Fiona Lu

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Theranos: An Innocent Board?

Elizabeth Holmes

 

Elizabeth Anna Holmes is the founder and CEO of Theranos, a medical technology startup which claimed to have revolutionized blood testing by using much smaller amounts of blood and hence making it abundantly more convenient and accessible. By 2015 Theranos was valued at $9 billion and Holmes was named the youngest and wealthiest female self-made American billionaire by Forbes. However, allegations against the credibility of her claims began to come to light in late 2015 and today Elizabeth Holmes faces up to 20 years in federal prison. 

Holmes’ strategy when it came to her board of directors was to recruit big important people, not necessarily ones with experience in the field or even in business. By the time Theranos was outed its board of directors consisted of people such as Henry Kissinger, former Secretary of State, Richard Kovacevich, former Wells Fargo & Co. CEO, Sam Nunn, former US Senator, and other well known figures. This led to a board of directors composed nearly entirely of powerful figureheads of the country, lending credibility to the company. The natural question then is how, exactly, Elizabeth Holmes, a young unknown entrepreneur, was able to convince such people to invest their lives in her company. The answer is still unclear but many believe that her charisma played a major part in her success; reports describe her as tall, with a deep voice uncharacteristic of an nonsmoking woman in her thirties and dressed consistently in expensive black turtlenecks. Witnesses say that, without any shared history or relationship, she was able to convince Henry Kissinger to join her board of directors after a single brief meeting. 

Today, in the aftermath of Theranos’ downfall, it is worthwhile to question the motivations, roles, and choices of its board of directors. Theranos has been exposed as a complex scheme and the devious brainchild of Elizabeth Homes herself, but how were the board directors involved? Evidence suggests that few if any of them were aware of the extent of the fraud and so during the criminal investigation they were deemed guiltless. However, a board of directors is directly responsible for the actions and decisions of its company, and so even if none of the directors were “on the inside” of the scheme, are they in fact innocent? 

While the story of Theranos and Holmes and their star-studded board makes a good read, or watch, it also provides an important lesson for board directors everywhere. A board is tasked with overseeing the mission and integrity of a company; its directors should never be willing to compromise that even if under the spell of corporate charisma.

The NYSE Refrains From Adopting Diversity Requirements

NYSE Diversity for Listed Companies

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On August 6th, 2021, The U.S. Securities and Exchange Commission approved the rule changes proposed by the Nasdaq Stock Market regarding board diversity. The rule stipulates that the boards of Nasdaq-listed companies must have one director who identifies as female and another who is a member of an underrepresented minority group or is LGBTQ+, reports BBC News. Otherwise, companies must provide transparency on their board selection process.

In contrast, the New York Stock Exchange leads a different approach to increase diversity. Rather than setting a direct requirement for diversity, NYSE adopted a market-based approach, focusing on the power of networks between diverse individuals. The NYSE launched its Board Advisory Council (BAC) in 2019 to address the need for diverse, inclusive leadership on public and private company boards. The 19-member council is composed of distinctive CEOs who leverage their extensive personal networks to identify talented and diverse candidates to recommend to NYSE-listed companies. This method is supported by a publication by Vell Executive Search, Inc. on gender diversity within boards of technology companies, in which researchers found that 92% of those board seats are filled through personal networks. In conjunction, Vell also found that women have less access to those networks. As such, expanding personal networks to match talented and diverse candidates with boards looking for new board directors will create deliberate progress. BAC networking events have resulted in over 500 meetings between 64 company leaders and 144 candidates to date. In addition to educational and networking opportunities for the board candidates, the council hosts a series of live events designed to connect diverse candidates to NYSE-listed companies seeking to diversify their boards. 

Despite being hesitant to require board diversity like Nasdaq has, the New York Stock Exchange still considers board diversity a critical issue. In addition to the BAC, the NYSE intends to create an online database, reports Executive Vice Chairman Betty Liu in a Barron’s commentary article on February 5th, 2020. The database would be a directory consisting of all diverse candidates nominated by the NYSE Board Advisory Council and will be available to all NYSE-listed companies. The directory will carry the influence of the CEOs that nominated them as well as each candidates’ qualifications.

