Publications & Resources

October/November 2007
Focus: Directors Issues

Changing How We Think About Boards

By Philip K. Smith

There may be a sea change coming in how we view boards of directors. We all know that Sarbanes-Oxley, increasing regulatory scrutiny and activist stockholders are putting more pressure on directors of all institutions, public and private. As a result, it is possible that the next decade or two may result in major shifts in how we think about our boards of directors. This article highlights some of those possible changes.

Evaluation of directors

Most directors are successful business people, many of whom run their own companies. If you ask them about how they monitor performance of their employees, you will probably find that they are big proponents of review and evaluation with resulting termination for those who are not doing a good job. However, when presented with the opportunity to implement evaluation of their own job performance and that of their fellow directors, there is often hesitancy. A major shift that seems to be coming is a movement toward monitoring and evaluating how board members perform their duties. Some organizations may choose to do it through simple mechanisms like questionnaires for self-evaluations or peer-to-peer evaluations while other organizations may be more comprehensive with actual targeted benchmarks that directors must meet in terms of loan referral performance, marketing activities on behalf of the organization or other steps.

Limited term service

Currently, when directors (particularly of community financial institutions) are elected, they are arguably elected for life. Rarely do you see dramatic stockholder votes against a recommended slate of directors put forth by the organization. However, because the increasing demands and time pressures of serving as a director are dwindling the field of top candidates, we may see a shift toward asking directors to serve for only some limited period of time (for example, 10 years). That would provide enough continuity in the organization to promote some consistency, but also eliminate concerns of mandatory retirement and other problems. Directors serve for a finite period of time and then move on to other endeavors.

Majority voting

It may not be anything you have ever thought about, but directors typically are not elected by a majority vote. Rather, they are elected by a plurality vote meaning that as long as the director receives more votes in favor of his or her nomination than against, election is guaranteed. In theory, then, as long as a director receives one vote and there are no other votes against the director, that director is elected. For corporate governance purposes, there is some movement to require directors to be elected by a majority vote of the total outstanding shares. This could prove cumbersome if an organization has a large number of shares not voting and particularly when the organization is public and has substantial shares held through brokers. Such a requirement would mean stockholders could effectively remove directors by simply abstaining from voting. That dramatic shift of power to stockholders in the election of directors could change the way boards are viewed.

Executive session

Many organizations are moving toward the consistent use of the executive session and, over the next decade, many organizations will make it mandatory. This trend is growing proportionately with the movement toward having a majority of the board of directors composed of individuals who are outside directors and not members of management. Doing so empowers a board to more frequently challenge management on key issues and for many community financial institutions may shift the balance of power from a strong management to the outside board members.

Redefining the chairman’s role

The chairman’s role is typically ceremonial more than anything. If your chairman is not aware of that, perhaps he shouldn’t read this part. In the future, the chairman’s role will likely evolve from one of simply being the wise veteran who speaks up on matters of critical importance and provides advice where needed. Rather, the job may shift toward being an active manager. The chairman’s role could evolve to one of much more active participation in the development and structure of agendas, the organization, the use of committees and other tasks.

Whether any of these elements ever become mainstream enough to change the way directors operate remains to be seen. However, some combination of any or all of these will present directors with new ways of doing their job and leading their organizations. Whether directors embrace these types of provisions may determine whether institutions profitably move forward into the next decade or lag behind peer.

Philip Smith is a principal in Gerrish McCreary Smith Consultants, LLC and a member of the board of directors of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He may be reached at (901) 767-0900.