Developing Strategic Boards of Directors: Here Are 10 Common Mistakes to Avoid When Choosing Board Members

Strategic Finance, November 2003 | Go to article overview

Developing Strategic Boards of Directors: Here Are 10 Common Mistakes to Avoid When Choosing Board Members


Isn't it ironic that the one group with the power to decide the fate of an organization--the board--is the one group in an organization that is often randomly selected, casually engaged, rarely evaluated, and almost never held accountable? What better examples exist than Enron, WorldCom, HealthSouth, Adelphia, Tyco, and even the New York Stock Exchange?

I have been working with boards of directors for many years, and I have found 10 common mistakes companies make in creating and using their boards. So, I have developed a continuum for board excellence based on those mistakes.

My premise is simple: BETTER BOARDS MEAN BETTER COMPANIES.

The untold stories are the thousands of companies that have avoided crises because of their hard-working boards that have high integrity, add value, and prevent the fatal mistakes. As financial experts, you have a rare opportunity to make a difference. You have a rare opportunity to restore consumer confidence and inject integrity back into the system. You have a rare opportunity to infuse governance with best practices--to make boards the solution instead of the problem. In addition to the work you are now doing to strengthen boards, if you are not already doing so, I encourage you to serve as a director.

Think about these 10 mistakes, and figure out where your board fits on the continuum of excellence. At the same time, consider where the Enron board went wrong.

Mistake 1: Failure to Recruit Strategically

If a board is to add value, its members must be recruited strategically. Too often recruitment has to do with relationships--like golf buddies--or celebrity appeal--like O. J. Simpson on the audit committee of Infinity Broadcasting, a subsidiary of Viacom--rather than capacity.

To avoid this mistake, proactively recruit directors to your future--to your strategic plan. In other words, devote the same energy to recruiting your board members as you do your key officers, your CFO. See the seven-step process outlined in the sidebar, "How to Recruit Board Members."

What's the hardest thing to do? The most popular article in Directors and Boards is how to fire a director. No one wants to confront a poor director and ask him/her to leave the board. Why not invest in the process instead of a failure?

Strategic boards are a value add for all companies, large and small. In a Boardroom Consultants' study of 360 early-stage companies, success moved from 20% to 70% when independent boards were in place.

So the first and most important step is to recruit strategically. How did Enron measure up? Not well. Directors were recruited by management for management. Enron = 0

Mistake 2: Too Many Insiders

The best number of insiders is one. Why?

An insider's allegiance is likely to be to his/her boss. It's too difficult for an inside director to function as the subordinate of the CEO every day and then, at a board meeting, become, in effect, his/her superior. Further, a CEO may be reluctant to discuss certain issues in front of employees, such as succession and compensation.

You already know what the insiders think. And you have the benefit of their expertise and commitment. Why not get the benefit of outside knowledge, experience, access, and wisdom?

Enron had only two employees on their board, so was within accepted standards. Enron = 1

Mistake 3: Too Many Paid Consultants

This includes anyone who stands to have his or her income compromised. A survey by Christian & Timbers found that 74% of board seats are filled by individuals who have some previous association with the company on whose board they sit, so this is a critical issue.

If a conflict does exist, it is most likely to surface during the very crises the director is there to help resolve.

Many of the Enron directors were conflicted. Board member Lord Wakeham had a consulting contract with Enron. …

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