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BOARD FUNDAMENTALS

JANUARY

2023

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Agenda

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Board Governance Overview

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Corporate Board Structure & Committees

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Board Member Selection Process

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Path to the Boardroom

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Q & A

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Carol Lam, JD '85

Co-Lead, SWB Attorneys on Boards Committee; Stanford Board of Trustees

Co-Lead, SWB Attorneys on Boards Committee; Co-Managing Partner, InfoLawGroup

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Gail Harris, '74, JD '77

Our Presenters

Belinda Nixon, '90, '94 JD Georgetown

Co-Lead SWB Mosaic;

Member, SWB Attorneys on Boards Committee;

Partner, Perkins Coie

Lead Director of Evercore Inc.

Agnes Bundy Scanlan, '88 JD Georgetown

President of The Cambridge Group LLC

Justine Gottshall, JD '94

Howard Woolley

President of the Howard Woolley Group

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1. Board Governance Overview

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Not All Boards Are Alike

TYPES OF BOARDS

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Public Companies

Private Companies

  • Shareholders
  • Traded on a �stock exchange
  • Subject to disclosure regulations
  • Privately owned
  • Family owned
  • Privately funded
  • May plan for IPO or acquisition

Advisory Boards

  • Advise management
  • Functional or �research focus
  • May be first step for a start-up
  • National and international �non-profits
  • Regional agencies
  • Foundations
  • Educational institutions

Not-for-Profit Orgs

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Aligning Interests for Growth & Success

KEY CORPORATE ACTORS

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CEO & Management

Board of Directors

Shareholders

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What Exactly Does a Board Do?

  • CEO
  • Succession for CEO and other Key Executives
  • “Tone at the top”
  • Strategy
  • Risk management
  • Financial reporting
  • M&A
  • Operating plans/budgets
  • Executive compensation
  • Business resiliency
  • Nominating directors / governance
  • Compliance

BOARD OF DIRECTORS RESPONSIBILITIES

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Oversight,

not operations

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“Fingers out,

noses in”

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2. Corporate Board Structure & Committees

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Building an Effective Board

  • Size and complexity of the company
  • Stage of company development
  • Odd number – most often 9
  • Benefits of larger/smaller
  • Inside directors and outside directors
  • Thought, backgrounds, skills, experiences and expertise
  • Tenure on the board
  • Representative of society and customers

Board Size Considerations

Diversity

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Director Attributes

  • Integrity, sound judgment
  • Relevant experience and point of view
  • Independence
  • Willing to invest time

Leadership

  • Chair or CEO/Chair
  • Lead director
  • Committee chairs

BOARD COMPOSITION

Diverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value.

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Legal Skill Sets That Can Enhance a Company Board

Typically, attorneys are not recruited by boards for narrow areas of expertise. However, if a skill set is relevant to the core operations of a company, boards can benefit from the experience and judgment of attorneys in assessing risk and helping to bring the board to a consensus on issues.

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For example, litigators for a company with substantial litigation exposure, regulators for a highly regulated industry, and employment attorneys for employee-intensive or unionized industries.

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Ensuring Board & Management Accountability

  • Required of all public companies
  • At least one qualified financial expert, with financial literacy standards for all members
  • Responsible for selecting and retaining the outside auditor
  • Ensures quality of financial statements
  • Oversees the company’s system of internal controls, compliance, and the internal audit function
  • Responsibility for risk assessment and management (unless covered by the Risk Committee, if there is one)

AUDIT COMMITTEE

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Guiding Board Dynamics & Leadership

  • Establishes criteria for board membership, considering board composition
  • Conducts succession planning for the board of directors
  • Final responsibility for selecting director nominees (CEO may recommend; recruiters may be engaged)
  • Assesses board and member independence
  • Conducts evaluation of the board – leadership, structure
  • Reviews and adjusts committee assignments
  • Reviews corporate governance guidelines and establishes board operating practices

NOMINATING/GOVERNANCE COMMITTEE

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Measuring Performance & Designing Incentives