Overall, regardless of differences in method, both stock exchanges agree that diversity improves board performance and listed companies on either are looking to improve the diversity of their boards. Ultimately, for women and members of underrepresented minority groups, now more than ever is the best time to search for board positions.

Inflation on the Responsibilities of the Board

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The phenomenon of inflation warps myriads of aspects of corporate life, and perhaps most significantly the task of the compensation committee. As prices across the board skyrocket, budgets must be increased and compensation packages must be reevaluated. 

In the current inflationary economy boards must advise based on the level and rate of inflation that the economy is suffering. As the prices for goods and services rise unchecked, wages across the country must be raised to meet expenses in order to maintain a healthy business and workplace. Boards must be prepared to react appropriately to such discrepancies in national economic health or risk disrupting the productivity of their company. 

Most companies approve incentive plan targets within the first quarter of the year, so now is the time to consider how inflation will impact this year’s salary increases. Merit budgets had been at a steady three percent for the last 10 years or so; however, in 2022, the delivered merit budget increased to 3.4%, and for 2023 it is projected to be at 3.8%. This is crucial for board directors to consider when drafting incentive plans and advising for compensation packages. While it may be tempting to simply increase incentive opportunities, incentive plans can be riskier during inflationary periods and so smaller salary raises may be wiser. Slight complexities such as this pose opportunities for an inattentive board to misadvise and cause company decline during these times, but, as always, precarious moments also provide opportunities to succeed beyond competitors. As a board director it is important to recognize those moments when slightly more effort and communication may result in an advantageous level of preparedness. 

During the times of uncertainty that multiple years of a pandemic have created it can be tempting to try and deduce certainty out of supply chain statistics and changing product value, but current supply chains are too intricate to be reliable. Incentive plans must be generated in response to the current economy, which is inflationary. 

Today, supply chains are far too complex to predict the results of incentive plans or goals, which introduces the necessity of a well-informed financial director. This is one of the board’s primary jobs, for which it is vital to evaluate current economic data and draw judgements based on the best interest of the company. In sum, a good board consists of directors who take stock of the current economic environment and its quirks, for example inflation, and advise in response to it and in redistributing incentive plans and payouts. 

Demand for Board Director Diversity is Soaring

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As it nears the end of 2023, many of America’s top public companies showcase increasingly diverse boards of directors. Although there has been significant progress in expanding director appointments, to reflect many types of diversity, there is always room for improvement. Recently, the corporate sector has been overwhelmed by the impact of the pandemic, geopolitical shifts, environmental changes, and social justice movements, which have taken the country by storm over the past few years. Pressure from stakeholders and regulators for company leaders to acknowledge such events, and actually take a stance, is continuously increasing. Diverse boards are seen as better equipped to navigate complex, multifaceted issues, adapt to change, and sustain companies in the face of evolving global challenges. So, the search for more diverse perspectives in the boardroom continues, meaning that demand for diverse directors, with varied backgrounds, knowledge, and experience, are still on the rise.

According to the seventh edition of “Missing Pieces,” historically underrepresented groups, including women and Black/African, Hispanic/Latinx, Asian, Native American/Alaska Native, Native Hawaiian/Pacific Islander, or multiracial men, continue to make strides in the boardroom. In 2022, women held upwards of 30% of board seats in the Fortune 500, which marks about a 5% increase from just two years prior. The number of Fortune 500 board seats held by racial and ethnic minorities also saw about a 5% increase and now stands at 22.2%. 53 companies in the Fortune 500 have more than 60% of their board seats filled by individuals from historically underrepresented groups, the highest percentage in its history. Additionally, from the 2023 Spencer Stuart Board Index, 67% of all new directors, at S&P 500 companies, are from historically underrepresented groups and 48% of all directors are diverse, a 2% increase from 2022. These findings indicate progress, albeit at a gradual pace. At the current rates of increase, for diverse board membership, it will take several decades for America’s leading corporate boards to truly reflect the diversity of the actual population. 

