CHAPTER 4

BOARD SELECTION

INTRODUCTION

• a publicly held corporation can only be represented by the board of directors.

• The board must in aggregate, contain a proper mix of individual director attributes relevant to the mission of the company.

• The members of the board should have unquestionable integrity.

• The board should bring needed expertise which is related to the industry.

CONVENTIONAL WISDOM ON BOARD STRUCTURE

• There is a believe that the board should be small with 10 members and dominated by outsiders.

• The view embraces the belief that a small board has a better chance of building interanal trust and acting quickly and decisively when necessary.

• In real sense the board is effective when it has competent and committed directors.

ORGANIZING THE BOARD FOR SUCCESS

• The board must manage its affairs based on a few simple princoples ;

• The board must attrct and retain talented management (CEO) and hold him or her accountable for executing the company’s strategy and achieving outstanding results compared with peer companies.

• A mechanism for performance should be put in place which should be linked to the appreciation of the company’s value(market value) compared to other firms in the industry.

• Deciding how the firm’s available capital is to be allocated between reinvestments in the company and distributions to the shareholders.

INDEPENDCE OF BOARD MEMBERS

• An effective board should be composed of non management directors this is mainly because the duty of any board is to protect the interest of the shareholders.

• When the board is composed of two thirds of independent members it removes the chances of potential conflict between management and shareholders.

• If the board only consists of management members they are more likely to be influenced by the benefits of their positions rather than of the shareholders.

THE DIRECTORS STAKE IN THE GAME

• There is need for directors to own significant amounts of equity in a firm to motivate them to become fully engaged.

• By not owning a substantial amounts of equity in the firm it might be a sign of lack of commitment from their side.

• There is therefore need for the directors to invest a substantial investment and a major part of their compenstationa should be in form of stock in the corporation.

THE RETIRING CEO

• There should be a consideration from the board wether to retain a a retiring CEO;

• The advantage of a retiring CEO includes knowledge of the business and the strong likelihood of their having a major stake in it.

• The major disavantage is the likelihood of creating problems for the new CEO particularly if the new CEO Wants to make major changes.

• The convention wisdom is that a retiring CEO should leave the board by having a smooth transition.

The REFLECTION OF INCUMBENT DIRECTORS

• There is an assumption that sitting directors customarilu should be reelected unless they are removed for cause.

• The cause can only arise fro the legal interpretation of some action or inaction that most often involves conflict of interest, the commitment of some illiegal act or behavior that constites an embrassment to the firm.

• In the abscence of cause a review should be done on the contribution and perfomance of individual directors and the board as a whole.

CONTINUATION• A practical solution of mantaining an effective board is by regular evaluation of the performance of the board a s a collective body and of the sitting directors by their peers, taking into accoount of the current needs of the corporation.

• The reviews should be annual, formal and thorough.

• Most boards do have mandatory retirement ages, around 70-75 years of age.

• Some board require members to resign incase of changes in primary employment whereby it might be accepted or not after the board analyses on how the change in staus will influence the directors ability to function effectively.

THE SELECTION PROCESS FOR NEW DIRECTORS

• There should be a nominating committee, the majarity which is composed of outside directors.

• The CEO should also be a member of the nominating committee which is also known as governance committee.

• In absence of such the board’s executive committee perfoms the duty.

SELECTION STEPS

• First steps is to create a profile opf the type of skills and experience needed on the board.

• The attributes would depend on the business or businesses in which the company engages and the strategy it expects to employ.

• After the nominating committee has clearly identified the desired skills and experience of board members, it should compare its ideal attributes with the characteristics and experience of the returning board members and identify any apparent gaps.

Cont’

• The committe would then search for candidates who could complete the ideal profile of the board.

• There should be a diverse set of skills and experience while selecting the members since similar backgrounds will tend to take a predictable pattern on the decision.

THE SEARCH AND SCREENING PROCESS

• After nominating committee members the next step os to look for aPpropriate candidates;

• By seeking suggestions from other groups or individuals familiar with the firm such as investments bankers, lawyers and customers.

• After a list of potential candidate has been compiled, an initial screening should be carried out.

• The initial screening involves gathering reported information about the individual candidates and thei credentials.

• The sequence of identifying potential canidates for board may vary from those who won or represent large shareholding or the family of the company’s founder or a rep of nonprofit foundation with a large equity position in the company.

• It is important for the candidates to recognize they are elected to represent the interests of all shareholders.

• The next step is for the committee to have an ordering list for potential candidates which can be done according to their skills or experienc e needed for the board.

• The n nominating committee should then decide on which candidate best fit the needs of the board and the company.

• The next step for the committee is to conduct its due deligence, meaning really getting to know the individual candidate and their reputations(due deligence).

• The due deligence is done when the committee has decided on the candidate.

• This process also helps the candidate to determine wether there is chemistrybetween the candidates and the other members.

• Its also an opportunity to analyse whether the individual has the time and interest to make the necessary commitment to join the board.

RECRUITMENT

• I t takes a variety of approaches but the most common is through a personal relationship wiht one or more existing boardmembers.

• Visits to the company facilities, meeting with key managers and social occasions wiht existing directors.

• At such gatherings the board aims at impressign at impressing the candidate and emphaiszing on the contribution the recruit might make to the board and the company.

The NOMINEE’S DECISION SERVE

• The nominated candidate should perform some research before agreeing to stand for election.

• It is the incumbent on the prospective nominee to determine precisely what a director’s full responsibilities are and to judge his or her individual ability to fulfill them.

• The prospective nominee should also ensure there are no conflicts of interest exist.

ELECTION OF DIRECTORS

• The election of directors takes place at the annual meeting of shareholders .

• The shareholders elect the directors, who will be legally charged with representing their inteests.

• Incase of interim vacancies, the board is empowered through bylaws to fill the vacancies for the balance of the unexpected terms or untill the next annual meeting.

• Directors are elected for a term of usually 1-3 years.

• Terms begin and expire on the date of the annual meeting of shareholders.

• The removal of the director is next to impossible unless there are some cause which can lead to his/her resignation.

• This rigidity makes the election process very critical

MANTAINING BOARD EFFECTIVENESS OVER THE

LONG TERM• Strong boards evolve from a culture that includes a strong, independent set of directors and a well- functioning nominating committe charged with identifying, recruiting and obtaining the election of pople meeting the criterial described earlier.

• Weak boards emanate from a dorminant CEO who controls the nominating process of forming the board.

OTHER AVENUES BY WHICH CEOS HAVE OR GAIN

CONTROL• By ensuring the appointment of friends or supporters on whom they can depend for favorable consideration of their initiative.

• A quasi- public company is one that is effectively controlled as a private company but has the reporting requirements of a public company.

• This firms come to exist when a private company chooses to go public through an IPO

• Another method is for a much larger private company to merge into a smaller, already listed public company and in the process become a puclic entity, but one firmly controlled by the shareholders of the previously private entity.