Directors go back to school

Mar 01, 2005
<p>Traditionally, corporate directors learned on the job.</p>

‘If you were lucky enough to be on a board with other directors who really knew what they were doing, then you learned well,’ says Donald Jacobs, veteran board member and dean emeritus at the Kellogg School of Management. ‘If you were on a board that had little experience, you wouldn’t have had much information passed on to you.’ 

As it turns out, however, such a learning environment tends to occasionally produce a proportion of boards so astoundingly lacking in critical culture and technical skills that it shakes capitalism’s very foundations. In the post-Enron era, legislators and regulators have responded by giving directors even greater responsibility and telling them to be more diligent, knowledgeable and proactive – or else. While no one is actually making them do it, there’s a great deal of pressure on companies to educate their boards in order to better fulfill their new tasks. 

In fact, an array of key institutions supports the premise of continuing director education, including stock exchanges. The NYSE now requires its listed company boards to adopt and disclose corporate governance guidelines to address director education. Both the NYSE and Nasdaq actively promote such education, as do D&O insurance providers – several underwriters offer special rates based on the carrier’s assessment of compliance with corporate governance best practices – governance rating agencies, educators themselves and, of course, investors. 

AVOIDING GROUPTHINK

‘To really work, diversity doesn’t mean a board must be divided into certain color or gender ratios. Diversity only works when it displays different perspectives. So if the minority on the board behaves just like the majority, you might have achieved a political objective but you haven’t made the board more effective. The problem is that new people in groups often start behaving like the group, instead of what they are actually supposed to represent. A good education can teach boards the value of diversity.’
Thomas Lys, Kellogg School of Management

Public pension giant TIAA-Cref, for example, recently revised its corporate governance policy statement to place much greater emphasis on director education. ‘No one is born with the innate ability to, for example, sit on a compensation committee, without some degree of professional education,’ says Peter Clapman, senior vice president and chief counsel at TIAA-Cref. The pension fund’s new policy statement asks companies to begin disclosing whether directors are availing themselves of continuing education programs. Clapman says a board’s educational history won’t directly affect the retirement fund’s proxy voting or investment decision-making – yet. ‘At some point it might affect how we evaluate companies,’ says Clapman. ‘We do evaluate companies on a variety of criteria and it would be logical for us to incorporate this.’ 

For their part, according to surveys, many directors are quite comfortable with the notion of regular professional education. ‘The days are gone when you could rely on all your old learning to be able to make the right decisions in the boardroom,’ says Jim Gamache, a director at welding equipment maker Thermadyne Holdings Corp. ‘The business and regulatory worlds are changing fast and the issues are complex. I find it hard to believe that, over the course of a couple of years, any director thinks he or she wouldn’t need to be refreshed on a particular subject.’ 

No director left behind

With ongoing court decisions and reforms in state laws regarding corporate governance issues, the need for technical skills only increases. Yet real education aims at transferring not only the knowledge of facts, but also strives to instill values and the spirit of inquiry itself. As the board and shareholders of companies such as Enron know only too well, the only stupid question is the one that isn’t asked. 

‘One problem board members run into is that if you are asked to sit on a board you are supposed to be a highly accomplished professional and therefore less likely to say, I don’t get it if you don’t understand something,’ reports Sandra Peterson, who serves on the board of several companies and organizations. ‘In a continuing education environment, on the other hand, you are expected to ask all the dumb questions.’ 

In fact, a key benefit of director education courses is the opportunity to meet and share experiences with other directors. ‘Many individuals often feel more comfortable talking to a group of people they don’t know about mutual issues and how they handle them,’ says Ethan Hanabury, associate dean for executive education at Columbia Business School. ‘Afterward, they have a network of directors from other companies that they can stay in contact with when new issues come up.’ 

‘The fact is, it can be really lonely in a boardroom,’ adds William Ide, a corporate director and senior fellow at Emory University’s Goizueta Directors Institute. ‘That’s why programs like ours are so important, because they give confidence, credibility and authority to people who go back to their boards and try to move them in the right direction.’ 

Daniel Siciliano, executive director of the program in law, economics & business at Stanford Law School, cites another dynamic augmenting the importance of director education. ‘There’s pressure to sit on fewer boards these days,’ he explains. ‘That will probably lead to more alert directors but another practical effect is that there is much less opportunity for cross-fertilization of ideas and discussion among informed individuals about what to do in certain circumstances. Board education provides that opportunity.’ 