In recent years, overwhelming amounts of evidence have come out showing the improvements that board diversity makes on performance and leadership. Expanding the boardroom to be more diverse and inclusive often increases financial returns and improves corporate reputations. Diverse boards are also associated with stronger risk management and strategy planning. Positive effects, such as these, serve as strong incentives for investors to actively seek out boards that prioritize diversity. With the increasing value of diversity, board selection should address existing gaps in the board’s makeup, keeping gender, age, race, and ethnicity, but also professional experience, in mind. By setting goals to fill these gaps, boards gain diverse perspectives and are able to contribute to many aspects of organizational success and financial effectiveness. It’s important for board members to align themselves with the interests of the groups they represent, to ensure the board is held accountable to satisfying the diverse needs of these groups. If boards are diverse, they make better decisions, which keeps these groups engaged. Informed decision-making is necessary to keep internal matters at bay, keep up with market trends, and maintain healthy public relations. This will also maintain the sustainability and long-term success of the board and strengthen stakeholder trust, as investors want companies to be socially responsible and have diverse employees. Keeping this in mind, it is often most beneficial for companies to focus on prioritizing what is in the best interest of investors and the public.

The demand for board diversity and recognition of its importance continues to grow, and many legislative measures have been implemented to ensure increased diversity within public companies. The U.S. Court of Appeals for the Fifth Circuit recently upheld Nasdaq’s board diversity rule, originally approved by the U.S. Securities and Exchange Commission in 2021, which requires Nasdaq companies to have a minimum of two diverse directors, including at least one woman and one individual from an underrepresented minority or self-identifying as LGBTQ+. Despite resounding support for board diversity and its benefits, there has been some concern over the Supreme Court’s landmark affirmative action ruling. While this ruling only specifically ended race-conscious college admissions, Justice Neil Gorsuch has insinuated that it should and will apply to the hiring process of employers wanting to hire diverse employees. Regardless, stakeholders appreciate diversity in the boardroom, as organizations that prioritize diversity are seen as more resilient, innovative, and socially responsible. Embracing board diversity is a moral imperative, necessary for business success. If companies continue to build more diverse boards, it shows further progress in addressing the complexities of a diverse world. 

Board Diversity Legislation

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board diversity

Board Diversity Legislation 

Even in the private equity sector there has been a demand for women by investors as the performance of more diverse companies has been steadily increasing relative to those with no women on their boards. Similarly, having all-male all-white boards is a common sign of bias within the appointment process signifying a lack of corporate responsibility.

Studies have long confirmed the clear business case for board diversity–heterogeneity allows boards to better identify and manage risks due to the range of skill sets and experiences that diversity brings to boardroom discussions. Furthermore, a diverse board leads to a better understanding of customers and provides better goods and services for the customers.

Goldman Sachs CEO David Solomon has told CNBC that the investment bank would not take companies public unless they had at least one “diverse” board member.

“Starting on July 1 in the U.S. and Europe, we’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women.”

As the economic and social significance of board diversity becomes more widely recognized, some U.S. state legislatures have taken initiatives to address the rising concerns for demographic variety in the corporate boardroom. Listed below is the run-down of each state that has introduced and/or passed bills regarding diversity.

Laws

California (2018) Senate Bill 826

By the end of 2019, every publicly held domestic or foreign corporation whose principal executive office is in California is required to have a minimum of 1 female director on its board. Further, by the end of 2021, each one with 6+ board seats must have at least 3 women, those with 5 seats must have at least 2 women, and those with 4 or fewer seats must have at least 1 woman.

Illinois (2019) HB3394

Though initially introduced with specific representation requirements for every corporation to have a minimum of 1 female and 1 African-American director on its board, this bill now only requires that all publicly held domestic or foreign corporations whose principal executive offices are in Illinois must annually file public disclosures regarding the racial, ethnic, and gender demographics of their board.

