Tag Archives: board of directors

California Will Require Women Members on Corporate Boards: A Good Idea or Not?


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One of the most popular posts on this blog discussed the advantages of privately held companies having a corporate board with outside directors. I argued that outside directors can provide broader and deeper knowledge relevant to the business than company management can. If shareholders select directors with expertise the business needs, and if those directors develop ongoing knowledge of the business, the company will benefit.

My post dealt with private companies, but boards of directors can serve the same function in public companies of all sizes also. When board members bring expertise and when they develop ongoing company knowledge, they can contribute greatly to the company’s success.

Obviously, then, it is important for shareholders to choose wisely when electing board members. In the usual course of affairs, management (generally the CEO) proposes board candidates. But boards of larger and more sophisticated companies often have board selection committees that propose the candidates. However the candidates are selected, and shareholders then approve or disapprove the choices.

conference-2110768_640My premise is that who is on the board makes a difference.

So what happens when jurisdictions adopt diversity requirements for directors? California has just become the first state in the U.S. to require large companies to have female directors, Will that requirement help or hurt California-based companies?

California Senate Bill 826, which Governor Brown signed into law last month, mandates female directors on company boards. The stated purpose of the law is to advance gender diversity. SB 826 requires all publicly traded companies with headquarters in California to have at least one woman on their boards by the end of 2019. And by 2021, firms with at least five board members will be required to have two or three women on the board, depending on the total size of the board. If companies do not comply, they face fines of between $100,000 and $300,000.

About 94 publicly traded companies headquartered in California currently have no female directors and would be affected by SB 826, assuming they do not change their board membership by the end of 2019.

But will this law lead to improved corporate governance and financial performance?

It is tempting to say that companies should be able to locate sufficient women with the credentials to provide the expertise required. And most of the time that will probably be true.

It is also tempting to say that women provide a different perspective than men on management. And in the wake of the #MeToo movement, that is true in certain circumstances and about certain issues.

But I am cynical enough to believe that corporate management is usually not sufficiently broad-minded to look far enough for women capable of serving in board roles. I believe competent women exist, but some competent women will have backgrounds different than their male counterparts, and they might be passed over for consideration. And so, it is possible that the same women will be tapped repeatedly for board roles.

Moreover, female candidates selected after passage of SB 826 face the stigma of being “affirmative action candidates.” Their opinions may not be given the same credence that male board members’ opinions receive. The problem with any legal mandate is that it stigmatizes the very people it purports to help.

On a more practical note, Wharton research shows that adding female directors to a board does nothing for company success. The gender composition of the board does not matter, for better or for worse, when it comes to improving financial performance.

The California statute will face legal challenges. Legal scholars, even those who believe the law is “well-intentioned,” have called the mandate unconstitutional, because the Supreme Court has previously ruled that the makeup of a corporate board is governed by the state where the corporation is is chartered, not where it is headquartered, which is what the California statute purports to cover.

The Wall Street Journal reports that 35% of new directors in Russell 3000 companies (one broad cross-section of public companies in the U.S.) have no female directors at present. So if laws like California’s SB 826 are passed in other states, the composition of many corporate boards will change. Perhaps it would be wise to wait to see what happens in California before more states jump on the board diversity bandwagon.

And will California’s mandates stop with gender diversity? What is to keep the liberal California legislature from mandating racial diversity? What about sexual orientation? Religion? Age?

In the meantime, public corporations in California will have to choose whether to comply or whether to fight the law. Privately held corporations in California remain free to decide for themselves the composition of their board, and even whether to have outside board members at all.

What do you think about requiring a diverse board composition?

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Six Issues to Address Before Serving on a Non-Profit Board


sekulic-Vetta-Getty ImagesAt the start of the year, many people begin new terms as not-for-profit board members. It’s exciting to start working with an organization whose mission is close to your heart. And it can be helpful to your development of managerial and leadership skills. However, it’s critical that your expectations be aligned with those of the organization. Ideally, these expectations should be set before your term begins, but it’s never too late to clear the air.

