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HR Magazine: Educating the Board

Susan J. Wells  2/1/2005
 

HR Magazine, February 2005Vol. 50, No. 2

HR plays an increasingly vital role in helping directors gain the skills and experience they need to oversee complex corporate activities. 

Today’s boards of directors—driven largely by far-reaching regulatory reforms and heightened corporate expectations in the post–Sarbanes-Oxley era—are feeling an insatiable hunger for orientation, education and evaluation. And while responsibility for satisfying that hunger traditionally falls to general counsels, corporate secretaries or financial executives, there’s growing evidence that HR professionals also are helping corporate directors gain the hands-on knowledge they need to become more valuable players in the boardroom.

HR professionals’ experience in bread-and-butter corporate areas such as compensation, benefits, succession planning, employee training, recruiting and due diligence uniquely positions them to work in concert with their companies’ corporate governance team. While many board compensation and nominating committees tap HR officers to advise them on pay and retainer issues and to research board appointments, the potential exists for them to get even more deeply involved.

“We are seeing more and more involvement of HR with the board and, in fact, HR is expected to get more active at the board level,” says Edward Lawler III, distinguished professor of business and director of the Center for Effective Organizations at the University of Southern California’s Marshall School of Business. “It’s a tremendous opportunity for HR, as many issues that boards face are issues that HR could—and should—be able to contribute to and influence.”

Lawler, who is also an author of Corporate Boards: New Strategies for Adding Value at the Top (Jossey-Bass, 2001), notes that in the wake of high-profile corporate financial meltdowns that made headlines nationwide a few years ago, companies continue to refocus their corporate governance priorities. The result: “Clearly, there’s a lot of pressure for boards to be more educated, knowledgeable and accountable,” he says.

Just one sign of this growing trend: 80 percent of 2,588 global companies now provide training to corporate directors vs. 14 percent in 2002, according to 2004 research by GovernanceMetrics International in New York.

Whats Behind the Trend?

Several factors have converged to fuel the "back-to-school" momentum among todays boards of directors.

The demand for greater scrutiny and accountability of corporate directors has been driven primarily by the Sarbanes-Oxley Act of 2002, which ushered in a new governance environmentone in which corporate boards were dealt a host of new responsibilities. Among the changes: Board audit committees for all publicly listed companies were required to have at least one financial expert by 2004.

Since passage of the act, other organizations have joined the movement to increase accountability for board members and to ensure that their skills and experiences are equal to the tasks for which they are responsible.

Last year, the New York Stock Exchange (NYSE) started requiring boards of its listed companies to conduct annual self-evaluations to determine whether they and their committees are functioning effectively. While the guidance doesn’t specify exactly how boards should measure themselves nor what approach to take to do so, it does put responsibility for regularly judging and improving performance in their hands. Some governance experts expect such exercises to become the norm for any large public company—regardless of where it is traded.

(Nasdaq listing standards don’t require board evaluations, but many listed companies are doing them as a best practice.)

The NYSE also now requires listed companies to adopt and disclose their corporate governance guidelines, including those relating to director orientation and continuing education.

In addition, director education is now one of eight “core categories” used by Institutional Shareholder Services Inc. (ISS) to calculate its corporate governance quotient (CGQ). The CGQ scores carry considerable clout: Analysts, portfolio managers and research directors use them to gauge the impact that a company’s corporate governance structure and practices might have on a portfolio’s performance. ISS uses the CGQ to rate 7,500 companies.

 Along with the slew of outside entities looking over directors’ shoulders, companies themselves are fixing the spotlight on their boards. According to the GovernanceMetrics research, 90 percent of companies surveyed now have policies for evaluating boards and/or their individual members, up from 35 percent two years ago.

And businesses are increasingly making use of those policies: 73 percent of nearly 1,300 public companies formally evaluated their boards in 2004, compared to 50 percent in 2003 and 33 percent in 2002, according to an annual survey of boardroom practices by Corporate Board Member magazine and consulting firm PricewaterhouseCoopers. Furthermore, 35 percent of those companies’ boards evaluate individual directors on a regular basis, compared to only 23 percent in 2002.

The Need To Get Up to Speed

At the same time that the heat is being turned up on corporate directors, a host of new board members are taking a seat at the table for the first time. This trend was pointed out in a recent webcast, “Time Crunch: The Board Education Conundrum,” sponsored by Corporate Board Member magazine and the NASDAQ Stock Market Inc.

High-level recruiters are seeing the same phenomenon. Julie Daum, North American leader for the Board Services Practice of Spencer Stuart, the global executive search firm based in New York, notes that more than 40 percent of the 300 directors Spencer Stuart recruited and placed last year were new, first-time members.

“You’re going to have a lot of people joining boards who have never sat on a board before. They are going to need to know what it means to serve on a board,” she says. “We see a great demand here—they’re asking, ‘How do I get smart before my first board meeting?’ ”(To read how one new director chose to get up to speed, see One Directors Experience.)

