The Delaware Chancery, Supreme Courts, and Their Importance
Rulings from the Delaware Court of Chancery and the Delaware Supreme Court have become the foundation for corporate law and a critical guide for corporate governance. Over one million businesses today list Delaware as their legal home, including roughly two-thirds of the Fortune 500. It has been the principal state where businesses have registered since the early 1900s.
The Compensation Committee of a Board of Directors
Oversight of management is one of the board of director’s primary responsibilities. This includes hiring, monitoring, evaluating, and compensating the senior team. Most boards establish a compensation committee to be responsible for this important topic. Often, the committee retains an independent compensation consulting firm for advice.
The Importance of the Audit Committee
Effective governance includes a board of director’s ability to play a role in helping to maximize long-term shareholder value. In general, a board’s primary responsibilities are to oversee management, strategy, and financial reporting and compliance.
Environmental, Social, and Governance Issues
Environmental, social, and governance (ESG) are three related pillars of criteria used to assess a company through the lenses of ethics and sustainability. The term was first coined in a 2005 study examining these three criteria as value drivers for a business. ESG factors are increasingly considered in investment and governance decisions and span a full spectrum of issues not traditionally part of financial analysis but that may very well have financial relevance. While so-called ESG investments total tens of billions of dollars, this understates ESG’s impact, as institutional investors such as BlackRock are increasingly demanding enhanced actions and reporting on ESG topics.
The Board and a Corporate Crisis
In its capacity as a fiduciary for shareholders that oversees a company, a board of directors should be prepared to effectively oversee the response to an extraordinary circumstance or crisis that can potentially very negatively impact a business. Crisis management can differ depending on the event in question. Regardless, a detailed crisis management plan developed by management and approved by the board should be “on the shelf” and “rehearsed” to address such value-threatening and potentially life-threatening situations.
A Board of Directors Should Evolve as a Company Does
Governance is critical for companies of every size. The maturity of a company can impact the scope and detail of a board of directors’ responsibilities. A board should grow and evolve with a business. For smaller businesses, the board is often involved in specific decisions, especially if the CEO is a first-time leader of a company, as opposed to the more typical oversight role in larger companies.
Recruiting Value-Added Directors
Replacing or adding a board member is a time- and labor-intensive process that starts with determining the skills an organization needs. Hopefully, a board has an existing skills matrix that shows the attributes of the existing directors. From there, the board can cross-reference its obligations with the skills of current members and assess what is missing given its objectives.
Term Limits for Corporate Directors
There are increasing conversations and more support from various governance organizations about term limits of generally about ten years for directors of publicly traded companies. The idea is to refresh boards and adjust for an organization’s changing needs and director skill sets. However, the downside of term limits is a lack of organizational knowledge, more time dedicated to recruiting and onboarding new board members, and the risk that new directors will not be effective.
Why Aren’t Corporate Directors Licensed?
Many occupations require licenses to prove competency, including accountants,
investment professionals, physicians, private investigators and security guards.
While licensees are not necessarily excellent at what they do, a license does
guarantee that a licensee has fulfilled the requirements for a given role determined
by a reputable authority.
Chief Executive Officer Succession and the Board of Directors
Navigating Chief Executive Officer succession is critical to the success of a company, even one that has been established and successful for some time. One of the board of directors’ most important roles is naming, evaluating and compensating the CEO. While important input is often provided by the sitting CEO, the head of human resources, often an executive recruiter, and sometimes an industrial psychologist, the board is ultimately responsible for this critical hire.