speed with the developments arising from the working group’s efforts.

This leads to the second issue: How and when does the subgroup update the board? “When” may be straightforward—as needed to keep all directors current. But the “how” has led to some confusion. Must the subgroup have a formal charter, as contrasted with a mandate to simply fact find and report back? Likely, the simple mandate method works. (Internal board-led investigations are different. See Chapter 6 of the full publication). The project may not last beyond weeks or at most months, and there may or may not be a desire that it be a formal committee with charter, minutes and meeting fees, depending on a number of factors. However, those directors not involved will want some record that they also kept some oversight on the matter.

Need the updates from the working group to the full board occur only at minuted board meetings? Directors want to be sure their due diligence is recorded, but, most times, a telephonic board update between the regularly scheduled meetings will suffice if developments progress at such a rapid speed between meetings that keeping all directors current makes that desirable. Such telephonic updates need not be minuted. The Secretary will have a record, and the telephonic update(s) can be referenced in a sentence or two as having occurred in the minutes of the next board meeting.

As simple as this may sound, instituting and following protocols like the one described above affirms a culture of mutual respect and support. Absent it, directors risk being left behind and board cohesion and decision-making suboptimized.

Committee Staff

It has been more than twelve-and-a-half years since the Sarbanes Oxley (SOX) Act prompted a cascade of additional board and committee requirements, associated disclosure obligations and stock exchange rule enhancements. These days, audit committees commonly meet a dozen times a year on a scheduled basis, in contrast to the pre-SOX norm of four or five times yearly. Other committees, such as M&A and Compensation (especially since the 2007 stock options snafus—see Chapter 3) now wade through reams of data. And the Nominating and Governance Committees must now deal more vigorously with annual committee charter reviews, activist pressures for board change, CEO succession, ISS and Glass Lewis dynamics, diversity and sustainability reviews, etc. Chairing some of these committees has become virtually a full-time job for substantial parts of the year.

The intensity of committee work raises the subject of committee staffing. Support for respective standing committee chairs is provided by the relevant senior management units and advisors (such as compensation consultants and independent auditors). Yet, with the increasing workloads and coordination needs of both committee chairs and the independent lead director, there comes a point at which reliance on the respective business units or CEO staff is, or may be, insufficient or inappropriate. We may be at a point where publicly traded company boards need a small dedicated administrative staff focused on coordinating and supporting directors’ work as committee chairs, as independent lead director and as board and committee members. Among other things, that would facilitate independent lead directors’ liaison with the other board members and provide human complement to the gigabytes of electronically disseminated board and committee materials. It would make active, not passive, the culture of interchange through secure company resources—instead of default-mode communication with directors at their day-job email addresses (which raises issues relating to security and attorney-client privilege protection). With so many resources appropriately concentrated in the CEO’s hands, such a directors’ staff need not be at all large in order to provide the degree of separation and, when desired, independence of execution helpful to board work.

Now, Something Completely Different

There was an extraordinary demonstration of corporate culture at work (forgive the pun) through the use of social media by employees of a large retailer in the Northeast U.S. in 2014. Their organic initiation and months-long use of social media—soon echoed in intensive traditional media coverage—accompanied a board battle that was ultimately resolved to the mutual satisfaction of all concerned.

It was not a publicly traded company. And yet, that use of social media triggers the thought that there is a presently authorized but little utilized electronic forum protocol for publicly traded companies that could be of great value to boards and employee shareholders. The SEC’s proxy rules now contain a provision that allows managements and shareholders (including employee shareholders) to host and/or participate in electronic forums, using, for example, a dedicated webpage or microsite accessed through an existing web home page. Through that, the host can provide a symposium-type electronic forum through which management and shareholder views can be developed and shared real time. Use of such an e-forum will not be considered in direct solicitation of proxies to vote in favor or against upcoming shareholder meeting agenda items (director candidates or shareholder proposals) provided some ground rules (explained below) are adhered to.

So far, only a few companies have used this capability. Royal Dutch Shell (its “Tell Shell Forum”), Verizon, and Dell Inc. (before it went private: “Dell Shares”) are examples. Based on the impact of the 2014 retailer employee forum site, I expect that the SEC’s e-forum option will get more use—especially in the following particular and important way. The better e-forum sites to date have utilized well-controlled (by Investor Relations) access, terms, conditions and topics, allowing the host (IR) to qualify potential posting contributors and also reject or delete participants’ posts.

Given that many employees of publicly traded companies are shareholders in their company and/or otherwise vitally interested in topics affecting it (and them), an e-forum utilizing confidential employee I.D. identification and password can restrict forum access and at the same time powerfully validate the credibility of the site content as provided by knowledgeable employee shareholders who have a two-fold interest in company success. An e-forum such as “Connecting” (on how to better work together to coordinate various divisions’ sales to the same customer, thereby avoiding the embarrassment of multiple divisions each responding in overlapping fashion to the customer’s same RFP) or “Our Views” (in response to an activist shareholder initiative) could be powerful expressions of the company culture as well as a means of reinforcing it.

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