Here are some issues to discuss before or during your orientation with the board:

1. What is the mission of the organization? How has it developed over time?

You may think you understand the non-profit’s mission because of how it presents itself to the community. Sometimes, however, the formal mission differs from what the organization actually does. Or over time, the organization has taken on activities that are only tangentially related to its mission.

For example, a hospital that has its roots in providing healthcare to the indigent might start offering wellness or fitness programs. These might be important for improving community health, but it might be that too many of the hospital’s resources are being pulled away from basic healthcare services.

It is critical that a non-profit remain relevant to its community and customers. But it’s also important that it not develop “mission creep” or move beyond what its governing documents permit. Know what the organization’s by-laws and mission statement say.

2. What measures of success does the organization use?

Part of the Board’s role is to articulate the success measures for the organization. But you should know how the non-profit has traditionally measured its performance. Is it number of people served? Donations raised? Quality of service and accolades from clients? All of these may play some role in the success of the organization, but know what the staff considers its performance measures.

Then, during board meetings, frame your questions and advice in terms of how to improve the organization’s performance toward its success measures. And, if you think something is missing, work with your fellow board members to implement new performance indicators.

3. What communications tools exist to help board members speak to the community?

As a board member, you should be an advocate for the organization in the community. Some non-profits have communications or marketing directors who are responsible for presenting the organization’s face to the community. Ask to see the marketing brochures and other tools used in these communications. Ask for talking points that the organization wants board members to make.

And if the organization faces a public relations crisis or significant internal or external changes, find out how the staff is responding, and ask whether and how they want board members to assist. You will get asked about these issues by your friends and colleagues who know you are on the board, so be sure you are prepared to help the non-profit and not hurting it.

4. What board development and/or assessment and corporate governance programs are in place?

Some organizations elect board members then let them serve for decades with little attention. These days, particularly at larger non-profits, it is important that the board have the skills necessary to advise the non-profit staff. Know how board members at your organization are assessed.

Another best practice is to have a board orientation for new board members. Ask to participate in any orientation that’s available. If no formal board orientation is in place, then ask to tour the organization’s facilities, ask for an opportunity to participate in the non-profit’s activities in a meaningful way (or at least observe them). Also ask for a knowledgeable board or staff member to review the recent financial history of the organization with you.

When an organization has three-year board terms, it is much like having someone in a corporate position for three years—the first year is mostly a learning experience, and the ability to contribute increases in the second and third years. Anything that shortens that learning curve benefits both the organization and you as a board member.

If a board member is not attending meetings, or is not contributing to the organization, then there should be a mechanism to replace them. Term limits are usually a good thing for both the organization and the board members. Help the organization to put in place term limits and/or an orientation program and board assessment program, if nothing is available.

5. What financial commitments does the organization expect of board members?

Some non-profits have a fundraising expectation of board members, and others seek only advice (though, of course, donations are always helpful). Know going into the position what the organization expects of you. And then meet or exceed those expectations.

Business Meeting

Flickr photo from thetaxhaven on Creative Commons

6. What else do you want me to know?

You were asked to be on the board for a reason. Ask what that reason was—was it your skill set or your perceived deep pockets or something else?

Also inquire about issues within the organization the staff want you to know. The Executive Director or CEO may want you to get involved in evaluating a particular department. The Chair of the Board may think there are issues with the staff. Have some one-on-one conversations with at least the head staff person and the board chair, if not before you begin your term, then soon after it begins.

You are a board member, act like one. It all boils down to knowing as much as you can about the organization and knowing what is expected of you.

What other questions would you add to this list?

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How Trends in Corporate Governance Vary for Smaller Firms


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Flickr photo from reynermedia on Creative Commons

I work mostly with smaller organizations, especially family-run companies, but I’m interested in corporate governance trends at larger institutions. I’ve written before about why privately held companies might want independent boards of directors. What is good for large institutions is often also helpful in small companies. And sometimes smaller organizations are ahead of stagnated large companies—they can change more rapidly when the need arises.