New York (2019) S.4728

This bill is amending the state’s current Business Corporation Law to conduct a “women on corporate boards study” aimed at collecting data about board diversity in companies in the state. Domestic and foreign corporations authorized to conduct business within New York are required to report the number of directors and the number of women on their board on their Biennial Statement Filings. By February 1st 2022 the Department of State will publish these findings and will repeat the process every 4 years.

Maryland (2019)  HB1116 SB0911

This bill outlines annual data reporting requirements for corporate boards that will last through September 30th 2029. Effective October 1st 2019 tax-exempt domestic nonstock corporations with operating budgets exceeding $5M and domestic stock corporations with total sales exceeding $5M will have to include number of women and total members on their annual reports to the State Department of Assessments and Taxation to be reported online on January 1st2020. Private companies where at least 75% of shareholders are family members are exempt from reporting.

Washington (2020) RCW 23B.08.120

Requested by the Washington State Bar Association to amend the Washington Business Corporation Act, the 23B RCW requires corporations that are organized under Washington law and that file public reports with the Securities and Exchange Commission (SEC) to satisfy gender diversity requirements with respect to their boards of directors, among other revisions. By Jan. 1, 2020, the law requires a public company to maintain a board of directors that is composed of individuals at least 25% of which self-identify as women or to alternatively provide its shareholders a discussion and analysis concerning its approach to board diversity in advance of its annual meeting. 

Nasdaq (2021) 

When the SEC approved the Board Diversity rule in August 2021, it became part of Nasdaq’s corporate governance requirements as Rules 5605(f) and 5606. Subject to certain exceptions, the Rule requires each Nasdaq-listed company to 1) publicly disclose diversity statistics regarding its board of directors, and 2) have, or explain why it does not have, at least two diverse directors, including at least one who self-identifies as female and one individual who self-identifies as an underrepresented minority  or LGBTQ+.

Past Resolutions

Past resolutions are written motions that cannot progress into a law, but instead function as signifiers of the legislature’s position on certain issues and encouragements for certain actions to be made.

Massachusetts (2015) Resolution S.1007

By the end of 2018, all publicly held domestic or foreign corporations whose principal executive offices are in Massachusetts with 9+ members should have a minimum of 3 female directors. Boards with fewer than 9 members should have at least 2 female directors.

In addition, the legislature urges these corporations to disclose the gender diversity on their boards and implement policies and practices designed to increase the number of female directors.

Illinois (2015) HR0439

By the end of 2018, all publicly held domestic or foreign corporations whose principal executive offices are in Illinois with 9+ members should have at least 3 female directors. Boards with 8 to 5 members should have a minimum of 2 women and those with 4 or less members should have at least 1 woman.

Pennsylvania (2017) HR273

By the end of 2020, all publicly held domestic or foreign corporations whose principal executive offices are in Pennsylvania should have boards comprising or at least 30% women.

Colorado (2017) House Joint Resolution 17-1017

By the end of 2020, all publicly held domestic or foreign corporations whose principal executive offices are in Colorado with 9+ members should have at least 3 female directors. Boards with 8 to 5 members should have at least 2 women and those with 4 or less members should have at least 1 woman.

 

This article is current as of March 21st 2023.

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Corporate Governance Under the Biden Administration

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Joe Biden and Kamala Harris

The transition to the Biden administration is expected to have a significant impact on corporate governance. This impact is due in part to specific governance related proposals that will pass through the administration, and in part to how Biden’s policies will influence state legislation, governance best practices, and board conduct. During his campaign, several proposals with a significant impact on corporate governance were brought up by progressive candidates such as the Affordable Capitalism Act, the Ending Too Big to Jail Act, and the Corporate Executive Accountability Act. Looking forward, more specific proposals will likely establish basic goals and requirements for board diversity, gender equality, and worker representation.

Biden set the tone for his approach to board governance during his campaign when he claimed the age of shareholder primacy would come to an end during his presidency: “It’s way past time we put an end to the era of shareholder capitalism. The idea the only responsibility a corporation has is with shareholders: that’s simply not true. It’s an absolute farce. They have a responsibility to their workers, their community, to their country. That isn’t a radical notion”. In accordance with this sentiment, Biden will work towards fair taxation of corporations and ensure that they put their workers and communities before their shareholders.

