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Column

Gary Sutton
Columnist, “Sutton’s Laws”
Directors & Boards

The gritty stuff
Heard this in your governance seminars or RiskMetrics grading sessions?

By Gary Sutton

I’ve successfully sat through several seminars for board members, and actually stayed awake through most. My public companies earned ISS points for my attendance (yeah, team). None of these seminars touched on the gritty stuff that makes a board work.

Here’s what makes them not work:

1. Too Much Diversity: Getting an Asian, a woman, a professor, and other window-dressing board members slows down meetings — unless each has been a CEO. How can you advise if you’ve never experienced the relentless pressure of improving cash flow and earnings quarter after quarter? How about an Indian, a handicapped person, and a professor with that P&L background? Super! Recruit them. Just know that they’re already highly sought after as board members, and should be.

2. Dinner Before the Meeting: This common social gathering serves little purpose. Have a dinner after the meeting. Then you can leisurely dig into issues that arose during the business day. Dinner before requires holding back some information; otherwise, why have the meeting? Boards are about business, not being pals.

3. Blurring Committee Lines: Committees make the business go smoother, with more focus on key issues without taking up the entire board’s time. A couple years ago, nobody wanted to get near the audit committee. Liabilities. No blurring problem then. Today, nobody wants to be on the comp committee. Liabilities. But salaries are more fascinating to everybody, and other directors tend to butt in too early or fail to leave the room when comp committees meet. Blur, blur.

4. Red-Lining 10-Qs: This is a common courtesy the auditing firm or legal does for the comp committee. Makes reading easier. Concentrates the committee on changes. Sounds good. But businesses change, and the drudgery of rereading old text is important since some of those historical statements have become obsolete.

5. Mismatching Size: Knowing how a small business operates and knowing how a big business operates is far more important than industry knowledge. Hiring that VP from MegaCorp Holdings for a board seat at Corner Grocery results in hiring a consultant to tell the grocer how to stack apples, installing an SAP system to better manage the business, and drafting HR policies that require a three-ring binder to hold. Put the grocer onto MegaCorp’s board and he or she will start asking why the bigger business stays in the lower-margin businesses and why it spends so much on consultants. (Not bad questions, by the way, but these questions will be asked too directly and without corporate parlance and so will be dismissed by the more “sophisticated” other directors.)

6. Hiring Young Directors: You don’t want directors who covet the CEO’s job, even if they have the energy to do it. They get overcritical. Chaos ensues. The board’s job is to advise, fire the CEO for cause and hire the next one — getting involved in the business only enough to make those moves with intelligence. And they should fire the CEO with regrets, understanding that finding the next and more perfect CEO is a real challenge.

7. Blindly Picking D&O Insurance: Rates matter. Number of incidents covered matter. Higher deductibles help. Shopping pro-actively, with presentations to insurers months before renewal time, makes everybody happier and gets far better rates. But before signing, look at each insurer’s recent record, and where they may have tried to avoid defending a client for less than crisp reasons; or, where they may have rolled over to settle too quickly, which merely raises your rates for the following year.

If you’re sitting on a board where there’s never controversy … stately dinners … perhaps some golf … that’s fine. Just don’t kid yourself into thinking you’re helping. You’re parasitic.

Gary Sutton has been a CEO and director of a number of private and public companies in his career as a specialist in startups and turnarounds. He writes the “Sutton’s Laws” column for Directors & Boards.

He is the author of two books on business, “Corporate Canaries: Avoid Business Disasters with a Coalminer’s Secrets,” which has been translated into six languages, and “Six-Month Fix.”

He can be contacted at garysutton@san.rr.com.