March 1, 2014

The Right Way to Build a Board

With excellence more important than ever, what to look for in  your present and future directors

Executives who presume that boards are not that important—or who believe that adequate board members can be identified primarily on the basis of their friendship with the CEO or major shareholder—need an urgent reality check. For evidence, consider the many billions of dollars of shareholder value destroyed over the last decade alone by boards and management that failed the tests of vigilance, independence, engagement, qualifications and integrity. 

In the face of this sorry performance, investors, public and private, increasingly expect management to be held accountable by boards of directors. And boards must be held accountable for doing so. Alongside shareholders’ growing expectations, there is also now the unrelenting regulatory momentum to crack down on wayward boards. CEOs and their boards must surely be aware by now, for instance, of their potential liability for violations of both the Public Company Accounting Reform and Investor Protection Act of 2002, popularly known as Sarbanes-Oxley, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. 

The overarching duty of any board of directors is to protect and sustainably maximize the assets and interests of shareholders (or stakeholders, if the company is private). To that end, the legal “basics” require a board to approve a financial statement, select and approve auditors, approve the annual budget, and set the tone (and policy if needed) for compliance and risk management.

The all-important “value add,” which a board should additionally provide, includes: reviewing, testing and approving strategy; selecting, evaluating and mentoring the CEO; and directing and approving major M&A and finance transactions (mergers, acquisitions, divestitures, joint ventures, partnerships. It should also be a resource to management as a sounding board, providing guidance, contacts and relationships.

Issues of strategy and board involvement deserve special mention. This is where a company’s vision and mission are tested, its acquisitions or divestitures are approved, its capital committed or not, and its leadership promoted and recruited. Boards made up of carefully selected, seasoned candidates can be particularly useful in providing perspective and balance to the “bets” and strategy of companies.

Metals industry boards have the same requirements as any other industrial corporation, of course. However, in our dynamic industry, where disruption abounds in technology, regulation, foreign exchange rates, import restrictions, foreign country subsidies, competition, sourcing strategy and business models, board members need to bring a somewhat higher level of preparedness and a broader view of the industrial and commercial playing field.

Board candidates or members must be educated and current on the practices, technologies, pricing and strategies of all the competitive threats to the company in question—as well as the threats from businesses in the adjacent competitive spaces. Especially valuable are candidates and members who are students of the methodologies, business models and competitive advantages of those companies that would challenge their market position. When interviewing prospective members, questions about these issues can bring to light just how thoughtful and informed a candidate really is.

A good board is composed of individuals with complementary skills, experiences and personalities.

My interview checklist for potential board candidate requirements includes the personal qualities of:

  • unshakable integrity
  • clear intellect (with high mental “clock speed” being a real plus)
  • independence as a thinker
  • seasoned tenure in executive management
  • (preferably) prior board experience
  • a strong, positive reputation
  • good interpersonal skills
  • strategic agility
  • wisdom (the most elusive and important of all)

Some of the best board members I know are men and women who are lifelong learners and readers. So I often ask prospective board members what they are reading.

Assembling or expanding a board is like artfully solving a puzzle. I look for a balanced board of individual players—each of whom brings subject-matter expertise. Important elements of the board equation typically include a lawyer with a broad perspective, a senior financial or accounting professional, an experienced M&A or deal person with a track record in the field, an individual with strong credibility in commercial matters (sales, marketing or negotiations), someone with deep technical or engineering expertise, and (ideally) someone who can credibly represent the interests and needs of customers.

There are a number of proven ways to find good board members. Talk with board members you know, as most members have contacts in the board community. Another excellent resource is the National Association of Corporate Directors, which provides board education and board certification, and has a searchable database of its members, which comprise the significant majority of professional board members. If the search is for a public board or very large private firm, retain a national search firm. It will inevitably produce a broader range of candidates, and will demonstrate diligence to investors who otherwise might question the independence and quality of the search.

In the fast-paced world of metals production, service centers and manufacturing—where new market entrants, technologies and business models are continually evolving—a strong, independent board is crucial for building a sustaining company. Good boards are created by the diligence of chairmen, CEOs, and nominating and governance committees. The result? A diverse team that takes its board service seriously and prepares accordingly.

Stephen Fraser has more than 15 years of experience on public, private, private equity and not-for-profit boards. He is the managing director of Barrington Capital Partners LLC, which provides board, transitional/interim CEO and pre-sale advisory services to companies in the logistics, supply chain, transportation and distribution industries.