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Tips for Would be Directors

Tips for Would be Directors

For many decades, non-executive directors around the world have been drawn from a fairly small local coterie, with serving or retired CEOs at the top of the wish list. Things are changing, however: CEOs are less willing to sit on outside boards, and increasingly stringent independence guidelines rule out a swathe of eligible candidates. Today, boards are starting to look beyond traditional candidate pools to satisfy demands for greater diversity; they are recognizing the need for an influx of new skills and perspectives.

This is good news if you are a high-achieving executive, or even a top professional outside the corporate world, since your specific skill set and background may potentially make you highly desirable for certain types of board.

Joining an outside board can help your professional development – it offers a unique opportunity to broaden your knowledge, develop new insights and compare your experience with that of another company.

If you feel confident that there is something you can gain from being on a board, and something of value that you can add, then the following tips will help you adopt the right approach.

Be patient and realistic

Board seats are not in plentiful supply. With the trend towards smaller boards, every board seat is crucial and needs to fulfil a specific role, for example that of an Asia specialist, or a technology, mining or regulatory expert.

In deciding who should fill any vacant board seat, the nominating committee will be considering the health and strategic direction of the company, the balance of the board and any areas where it may be lacking in knowledge and experience.

While you may have the requisite qualities to become an effective board director, it takes time to find the right match – and for the right board to find you. Make yourself known to leading headhunting firms and other director-level organisations. It helps if you come armed with a recommendation from your CEO or board chairman.

Set yourself realistic expectations. By all means aim high, but this does not mean a top 100 company. Focus your search on industries that genuinely interest you and do not automatically accept the first directorship you are offered. Remember, a board commitment lasts at least one three-year term – and probably two – so weigh up your options carefully, not least because your employer will only allow you to hold one outside commercial directorship at a time.

Do your due diligence – thoroughly

If a possible board directorship comes your way, be sure to evaluate the opportunity with care. You do not want to make a bad decision for a variety for reasons.

First, your association with a company that is perceived to be failing or embroiled in a controversy can damage your reputation. Second, extricating yourself from a board before the completion of a term is difficult; whatever the circumstances, an early exit may and jeopardise your chances of finding another directorship in the future. Third, any board that hires you will likely have a specific reason for doing so. Whilst your job is not to join the management team, in a smaller company your level of involvement may become significantly greater than you anticipate, detracting from your ability to fulfill your executive obligations.

Before joining any board, you must be comfortable with what one experienced director calls “the tone at the top”. You should establish how seriously the CEO and any other executive directors take corporate governance and how willing they are to share their concerns with the board and take advice – in other words, are they willing to use the board in a positive way, or do they see the board as a necessary encumbrance that needs to be worked around?

You should satisfy yourself that the CEO wants constructive dialogue with the directors, otherwise you may find yourself getting frustrated and antagonistic towards management – not a good position for a director to be in. Likewise, you should be sure that the chemistry with your fellow directors is good. You are joining a team and need to feel comfortable alongside your board colleagues.

Consider the risks

Board composition is increasingly in the spotlight, with investors, politicians and the media scrutinising board composition and new appointments. When things go wrong inside a listed organisation, it is not just the CEO and senior management team who are held to account – the directors fall in the spotlight and become vulnerable to litigation and reputational loss. Being a non-executive director these days requires courage, conviction and commitment. However well you do your due diligence, you cannot completely eradicate the element of risk.

Understand the role

Make sure you understand the role of a director versus that of a manager. It is not an easy adjustment to make. Thinking and speaking like an executive is one of the most common mistakes new directors make. Remember, your primary duty is to safeguard the interests of the company’s shareholders and uphold corporate integrity. You do this by advising the company based on the information it provides you. You can and should challenge and inspect the accuracy and forthrightness of this information. But you should avoid getting involved in the day-to-day operations of the company.

Questions that prospective directors should be asking

  • What is the company’s — and the CEO’s if he/she is a newcomer — track record for value creation?
  • Who are the company’s major shareholders? How long have they held their respective stakes in the company?
  • What are the company’s corporate governance processes, such as board charters, mission statement, defined roles and responsibilities and directors’ decision boundaries?
  • What does the annual report convey about this approach?
  • How many committees does the board convene? What are the responsibilities of those committees?
  • How does my background fit with the company’s strategy or business model?
  • How do my skills complement the existing board?
  • How proactive is the board in providing director orientation and training; how thorough is its performance evaluation process?
  • How many independent directors sit on the board? How does the board define independence?
  • What is the expected workload or time commitment?
  • What are the liabilities and D&O coverage?
  • How are directors compensated?

