Boards are on a new mission*

How can directors get beyond box-ticking to create value for the companies they serve?

* This is an expanded version of a summary that first appeared in the March 2007 issue of CAmagazine.

By Mike Harris

Since the introduction of Sarbanes-Oxley in the United States and related regulatory changes in Canada, the role of the corporate director has changed dramatically. Directors are now expected to sort their way through a multitude of new regulatory standards while meeting their stakeholder expectations.

According to a new survey of Canadian board directors, by PricewaterhouseCoopers in association with the Institute of Corporate Directors, the major issue around the boardroom table today is how to go beyond the regulatory requirements to create value for the companies they serve.

Seventy-seven directors from across Canada were interviewed for the survey commissioned by PwC and the ICD. The survey was designed to engage directors in discussions about their perceptions of evolving roles, responsibilities and expectations of corporate directors and to discover best practices in the boardroom.

The survey found that directors were concerned with developing the right teams to achieve a culture of integrity.

One director in the survey commented: “The board’s real responsibility is the strategic direction, the planning process, making sure the board’s doing the right thing. Those have not changed. The problem is the ticky-checky stuff has taken over the boards and they’re spending so much time getting it right, getting the structures right. You should use your main board meetings for the strategic stuff. And I think the really good boards do that. Everyone is sort of slowly sorting this out.”

Board building blocks
In their quest to have a high quality board, directors are paying much more attention to ensuring a diversity of skill sets with people that have management/business experience, industry experience, board experience and financial literacy. Furthermore, directors in the PwC/ICD survey felt it was important for boards to become more representative of society, employees and customers, particularly in gender composition for better board insights and decisions.

Directors told PwC/ICD that proactive boards are demanding team development through training, team-building and mentorship. Boards are also trending smaller.

The more progressive boards in the survey are providing funding for formal director education through new and innovative opportunities like the ICD’s directors’ education program. The ICD has the mission to educate both experienced directors and next-generation directors on current best practices in corporate governance, and not just on the laws and basic fiduciary responsibilities. To date more than 700 directors have graduated from the program across Canada. In addition, the ICD offers education programs for directors of not-for-profit organizations (governance essentials program) and a financial literacy course.

The value of good relationships
Relationships with management, auditors, shareholders and other stakeholders were highlighted as a key area in the PwC/ICD survey as a tool to building a better board.

Directors say their boards are trying harder to understand and fulfill all their responsibilities, control the risks and maintain the interests of shareholders, without becoming immersed in day-to-day management.

Directors want to make sure they are using their position effectively to oversee the strategic planning. “Nose-in, fingers-out” has become a popular expression to explain the board’s role in overseeing the business.

Using committees for good governance
One of the best practices identified by the directors in the PwC/ICD survey was to use governance resources efficiently so they are not overly burdened by the need for compliance. With this in mind, directors highlighted the need for a strong committee system.

Several directors commented that, if committees are looking after the box-ticking and clearly reporting to the full board, whole-board time will be freed up for strategic issues.

According to directors, the best practice in a board is to take a good hard look at the governance resources they have for filling committees, and the mandates associated with those committees.

While boards have a collective responsibility, there is still a sense that the audit committee is the most difficult committee to populate due to a combination of liability concerns and paperwork.

However, several directors are suggesting that what has happened to the audit committee is also happening to the human resources committee – it is becoming a fishbowl in the face of concerns over executive compensation, and demanding more time and experience from its members.

Moving forward to create value
Directors in the PwC/ICD survey provided a vision for the practices needed to move beyond box ticking in the coming years.

• Directors would like to better understand the relationship between good governance and company performance or shareholder value.
• Directors want to learn how to phase in an effective board evaluation.
• Directors want to understand the motivations and incentives for recruiting high-value directors and how to share best practices on controlling compensation.

What works
So what personal characteristics does a highly effective director have? The PwC/ICD survey pointed to:

• Courage: The ability to think independently and to challenge a consensus tactfully.
• Collegial attitude: While it’s important for directors to think as individuals, the ability to listen and work in a group is highly valued.
• Seasoned judgment: Highly effective directors are good at contextualizing and using their experience to understand a problem.
• Dedication: Highly effective directors are able to attend all meetings and be focused on their role.

An effective board is essential to establishing and sustaining shareholder value, and a direct correlation can be drawn between financial returns and board performance. Success depends on having the right dynamics in the boardroom, and on hard work. By taking a proactive role boards will help companies anticipate the expectations placed on them, respond to those expectations in an efficient and responsible manner and lead the way in corporate governance.

PwC has developed a website to educate directors, CEOs and others on corporate governance issues in Canada. For more information on the directors’ survey please visit www.pwc.com/ca/corporate governance.

Mike Harris is a PricewaterhouseCoopers advisory services partner and leader of the firm’s corporate governance practice.