Strategic motivating terms: encouraging boardroom change

Oct 23, 2014
<p>Corporate officers can motivate changes in board thinking by reminding directors of key risks that they need to be prepared to confront</p>

Consider the myriad of instances over the past few years in which board directors have appeared woefully unresponsive or ill-equipped to address the issues directly impacting their company’s very survival: when crises crept up on boards out of nowhere; when criminal behavior by employees seemed rife; when directors came under personal attack, faced shareholder revolts, lost their seats, or were personally sued and wound up paying through the nose.

There’s no doubt such boardroom vulnerabilities continue to plague public companies. Some firms remain challenged on how to persuade directors of the need for a broader and deeper focus on current or potential susceptibilities or, better yet, for proactive initiatives that can eliminate or at least mitigate future problems. The burden falls on both individual board members and corporate officers – not to mention corporate secretaries – to motivate changes in boardroom thinking and action. It is imperative that officers fulfill their key role in identifying and providing the critical information directors need to discharge their fiduciary duties. The relationship between management and the board must always be symbiotic and collaborative.

If senior management is to better communicate with the company’s directors, it will need to use a form of salesmanship that is no different from other expert sales strategies. Consider the more successful vendors of professional services, from law and accounting to PR and marketing. Either consciously or instinctively, these sales people approach their targets with one question uppermost in their minds: what keeps this person awake at night? Or a corollary question: what problem would keep this person awake at night if he or she knew it existed?

When the service being offered to a buyer is essential, an aggressive sales technique is more than appropriate. In some cases, you are addressing needs that weigh on the buyer’s conscience. In other instances, you are clarifying needs the buyer should be concerned with – which brings us back to the board. The diverse crises of our times have led to a keener realization that greater board preparedness and involvement are necessary. Senior executives and governance professionals within public companies have a potent ally in their efforts to help board members better address current and future problems: the media. After all, what keeps board directors awake at night? The news.

The news can not only convince directors of the need to expand their purview and intensify their vigilance but also routinely wields phrases that can serve as strategic motivators to get directors’ attention in a New York minute. Think about just a few of the following terms – ripped from the headlines – and how they might be marshaled to strengthen boardroom preparedness and performance.

Personal liability

‘Personal liability’ is an appropriate and relevant term in the context of boards tasked with a fiduciary duty to ensure their company’s survival and the protection of various stakeholders’ interests. The litigation that references directors’ personal liability is too commonplace to necessitate dire warnings to board members, even if such threats were appropriate. Directors know what’s at risk for them in terms of money, reputation and acute psychological strain.

That said, reminding directors that proactive engagement is in their own best interest, as well as that of the organization, is completely appropriate. Active participation on board committees that emphasize appropriate controls is critical. For example, directors who understand that effective audit committees can limit their own and top executives’ personal liability are inclined to be more insistent on regular audit committee updates and reports.

Activist investors

The term ‘activist investor’ is an even more ominous reminder to boards of their own vulnerability in a marketplace where directors are removed not necessarily because of malfeasance or even poor company performance, but because activists claim they can do better with their own representatives in an oversight capacity. Such activism should be a call to action for sitting directors to relentlessly focus on growth prospects and potential market risks.

Successful activists often have many billions of dollars in assets, making the need for board members to cultivate collaborative relationships with business unit leaders, as well as the C-suite and investor relations teams, paramount. A potential threat from activist investors also explains why directors need constant input from the company’s public affairs team. Directors should see first-hand how activists generate support online, particularly via social media, a format with which older or more rigid board members are often unfamiliar.

Boards should be open to tactical questions such as: does the company need to own certain risk terms on search engines in order to disseminate its position ahead of potential adversaries? Some directors will not know to ask about such capabilities, and that’s why communication between management and the board is a two-way street. If directors don’t know that they should lose a little sleep worrying about who owns search terms, it’s the job of management – or a corporate secretary – to inform them.

Preparedness also means having a requisite strategic awareness of how activists should be engaged. Even as they mount a defense, board members should listen closely to the adversary’s position or they risk alienating other stockholders, who are increasingly being approached by activists for support. Directors should also understand that activists are no longer predictably short-term in their goals; more and more they too are seeking, and offering, the promise of long-term value generation.

Whistleblowers

No term jumps out at directors from the pages of Dodd-Frank quite like ‘whistleblower’. What’s in order here is a practicum for directors – a boardroom guide, as it were – to ensure they focus on two essential goals: first, demonstrating to the government at the earliest opportunity that the company intends to be part of the solution, not the problem; and second, showing that the aberrant behavior was just that – aberrant – and that the company’s compliance program is essentially sound.

In its consultations with the legal and compliance teams, the board should be apprised of steps that will serve the company in good stead if a problem arises. It is the board’s responsibility to ensure management has established channels via which employees can report compliance issues internally before they contact the government. And it is management’s obligation to list the multiple ways in which directors can ensure the company is on the soundest possible footing against future trouble.

Directors navigate a minefield of liabilities that threaten their companies and themselves. That said, the strategic motivating terms that underscore those liabilities should be used very judiciously. They should be used just enough to encourage boards to be proactive and respond in a measured, thoughtful and deliberate manner. The goal is not boardroom omniscience, but sufficient knowledge and foresight to make informed decisions and communicate the appropriate message when it is needed most.

Suzanne Rich Folsom is general counsel, chief compliance officer and senior vice president of government affairs at United States Steel

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