The Key Steps to Better Results in Recruiting Board Members in Today's Business Environment

By: Lawrence J. Holmes and Larry D. Mingle, Managing Directors of Columbia Consulting Group

Based upon the issues, regulations and requirements associated with the Sarbanes-Oxley Act, the ability to attract talented Board of Directors (Board) members will be a difficult task considering the independence required of the Board from company management.

The Board, which is now truly responsible to recruit the company's needed Board member (s), may be subjected to unnecessary frustration and time-consuming steps when attempting to accomplish this task on its own and without professional recruitment assistance. This may simply be because it is unfamiliar with some fundamental issues that need to be addressed before an executive search firm is selected or Board candidates are called in. With a modicum of advance thinking and preparation, the Board can greatly increase the likelihood of a problem-free selection process, and stand a far better chance of attracting candidates who are right for the organization and who specifically meet the objectives of the Board.

Organizing the Recruitment Process

The Nominating Committee is usually responsible for establishing the Board's criteria for selecting new directors for Board service. However, a "Search Committee" should be established in order to maintain control and independence over the recruitment and selection process. The Search Committee should consist of three or five Board members with at least one being from the Nominating Committee. Its responsibility is to meet the challenges of recruiting qualified Board members in an orderly, independent and professional manner. The following information is to assist Boards and Search Committees in organizing, planning, and directing the recruitment and selection process.

Achieving Consensus

The reasons for difficulties in finding an "ideal" Board candidate are numerous, and often legitimate. A major obstacle frequently cited by Search Committees is lack of time. However, the most significant cause of frustration is the failure to establish at the outset a set of shared understandings and expectations among the members of the Search Committee and the rest of the Board. Achievement of a consensus viewpoint on key issues is the Search Committee's single most important task.

The scope of a Search Committee's advance planning should be determined jointly. Most frequently it covers review, analysis and agreement in the following key areas: the Board, the role, the packaging, and the candidate.

STEP 1: Define the Board

The Search Committee should first review and define what the Board and the Company is now, and what it expects to be in the future.

In practical terms, this involves a review of the following:

Mission Statement. A well-conceived and up-to-date corporate mission statement is an essential tool in an effective search. Serious, qualified candidates will request this information and are likely to base their initial level of interest on how well the company articulates its focus and reason for being.

Strategic and Financial Objectives. The search committee should clearly define what the Board and management will be expected to achieve. Are they realistic, or do they represent a "wish list" likely to discourage potential qualified Board candidates?

Current Operating Performance. The most current information on company operations should be available to all parties involved. To get the most accurate viewpoint, some Board members may consider going beyond written reports by speaking directly with senior line management.

Scope and Nature of Current Challenges. A thorough examination of current conditions will make the company's challenges readily apparent. These conclusions are extremely important because they help to objectively define the background and qualifications of the most appropriate Board candidates. In many cases, the current challenges dictate the type of Board members needed to meet the challenges of specific changes, i.e., financial expert, industry expert, or functional expert.

Casting a wider net for potential Board candidates will be the approach in the future and needs to be addressed along with the current challenges. Liability issues and D & O Insurance coverage, which have caused many directors to exit Boards, need to be addressed with potential Board members.

Organizational Structure. Determine whether existing lines of responsibility are based on sound strategic planning or historical circumstance. The structure of the Board and the committees also needs to be explained along with any new changes. The potential new Board member needs to know if the company's chain of command is likely to be (or should be) altered significantly as a result of any senior management change.

Culture and Traditions. These "warm and fuzzy" issues, sometimes discounted in importance by Search Committees, are as significant as more tangible matters, and have been the Achilles' heel at many companies. Examine institutional values and style in an effort to create a broad list of personal, intellectual, and social characteristics the Search Committee should be seeking in a Board candidate. The ability of the Board to build a collegial working relationship usually leads to well thought-out consensus of direction.

STEP 2: Define the Role

With an accurate analysis of the Board's and the organization's condition and charter, the Search Committee is now prepared to define the specific role the new Board member will assume.

This definition should cover:

The Nominating Committee: The Nominating/Governance Committee's purpose is to identify individuals qualified for Board service, and for establishing criteria for selecting new directors, among other duties. Clearly, with the new regulations, a Search Committee needs to be established in order to meet the changes that Boards will be required to make in the future.

Qualifications: The Search Committee (as well as the prospective candidate) will need to know the backgrounds and accomplishments of those who currently serve on the Board and the specific qualifications of the potential new Board members. Based upon the Sarbanes-Oxley Act, does the new Board member meet the criteria of "financial expert" for the Chairperson of the Audit Committee role or a financial understanding to serve on the Audit Committee?

Similar conditions could exist on the Compensation Committee by having someone with specific experience in that role. As Board members will be required to be more active and involved in the Board's activities, it is believed that Boards will become smaller and be more decisive due to the manageability and potential liability of the Board. Is the candidate inheriting a responsibility that has been under heavy scrutiny? Investigation? Neglect? The non-Executive Chairperson's responsibilities will need to be specific and established by the Board.

The following criteria can be used in briefly defining the qualifications of the role:

Personal Characteristics to be evaluated:

• Integrity & Honesty
• Intuition & Vision
• High Performance Track Record
• Accountability
• Chemistry fit
• Commitment of time
• Independent thinking (prepared to & able)
• Business maturity
• Confidence

Boardroom competencies to be considered:

• Management experience
• Accounting understanding
• Financial "expertise" (Audit Chair)
• Availability
• Leadership skills
• Business judgment
• Industry knowledge
• Strategic thinking
• Functional/Industry experience wanted
• Conflicts of interest in relation to person and business relationships
• (Non-Executive Chairperson considerations could vary.)

