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Letting the Outside In: A Checklist for Using Your Independent Board to Enhance Growth and Profitability

In today’s fast-paced and very challenging business climate, more and more companies are coming to realize the potential power that an independent board of directors can bring to their long-term growth and prosperity. Even in family-owned businesses that still have vestiges of a protective, cocoon-like atmosphere and culture, an ever-increasing number are coming to realize the potential benefits that can flow from “letting the outside in.”

At some point in the evolution of a company, family-owned or not, the value of establishing a board of independent directors overrides the less formal governance structure from earlier days. As the growth, size and complexity of the business increases, its environment changes, and as ownership progression and generational change begins to occur, even advisory boards offering guidance principally to the company’s owner or CEO can begin to be less appropriate for the circumstances. Outside directors become increasingly important in helping create a culture of openness and accountability. Outside directors bring relationships, independent advice and oversight to enhance and protect the interests of all stakeholders.

Yet, even as companies build their boards, many often don’t know how to best utilize the expertise of their directors, how to develop effective boards and how to run efficient and productive meetings.

Board meetings can be a misuse of time if not run appropriately. Likewise, they lack value if the board is not made up of members who understand that they have an important fiduciary role with the company, take their responsibilities very seriously and have real strengths to offer to the company. On the other hand, if a board is appropriately structured and meetings are well-planned and well-executed, the meetings can be an extremely valuable source of input and guidance for a management team in pursuit of enhanced growth and profitability.

The following checklist might help unlock the “secrets” and power of an effective board of directors:

1. Create a board charter that delineates the expectations and responsibilities of the board and its members to the company as well as the duties and responsibilities of the company and management to the board including the following:

• Who should be on the board? Qualifications? Experience? How many insiders? How many outsiders? Other attributes and requirements for service?
• Compensation of outside directors
• The number of regular meetings per year, requirements for attendance, expectations for advance preparation and review, committees (if any) and participation and other critical expectations
• A requirement for preparation and distribution of board books in advance of the meetings (usually a minimum of one week) to permit the directors to be fully prepared and informed on matters of substance

2. Set board meeting dates and meeting cycles one year in advance. To promote full and active board member participation, set the meeting dates at least one year in advance. Stick to the schedules. In addition, develop a board rhythm by designating a meeting cycle for key topics. Assuming a quarterly meeting schedule, an annual cycle might include the following:

• Q1
  
  • Annual audit
  • Board evaluation
  • Risk management
  • Compliance
• Q2
  
  • Management compensation and performance
  • Employee benefits
  • Board policies and processes
  • Competitive assessment
• Q3
  
  • Strategic planning
  • Management development
  • Succession planning
  • Next year’s board calendar
• Q4
  
  • The following year’s business plan and operating budget
  • Capital expenditures
  • Dividend policy

3. Think through the meeting goals in advance. Even though a meeting might be regularly scheduled, give advance thought to what the desired outcomes of the meeting should be e.g., decision making, problem solving, planning, evaluation and on what topics and issues. If the President or CEO knows the goals in advance, he can more effectively gear the meeting toward satisfying those goals.

4. Prepare an agenda. The President or CEO should have a well-thought-out and scripted agenda prepared and distributed in advance of the meeting. The most efficient way to do this is to lay out an agenda and get pre-meeting feedback from the other board members (and potentially key managers) to ensure that the board covers appropriate topics and allocates the correct amount of time for each one.

5. Consult with directors in advance of the meeting. From an update and preparedness perspective, the President or CEO should always enter a meeting having a complete understanding of where the various board members stand in terms of major decisions. There should be no surprises. This requires the President or CEO to have individual meetings or calls in advance of a board meeting to walk each director through any decisions that need to be made and the accompanying analysis behind them. Involving the directors in advance will both educate them on issues and also help them become active and supportive meeting participants.

6. Distribute board books at least one week in advance of meetings. To help the directors fully prepare for board meetings, it is essential that the directors be given as much relevant information as possible. The books should include a meeting agenda, minutes of the last meeting, the latest financials together with an executive summary highlighting relevant information and trends and other relevant meetings specific information necessary. The more information the directors can review in advance, the more likely the meetings are to be productive and focused.

7. Decide in advance who should attend meetings.

• The participation of advisors and management of the company should be dependent on the issues being discussed. It is common to invite counsel and accountants to participate in some or all parts of certain meetings. They might bring a level of objectivity and connectivity to the discussion that is not readily available from existing board members. In addition, if there is an issue on the agenda in which a specific outside advisor has been involved, it might be appropriate to invite that person to participate in the discussion.
• Members of management might also be invited to participate in parts of the meeting depending on the topic being addressed as well as their roles in the company. In order for the board to do a better job of understanding and helping lay out the future plans for the business, it is helpful for them to know and understand the people involved with running the business on a day-to-day basis.
• While it is normal to invite outside advisors and management personnel to participate in meetings, it is often helpful to set aside time on the agenda for a board-only session to not only get the requisite board approvals on topics like dividends and minutes, but also allow for discussions on pertinent or sensitive topics like executive compensation, budget planning, financing/exit strategy or concerns about personnel.

8. Promote proactive meeting content. As much meeting time as possible should be spent on discussion, rather than updates—on forward-focused topics rather than history. What directors should need to know are the management team’s priorities and why, how they are tracking those goals; and what keeps them up at night with respect to fear of not meeting their objectives. What they don’t need is a litany of presentations and demonstrations with no discussion. The directors should continually evaluate and monitor the company’s strategic plan and goals; understand where the market is and how the company is positioned against its competitors; and discuss management’s plans, priorities and performance.

9. Develop a framework for the meetings. While there is no correct way to run a meeting, having a framework in mind can help the President or CEO lead organized and informed discussions. A good framework would include the President or CEO giving a high-level company overview followed by department-level drilldowns delivered by department heads (e.g., finance, sales, marketing, IT). Typically, in the context of these department-level reports, discussion will ensue on milestone progress; roadblocks or hurdles to realizing key goals; resource constraints; performance of various employees; and any potential addition or subtraction to the list of goals. Many of these reports can be good leading indicators of potential problems on the horizon.

10. Watch the time. Meetings should be held as closely as possible to a fixed time schedule. If meetings tend to routinely run over, that might indicate that the board is diving too deeply into tactics rather than higher-level planning and strategy. Much of the work of any well-functioning board happens outside of the formal meetings through informal interactions with the President or CEO and other members of the management team via telephone, e-mails and personal conferences, as appropriate. Bottom line: The key to productive meetings and enhanced board contributions is advance meeting preparation and open communication.

11. Promote ongoing communication. View communication as an ongoing process, not an event targeting only an upcoming board meeting. Send or post important interim information such as financial reports and summaries on a shared Web site so that the directors can stay informed and involved.

If used effectively, a focused and invested board of directors can help unlock a company’s true potential.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.