Newcomers to the boardroom may have another reason to pursue such education regularly: to gain some protection from liability, says Ralph Ward, publisher of Boardroom INSIDER newsletter and an author, speaker and consultant on board issues.

“If a board can point to a systematic plan in place for continuing education, that’s got to be at least one means of helping to support and rationalize the actions they take,” he says.

But it’s not fail-safe, warns Holly J. Gregory, a partner in the corporate governance practice of Weil, Gotshal & Manges LLP, an international law firm in New York.

Due care, loyalty and good faith remain the standards for avoiding liability for a breach of fiduciary duty, she says. But boards need to understand that changing expectations impact how courts judge what those responsibilities mean.

“It would be a stretch to say as a defense to a shareholder lawsuit, ‘They didn’t have an education program in place,’ ” Gregory says. “But in court, would you want to be able to point to directors’ understanding of their duty of care and help explain how expectations, best practices and culture came to be? Sure, you would.”

In light of such factors, more companies now clearly place their corporate governance practices on their web sites and in investor materials. And in many of the documents, director education figures prominently.

For example, Atlanta-based Home Depot Corp.’s governance standards require a director orientation and education program designed to enhance the knowledge and skills they need to perform their duties. Further, in the interest of developing an understanding of the industry, as well as interacting with customers and store associates, the home-improvement retailer recommends that each director visit a minimum of 12 stores annually.

“We’re seeing more and more companies writing some form of continuing education as recommendations in their corporate governance policies,” says Peter Gleason, chief operating officer and director of research for the National Association of Corporate Directors (NACD), a 15,500-member nonprofit membership organization for corporate boards and individual board members in Washington, D.C.

“This whole movement in board education is really taking hold, and you’re going to see more companies attuned to it,” he predicts. “And if the biggest companies are doing it, you can bet that most smaller companies will fall in place behind them, too.”

Evaluating the Options

Generally, there are three prongs to an effective director education program for both new and existing directors: orientation and briefings on the company; in-house meetings with senior management and selected speakers or consultants; and outside open enrollment in training seminars, courses and lectures, where larger numbers of directors gather to learn about current and best practices.

At a minimum, experts say, directors should expect to become well-versed in:

  • The main drivers of the business.
  • Major strengths, weaknesses, opportunities and threats.
  • The companys financial management and reporting.
  • The regulatory and legal environments.
  • The investment environment.

Key people and talent issues.

Not surprisingly, the push for director training has spawned a budding cottage industry of high-level education resources. The expanding supply of programs range from multi-day university-based seminars, courses and conferences to one-on-one coaching to in-house training sessions. (For more information about in-house training, see "Customized, In-House Programs Gain a Following".)

And they’re growing all the time: NACD, which already offers a series of director education courses, in-house programs and online instruction, plans to formally launch its own education initiative, the NACD Corporate Directors Institute, in fall 2005, Gleason says. The program will offer a certificate of director education and professionalism for those who complete a 16-hour governance course.

When selecting from the wide array of education options available, take into account the nature of the company’s business as well as the personalities, strengths, weaknesses and inevitable time constraints of board members, say experts.

HR and the corporate leaders they work with should evaluate choices carefully, says Dr. Carolyn Kay Brancato, director of The Conference Board’s Global Corporate Governance Research Center and Directors’ Institute, a provider of governance education for directors. Since its launch last year, about 150 directors representing 300 boards have attended Institute sessions, which are offered as open seminars and in-house courses, she says.

When selecting between providers, weigh such factors as the quality of the instructors, the organization’s experience and track record in providing such governance guidance, current relevance to the needs of the board members, costs and whether the session can be held on-site for board members, says Brancato.

You also must take into account the networking needs and preferences of board members. The Directors’ Institute’s one-day programs, for example, accept only sitting corporate directors—it does not invite other corporate executives. “We’ve found that directors only want to sit with other directors—chiefly for the commonality of experiences and challenges,” she says.

Getting the Call

It pays to be ready because you never know when you’ll be asked to get involved in board education.

That’s something to which Jerry Ballard can attest. Ballard, vice president of HR operations in the Memphis, Tenn., operations headquarters of The ServiceMaster Co., was a little taken aback when company chairman and CEO Jonathan Ward asked Ballard and the company’s general counsel to set up a detailed orientation and education process for new members of the company’s 12-person board.

“I was surprised—but pleasantly so—at the involvement of HR with the board,” says Ballard. “Yet, it makes sense. In our business, people make the difference, so HR is a logical fit for these responsibilities.”

It’s been two years since Ballard got the call from Ward. The program he helped set up is currently in place and takes a full year to complete. The goal is “a full, hands-on indoctrination to all aspects of the business,” says Ballard. “It’s a total immersion in that unit, where directors spend two days learning and asking questions,” he adds.

Along with providing a detailed history of the company and briefings on its growth and impact, a significant part of the orientation is field-location visits for each division of the business, where directors meet with the unit’s president and its front-line employees, Ballard says.

“HR rides right alongside our directors in the car on all of these visits to be an immediate resource, answer questions and make sure the goals of the visit are met,” he says. The company also requires a mandatory “We Serve” day as continuing education for board members, during which they spend additional time in a field business unit at least once a year.