Biden’s approach aligns with that of Elizabeth Warren, who had the most developed set of corporate governance policies during her campaign. These policies included pledges to place workers on boards, as well as the introduction of “charter companies” which would be dedicated to stakeholder interests rather than shareholder interests.

Kamala Harris has been similarly outspoken about the need for change in corporate America, stating her commitment to restore the corporate taxation level to 35% and augment diversity in the boardroom: “When our country’s corporate leadership looks more like the rest of the country, it ensures that a wider array of perspectives are heard in meetings and board rooms and that the needs and interests of more people are considered. We must do more to hold companies accountable for living up to their own diversity goals and make sure we have reliable data about their progress”.

Kamala Harris similarly proposed a new law that would compel companies of one hundred employees or more the prove that they pay men and women equally or face a fine of one percent profit per one percent of pay disparity. In this way, Kamala looks to take the burden off of the working woman by holding corporations accountable for paying their employees fairly.

While Biden and Harris are not as radical as Bernie Sanders and Elizabeth Warren in their intentions for changes in corporate governance, advisors have begun warning companies to prepare for new regulations. These regulations will likely turn corporate attention away from their shareholders and towards their stakeholders and enforce greater boardroom diversity. Moreover, companies should be prepared for the administration to raise corporate taxes, especially for companies that shift jobs overseas, and to require the disclosure of the racial, gender, and ethnic makeup of their boards.

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The Origins of the Corporate Board

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How exactly did the corporate board come to be? This is an important question to consider when thinking about how important board director positions are today. The concept of corporate governance in practice dates back as far as the 12th-16th centuries. Although many of the fundamental principles of corporate governance have endured the test of time, the dynamics of how they operate, including the responsibilities of individual roles and the distribution of power and decision-making, have continued to evolve.

The earliest roots of the corporate board can be found in Medieval Europe, where merchants and traders formed partnerships, sharing risks and profits. During this period, guilds, associations of craftsmen and merchants who practiced trade, played a significant role in the economic and social structure of the medieval village. Guilds had a sort of board that oversaw their activities and made decisions regarding things like trade regulations and apprenticeships. The individuals on this board were typically elected by guild members. This is the first concept of an early corporate board, meaning there was a group of individuals responsible for making decisions collectively and overseeing an organization’s affairs. 

More notably, the Dutch East India Company (the VOC), established in 1602, is highly regarded as one of the first multinational corporations. This company introduced a more formalized corporate governance structure. It had a board of directors and shareholders, serving as the template for modern corporate governance. More specifically, the VOC was made up of multiple private trading companies where individuals and directors acted as shareholders. Their liabilities were limited to their paid-in capital, meaning the company was essentially what is today known as a limited liability corporation. Critical elements of success for this board included the carefully balanced representation of shareholder interests and the director positions being filled by existing merchants who had authority over the investors. With these successes, we see the importance of separation of ownership and control and how a board should focus on policies that benefit the whole company.

In the 17th century, the formalization of stock exchanges was significant for defining corporate governance. Particularly, the establishment of the London Stock Exchange in 1698 greatly contributed to the development of joint-stock companies. Exchanges served as platforms to buy and sell shares of publicly traded companies, further reinforcing the need for corporate governance. This was more organized and transparent for companies who were aiming to raise capital by issuing shares to the public. Shareholders were able to vote on company affairs during general meetings, giving them a way to influence the board’s decision-making. The London Stock Exchange had requirements and regulations regarding financial disclosures and transparency of operations, which established levels of accountability in terms of corporate governance.

During the 19th century, the United States experienced a railroad boom, alongside the rapid expansion of modern corporations. The expansion of the railroad industry, during this period, led to the formation of many railroad companies and a surge in corporate activity. Therefore, corporate boards became more common, as growing companies needed increasingly complex management. The complexity and scale of railroad operations meant companies needed to improve their regulations and such. Many of these companies fell victim to financial speculation and fraud.