Position responsibility: The Search Committee should establish the overall and specific duties and responsibilities of the Board member to carry out his or her role.

The following is an example for a Committee Chairperson's role:

• Regularly attends Board meetings and important related committee meetings as well as coordinates his/her own committee.
• Sets the tone for the committee in working with strong Sarbanes-Oxley reporting efforts.
• Ensures that members have the information needed to perform their obligations.
• Makes serious commitment to participate actively in other committee work.
• Oversees the logistics of the committee's operations and meets all of the new regulatory requirements.
• Assigns work to committee members and external consultants (i.e. "financial experts"), sets agendas, runs meetings, and ensures distribution of meeting minutes.
• Stays informed about committee matters, prepares for meetings, and reviews and comments on minutes and reports.
• Gets to know other Board and committee members and builds a collegial working relationship that contributes to consensus.
• Reports directly to the Chair of the Board.
• Works closely with the CEO and other staff, as agreed to by the CEO.
• Reports to the full Board on committee's decisions/recommendations. Initiates and leads the committee's annual evaluation.

Major Objectives. The Committee should define its expectations as precisely as possible. These will serve as the foundation for how the Board member's performance will be measured.

External Involvements. The Search Committee should be prepared to discuss secondary responsibilities of potential Board members involving existing or anticipated "outside" relationships such as participation on other corporate Boards or other potential conflicts of interest issues.

STEP 3: Packaging the Opportunity

With the organization and the Board role well defined, the Search Committee is prepared to evaluate and "package" the opportunity in a manner that will fairly portray the situation and appropriately compensate the outside Board member. It will also increase the likelihood of capturing the interest of qualified candidates, and ensure the long-term success of the company.

This packaging of the opportunity involves evaluation of:

• Compensation Elements. The various elements of annual compensation for outside directors should include retainers, per meeting fees for regularly scheduled full Board meetings multiplied by the number of meetings, and payment for service on committees. The Committee Chairperson receives additional considerations due to required skills needed and heavier workload requirements. Basic annual compensation may include stock, but supplemental stock options and restricted stock grants are excluded. Each element should have a specific purpose, and the total program should be directed toward the Board's objectives. The Committee needs realistic parameters, based on the company's stated goals and on the availability of qualified talent. Assessing how the current package compares with others in a particular industry with similar dynamics is very important.
• Intangible Benefits. The intangible benefits for being on the Board are usually being based upon the other professionals on the Board and the specific role the individual is to play. While many will simply appreciate and enjoy the company and professional relationships, there are others who may also want to assist in establishing the direction of the company with the Board and management. Therefore, having the ability to impact results is extremely rewarding to the conscientious Board member. That contact and interrelationships with the other directors may also lead to other opportunities. It is essential to leverage the other Board members' credentials and reputations to attract new additions.

STEP 4: Define the Ideal Candidate

The Search Committee can now begin to develop a description of the "ideal" Board candidate.

"Ideal" is somewhat relative to the role the individual will play, be it a general Board member, a "financial expert" Audit Committee director, and/or a non-Executive Chairperson. This characterization should include a loose profile of: personal characteristics; professional background; education and training; established track record and reputation; industries and/or specific companies where the candidate may currently be working or has worked; and the overall organizational "fit."

Although development of a specific image of the ideal Board candidate is important, the Committee needs to understand that this is just a wish list; they will have to be prepared to make some real-world compromises in the selection process. Flexibility is a key element for successful completion of a search within a reasonable time frame.

Summary

In summary, Board Search Committees need to address the loss of Board members, liability, independence and "financial expertise" issues as they relate to the Sarbanes-Oxley Act and take a systematic and comprehensive approach in recruiting qualified Board members.

This four-step analysis prepares the Search Committee for its assigned responsibility, which must be supported by discussion and agreement on a number of tactical issues that are better addressed before any action is taken. These tactical issues include:

• Confidentiality - to be maintained on internal and external basis
• Selection - of an appropriate executive recruiting firm or source of qualified candidates
• Introductions and meetings - establish arrangements for Board candidates and members
• Communication - establish a protocol to communicate with the full Board
• Presentation - establish a method of presenting the final candidate(s)
• References - establish arrangements for checking references and background investigations
• Scheduling - establish target time frames for completion of various tasks and for final Board candidate selection

Development of these shared understandings and shared expectations in the search for a new Board member is no simple task, especially for busy Search Committee members with independent responsibilities and/or companies of their own to manage. However, those who commit to this up-front investment of time gain greater control over the selection process. And more significantly, they will accomplish in a responsible fashion one of the most important roles of organizational governance.

About the authors:

Lawrence J. Holmes is a founding partner of Columbia Consulting Group. Larry's 20 years in search demonstrates a thorough knowledge of the financial services and industrial sectors. He manages a search practice heavily involved with the financial services (investment banking, brokerage, banking, and insurance) and industrials (general manufacturing, telecommunications, consumer products, electronics, engineering, and chemicals) sectors.

Larry Mingle joined CCG in 1996, bringing more than 25 years of search experience to the firm. A former partner at Norman Broadbent International; a co-founder of Higdon, Joys, & Mingle, a New York-based recruiting firm; and a Managing Director at Russell Reynolds Associates, Inc. Larry serves CCG from his Jupiter, Florida office.

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