3.5.6 Elements of best practices

The performance of the corporate board ultimately depends on the ability of directors to access in good time all useful business information needed to make informed decisions in the interest of the company. Senior and lower managers are the major providers of such information. They owe a duty of candour to members of the board. To maintain objectivity, the board must receive data from external sources too, such as market trends, analyst reports and competitive analysis. The board should also examine the books and inspect the facilities.1 In most cases they give the CEO advance notice of such visits.

It is US practice to provide directors with timely and detailed information by means of extensive "information packs" before every meeting. Since the Enron debacle, independent directors do their homework well. There is more emphasis on receiving information from lower management and separate divisions.

Directors need to be more actively involved and have information in three main areas, i.e. the company's long-term strategy and health (its ability to survive and develop over the longer term), its short-term financial performance, its strategy and assessment of risk and its leadership and succession.2

For the board's role in its monitoring risk oversight role the directors need to be informed about all essential aspects of the business. They must also pay-on-site visits, meet officers of subsidiaries and understand the business. They should not be burdened with an information overload, but should instead be supplied with succinct information especially put together for them.3

Boards should have regular tutorials by both company employees and outside advisers. Board retreats of two or three days will have longer agendas for the education of directors about special issues.4

Board members need to give sufficient time to the company. This is important in order to develop teamwork on the board and between the board and management. Generally CEOs take on few other board positions. Jack Welch, when CEO of General Electric, refused to be on any other outside board. This is rather extreme given that CEOs can gain experience when sitting on other boards. The general US opinion is that CEOs should be on no more than one or at most two other boards. Retired executives might sit on a few more boards.5

The number of times the whole board meets in the US is not much more than that of Dutch supervisory boards, i.e. six to nine per annum (six in industry, food and utilities and nine in commercial banks). In the US the number of board meetings is not infiuenced by the size of the company, but there is far more material to be studied in boards of larger companies.6 However, US board committees meet more frequently than Dutch committees. In 2008, its audit committees met on average 9.1 times per year,7 compensation committees 6.6 times8 and nomination committees 4.5 times 9 These figures were not much higher than the 2007 averages. Other differences between US and Dutch companies which indicate that US independent directors put more time into their task than Dutch supervisory directors do are the frequency of on-site inspections and informal gettogethers and the volume of information packs in the US. Each meeting usually involves a dinner plus a whole day (either aftemoon meeting, dinner and morning meeting or dinner and meeting next day). The directors often fiy in. Furthermore, the fact that directors really make the decisions (the board decides as a whole) gives them a greater sense of involvement. In the US independent chairmen and lead directors devote even more time to the company business than the other independent directors.

Overview of meetings of boards in listed companies

Increasing time demands on board members will result in a greater use of modern conferencing and communication technology so that travel time can be reduced, committees can meet apart from meetings of the whole board and special meetings with consultants can be arranged. Dealing with crises and important issues will demand more frequent special meetings with outside consultants.10

Evaluation of the board as a whole and individually of its members and of the CEO takes place onder the leadership of the nominating committee. There is a three-level assessment of the complete board, the committees and of individual directors. Most companies assess the first two annually. The assessment of individual directors often takes place only before reappointment or retirement. Normally, the non-CEO chairman or lead director chairs the nominating committee.11 The fact that there will be a formal evaluation and the manner in which it will be conducted has to be made public by being placed on the website. The result of evaluations themselves are confidential and aim to promote teambuilding.12 Risk Metrics, now called Institutional Shareholder Services, has been factoring director training into its governance ratings or assessments, which has acted as another key driver for companies to arrange continuing education for their directors.13

US companies devote much time and care to promote team work, but are aware of the constraints. Board members are often unable to spend enough time together and then resort to phone calls and email communication among themselves. Limitations include other demanding jobs and the fact that there is only one full-timer on the board, i.e. the CEO, who can control most information. There is a tendency for board members, often former or present CEOs or executives in other companies, not to challenge the CEO too seriously and too often.14 Some board members have connections with or are nominated by different shareholder groups. There are other interests which some board members feel close to, and there are — as in every organization — ego clashes. Some directors are extrovert or dominant and some are more reserved. The present day over-emphasis on committee work, caused by the Sarbanes-Oxley Act divides up the board in many separate meetings, all factors which make teamwork difficult.15

Various suggestions have been made for improving team work.16 Having a separate non-CEO chairman or lead director could promote a shared leadership approach. In these cases the CEO and the chairman or lead director would always prepare for board meetings together and, again communicate with each other after each executive session. Effective chairmen have techniques such as "calling on directors" for comment on each item, "going around the room/ asking all directors", polling the board and having pre-meeting conversations with individual directors, encouraging them to speak to one another, making sure directors are selected with ample time and an appropriate mix of team members of varied areas of expertise and backgrounds, as well as creating an appropriate mix of team members with varied areas of expertise and diverse backgrounds.

It is worthwhile for the board to evaluate the extent of the board's teamwork with rigour and candour. In this evaluation the board should at given times be assisted by outsiders. The evaluation confirrnation should be laid down in writing and discussed in meetings. Boards should not be too large (8 to 12 members), on the assumption that leadership involving specific problems is often provided not only by the CEO, the chair and the lead director, but sometimes also by committee chairs or sometimes a specialist or simply each director.17

The audit committee may only have independent members.18 There must be at least three members who are financially literate. One member must have accounting and related financial management expertise.19 The company must disclose whether there is a financial expert. The committee is responsible for hiring and firing the outside auditor. The liability of outside auditors should not be limited. Meetings should be held with an outside auditor and also with the chief legal counsel at least quarterly. The audit committee should be free to hire independent advisors. In 2005 the Fortune 1000 audit committees met on average nine times a year, which was up from five a year in 2002.20 This number of meetings a year was still nine in 2008.

The corporate articles of association should describe the scope of authority, the power to delegate, the role of any executive in determining the compensation of any other executive and the role of the compensation consultant

The Dodd-Frank Act confirms that all compensation committee members must be independent. The role of the compensation committee is to oversee the corporation's overall compensation structure, review the corporate goals and objectives relating to executive compensation and performance measurement, evaluate executive performance in light of those goals and objectives and determine and approve executive compensation. The committee should oversee the company's disclosure practice with respect to executive compensation and play an integral role in preparation of the compensation discussion and the analysis to be included in the proxy statement and annual report. The compensation committee should regularly report to the independent directors, who should review and ratify committee decisions. The committee should maintain appropriate communication with shareholders and provide full disclosure on compensation matters. Other functions are to ensure that a strong executive team is in place, to work closely with the nominating committee to ensure leadership and effective succession planning and to ensure consistency of pay practices at all levels.

Compensation committees met 5 times on average in 2005.21 This rose to 6.5 times in 2008.22

The functions of this committee are to select candidates and make nominations for appointments to the board of directors, including the position of CEO in case of succession, and to take initiatives relating to corporate governance principles of overseeing the board and overseeing offers to evaluate and hire search firms. These committees meet 4.5 times a year on average.23