The Industrial Revolution marked a significant shift in business practices. This was a period that shifted manual labor-based economies to industrial and machine-driven ones. As industries expanded, the need for capital and management also increased. Capital accumulation led to the further emergence of joint-stock companies. The concept of limited liability became even more crucial to protect the financial responsibilities of investors, leading to newly developing legal structures and other management. The formation of corporations continued to expand.

Finally, in the 20th century, we witnessed the formalization of corporate governance. The term, “corporate governance,” wasn’t actually used until the 1970s and largely stayed within the United States. During this time, the role of the board became more defined, as corporations grew in influence, with an emphasis on representing shareholder interest, strategic planning, and management oversight. 

Today, corporate boards are a necessary part of corporations, playing a crucial role in decision-making and oversight. The many historical pioneers, of simpler corporate governance systems and the framework of principles they began with, are still relevant to this day. Modern responsibilities of today’s board directors have changed greatly and their complexities will continue to evolve. 

Meeting of shareholders

Board Organizational Frameworks

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Developing a strong organizational framework for the board of directors is critical to ensuring that company matters are addressed by the correct committees and receive the attention necessary for solving these matters. Issues of importance should be prioritized appropriately and given ample time for review. 

Corporate Culture and Board Organization

There are many mechanisms for organizing the board, all of which lead back to the topic of corporate culture. Corporate culture begins with the board; if the board is unable to establish an understanding grasp of what motivates corporate behavior, the rest of the company will follow suit. Failing to give thoughtful attention to employee and executive interactions, behaviors, and language will undoubtedly result in a disorganized board and a company that lacks a clear focus of what defines its team members. Thus, it is important for boards to maintain an environment that fosters engagement and meaningful conversation as a backdrop against accomplishing agenda tasks. This is the first step to spreading a culture of candor and trust within the company and cannot be accomplished through one 40-minute team bonding meeting. It must be consistently worked upon and established over time through healthy discussions of sensitive topics, transparency about company goals, and acknowledgment of personal weaknesses to make room for learning growth. 

Corporate culture should also be included in a company’s formal risk assessments as it can very easily influence workforce productivity, company reputation, and law breaches. According to the 2017 Board Leadership of Corporate Culture in Europe Report, approximately 85% of the value of leading businesses come from intangible assets, such as a company’s brand, reputation, and internal relations. These intangibles are all inextricably linked to the board’s ability to set the right organizational culture and are important factors to business success. Thus, investing more time and resources into mindful culture development will bring a company greater returns. 

Tailoring the Board to Meet Company Needs

When talking about board organization, it is important to keep in mind that not every board is the same. Board work should be tailored to the specific needs and culture of the company. What makes sense in the context of one board may not work for another. While looking at best practices and board trend reports may be helpful in establishing a general framework for your own practices, it should not be viewed as the golden rulebook of board organization. Such trends come and go; a company should only adopt a policy after considering the specific benefits it will bring in their unique corporate circumstances. 

One example of the significance of examining company specifics is the debate over combining or separating the chairman and CEO roles. One generally accepted argument is that the role of the CEO/management is to run the business operations while the role of the board is to oversee this management, thus the leadership of the two roles must be separated to keep each other in check. Conversely, others argue that the role of the CEO and Chairman go hand in hand and can be combined to one position of oversight. This age old debate has no one-size-fits-all answer because it depends on the circumstances of the company. In the U.K., the CEO does not serve the dual role of the chairman, whereas in the U.S., over 50% of CEO’s surveyed also serve as chairman. 

A simple yet helpful device for setting the distinction between management and board decision-making is to set up periodical reviews of the specific responsibilities reserved for the board. While this is just one example of how different systems can adopt differing policies, in general, all major questions regarding board and leadership structure require careful consideration of the unique set of company needs and corporate culture that influence these decisions.

