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Column

Nicole M. Sandford
Center for Corporate Governance
Deloitte

Improve the ROI in Your Board
As the financial crisis ebbs but regulatory reform looms, my hope for the future is that boards take this opportunity to improve the dynamic between the directors and management.

By Nicole M. Sandford

While there are a number of regulatory reforms under consideration as we navigate an unprecedented world economy, the change I would most like to see cannot be regulated. It is tough to achieve and even tougher to measure — but, a fundamental change in the dynamic between boards and management is critical to improving our corporate system.

Most CEOs analyze the ROI of major expenditures, particularly those related to projects for which outside advice is sought. Yet, curiously, fewer executives adopt a similar mindset when it comes to the investment the company makes in its board.

Board compensation is at historic highs, and likely to increase if the job requirements continue to expand. Add in meeting fees and expenses, and the cost to the company can be significant. Presumably, board members were selected for their experience and knowledge. But sometimes this expertise isn’t leveraged to maximum advantage.

As a result, management often fails to reap the potential benefits of a well-informed, engaged board.

The Absolute Necessity
To be sure, directors have an important role in attaining the ideal dynamic. Thoughtful board leadership is an absolute necessity. Directors must recognize that, in today’s environment, the amount of time traditionally spent understanding the business and building relationships with key members of management is probably inadequate. And boards must insist on a higher level of performance from all members if the board is to be viewed as a valued resource to the CEO and the core executive team.

I believe there are several steps to reaching this optimal level. Comprehensively implementing them all may prove challenging; however, I have seen firsthand how these can improve board dynamics and build trust between the board and management:

A Robust Board Assessment Process — one that moves beyond checklists and gets to the heart of board dynamics, knowledge, and leadership — must be implemented. Concrete improvements should be made based on the results.

Director Composition Should Be Reexamined. Underperforming directors must be removed from the board, and future board members should be selected based on diversity of thought, significance of accomplishments, and their ability to devote adequate time to the job. This is difficult, but not impossible.

The Quality of Information Provided to the Board Should Be Improved. Board books are only valuable if they provide concise timely insights instead of volumes of detailed data.

Companies Should Design and Implement Director Education Programs that help directors understand their roles and duties to stakeholders and clarify the division of authority between the board and management.

Board Leadership Must Be Improved. The chairman or lead director must insist that each member set aside personal agendas and fulfill their duties with professionalism and diligence. In addition, relationships with senior executives should be developed and nurtured.

Don’t Miss This Opportunity
I am encouraged that many boards — often led by the CEO — are demonstrating renewed commitment. However, we have been here before. Boards and managements may have missed previous opportunities by becoming overly focused on compliance.

My hope for the future is that boards take this opportunity to improve the dynamic between boards and managements.

Nicole M. Sandford is a partner with Deloitte’s Center for Corporate Governance, where she leads the firm’s governance practice. She advises senior management and boards on improving the effectiveness of corporate governance programs. She can be contacted at nsandford@deloitte.com.

In 2008 the Millstein Center for Corporate Governance and Performance at the Yale School of Management selected Ms. Sandford a “Rising Star of Corporate Governance” — honorees under the age of 40 who are “making their mark as outstanding analysts, experts, activists, and managers.”

This article originally appeared in the Governance Year in Review special edition of Directors & Boards, published in July 2009.