A month after these visits, directors are asked for formal feedback. The results are used to constantly upgrade, change and improve the orientation methods. As an example, board members told the company they didn’t want to visit branch units when hourly workers weren’t there.

“That meant we had to get our board members out in the field at 6 a.m.—before the workers left the site for jobs,” Ballard says.

Today, Ballard is the point person and ambassador for board members’ guidance on any people issues.

“To be a counselor or confidant to company leadership, you have to show them the importance of your contribution and the value of the HR information you know,” Ballard says. “As more and more board members expect this level of detail, I think we’ll see HR becoming even more involved with the board.

“When you think about it, HR is already responsible for orientation of every other employee of the company, so why not board members, too?” he says. “To think of it any differently is probably the wrong way to think about it.”

Becoming Involved

Above all, experts say, take on the role—if your company doesn’t have a formal director orientation or education program, start one. If done well, a focus on director education can improve a board’s ability to excel as strategic assets for the companies they serve—a goal that should be shared by all members of corporate leadership, including HR.

Gail Aldrich, SPHR, who had responsibility for organizing and arranging board orientation and educational meetings as an HR officer at three California companies, urges HR professionals to be proactive in helping their top leadership improve upon board effectiveness.

“Don’t wait to be asked to do this,” says Aldrich, who is currently the Society for Human Resource Management’s chief membership officer. “Sit down with the CEO and bring forward suggestions on how to do a better and more comprehensive job of orienting and educating your directors.”

Susan J. Wells is a business journalist based in the Washington, D.C., area with 19 years of experience covering business news and workforce issues.

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 One Directors Experience

 

Directors can stay current on their legal, fiduciary and ethical oversight responsibilities by reading and reviewing corporate documents, financial and analyst reports, and periodicals. But formal education programs offer key advantagessuch as practical interaction, live issues and case studies, says Phoebe Wood.

Since 2002, Wood has served as chairman of the audit committee and a member of the compensation committee for the board of global childrens clothing company OshKosh BGosh Inc., in Oshkosh, Wis. She signed up for a highly regarded set of programs offered by The Directors Consortium, a joint program of the University of Pennsylvanias Wharton School, Stanford Law School and the University of Chicago Graduate School of Business.

Despite her strong credentialsWood serves as executive vice president and chief financial officer of Brown-Forman Corp., a $2.3 billion producer and marketer of major wine and spirits brands in Louisville, Ky.she felt the need to enroll in the board education program.

Weve gone through a cultural revolution in board governance and in the way you think of your responsibility as a board member, she says. As a relatively new board member myself, I felt it was critical to get this type of training.

One session that left a big impression on Wood included a presentation by Charles Davidow, a securities-law expert and partner in the law firm Wilmer Cutler Pickering Hale and Dorr LLP. In real life, Davidow represented the special committee of Enron Corp.s board when it investigated the transactions with entities controlled by Andrew Fastow, Enrons former chief financial officer.

In the class, Davidow played the Fastow role, acting out a boardroom presentationthe speech the CFO would have given to the audit committee in defense of the partnerships that ultimately led to the companys demise, says Wood.

He came across as so believable and plausible and, as we all now know in retrospect, it was not at all the situation he represented it to be, recalls Wood. It really hit home how important it can be to not blindly accept a judgment from someone you trust.

Ultimately, Wood says she took away another key fact from her recent training experience. Your role is to look out for the shareholdersand they come in all different sizes and shapes with different needs and motivations, she says. As a director, your focus now is not only What can I do? but What must I do?

Susan J. Wells

 

 Customized, In-House Programs Gain a Following

 

After passage of the Sarbanes-Oxley Act of 2002, corporate officers and directors flocked to education sources to learn the basics of the myriad regulatory changes related to the landmark law. Today, while directors continue to seek a general best practices overview, many also are looking for more specialized instructionand they are asking the question, My place or yours?

Now were seeing very customized programs being brought in-house, where companies will tailor their own curriculum based on choices from our core offerings, says Peter Gleason, chief operating officer and director of research for the National Association of Corporate Directors (NACD), a nonprofit membership organization for corporate boards and individual board members in Washington, D.C. For example, they may choose to spend two hours on compensation issues and two hours on succession planning, if those topics are their top priorities.

The attraction of such in-house training is a practical, hands-on, discussion-based interaction, he says. It can be good from the standpoint that its very focused on your boards challenges.

NACD was scheduled to conduct 60 in-boardroom programs in 2004, up from 50 in 2003.

Despite the move toward customization, the most sought-after board education still tends to include more general audit committee issues, fiduciary duties and finance, says Ralph Ward, publisher of Boardroom INSIDER newsletter and an author and speaker on board issues. Anything compliance-related is always in high demand, he says.

He also sees more interest in in-house programs, even though demand for open, off-site training remains high. One reason: From a logistics point of view, he says, the time it takes to get board members trickled off a few at a time to campus can be kind of inefficient. These are very busy people.



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