Public company directors are under more pressure than ever to oversee enterprise risk, even risk from day-to-day operations, which is normally addressed by management. Egregious failures of upper management to react to red flags have put boards on the hot seat and generated bad press that has jeopardized corporate reputations.
Witness the 2015 listeria outbreak at Blue Bell Creameries, which sickened consumers of the company’s ice cream and caused three deaths. Although the C-suite was allegedly aware of numerous warning signs before the company was in full-blown crisis, management never raised the alarm in the boardroom. In a 2019 decision that captured the attention of corporate directors across the country, the Delaware Supreme Court refused to dismiss a shareholder lawsuit against Blue Bell’s directors, finding adequate the lawsuit’s claims that the board had absolutely no system for monitoring food safety—in a company whose only product was ice cream. The decision was followed by several similar Delaware holdings, including one allowing a lawsuit against the board of a pharmaceutical company for allegedly ignoring red flags that a clinical trial for a key drug was failing, and another permitting claims to proceed against the directors of Boeing after two fatal plane crashes for not properly overseeing aircraft safety.
Directors can only exercise their fiduciary duties if they have adequate information. But directors are removed from the action. Their job is to oversee management from the lofty perch of the boardroom with a 50,000-foot view, not stand in the trenches. Critical to the role of the director, then, is the ability to face and question management. An effective question-and-answer process in the boardroom is an art form, and actions that a director takes outside the boardroom may be just as important as how he asks the question. Here are some tips that may help.
Tip 1: Understand the Board Dynamic
A new director should try to grasp quickly how a board is run. Is the board chair (whether she is an independent director or the CEO) a dominant, or even domineering force? Are there other powerful or influential personalities around the table who suck the air out of the room? An effective questioner should be aware of the dynamics of the group and formulate questions considering those sensitivities. It can be helpful to consult privately with the longer tenured directors or the lead independent director about whether certain issues (for example, salary increases for the named executive officers in a year of lackluster performance) should be probed with delicacy. Similarly, veteran directors can help newcomers understand whom to consult for answers to legitimate questions without stepping on toes or appearing to threaten the manager responsible for the subject matter.
Tip 2: Don’t Be a Lone Wolf
Guidebooks and manuals for corporate directors often stress the importance of collegiality without explaining what that means in practice or why it is important. Collegiality and interpersonal skill are real, critical factors that can “make or break” a director’s effectiveness. Collegiality, including graciousness, respect, tact and humility, go a long way toward building a director’s credibility around the board table and fostering mutual trust. Mutual trust among the directors is essential for a healthy group dynamic in which directors feel they can be candid and ask tough questions without their views being dismissed. Directors who are needlessly confrontational, contrarian, aggressive or condescending toward other directors, managers or even boardroom advisors risk tarnishing their reputations and inhibiting their success, sometimes for the rest of their board service. For example, a director who dresses down a consultant at a meeting may offend the other directors and managers who have worked successfully with the consultant for some time and been pleased with his work product. Directors who act this way often feel they need to stand out, make an impression or demonstrate their value. But often they end up isolating themselves and diminishing their influence, even when they have important and legitimate things to say.
Tip 3: Do Your Homework
Since the enactment of the Sarbanes-Oxley Act in 2002, boards have been called upon to be more actively involved in key company decision making, oversight and governance. As a result, boards receive more and more material to review in between meetings. It is critical that directors set aside enough time to read and study the information that management has provided, even if it sometimes seems overwhelming. By preparing in advance, and being active listeners during meetings, directors can identify questions that they may be able to ask outside the boardroom. This can avoid bogging down meetings and make questions asked in the boardroom more informed and targeted to significant concerns. For example, if a financial report contains terms or acronyms unique to the industry that are unfamiliar to a new director, she should feel free to e-mail the CFO before the meeting to ask for a glossary. She may be surprised that even tenured directors, who were reticent or embarrassed to ask the question, may not have a working knowledge of these terms either and will be pleased to receive the explanation. Directors should not hesitate to request that management provide reports on substantive areas about which a director wants information, allowing sufficient time for management to respond.