  • Establishes goals and measures performance against goals for the CEO
  • Determines and approves CEO compensation
  • Approves recommendations for management team compensation
  • Has authority to hire independent compensation advisors
  • Establishes stock ownership requirements for management and board members
  • Understands benefits, costs and change of control provisions
  • Sets director compensation and policies

COMPENSATION COMMITTEE

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Executive compensation �should be designed to �align interests �of senior management, company, and shareholders, and to foster long-term �value creation and �company success

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Other Board Committees

Finance Committee

Strategy Committee

Technology Committee

Risk Committee

Compliance Committee

Executive Committee

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3. Board Recruitment & Selection

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Constructing an Effective Team is Challenging

  • Historically, relationship-based
  • ~30% now handled by executive search firms
  • ~5% from other sources (shareholders, database)
  • Skills emphasis is both good and bad
    • Financial experts required
    • CEO experience valued but not always delivered
    • Operating experience is valued but isn’t required for all board members
    • Skills focus can exclude consideration of underrepresented groups
  • Growing demand for diversity – gender, underrepresented (race, ethnicity, LGBTQ), experience (age)
  • Search process needs to highlight the complementary value of potential candidates, not just ”meet the spec”

BOARD SELECTION

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Not All Board Seats are Created Equal

BOARD EXPERTISE

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COMPANY CEO

40% of CEOs are also Chair of the Board

FINANCIAL DIRECTORS

Boards are required to have at least three Audit Committee members

FORMER CEOS/ COOS

Historically, 50% of directors had CEO or major P&L operating roles

INVESTORS

Typically fill 50+% of seats until the company goes public

OTHER DIRECTORS

Added for perspective or expertise

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Gender Diversity Has Become a Focus

2020 WOMEN ON BOARDS DIVERSITY INDEX

  • California SB826: Quotas for women on boards by December 31, 2021 (2018)
  • California AB 979: Quotas for underrepresented communities by the end of 2022 (2020)
  • Six other states have instituted or proposed board diversity requirements

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Year

Russell 3000

100 largest companies

1000 smallest

2020

22.6%

29.9%

18.2%

2019

20.4%

27.7%

15.7%

2017

16.0%

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4. Your Path to the Boardroom

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Experiences & Skills to Prepare for the Corporate Board Room

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  • Find mentors with Board experience who can potentially recruit you onto a Board and/or give you advice
  • Network with your classmates who are PE/VC investors or startup founders
  • Engage with organizations focused on board service, such as NACD, theBoardlist, Corporate Board Member, etc.
  • Network with recruiters
  • Sign up for SWB!

Network

Functional Expertise

  • Rise up to C-level position at your company
  • Get exposure to Corporate Board meetings to understand how they operate
  • If you’re an investor, it’s quite easy to get an observer role
  • If you’re an operator at a company, ask for opportunities to present to the Board (easier at startups than larger companies)

Financial Literacy

Non-Profit / Advisory�Board Experience

  • Learn how to analyze and manage a P&L
  • Take DeMarzo’s class and other finance / modeling classes
  • Aim to get P&L responsibility at your company (e.g. GM roles)
  • Gain Board P&L experience by joining a non-profit Board
  • Join a non-profit or Advisory Board to get a sense for how to work with other Board members and how a Board manages the P&L
  • Network with friends who may be running non-profits
  • Help friends who are founders of startups and offer to be an advisor

Personal Brand

  • Gain credibility and respect amongst your peers as a thought leader in a niche area of expertise (e.g. social media marketing, enterprise sales, financial / regulatory auditing, etc.)
  • Get exposure via social media (e.g. blog, Twitter, podcast, etc.) and speaking engagements

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Sample Paths to the Board Room

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Agnes Bundy Scanlan

  • 1988 - Graduated from Georgetown University Law Center
  • 1989 – Served as Counsel to US Senate Budget Committee (DC)
  • 1994 – Commenced an eleven-year initial banking career (FleetBoston and Bank of America) as C-Suite Executive in Risk and Lending (consumer products/RI and MA)
  • 1994 – Commenced leadership Non-Profit positions
  • 1999 – Joined Bryant University Board of Trustees
  • 2005 - Practiced law at Goodwin Law; Joined Smith College Board of Trustees
  • 2009 – Commenced C-Suite Executive banking roles at TD Bank (NJ, MA and Canada); Joined the Executive Leadership Council
  • 2010 – Commenced leadership roles with the American Bar Association’s Business Law Section
  • 2012 – Commenced first tenure with Treliant LLC (provided consultation on risk and strategic management matters with financial institutions and fintechs) (DC)
  • 2015 - Served as Regional Director of Supervision for Consumer Financial Protection Bureau (NY)
  • 2017 – Commenced Corporate Board service with SunTrust Bank which became Truist in 2019, commenced second tenure with Treliant LLC