Here are some recent trends in corporate governance, together with how I think the trends may work differently in large and small companies:

  • Focus on independence and diversity

The Council of Institutional Investors (CII) states in its Corporate Governance Policies that at least two-thirds of a board’s members should be independent. Most small businesses rely primarily on company management to serve as directors. When most of the shareholders are also managers in the organization, this makes sense.

However, as a business grows, a focus on independence becomes more important. Large institutional shareholders will demand a voice on the board, and their opinions might or might not agree with what management wants. Because shareholders are the ultimate decision-makers, their voices should decide who is on the board.

Diversity may or may not be a focus in both large and small companies. Public sentiment desires more diversity in corporate decision-making, and greater racial, ethnic and gender diversity can keep consumer products, entertainment, and other companies with a public base more in tune with its customers. However, shareholders at some institutions may feel less strongly than others.

Here is another trend where small and large companies may diverge. Shareholders at family-run companies are more likely to want continuity and consensus than larger companies with institutional owners. Board diversity is particularly likely to be important where the shareholders are public entities, such as government worker pension plans or universities.

  • More scrutiny of the board, through self-assessment and shareholder assessment

The U.S. National Association of Corporate Directors (NACD) recommends that the Governance Committee of boards should have a process to routinely assess its own performance, the performance of its Committees, and its individual directors. Moreover, a Nominating and Corporate Governance Committee is one of three standing committees—along with an Audit Committee and a Compensation Committee—that the NYSE requires be composed entirely of independent directors.

This self-assessment is a growing trend in corporate boards. Along with self-assessment is an increased scrutiny of the board by institutional shareholders. With only independent shareholders on the governance committees of publicly traded companies, these large shareholders have the opportunity to assess the board and make changes when necessary.

At smaller and privately held companies, self-assessment and shareholder assessment may be less rigorous. But all companies should develop some form of board member assessment. For these smaller companies, it might be an outgrowth of internal succession planning and leadership development.

  • Increased transparency and disclosure

Along with board assessment comes the need for transparency in board activities. Shareholders cannot assess what they cannot see. The NACD expects boards to disclose sufficient information to shareholders to enable them to assess whether the Board is functioning effectively.

What is sufficient information will vary from organization to organization. In larger organizations, what is material to the company’s functioning will be much greater than at smaller companies. But as the number of independent board members increases and there is less involvement of management directors (who presumably know what is going on internally), the amount of disclosure will increase.

  • Attention to a broader array of risks, such as cyber-attacks

It used to be that boards only needed to worry about the corporate balance sheet and CEO succession (and they could avoid the succession issues for years at a time). However, in today’s environment, cyber-crimes will only become more sophisticated, and every organization needs to consider its vulnerabilities, along with those of its suppliers and customers.

Now, not only must directors focus on financial threats, but other existential risks as well. These risks might come a wide variety of causes even beyond cyper-attacks—natural or environmental disasters, terrorism, and public relations debacles.

A good board of directors at any institution, large or small, thinks about these threats. Each organization will need to undertake its own risk assessments, then educate its board of directors about its conclusions.

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Flickr photo from thetaxhaven on Creative Commons

Flickr photo from thetaxhaven on Creative Commons

Institutional investors at large organizations will continue to demand greater influence not only on financial strategies, but also on risk assessment and board member assessment. As these demands grow, shareholders at smaller organizations, including family-run companies, need to analyze what makes sense in their companies.

Furthermore, managers interested in developing themselves to be board members someday—regardless of the size of institution on whose board they might serve—would be well served to educate themselves in these areas of corporate governance. To be a serious candidate for any corporate board, an individual needs to be savvy about what shareholders expect in today’s environment.

What other corporate governance trends do you see? Which trends that I mentioned do you think are most important?

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Why Have an Independent Board of Directors in a Privately Held Corporation?