For many decades, non-executive directors around the world have been drawn from a fairly small local coterie, with serving or retired CEOs at the top of the wish list. Things are changing, however: CEOs are less willing to sit on outside boards, and increasingly stringent independence guidelines rule out a swathe of eligible candidates. Today, boards are starting to look beyond traditional candidate pools to satisfy demands for greater diversity; they are recognizing the need for an influx of new skills and perspectives.

This is good news if you are a high-achieving executive, or even a top professional outside the corporate world, since your specific skill set and background may potentially make you highly desirable for certain types of board.

Joining an outside board can help your professional development – it offers a unique opportunity to broaden your knowledge, develop new insights and compare your experience with that of another company.

If you feel confident that there is something you can gain from being on a board, and something of value that you can add, then the following tips will help you adopt the right approach.

Be patient and realistic

Board seats are not in plentiful supply. With the trend towards smaller boards, every board seat is crucial and needs to fulfil a specific role, for example that of an Asia specialist, or a technology, mining or regulatory expert.

In deciding who should fill any vacant board seat, the nominating committee will be considering the health and strategic direction of the company, the balance of the board and any areas where it may be lacking in knowledge and experience.

While you may have the requisite qualities to become an effective board director, it takes time to find the right match – and for the right board to find you. Make yourself known to leading headhunting firms and other director-level organisations. It helps if you come armed with a recommendation from your CEO or board chairman.

Set yourself realistic expectations. By all means aim high, but this does not mean a top 100 company. Focus your search on industries that genuinely interest you and do not automatically accept the first directorship you are offered. Remember, a board commitment lasts at least one three-year term – and probably two – so weigh up your options carefully, not least because your employer will only allow you to hold one outside commercial directorship at a time.

Do your due diligence – thoroughly

If a possible board directorship comes your way, be sure to evaluate the opportunity with care. You do not want to make a bad decision for a variety for reasons.

First, your association with a company that is perceived to be failing or embroiled in a controversy can damage your reputation. Second, extricating yourself from a board before the completion of a term is difficult; whatever the circumstances, an early exit may and jeopardise your chances of finding another directorship in the future. Third, any board that hires you will likely have a specific reason for doing so. Whilst your job is not to join the management team, in a smaller company your level of involvement may become significantly greater than you anticipate, detracting from your ability to fulfill your executive obligations.

Before joining any board, you must be comfortable with what one experienced director calls “the tone at the top”. You should establish how seriously the CEO and any other executive directors take corporate governance and how willing they are to share their concerns with the board and take advice – in other words, are they willing to use the board in a positive way, or do they see the board as a necessary encumbrance that needs to be worked around?

You should satisfy yourself that the CEO wants constructive dialogue with the directors, otherwise you may find yourself getting frustrated and antagonistic towards management – not a good position for a director to be in. Likewise, you should be sure that the chemistry with your fellow directors is good. You are joining a team and need to feel comfortable alongside your board colleagues.

Consider the risks

Board composition is increasingly in the spotlight, with investors, politicians and the media scrutinising board composition and new appointments. When things go wrong inside a listed organisation, it is not just the CEO and senior management team who are held to account – the directors fall in the spotlight and become vulnerable to litigation and reputational loss. Being a non-executive director these days requires courage, conviction and commitment. However well you do your due diligence, you cannot completely eradicate the element of risk.

Understand the role

Make sure you understand the role of a director versus that of a manager. It is not an easy adjustment to make. Thinking and speaking like an executive is one of the most common mistakes new directors make. Remember, your primary duty is to safeguard the interests of the company’s shareholders and uphold corporate integrity. You do this by advising the company based on the information it provides you. You can and should challenge and inspect the accuracy and forthrightness of this information. But you should avoid getting involved in the day-to-day operations of the company.

Questions that prospective directors should be asking

  • What is the company’s — and the CEO’s if he/she is a newcomer — track record for value creation?
  • Who are the company’s major shareholders? How long have they held their respective stakes in the company?
  • What are the company’s corporate governance processes, such as board charters, mission statement, defined roles and responsibilities and directors’ decision boundaries?
  • What does the annual report convey about this approach?
  • How many committees does the board convene? What are the responsibilities of those committees?
  • How does my background fit with the company’s strategy or business model?
  • How do my skills complement the existing board?
  • How proactive is the board in providing director orientation and training; how thorough is its performance evaluation process?
  • How many independent directors sit on the board? How does the board define independence?
  • What is the expected workload or time commitment?
  • What are the liabilities and D&O coverage?
  • How are directors compensated?