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Continued

  • 2020 – Joined the private board of NewTower Trust (chair of its Board risk and audit committee) and public board of AppFolio.
  • 2021 – Became chair of AppFolio’s Board risk and compliance oversight committee. Joined the board of R1 RCM.
  • 2022 – Became chair of R1 RCM’s Board compliance and risk management committee.
  • 2023 – Became chair of Truist’s Board Nominating and Governance Committee; Joined the private board of iCapital.

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Sample Paths to the Board Room

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Carol Lam

  • 1981 – Graduated from college (Yale)
  • 1985 – Graduated from Stanford Law School, became a federal prosecutor
  • 1999 – Appointed a judge of the San Diego Superior Court
  • 2002 – Appointed U.S. Attorney in San Diego; became ex officio member of the High-Intensity Drug Trafficking Areas Board
  • 2007 – Joined Qualcomm Incorporated as Deputy General Counsel, liaison to the Audit Committee; reviewed SEC filings; attended all Audit Committee meetings and Board meetings; briefly served as Acting General Counsel.
  • 2007 – Joined Non-Profit Boards: The Bishop’s School for 8 years (Board Secretary; Investment Committee) and the La Jolla Music Society for 8 years (Chair, Audit Committee)
  • 2015 – Joined Non-Profit Board of the La Jolla Symphony & Chorus for 6 years (Chair, Audit Committee; Finance Committee)
  • 2018 – Joined Stanford Board of Trustees for 5.5 years (Chair, Audit Committee; Finance Committee)
  • 2021 – Joined Board of TRACON Pharmaceuticals
  • 2022 – Joined Board of National Association of Former United States Attorneys

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Gail Harris

  • 1977 – Graduated from Stanford Law School and joined the law firm of Simpson Thacher & Bartlett (STB)
  • 1984 – Became a partner at STB
  • 1999 – Joined Non-Profit board of directors - New York Cares
  • 2001 – Became Chair of the Board of New York Cares
  • 2004 – Joined the CIGNA Life Insurance Company of New York Board
  • 2006 – Joined the Evercore, Inc Board (Audit Committee, Nominating & Governance Committee)
  • 2008 – Elected to serve as Presiding Director of Evercore
  • 2009 – Elected Chair of Independent Directors Committee for CIGNA Life Ins 2010 – Elected Chair of Independent Directors/Audit Committee for CIGNA Life Ins
  • 2011 – Joined Stanford Law School Board
  • 2012 – Elected Lead director of Evercore
  • 2013 – Joined the Stanford University Board of Trustees (Chair of Investment Responsibility Committee, Member, Finance Committee, Audit Committee, Stanford Medicine Committee)
  • 2014 – Joined private company, Straus Newspapers Inc., as a director
  • 2017 – Joined private company, Siris Medical Inc, as a director
  • 2018 – Joined the Stanford University Freeman Spogli Institute For International Studies Board
  • 2020 – Joined public company, Seacor Holdings Inc., board (Audit Committee, Nominating and Governance Committee)

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Questions?

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Appendix

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Demands on Directors are Growing Rapidly

  • Relationship with CEO
  • Relationships with other Directors
  • Time commitment: Board meetings & committees
  • Liabilities
  • Current governance issues
    • ESG
    • Cyber Security
    • Talent and Culture
    • Activist Investors
    • Market Volatility
    • Diversity

REALITIES FOR BOD MEMBERS

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What distinguishes exemplary boards �is that they are robust, effective social systems… �virtuous cycle of respect, candor and trust

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Each Director Contributes to Effective Board Meetings

  • Committing the time – for meetings, preparation, relationships
  • Avoiding ”over-boarding” – responsibilities are growing for corporate board service
  • Meeting in Executive Session, without management
  • Agreeing on appropriate access to management
  • Setting and supporting the agenda
  • Pursuing director education to be current on governance and industry issues
  • Maintaining confidentiality
  • Relying on experts, management, and one another
  • Working together – building relationships and supporting diverse perspectives

BOARD OPERATIONS

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What Does the �Board Look for �from Management?

