Corporate boards tend to be very stable organizations, generally with little
director turnover from year to year. However, there are scenarios in which
boards are created essentially from scratch or must be aggressively reinvented
— when a company is taken public, spun off from a parent or rebuilt after
bankruptcy or a crisis.
These situations provide the rare opportunity to shape the composition of the
board to reflect the direction, challenges and opportunities of the new or reinvented
company. These new boards should be consciously and carefully constructed with
the particular focus of creating a board capable of guiding the new entity.
Based on our significant experience helping companies build or rebuild their
boards, we have a definite point of view on how to proceed. Looking across a
number of these engagements with clients, we have documented what we believe
to be the best practices in the following blueprint for building a board.
- Start with strategy
- Secure board leaders
- Create a matrix of desired board skills
- Consider the board culture and organization
- Understand the special considerations for different scenarios
UNDERSTAND THE SPECIAL CIRCUMSTANCES
While the fundamentals of building a new board are similar, it is helpful to understand the unique
characteristics and issues associated with spinoffs or companies preparing for an IPO or undergoing
reorganization, which are highlighted in the next few pages.
SPINOFF
Maintaining an element of continuity with the parent company may be an important consideration.
This is a way of ensuring institutional memory and can be achieved by bringing at least one director
from the parent company onto the board. Bridging the old and the new can be a useful role for an
elder statesman director who is nearing retirement. Tapping an individual who is knowledgeable
about the parent, as well as the logic and business of the spinoff, for the new board can help it get
off to a good start. At the end of his or her term, the director may cycle off the board, opening a
space for a new director. This allows the board to identify a need that directors may not have predicted
when forming the board.
Everything flows from the strategy
Building a new board should begin with a thoughtful, detailed process and
upfront planning that starts before the actual search for director candidates begins.
Regardless of the specific situation — a reorganization, a spinoff or an IPO — the
foundation of this process is a thorough understanding of the future strategy of
the company.
In all of these situations, understanding the strategy enables the next logical step:
determining the set of talents, backgrounds and knowledge needed on the board to
evaluate and propel the strategy.
Start with strong board leadership
While board leadership is always an important consideration, it is even more crucial
when constructing a new board to ensure it — and the company — get off to
a strong start. The first step is to evaluate the board’s leadership requirements.
An important early consideration is whether the chairman and CEO roles should
be separate or combined with a single individual. It is common for the chair and
CEO roles to be split in new boards because of the diverse responsibilities associated
with establishing the new entity — from operating responsibilities, to working
with a vast array of internal and external constituencies, to getting the board off to
a strong start when there is no corporate or governance structure or legacy on
which to rely.
BANKRUPTCY OR CRISIS
In bankrupt, distressed or financially vulnerable companies, recruiting new directors may be necessary
to regain credibility with key investors, customers and, sometimes, with regulators. In these situations,
the board may be overseeing a restructuring of the company and may need to evaluate and
potentially replace the CEO. For these reasons, it can be important to have a strong nonexecutive
chairman to lead the board as it assesses the strength and suitability of management for the restructured
business and ensures that restructuring milestones are met. A nonexecutive chairman also
serves as an independent voice to stakeholders. Given the complex strategic, operational, financial
and legal aspects of restructuring, there is a need for directors with significant financial acumen and
industry-specific knowledge and those who have the desire and time to dedicate to the board’s
work.
In the case of a spinoff, the CEO often is a senior executive from the parent company
who has been chosen to lead the new company. He or she may have no prior
experience as the CEO of a public company, with all of its attendant governance
requirements and other new demands beyond those on a divisional leader.
Similarly, in an IPO, a CEO is typically in place already, but may not have public
company experience. In a reorganization, boards frequently have a nonexecutive
chairman who can serve as an independent and credible voice to shareholders and
other stakeholders as the company emerges from the crisis. In a restructuring, the
first job of the board often is to determine if the company has the right CEO. The
chairman should have the time and skills to lead a CEO search succession process
and possibly serve as an interim CEO. If the chairman and CEO roles will eventually
be combined, the board must have a lead independent director.
The nonexecutive chairman or lead director. Begin by determining all the characteristics
the company will need in the board and the CEO in order of priority.
Evaluate which of those traits the CEO brings and identify the complementary traits
that would be valuable in the nonexecutive chair or lead director.
Look for an anchor or magnet figure to serve in the role of lead director or nonexecutive
chair, as this person can be a powerful force in attracting other valuable directors.
Indeed, this individual may be charged partially with selling the opportunity.
Recruiting a strong, independent leader for the board who has both the experience
and the credibility — whether dealing with employee groups or investors — will be
a huge asset in building an effective board. For these reasons, and because of the
significant time commitment, nonexecutive chairs or lead directors of new boards
are often retired CEOs or chairmen of other public companies.
