Corporate Governance and Informal Committees

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Corporate governance is about leadership. Boards are composed of leaders, and in the normal course of their duties, directors will form friendships and working groups. The board Chairman has the responsibility for establishing working committees. This responsibility demands the Chairman pays particular attention to these informal networks. Informal networks are inevitable and good of the organization. However, if the Chairman is unaware or unconcerned with committee composition, informal networks can create serious problems for the board as a whole.

The Sarbanes-Oxley Act of 2002 required boards to consider composition and independence as two of the most important issues when determining new directors. Board Succession committees must consider broadly all issues and perceptions of director independence. The Chairman must go a step further when deciding to name directors to working advisory boards. This attention to detail by the Chairman will ultimately determine the level and quality of work coming out of committee to the board. Directors too closely tied to the corporate management may stop short in their assessment of management’s performance or overstate management’s talents in certain areas and over compensate management for the results achieved. Directors too closely linked to the CEO may not hold the CEO accountable as circumstances may warrant. A properly composed advisory committee will ensure the ethical execution of the duties and responsibilities assigned.

The Chairman should also pay attention to the resumes of the various directors. Spreading talent among various committees and ensuring each committee has access to the necessary expertise is a critical component to maximizing committee performance. Directors volunteering to serve on committees may lead to a congregation of specific talent on one committee leaving another committee void of needed leadership. The Chairman should take the time to direct talent where it is needed and avoid issues of pairing directors.

Corporate ethics demand that directors give notice of their affiliations when joining the board of directors. Likewise, in the course of their service, directors must notify the Chairman before accepting a new board appointment. The Chairman should relay any notice given to the appropriate committee, such as the Ethics committee and the board should act on the recommendation of the committee. The director should respect the decision of the board as final. In this process, the Chairman should note the attitude and the response of the director to the board’s decision, and make note of any dissension among directors regarding the issue.

The Chairman should also protect the board from the appearance of dominance by insiders. The Succession committee has responsibilities for ensuring that the directors nominated as independent are truly independent as described by the Sarbanes-Oxley Act. The definition is intentionally broad and left open for interpretation by boards of directors. The Chairman in his duties should pay attention to employee directors and any affiliation with the directors determined to be independent. Friendships that develop beyond the boardroom could be perceived by other directors as coloring the independent director’s decisions.

Informal committees can be good for the organization. The Chairman can form informal committees by arranging for dinners the night before the board of directors meeting. These dinners can assign directors to certain restaurants to ensure the mix of talents and expertise is conducive to the needs of the Chairman. The small number of directors assigned to each party can be given a topic to discuss and assigned to report on the topic at the board of directors meeting the following day.

Informal committees have the potential to do far more harm than good. Chairmen must pay attention to the details of board composition even when the Succession committee has done its job. An astute Chairman can use this attention to detail to further the cause of the organization but only if he is aware of the various leadership styles, affiliations and common interests shared by various directors on the board.

© Dr. Earl R. Smith II

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Related Articles:

• Effective Board Meeting Practices
• Board of Directors: Cultural Evolution
• Board of Directors – Evolution through Devolution
• Corporate Board Dangers
• Lessons of Complacent Boards

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