Practical Governance Practices

Nov 252008

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

Corporate governance is the subject of many books and seminars. Every expert has theories to enhance performance and to take the board to the next level. Many of these proscriptions are convoluted and extensive. However, there are some very practical ways boards can effectively manage their responsibilities, and still improve the performance of their board and boost the confidence shareholders have their company.

One of the most practical steps a board can take to enhance the performance of the board is to address board composition. Boards face many challenges in understanding regulations such as Sarbanes-Oxley and the ever-changing tax codes. Boards must strategically plan to maximize profits without violating corporate ethics or the law.

Board composition should ensure directors deemed independent remain independent. Over the course of service to a board, bonds form between directors. The Chairman must ensure committee assignments take into account these bonds. Succession committees must also be aware of these bonds, and plan to bring in new talent to ensure future leadership, but also to balance the board with truly independent directors willing to participate in discussions and express dissension when they feel it is necessary.

Boards have fiduciary responsibilities and corporate image responsibilities. Boards must have controls in place to manage these fiduciary responsibilities. One practical control is a well-equipped and thorough Audit commit. The composition of the Audit committee should include directors with accounting and finance expertise. The Audit committee should also have all the resources needed to complete the job of reviewing the work of the internal and external auditors. The Audit committee should also be consulted before any external auditor is awarded work for the corporate management outside the annual audit. No member of the Finance committee or corporate management should be a member of the Audit committee. This will instill confidence in the findings and recommendations of the Audit committee.

Regulations and stock exchange listing rules are complex rules publicly traded companies must work within. Directors could easily spend their ten to twelve meetings per year working through the requirements. Boards are charged with guiding the company to enhance shareholder value. Many boards find it necessary to engage outside advisers to assist the company with meeting regulations and stock exchange listing rules. This frees the board to concentrate on strategic planning issues to maximize sales and earnings. Good governance means the directors must make maximum use of all resources including cash to enhance the shareholder value. Directors charged with governing the company should concentrate on leading the company not on focusing on the compliance management of one department of the company.

Another practical board practice is to assess corporate management’s performance. The Compensation committee generally completes this. The compensation committee reviews the goals and objectives laid out for corporate management in the previous compensation package. The committee must make judgments on the effectiveness of management’s performance in reaching the goals and objectives and decide if and how much of an annual bonus corporate management should receive. The Compensation committee also has the responsibility of deciding how non-employee directors are to be compensated. The Compensation committee should be knowledgeable about industry norms, compensation practices and how to motivate people. The compensation package should support the goals of the corporate board’s strategic plan.

Corporate boards of directors operate in very challenging business environments. Directors are supposed to compliment each other’s talents and experiences to govern the affairs of the company to the benefit of the stockholders.

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