INITIAL PUBLIC OFFERING
A company preparing for a public offering typically recruits directors with significant public company
experience, especially former CFOs or others with public company finance expertise. In situations
in which the CEO does not have public company experience, many boards have established the role
of nonexecutive chair, who can provide an experienced voice to the CEO and, by managing the
board, allow the new CEO to focus on running the company.
A nonexecutive chair or lead director’s duties include:
- Preparing the agenda for and chairing board meetings
- Organizing the board to do its work, for example, helping to determine who
chairs which committees
- Leading the governance process
- Leading the CEO and board evaluation processes
- Spearheading CEO succession planning
- Leading the board in executive sessions
When the chair and CEO roles are combined, then the lead independent director
will provide important support to the CEO/chair and the rest of the board in carrying
out these duties.
Key committee chairmen. Another leadership position that is a priority to fill is
the audit committee chair. As the responsibilities of audit committees have expanded,
the importance of recruiting a capable audit committee chair cannot be overstated.
Given the weighty and complex duties demanded of this position, new boards
especially require an individual with financial expertise and public company board
experience, as well as the time to devote to this role. Once this position is anchored,
it will be easier to recruit others to serve on the audit committee. Individuals subsequently
recruited for the audit committee will have more confidence that the audit
committee will be run well, and will be less concerned that serving on the board
will expose them to significant risk.
For many boards, recruiting a skilled compensation committee chairman also has
become a priority because of the intense scrutiny on executive compensation.
Developing a skills matrix
An effective strategy to employ in assembling the rest of the board is to think in
terms of a skills matrix. Each square of the matrix reflects a “must have” or “nice to
have” skill or experience, such as prior board experience, industry expertise, specific
board committee experience (audit or compensation, for example) or specialized
expertise in areas such as international business, marketing, technology or finance.
Once developed, the idea is to fill in the matrix with priority requirements when
recruiting directors.
Matrices and priorities will, of course, vary depending on the nature of the business,
its strategy and current situation. For example, in a post-bankruptcy reorganization,
it may be valuable for the board to have someone who has been through a
restructuring or a former banker who can consider possible transactions. In an IPO
situation, a former CFO with significant public company experience or a former
investment banker with extensive experience in financing may be in demand.
One important category in the matrix is diversity. Rather than being considered an
end in itself, diversity is increasingly considered an underlying dimension or criterion
when potential directors are sought for skills or experience. More and more,
boards recognize that including diverse perspectives on the board — in the areas
of age, gender, race and ethnicity and, in some cases, geographic knowledge — is
important. Boards are not normally embracing diversity to be politically correct or
because of outside pressure, but because it expands their views on issues, options
and solutions. It’s diversity of thought that is important and an advantage in board
discussions and deliberations. That comes from having directors who don’t all
come from the same mold, but from different backgrounds and experiences. Age
is important because the board wants to have appropriate turnover and not lose
all board members in the same year when they hit a mandatory retirement age.
The matrix also should include consideration of the board’s committee requirements.
In addition to the audit committee, the board needs knowledgeable independent
directors to lead and serve as members of the compensation and nomination
and governance committees. For a compensation committee chair, the desired
background might include a public company CEO with a great deal of board experience,
or someone who has previously served as a compensation committee chair, and others with expertise in human
resources or compensation. Whoever is selected, the individual must be up-to-date on compensation issues
and trends, as well as a decision maker who can lead the board in creating an appropriate and
explainable compensation model. The nominating committee chair should be experienced
in board governance and have a thorough understanding of best practices
and evolving trends in corporate governance.
Lay the groundwork for a cohesive board team
One of the characteristics of an effective board is that directors bring varied
perspectives to boardroom discussions, yet work well together. They know why
they have been recruited and what is expected of them, both as individuals and
as a team.
Recruiting for cultural fit. Teamwork is critical to the effective working of a board.
Those leading the search will be able to get a good feel for a candidate’s fit in the
course of conversations with a prospective director. The first thing to test with
director candidates is how they think about governance. Candidates should have
a healthy and contemporary view on governance, neither diminishing its importance
nor allowing compliance to overshadow the board’s broader role in strategy
and succession planning. Look for directors who are able to question, discuss, listen,
express an opinion and articulate differences in a constructive way. The best
directors are willing to make the tough decisions and be accountable, while being
a team player.
Getting off to the right start. Building a cohesive board culture is vitally
important. These efforts are particularly important when a board is starting from
scratch and has no culture, tradition or even relationships on which to build. Many
new boards start the culture-building process by having directors regularly meet
over dinner before each board meeting. An informal dinner or similar social gathering
allows directors to bond before they begin to work as a group.