Still, many directors, often the most experienced ones, are hesitant about going back to school. ‘They are skeptical about the value of taking time to go to a course and sit in what they worry will be a classroom setting where people tell them what they already know,’ says Siciliano. That’s why corporate secretaries can find themselves in the hot seat as their ever-changing job description includes ensuring their board maintains a proper pedagogical pedigree. ‘Corporate secretaries’ reputations are on the line,’ adds Siciliano. ‘To make the mistake of sending busy directors someplace where they don’t walk away saying, Wow, I’m really glad I came! is bad news.’ 

Knowledge is good

And the news gets worse. Observing the fast-changing governance environment, educational establishments have spotted a new and prestigious market niche and are scrambling to fill the void. However, according to Roger Raber, president and CEO of the National Association of Corporate Directors (NACD), ‘Ninety percent of the people out there peddling governance education have no clue. They have jumped on this because it is the thing to do at the moment.’ 

Raber is candid and experienced, though not non-partisan. His organization has offered a range of successful director education programs for more than 25 years – the most effective, according to Raber, being its in-house programs. ‘We’ll come into the boardroom and focus on issues unique to that board,’ he explains. The NACD recently inked an agreement with Nasdaq to provide its listed companies with corporate governance educational services at a discount. 

Other professional and industry groups are also tooling up educational initiatives. For example, in addition to its open enrollment programs, the Conference Board’s Directors’ Institute also offers in-house educational programs covering key corporate governance, audit committee and compensation issues. The Society of Corporate Secretaries & Governance Professionals (the Society), which already works ad hoc with the Conference Board, is exploring closer ties. ‘We will partner with the Conference Board by supplying members of the faculty and shaping the curriculum through surveys of our members, who often have a pretty good idea where the educational needs are,’ says Geoff Loftus, vice president of the Society. 

A key point to keep in mind when hunting for a directors’ education program is whether it is accredited by Institutional Shareholder Services (ISS). Attendance at an ISS-accredited program can raise a company’s corporate governance quotient (CGQ), a score used by some investors to assess a company’s governance structure and practices. Note, however, that the
ISS accreditation criteria aren’t overly rigorous. Each curriculum is evaluated based on ‘the promotion of strong corporate governance practices’. Standards include a minimum of eight hours of instruction; no more than 25 percent of the speakers may be service providers, such as bankers, lawyers or auditors; and at least 25 percent of the speakers must be current or
former directors of publicly traded companies.
 
If increased director education is desirable, why not make it mandatory? Then investors would be assured their interests are being represented not just by successful business people in relevant fields, but also by people with the professional qualifications required for a competent board. At this point, however, few but the educational institutions think it is necessary. 

‘That would be going too far,’ observes Clapman. ‘The risk of making something like this mandatory is that you can get bodies in the room for the wrong reason. I’d rather encourage people to attend because they really want to learn rather than feeling they’ve got to go for some kind of certificate.’
 
So what would properly incentivize directors to get an education? In its report, ‘Raising the bar in the boardroom: Massachusetts corporate governance in the wake of Soxa’, the Boston Bar Association (BBA) task force on corporate governance suggests taking such education into account when making investment and proxy voting decisions by public funds, as well as minimizing the liability of directors who have diligently attended continuing education courses. 

Regarding the latter, Beth Boland, a partner in the securities litigation group of Bingham McCutchen LLP and co-chair of the BBA task force, says, ‘If I were representing a firm, that would certainly be a piece of evidence I’d include. We’ll see whether courts will highlight director education in their decisions, but it certainly isn’t too far a stretch to imagine they will.’ 

Meanwhile, the agreement by ten outside directors of WorldCom to pony up $18 mn from their own pockets to settle a shareholder lawsuit is likely to swell the ranks of school-going directors. Although the settlement was thrown out due to a technicality, the directors actually face even greater liability now. In fact, the message of the WorldCom case is clear: directors are going to be held personally accountable when they get things wrong or fail to fulfill their duties. 

And it’s not only investors who are pressing for accountability. ‘The Justice Department is trying to set an example,’ says Thomas Lys, a professor at Northwestern University’s Kellogg School of Management. ‘If you fall asleep at the switch, you can’t pass the fine to someone else.’ 

Not surprisingly, then, while educational offerings in support of audit and compensation will likely be very popular this year, Loftus predicts D&O insurance will be huge. ‘All sorts of directors are yanking their policy binders off the bookshelf and taking a long, hard look at their coverage,’ he says. ‘People will want to know what their risks are and what they have to do to avoid being in the same boat as the WorldCom directors.’

Sign up to get stories direct to your inbox
Cs logo Cs logo
Loading