Business people looking at a screen during a video conference

Tips for Virtual Board Meetings

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In the midst of the current COVID-19 pandemic, virtual board meetings have proven to be an invaluable and necessary step to take in preventing the spread of disease. Virtual meetings are an effective way to convene during times of crisis and save valuable time and resources by eliminating the need to set up a physical meeting location. One of the greatest benefits of remote meetings is that they allow members of a team to communicate quickly and efficiently from the comfort of their own offices. This facilitates more frequent meetings and check-ins, added flexibility, and greater convenience in information sharing. 

Today’s modern technology has revolutionized the way virtual meetings are conducted, offering a variety of tools and software options to suit any meeting purpose. Advanced digital products are now available to provide greater security, offer cloud sharing options for file exchange, and support larger teams. Over time, video-sharing platforms have evolved to produce a streamlined process for conducting remote meetings and scheduling follow-up video chats. 

In the quest to practice social distancing and protect employees from undue health risks, it is imperative for companies to switch to remote meetings and set up the right tools for a fully integrated digital governance framework. With the right preparation and an understanding of the best practices for virtual conferencing, companies can ensure that their teams stay up to date on the latest tasks at hand and operate just as, if not more efficiently, while reducing the time and capital spent on setting up in-person meetings. 

We have gathered and summarized below the best tips for creating an optimal virtual conferencing environment. 

Setting up the Right Technology

Prior to switching to virtual meetings, the company must standardize what technologies will be used across the board. Selecting the right video conferencing portal that comes with sufficient security and private access is important in making sure that sensitive business intelligence does not get leaked to outsiders. A recommended software is Zoom because it allows users to send out private, password protected video conference links with capabilities of hosting up to 1,000 video participants and 10,000 viewers. Send out an announcement within the company that mandates everyone to download and run a test session with the chosen software to make sure everyone is able to access it before beginning any actual meetings. This also allows users sufficient time to become acquainted with the software’s features so that no time is wasted fumbling around with technology during actual conferences.

Creating an Agenda

Once the software is confirmed to be working for everyone, set up a virtual Google calendar that clearly details the time and agenda of each meeting, with the option for attendees to mark if they are able to attend. This creates transparency on who to expect at each meeting and creates ample time to reschedule if not enough people can make a certain time. In order to ensure that all board members are prepared, the board administrator must notify everyone at least three days in advance of the upcoming meeting with a reminder for speakers to send over their prepared talking points so that a transparent schedule can be outlined for the meeting. This ensures that the meeting does not run significantly overtime or get sidetracked. 

Meeting Etiquette

In order to optimize participant engagement, the video host must have a strong grasp on remote conferencing etiquette. This requires the board chair to first determine the right number of attendees to invite. A good rule of thumb is to keep the number of speakers limited to 10 so that there is less cause for talking over one another or inactively listening without contributing to the conversation. 

Next, determine what the best time to set up the meeting would be. Remember to be mindful of time zones and choose a schedule that is as convenient as possible for everyone. Sending out a Google poll with multiple meeting options can facilitate the process of picking the best time. 

Prepare your speaking points before the meeting and enter the virtual space at least 5 minutes prior to the scheduled start time. Greet participants as they join the space and introduce yourself as the meeting’s host. This will make participants more inclined to engage if they know who is running the show. Clarify any housekeeping rules before the meeting begins pertaining to the order of speakers, the basic features participants can use if they want to send a chat or pose a question, and an overview of what will be covered. 

Turn off your notifications to prevent any distractions and instruct participants to do the same. An alternative way to minimize distractions is to mute the participants’ audio and instruct them on how to unmute themselves if they have a point to make or when it is their turn to speak. This reduces the level of background noise and makes it easier to focus on the speaker. 

Meeting Follow-Up

After the meeting is over, include extra time for questions and feedback on how the meeting ran. Taking suggestions for improvement is key to making sure future meetings can run smoothly and eliminating repeat issues. Sending out a follow-up email one day after the meeting is a good way to make sure participants benefited fully from the meeting, clarify any sources of confusion, and perform post-meeting progress checks. Virtual meetings should always be recorded with the consent of its participants so that people can refer to the recording if they missed anything or were unable to attend. 