In addition, some boards have found it invaluable to have an orientation on
important business issues or governance-related topics before the first formal
board meeting, when they must deal with actual board issues. Convening directors
informally for training helps the board to get off to a fast start once their formal
responsibilities begin.
Of course, not every board has the luxury of time to gradually acclimate directors —
particularly in a reorganization. But, if possible, the cohesion that develops among
directors will pay dividends down the road when the board has to work as a team
on difficult issues and under time pressures.
Organizing the board to accomplish its work
An important task early on is to determine the governance structure and parameters
for the new board and the potential impact on director recruitment: board size,
committees, frequency and location of board and committee meetings, and director
compensation. In some cases, these may be built upon the existing policies of the
parent company or the current board, as in the case of a reorganization or spinoff.
Adopting progressive governance and compensation programs may be viewed as
a signal of things to come, and thus a way of attracting first-class directors. It can
be helpful to develop a recruiting manual to describe the basics of the company,
including the key businesses and personnel, corporate structure and locations,
relevant company history and the governance policies that will apply.
Board size. We recommend starting small — both in terms of the number of
directors and the number of committees — when creating a new board. Ideally,
the board should be small enough to have high-quality, active discussions and
large enough to be able to populate the committees. It is easier to build up the
board than to whittle down once people and structures are already in place. Over
time, gaps in the board’s skills and committee needs will become evident, and
needed modifications can be addressed. So, what is the magic number? From our
experience and the experience of those who have led new boards, a good place
to start is with a core group of seven to nine directors and with the three core
committees — audit, compensation and nominating.
Compensation. Since a newly formed board must compete for and retain the best
directors, it generally approaches director compensation in a systematic way. That
may mean working with an outside compensation consultant to establish benchmarks
by company size and industry to ensure director compensation falls within
accepted norms. In the case of restructurings, it may require providing a piece of
the upside if the company succeeds.
Directors may spend several months in limbo between the time they are recruited
and when they become official members of a functioning board. How do company
leaders determine a fair way to handle this limbo period from a compensation perspective,
and, further, how do they determine overall compensation for the new
board? While compensation is not primarily what attracts top-notch directors to
boards, how compensation is handled does speak volumes about how a company
values its directors as well as the time and effort they must expend.
To cover the interim period — between signing on and the first board meeting —
some boards provide a monthly stipend plus board meeting fees. Others provide a
lump sum retainer for directors of the new board, of a sufficient size to solidify
their agreement to join the board as well as to fairly compensate them for an estimated
three to six days of their time for the six-month interim period.
QUESTIONS AND GUIDELINES FOR BUILDING OR REBUILDING A BOARD
While there is not one right formula to follow when building or rebuilding a board,
there are practices that correlate with getting off to a good start as well as with longterm
success. Consider the following questions and guidelines to help ensure your
board addresses and resolves key issues early on:
BOARD LEADERSHIP
- Will the new board combine or separate the CEO and chair roles?
- If combined, what responsibilities should the lead director have?
- What skills and expertise should the chair or lead director bring? To what
extent should these complement the CEO?
GOVERNANCE CONSIDERATIONS
What governance parameters will the new board adopt? For example:
- Board size: How many directors will serve initially, based on the number of
committees planned and the other board responsibilities?
- Committees: Which committees will be established from the outset? What is
the process for considering the creation of additional committees?
- Meetings: How frequently will the board and its committees be meeting?
When and where will board and committee meetings be held?
- Compensation: How will directors be compensated — retainer, equity,
meeting fees, etc. — both in the short term and longer term?
- What are the implications for director recruitment (e.g., number of directors,
skill mix, etc.)?
CONTINUITY
- How many directors from the parent or original company’s board will be
deployed to the new board initially and why?
- How will this process be managed to best ensure continuity?
- What implications will this have for director selection and committee
assignments?
DIRECTOR EXPERTISE AND BACKGROUND
Skills and experiences
- What skills and experiences will be needed on the board to help the company
succeed and deliver value to shareholders?
- What should the director skills matrix include?
- What experience is needed by the nonexecutive chair or lead director based on
the company’s situation and the skill-sets of the CEO?
Committee expertise
- What steps will the board take to ensure committee chairs have relevant
domain expertise?
- What skills are critical for the audit chair?
- What skills are critical for the compensation committee chair?
Boardroom culture
- What personal traits are important in directors and how will these contribute
to the overall culture of the board?
- What steps will the board take to develop an effective and collegial culture?
- How will new board members be assessed to determine “fit” with the
desired culture?
Board orientation
- What steps will be taken to ensure all directors receive the materials and
training they need to effectively carry out their duties as board members?
For information about copying, distributing and displaying this work, contact permissions@spencerstuart.com.