5 Ways the Recession is Changing Boards of Directors
BY Josh Spiro
The recession is changing the relationship between CEOs and their boards of directors and here are 5 ways the status quo on issues like executive pay and succession is shifting.
With issues ranging from risk management to executive pay often in the headlines, the role of boards of directors is in the spotlight as never before. If you are setting up a board—and even if you have a board, and your relationship with boardmembers is good, you should expect that your board will become more active over the next few years. That's because, at the corporate level, boards are undergoing something of a revolutions. Much greater oversight and scrutiny is fast-becoming the norm. "Trends in boards and corporate governance issues start with Fortune 100 companies and work their way down," says Ralph Ward, the author of New Boardroom Leaders and Saving the Corporate Board. Inc. asked Ward to lay out five ways boards are adapting in the face of financial turmoil.
1. Risk is in the forefront.
"Boards now want to hear much more from the chief executive and the staff on risk-specific issues. This is something that was sort of down there on their top ten list of issues two or three years ago, but now it's very near the top," Ward says. He notes that unreliable suppliers and customers who default on payments are two common sources of risk that can have a larger impact in tight times.
2. Updates are much more frequent.
"Boards are asking for more interim financials and updates on operational figures. The directors I've talked to have been telling the chief executive and the CFO 'we need to see much more frequent numbers. If we could see something monthly, if we were to get an email with this even every week, it would not be unwise," says Ward. A few years ago, quarterly check-ins might have sufficed but with the economic instability, the board wants more data on things like cash flow and receivables to help them forestall a disaster.
3. Compensation is being rethought.
Information about executive compensation has become much more readily available than it was in the past. "Boards are much more likely along with the shareholders themselves to have a sheet of paper that says this is total of how much a CEO or other top execs will get," Ward says. Though he estimates that for every company that earns a media fiasco for its executive pay, 100 companies with similarly high salaries slip under the radar he adds that you still, "don't want to be in a company that's suffering a major loss and have the CEO getting an extra generous payoff at the same time, that just does not look good."
4. Succession planning is top of mind.
Succession planning "has traditionally been something that some companies do well, and a lot of companies do poorly. Typically if a chief executive has been dragging his or her feet on good succession planning, the board doesn‚t push too hard," Ward says. But now boards are pushing for long and short-term roadmaps. They are beginning to view the CEO "not as someone who takes the job and holds onto it until retirement, there is more likelihood [that he or she] will get the boot. Boards realize that without both good long-term and emergency succession planning, it gives the CEO a little bit more power in the relationship."
5. The level of disclosure is unprecedented.
"I think the CEOs are getting the point that they have to be more open and cross-communicative with their boards of directors," Ward says. Don't just alert them when trouble has already struck, clue them in to upcoming concerns; the upshot of this change in the CEO-board dynamic is greater respect. "I have been seeing CEOs taking the board of directors more seriously rather than simply treating it as one more department or constituency they have to manage."