Tip 4: Understand Your “Mandate”
The board of directors’ role is to oversee and advise management. Managers manage the company’s day-to-day business. Directors are not supposed to make day-to-day operational decisions. In fact, most outside directors are not qualified to do so because most of them have no professional experience in the company’s industry. Directors are called upon, instead, to provide ethical, informed and considered business judgment about the Company’s overall strategy and strategic decisions. Directors should frame their questions in this macro context, rather than getting into the weeds of management’s ordinary course decision-making. For example, when considering management’s proposed marketing and advertising program, rather than questioning the specific allocation of the budget, a director might ask what the objectives of the campaign are, how the budget has been allocated to achieve those objectives and how the Board can measure the achievement of the objectives.
Tip 5: Have an Attitude of Constructive Skepticism
The very nature of the director’s role as an overseer, rather than a manager, requires that he actively challenge management when it is important to do so. But challenging management does not mean calling them on the carpet to account for every decision, even decisions that turn out to have been bad choices. Instead, directors should frame questions in a way that encourages managers to elucidate their thought-process, and to explore whether and why they have ruled out other options. The goal is not to engage in a debate, but to elicit information that assists the board in meeting its fiduciary duties. A good management team will want the board to feel comfortable with the company’s strategic decisions and be able to articulate and defend them.
Tip 6: Ask the Experts for Help
Directors should have unfettered access to the board’s advisers, such as internal or external boardroom counsel, independent auditors, and other experts like compensation consultants. In fact, independence rules of the SEC and the stock exchanges require independent auditors and executive compensation consultants to be answerable directly to independent board committees, not management. Company counsel represent the organization, not any director or member of management, and may be able to field delicate or sensitive questions confidentially when a director is unsure whether it is prudent to ask the question in a meeting where minutes are taken. A management team that is reluctant to facilitate a direct line of communication between the independent directors and boardroom advisors should set off flashing red lights in the minds of directors.
Tip 7: Mix and Mingle
Directors should encourage and attend informal gatherings with their colleagues outside of the boardroom. Informal social interactions at cocktail parties, dinners and board retreats are important to building the bond of mutual trust that is essential for a functional board. They also provide opportunities for directors to express to smaller groups concerns and questions that they are reluctant to raise on the boardroom “stage.” Regular board advisors should be included in these events so that directors can get to know them and feel comfortable contacting them with questions in the future. In addition, key company managers who are not routinely present in the boardroom should be invited so directors can establish a rapport with them. In addition to opening additional lines of communication that may help answer director questions, exposing directors to key managers allows directors to judge for themselves whether senior management is infusing the organization with the right “tone at the top” and cultivating a bench of potential successors.
Tip 8: Don’t Be Afraid to “Go Public”
Directors may have questions that are so important, or even existential to the organization, that they should be asked in the open forum of the boardroom. If the board has been successful in building an atmosphere of trust, it will profit from a full and open discussion of the issue. This allows directors and managers to hear others’ views and even anxieties about difficult or sensitive matters, for example, CEO succession. If the director is adequately informed and has properly considered and framed the question from an attitude of constructive skepticism, then she should not be reluctant to ask it. Her primary job, after all, is to exercise her judgment. Other directors with similar concerns and doubts may be relieved that someone has finally “put the rat on the table” for an honest and frank discussion. Free and open discussion is especially important when the board is being asked to take affirmative action.
Tip 9: Have the Courage of Your Convictions (a.k.a., What Does “Independent Director” Really Mean, Anyway?)
Directors should frequently remind themselves whose interests they represent in the boardroom. There has been a decades-long debate between those who believe directors should manage the corporation solely to maximize shareholder value, and those who argue that corporations are so powerful that they should also be managed to advance the interests of their employees, customers, communities and society at large. There is no denying, however, that directors must make decisions in the best interest of the corporation itself. The corporation is a distinct legal person under state corporate law, with an identity and existence separate from those of its stakeholders. Directors must make decisions in the best interest of the organization over the long term. This fiduciary role may, in some (hopefully rare) instances, put directors in conflict with the CEO, the management team in general, or a significant stockholder. That is uncomfortable and unfortunate, but it is also unavoidable. Directors must remember that one of their most important functions is to ask tough questions. Having the courage to do so is part of the reason why they were selected for the job.
