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Being a good director ©
Serving as a director of an investor owned company, be it publicly traded or private, is or can be; a privilege, a responsibility, a burden, a source of satisfaction, a personal liability, a path to financial reward, interesting, frustrating, time consuming and fun.
San Diego, California USA - Serving as a director of an investor owned company, be it publicly traded or private, is or can be; a privilege, a responsibility, a burden, a source of satisfaction, a personal liability, a path to financial reward, interesting, frustrating, time consuming and fun.
Serving as a director of a privately owned and owner managed company can be all of the above but is likely to be less so as the board essentially serves at the pleasure of the owner / manager(s) and therefore is, in reality, more of an advisory board than one of supervision and control.
Managers will frequently assert that board members are a part of the "team" and share with managers the same overall objectives. This is a dangerous position to accept in terms of the directors fulfilling their obligations to the owners of the business. Close social relationships between managers and directors may not be constructive from the director’s perspective. The directors, individually and as a group, have the responsibility of establishing policy and objectives for the company and of supervising the managers to assure successful implementation of the policies and achievement of the objectives.
There are lots of issues relating to being a director. The most important one is identifying the Master or customer the director is serving. I believe that Directors only have a single Master and that is the owners of the business. Directors may not favor, in their actions, any segment of owners but must do that which is best for all of the owners. This is one of the reasons why it is so difficult for those asked to serve on a board by one group of interest holders, usually to protect their particular interest, to serve as impartial Directors. Of course, the introducing party anticipates the benefit of having placed a biased and therefore conflicted director.
I recall being invited to serve on the board of a NYSE listed company only to be uninvited after having lunch with the CEO. The CEO sought assurance that I would support his positions as a number of directors were taking exception to some of his ideas and actions. When I advised him that I could not make such a commitment he decided my advice and service were not necessary. It is neither unusual nor surprising that CEO’s want directors who will be supportive of the CEO’s positions. However, the role and responsibility of being a director precludes the offering of assurance as to how decisions will be made, except to the end of creating the greatest benefit for all of the company’s owners.
Stakeholders versus stockholders is a fallacious but oft heard and written about issue. The appropriate treatment of those individuals and groups impacted by company actions, other than the shareholders, in the end is always decided on a basis consistent with the stockholder’s best interests. The fair and responsible treatment by a company of its workers is in the owners’ best interest. The treatment of suppliers, customers and the community should also be fair and reasonable to be in the company’s owners’ best interest. If the company does not survive then the interest of all of the stakeholders will be damaged. When the wage rates demanded cause a company to close a facility then the workers are damaged. When a company allows ecological damage to occur the company will ultimately be damaged. In the long run the interests of those having relationships with a company and that company’s owners are predictably and inevitably aligned.
It might be useful were prospective directors to be asked to serve as advisors to the company, attending all board meetings, for a year before their nomination, so both the advisor and the members of the board were able to assess the contribution likely to be forthcoming from the advisor as a director and for the advisor to determine if this was a group with whom he wanted to become involved.
Although it is perhaps overly cynical to observe that directors voting against management proposals are not as likely to be successfully sued, it is also fair to surmise that directors who consistently abstain or vote against management proposals are unlikely to be renominated to serve as directors for future terms. The issue is usually one of causing or facilitating change. It is usually the managers of a company who propose corporate actions they believe will increase profits or in other ways benefit the company. All too frequently these managers allow "the wish to become the parent of the thought" in the development of projections supporting their proposals. The responsible director will focus his or her attention on the premises used in the development of the projections as correctly created data will usually be subject to analysis leading to an appropriate decision, without a lot of interpretation. Therefore, really understanding the reality of the projected benefits is mandatory for the director to know how to vote on any issue resulting in change.
Executive compensation is the issue attracting the most attention currently and boards of directors are being called upon to justify their having allowed executive compensation levels to reach such monumental heights. The issue is the same as has been faced by sports team owners and entertainment industry executives. What is a fair price to pay for that which is believed to increase the probability of winning in profit achievement terms. Businesses which are dependant upon only a few senior decision making executives are vulnerable and a well conceived and running business is a bit like a well designed car with lots of moving parts, none of which are irreplaceable. Indeed, the lack of dependence is a virtue for which a price/earnings ratio premium will or should be paid.
How involved should a director become in the management of a business? This is a good question the answer to which is both dependant on the needs of the company and the style of the director. Directors are charged with a responsibility to protect and, to a lesser degree, enhance the assets of the business. Managers are paid to implement the vision of the Board of Directors and in the process to administer the affairs of the company while growing the business, if that is the mandate of the Board.
I believe it would be constructive if each of the directors, in the proxy statement circulated prior to their election, briefly describe what they will personally strive to assure be accomplished in the coming year. I also believe the company’s CEO should set forth what he or she expects to accomplish in the coming year. "Only that which can be measured can be improved" and the owners of a business should be able to judge the effectiveness of a director or manager by how closely their objectives have come to being achieved.
The more experienced the director in the technical aspects of the company the more likely that director will influence other directors. Therefore a range of skills and experience are necessary for a board to be optimally effective. There is also a question as to the appropriateness of having company officers as voting members of a Board of Directors. If one of the primary purposes of a Board of Directors is to measure and evaluate the performance of management that task is made more difficult with managers being on the Board. Managers can be invited to attend meetings and to make reports and recommendations. However, when it comes to voting on issues only that which is in the best interests of all of the owners can be determinative of an individual director’s action and being a manager and a director Is frequently a cause of conflict.
There is a growing trend among publicly traded companies for only the CEO to serve on the Board of Directors. Much as the one description of bus load of attorneys driving off a cliff is "it’s a start", one management member on a Board of Directors is better than several managers being on the Board, but the basic issue remains the same.
The reality is that all directors do not make and are not capable of making the same level contribution to a company and therefore there should be some mechanism for varying levels of compensation. Also there should probably be term limits as directors, much as consultants, tend to make the greatest contribution of which they are capable in the early in their period of service. Those who the Board wishes to extend their service can retain the former Board members as advisors to the Board, not to the managers, as again issues of conflict are inevitable.
Directors should show respect to the money of the owners in the planning and conduct of meetings. Board meetings at resorts and in remote locations are expensive and though seductive and pleasing to both managers and directors such venue selections are not what serving the interests of the business’ owners is all about. Managers and directors should spend company money as if it were their own and also make risk and reward decisions using the same premise.
Unfortunately and yet predictably, managers frequently develop a “we (those of us who are investing our lives, etc.) and they (who are only interested in our earning money profits for them)” attitude re shareholders. Directors must always, to fulfill their responsibilities, be of the same mindset of “they – the owners of the business”.
© All rights reserved. Arthur Lipper III
Contact: Arthur Lipper
Author/Correspondent's Profile: Arthur Lipper III, Chairman, British Far East Holdings Ltd.