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Column

Robert H. Rock
Chairman and Publisher
Directors & Boards

A Ready Resource for the Board

Just as with access to the independent auditors and compensation consultants, maybe a board could benefit from its own independent advisers on matters of business strategy.

By Robert H. Rock

At a recent director roundtable, one in a series on “boardroom challenges” presented by Directors & Boards and the Debevoise & Plimpton law firm, the question arose as to whether independent directors should hire outside counsel to evaluate a transformational acquisition opportunity.

The discussion among the 30 directors focused on a hypothetical company whose CEO was proposing to diversify away from a “dying business” by acquiring a large company with “an attractive future,” though in a distantly related field. As one roundtable participant commented, the acquisition opportunity represented “a strategic right turn.”

Although the participants held mixed views regarding whether a board should directly and independently hire strategic consultants, some thought that such a hire could help the board make a more objective assessment of fundamental strategic alternatives.

Demanding Access
Boards have been directly hiring outside consultants for many years, as most visibly evidenced by the audit committee’s requirement to hire the outside auditor. Increasingly other board committees, in particular the compensation committee, are demanding that the outside consultants report to them. Not that long ago, the CEO and his top HR executive hired the consultants, who in turn often felt beholden to management. Now comp committees are choosing the consultants and insisting upon their independence and objectivity.

Whereas once comp consultant’s reports were prepared with management and presented first for the CEO’s review and approval, these reports now often go directly to the comp committee, sometimes “for their eyes only.” Moreover, comp committees are regularly holding executive sessions with the consultants.

Although management continues to be involved, the comp committee, in particular the comp committee chair, manages the process. The committee chair is often the point person who brings consultants and their proposals before the committee for “bake offs.” The comp committee negotiates and signs off on the consulting contracts, which often can be in the six figures.

Authority Derives from the Board
Since comp committees are frequently charged with management development (and are now often called HR or leadership development committees), they often hire outside experts to help develop the processes to evaluate top managers and prepare for management succession. The authority for developing and implementing these processes derives from the board, and consequently the consultants report up to the board through the comp committee.

Like the audit committee, comp committees increasingly are detailing the scope of the consulting work, and the related fees, for the entire year. The discipline of delineating an annual budget helps to define expectations for results as well as for costs. In this way, the comp committee more effectively oversees the work of both inside staff and outside consultants.

In addition to the audit committee and the compensation and leadership development committee, other board committees, including nominating and governance, safety and regulatory, and public affairs, are hiring outside experts to help them perform the accountabilities outlined in their charters.

Evaluating Strategic Alternatives
Perhaps it is time for the independent directors to hire strategy consultants who would work with them on an ongoing basis to evaluate strategic alternatives, including transformational acquisitions such as the one proposed at our recent roundtable. Boards often hire strategic consultants to help management develop a strategic plan, and boards periodically hire investment bankers to evaluate corporate development opportunities. But these consultants and bankers are usually hired for a specific project, not as a continuing resource.

Having strategic expertise on retainer, continuously available to the board, could help the outside directors provide the best possible independent and objective advice.

Robert H. Rock is chairman and publisher of Directors & Boards. He can be contacted at rrock@directorsandboards.com.