THE QUALITIES AND EDUCATION OF AN EFFECTIVE LEADER, POST SARBANES-OXLEY
By David Preng
Over the last decade, corporate boards have undergone a marked change. Pre-2000, board members were often friends that were trusted. They were people who went to school together, whose wives played tennis together. They would go to the same churches and see each other within the industry. If they demonstrated business sense and could help a company, they were often asked to join the board.
While that was a comfortable arrangement, it could lead to lapses of oversight. Remember Enron? WorldCom? The reaction to these and other corporate implosions was increased scrutiny by regulators. Congress passed the Sarbanes-Oxley bill, which set new director standards. Directors were now expected to be professional. They had to be knowledgeable about compensation, audit, and governance practices. That touched off a scramble to find board members with the necessary qualifications. These were often academicians, lawyers, CPA partners – people who knew the laws, regulations, accounting practices, etc., but tended not to be part of industry.
Unfortunately, if you’re not part of the industry, even though you had a top-notch understanding of corporate governance laws, you most likely will miss one of the most important qualifications of a board member: being able to guide company strategy. And if you can’t opine on strategy, are you really doing what the company needed?
So the pendulum started swinging the other way. Companies began looking for people who had worked in the industry, perhaps former CEOs, CFOs, senior operating people who were not considered for boards in the past. But they needed to be brought up to speed on the regulations in order to be a well-rounded, effective board member.
There are opportunities for directors to get education that will do that. I recently spent three days at Harvard University attending a course called “Making Corporate Boards More Effective.” We covered 15 different cases, all big-picture topics like the HP-Compaq merger. We were asked to put ourselves in the place of the directors, and try to figure out what they were thinking, and how they organized the merger. We then had a group discussion and debated the board’s decision and tried to determine what are the best practices in a merger situation. Harvard’s program takes the long view — they look at things from 20,000 feet. Some of the better business schools around the country offer their own versions of courses, also focusing on the audit committee, the compensation committee, or the governance committee. Some courses are generally more micro-oriented than Harvard’s and can last a full week.
The National Association of Corporate Directors (NACD) is the premier organization for directors. The NACD’s education provides a framework for a board or individual director to focus on specific topics. These might cover things like board interaction, board evaluations, the different committees, risk and strategy. With corporate governance placing a stronger focus on the credentials of directors, the NACD instituted a new distinction this year for experienced directors — Board Leadership Fellow. To receive this designation a director must complete a master class and take an additional 10 credit hours of skill-specific electives and collaborative course work, and to maintain the fellowship another 10 credit hours of continuing education each year.
How has all this training helped me as a director and as CEO of my own company? In two ways. First, if an issue comes up, I have the training and foundation to be reactive and to do the right thing. Second, and more important, I’m proactive in my thinking about how to make things better. It’s one thing to do things right, but another to do the right thing.
If board members approach their work in good faith, they need not worry about increased scrutiny from the outside. A board member has a duty of loyalty, care and monitoring. Consider the duty of care. If you do things right and act in good faith, in a manner where you reasonably believe that you’re acting in the best interest of the company, and you’re operating with the care a prudent person would expect to exercise under similar circumstances, then you are protected by law.
I complete several board searches a year, and I have learned that potential board members want to know two things. First, they want to know the CEO. If things go wrong it almost certainly starts there. They ask to go to dinner with the CEO and find out if this is someone they can work with. Besides the ability to be in the corner office, does the CEO have integrity? Second, they want to get to know the other directors. Are they the ones to be in the foxhole with in times of crisis? If so, and the company has a purpose and the new board member can add to its development and betterment, then it’s a placement that is professionally very rewarding.
David Preng is President of Preng & Associates, an executive search firm based in Houston. Mr. Preng is also the President of the Board of the Texas Tri-Cities Chapter of the National Association of Corporate Directors.
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