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CEO & MANAGEMENT RESPONSIBILITIES

  • Business operations
  • Strategic planning
  • Attracting investment or maintaining and growing shareholder value
  • Capital allocation recommendations
  • Identifying, evaluating and managing risks
  • Accurate and transparent financial reporting and disclosures
  • Annual operating plans and budgets
  • Selecting qualified management, effective organization structure and succession planning
  • Business resiliency, including crisis preparedness

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Good Governance Relies on Core Principles

  1. The Board provides oversight for strategy, CEO/Management, capital allocation, risk, ethics
  2. Management operates with the aim to produce sustainable long-term value
  3. Financial statements provide fair representation of business conditions, disclose risk
  4. Audit committee retains auditors, manages internal audit, oversees compliance and risk
  5. Nom/Gov committee plays leadership role in shaping corporate governance
  6. Compensation committee develops executive compensation philosophy, oversees implementation; may retain compensation consultant
  7. Board, management, and long-term shareholders engage on issues affecting long-term value
  8. The Board considers the interests of all of the company’s constituencies in decision-making

BUSINESS ROUNDTABLE GUIDING PRINCIPLES

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2019: New Statement on the Purpose of the Corporation

200 CEOs’ COMMITMENT TO ALL STAKEHOLDERS

Delivering value to our customers

We will further the tradition of companies leading the way in meeting or exceeding customer expectations.

Investing in our employees

This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

Dealing fairly and ethically with our suppliers

We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

Supporting the communities in which we work

We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate

We are committed to transparency and effective engagement with shareholders.

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Each of our stakeholders is essential

We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

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Board Composition Is Changing Rapidly

THE MODERN BOARDROOM

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The Modern Board is expected to have a deeper connection to the bench strength of the organization, shareholders and stakeholders broadly. It should look out to the future and understand the key imperatives the company must address to ensure relevance for today, and a business that will thrive in a fast changing, technology-determined world. It is now insufficient for boards to be made up of mostly retiring CEOs and financial experts. The Modern Board needs a diversity of career backgrounds, global perspectives, and stakeholder demographics.”

— Coco Brown, CEO, Athena Alliance

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Director Roles Change with Company Growth

Considers a Board where the majority of directors are “outsiders,” �with business experience in the industry and/or stage of the company

Is not afraid to push the company �to rapidly execute the business plan within cash constraints

Has the ability to recognize the need for a CEO change �and acts swiftly in implementing it

Maintains good contacts �for potential customers, employees and/or investors

Actively builds a private/confidential space �where only the best decisions for all shareholders are executed

THE PERFECT START-UP BOD MEMBER

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Source: C. Sands, 2015 Effective Start-up Boards

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Public Boards Seek Strategic, Experienced Contributors

THE PERFECT CORPORATE BOARD MEMBER

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Traits

Contributing Positively to Board Culture

Candid & Constructive

Speaks candidly with a positive intent and in a constructive manner

Listens & Questions

Seeks to understand other perspectives and asks the right questions in an appropriate manner

Prepared & Engaged

Comes prepared, is fully present at meetings and seeks to add value

Current & Open

Stays abreast of industry and company developments and is open to new ideas and ways of doing things

Expertise & Insight

Applies the relevant expertise and insights to the situation at hand

Character & Courage

Demonstrates the highest integrity and always has the courage do the right thing for the right reason

Independent

Possesses an independent perspective with the interests of the company’s shareholders and �stakeholders paramount

Source: RRA Analysis

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Resources

  • Equilar
  • InTouch
  • SWB Board Resources in Google Drive
  • Help a Reporter Out

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Keep in touch

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Lead Change.

Build Boards.

Empower Women.

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