Formal Corporate Meeting RoomEvery corporation – public or private – legally has to have at least one director. Most state laws on incorporation require three or more directors. Therefore, there is technically a board of directors in almost every corporation, no matter how small the company. The board is elected by the shareholders, and board members elect the officers of the company, approve by-laws, and otherwise govern the corporation.

But in privately held companies, the role of the board of directors, beyond these minimal legal requirements, depends on what the shareholders want. In a family-owned business, the family shareholders may want only family members to serve as directors. In these cases, the board will not be independent of management and may not bring any outside expertise. That is how most small corporations start.

Other closely held businesses – whether owned by a single family, by a small group of unrelated partners, or by a few outside investors – may want independent directors who can offer financial, technical, and/or strategic advice to the operational officers of the company. In these businesses, the owners and managers in the firm have experts to go to on a regular basis, people with some knowledge of the firm’s operations.

Even if the business is not a corporation, but is a partnership or LLP or LLC, it might be a good idea to have an advisory board that serves the same purpose as the board of directors for a corporation.

If you are the owner of a small, privately held business, why should you consider forming an independent board of directors? Because it is unlikely that you and the other managers running your company have the breadth and depth of experience that today’s business environment requires.

Here are a few examples:

  • First, most businesses operate in a heavily regulated environment. Whether it is food safety rules, or environmental impact, or financial disclosures, or labor relations and employment law, or licensing requirements, the law impacts every business. Perhaps the business could benefit from an attorney on the board.
  • The financial and securities industries have come under increasing scrutiny since the recession in 2008. Even if your business isn’t in these industries, you are likely to need financing as you grow, or perhaps you are considering a public offering or other means of raising capital. You might need someone with strong financial acumen or who is familiar with borrowing opportunities in your region or industry.
  • Every successful business suffers growing pains over time. Perhaps your employee base is increasing faster than your existing managers can handle. Perhaps you have ideas on how to expand, but don’t know how to handle the logistics of your growth – IT systems, people systems, sales channels, etc. Maybe you need someone with experience doing what your business is about to do.
  • Or maybe you know you need to grow, but aren’t sure what the best opportunities are. Perhaps it would be helpful to have someone to walk you through a strategic planning exercise, and then figure out how to bring the best growth options to life.
  • And lastly, perhaps the owners or key managers in your business are ready to retire, and there is no good succession plan in place. Again, outside directors could help your company through a selection process and the transition to new management.

In the examples outlined above, it would be possible for a business to hire consultants or contractors for a well-defined assignment. Or perhaps there is an employee with the skills to help the ownership of the business through the issue.

But there is an advantage to having people with an ongoing knowledge of the business available on a regular basis to provide input to management. The challenge is to use these advisors well. Even in large public companies, this is difficult, as a new McKinsey study points out. Directors need to have the time and the skills to provide the right assistance to the corporations which they serve.

The novel I am writing deals with a family-owned business in the throes of change. Its directors have been family members, but the business  is at the point in its growth cycle where it probably needs outside assistance. Its current leadership will have to grapple with this among many other issues.

For more information on the role of directors in privately held businesses, see articles such as:

The Responsibilities of a Board of Directors for Privately Held & Publicly Held Companies, by Derek Dowell, Demand Media

What Are the Responsibilities of a Board of Directors Within an Organization?, by Bonnie Conrad, Demand Media

Should a Private Company Have a Board of Directors?, by Theodore F. di Stefano, E-Commerce Times, February 8, 2008

Why Your Privately Owned Company Needs a Board of Directors , by Janet B. Fierman, Sheehan, Phinney, Bass & Green PA, Thursday, October 28, 2010

Why Privately Held and Family-Owned Businesses Should Have Independent Boards of Directors, by Carl Kampel, Financial Executive, November 2012

Outside Directors: Do You Need Them and Where to Find Them?, by Joe Hadzima, reprinted from Boston Business Journal

Startup Voice: Private Company Board of Directors FAQs, by Inna Efimchik, White Summers Caffee & James LLP

Are there other advantages to having an active, independent board of directors in a private company? What are the disadvantages?

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