of Network Six. (Network Six)
When Warwick-based Network Six Inc. sought to replace three directors on its board last year, Chairman and Chief Executive Officer Ken Kirsch wanted to find people with solid financial skills.
“It makes sense to look for people with strong financial backgrounds,” Kirsch said. “The rules of financial reporting have changed to the point that companies are much more concerned with putting out good, solid accounting numbers.”
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
Kirsch eventually got his wish: Two of the firm’s three new directors are certified public accountants.
Public companies use different strategies when hiring new directors. But there are a few common traits most firms look for, according to TK Kerstetter, chief operating officer of Brentwood, Tenn.-based Board Member Inc. The firm publishes “Corporate Board Member” magazine, which serves as a resource for board members of public companies.
Increasingly, public companies look for a broad mix of skills when recruiting directors: someone with solid international experience, a technology executive, and a director adept at handling mergers and acquisitions.
Kerstetter calls this “position-skill recruiting,” and says New Economy companies have pushed the strategy into the mainstream.
Boards also seek directors with a lot of external contacts, Kerstetter said. It’s common for boards to have at least one politician or university administrator – both of which usually bring a wealth of valuable contacts.
The board of Pawtucket toy maker Hasbro Inc., for instance, has several directors with political and higher education backgrounds, including Paul Wolfowitz, former dean of The Johns Hopkins University and recently appointed deputy defense secretary in the Bush Administration.
A growing number of public companies have directors who are active CEOs of other corporations.
“Everybody wants a standing CEO to serve on their board,” Kerstetter said. “It’s gotten to the point where some companies restrict the number of boards its CEO can sit on.”
The trend has led to a shortage in the number of CEOs available to serve as outside directors: As much as 75 percent of CEOs have rejected an invitation to serve on an outside board, according to a survey by Korn/Ferry International, an executive-recruitment firm.
Providence-based Textron Inc. has several active and former CEOs on its board, including Citizens Financial Group CEO Lawrence K. Fish and ALLTEL Corp. CEO Joe T. Ford.
Almost always, a company’s own CEO sits on its board of directors, as well as at least a few other top-level executives. An oft-debated question surrounding corporate governance – and one that has grown more heated in recent years – is the mix of “inside” and “outside” directors.
Inside board members are salaried employees of the company, such as the chief executive officer or vice president. Outside directors are not employed by the company.
“If the majority of directors are insiders, or paid officers, by definition that lowers the independence of the board’s overseeing of shareholder interests,” Kerstetter said.
The board represents shareholders by making sure the company follows the corporation’s charter and bylaws. But it also should serve as an adviser for company management, playing a key role in big decisions such as mergers and acquisitions and executive hiring.
“In the most ideal situation, there’s an excellent rapport between the board and management, where the board is able to ask questions openly and offer advice,” Kerstetter said. “Yet clearly it has a legal responsibility not to put its own interests ahead of the shareholders. It can’t be emphasized enough how delicate that balance is.”
Just how to strike that delicate balance has been at the heart of debate in the corporate-governance community in recent years.
“It gets at the fundamental question that’s always been debated: What are boards there for, and who do they represent?” said Edward Lawler, a professor at the Marshall School of Business at the University of Southern California and co-author of the recently released book “Corporate Boards.”
Historically, boards of public companies have been padded with insiders, which leads to the question of whether boards are working in the best interest of shareholders or the company’s officers. “Too often, boards have served to represent the in-place management,” Lawler said.
But the past decade has seen a shift to what Lawler calls “the era of shareholder boards.”
Investor activism has swelled in recent years, with more and more investor groups demanding – sometimes through litigation – better representation from outside directors. Also, the Securities and Exchange Commission tightened corporate auditing procedures in 1998, requiring more outside, independent directors to serve on boards’ auditing committees.
These factors have forced public companies to look outside the corporation for directors, Lawler said.
But the shift has the corporate-governance community asking a new question: Has the pendulum swung too far the other way, with too many outsiders sitting on boards?
Now more than ever, directors are paid in stock options. Shareholders want directors to be paid stock options in lieu of compensation, Kerstetter said, so as to put board members in the shoes of shareholders so they’ll better protect investor interests.
“The question becomes whether directors are so much like shareholders that they lose sight of the overall interests of the company,” Kerstetter said.
This trend comes at a time when the role of the board as a shareholder is more important than ever, because pressure on company management to meet and exceed earnings numbers has never been more cutthroat.
“The pressure to meet whisper numbers is so enormous, it puts pressure on the board to make sure not to let management cut corners,” Kerstetter said.
While debate over the mix of inside vs. outside directors likely will continue, Lawler in his new book supports a relatively new model of corporate governance: the “stakeholder” model.
“Boards have been and continue to be pretty homogeneous,” said Lawler. “We argue (in the book) that there should be more representation of all stakeholders, which includes employees and the communities the company operates in.” Other stakeholders include customers, suppliers and environmental interests, Lawler said.
One thing seems certain: The effectiveness of boards has improved over the past decade. “There’s no question that overall there’s a better balance, and that board practices have improved.”