With these tips in mind, your virtual meetings will run smoothly and become a powerful tool for holistically maintaining remote productivity across all teams. By leveraging video communications, corporate boards can continue to operate efficiently from home and address key issues without interruption.

Business people fearing swineflu virus

Tips for Navigating COVID-19

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Editor’s Note: Don’t forget Board of Director’s primary responsibility is insuring the well being and longevity of the company, which means making sure the company has the resources to function, retaining customers and employees, and managing risk.

The COVID-19 outbreak is a human tragedy that has affected detrimental impacts on families, consumers, businesses and the global economy. Navigating this novel incident is a tricky situation that companies and boards must prepare for. The effects of this pandemic have reached a never before seen global scale, with long-term consequences that are far-reaching and complex. So far, the coronavirus has disrupted worldwide trade, caused the stock market to plummet, and brought about country-wide lockdowns, canceled major events, and restricted travel. It continues to be the center of public policy discourse and is rapidly spreading, forecasting unpredictable changes in the future. 

As of now, over 175 countries have reported COVID-19 cases, with the U.S. alone reaching over 1 million cases this past week. During this time of crisis, board members must work together and assume their leadership roles to establish trust and guidance moving forward, taking care of employees and consumers alike. Companies must keep a vigilant eye on their region’s public policies to determine the best course of action and predict the contours of the pandemic in the following months. 

The key areas of concern companies should concentrate on are supporting employees and protecting them from a work-at-home basis, monitoring the pandemic’s spread, safeguarding consumers by enforcing social distancing, and planning for the next phase of disease spread. 

Key Areas of Concern

1. Supporting Employees

During this difficult time, many employees have found themselves out of work and unable to financially support their families. It is important for boards and management teams to be sympathetic of their struggle and provide reassurance about where different positions within the company stand. Enacting a work-from-home mandate is the first step to preventing further disease spread while maintaining workflow. To improve the efficiency of remote work, companies must create a transparent remote environment equipped with the essential communication, networking, and cloud sharing tools to operate as a cohesive unit and drive productivity. Sick-leave, scheduling, progress tracking and other work norm policies must also be amended to ensure health and safety at the forefront.

2. Monitor the Pandemic’s Spread

Boards must remain informed on key indicators of where and how the virus is evolving to conduct accurate scenario planning. Understanding how the pandemic might develop is essential to developing a fast response plan and emergency measures to take that prioritize protecting lives while minimizing financial losses. Board members must think critically about actions to take for cyber breaches, recalibrated consumer spending, economic recovery, and rapid day-by-day adaptations to change. Companies should have various plans in place that account for long-term remote operations and be aware of potential permanent changes to economic spending and market demand shifts that will persist even after the outbreak has relented. 

3. Safeguarding Consumers

Companies must play their role in curbing the pandemic by enforcing social distancing for their consumers. With many operations shut down during the lockdown, companies should brainstorm alternative ways to service their customers and ensure the safety of their goods. Communication and information sharing is key to establishing transparency with consumers about what services can be accessed, changes in refund policies, and what to expect moving forward. Board members play a critical role in this process by ensuring clear lines of communication between directors, management, employees and consumers. This enables unity and ensures collaboration on a single agenda. 

4. Planning for the Next Phase

As the pandemic continues to unfold, it is unclear when the state of the world’s health will return to normal. With this in mind, boards and executives must lead with resolve, resilience, and reimagination. Planning for the next step may be difficult when the atmosphere is heavy with uncertainty, so companies must remain open-minded and unopposed to drastic reinventions and institutional changes. Predicting market changes, reconsidering fixed versus variable costs, shutting down unneeded operations and opening new avenues of opportunity ultimately define business success and create a new compass for how to better deliver to customers. 

During this time, the most important priority for all parties is staying informed on the latest outbreak updates, being proactive, and maintaining protective health measures. As with any crisis, the coronavirus pandemic presents companies with the opportunity to emerge stronger and more resilient in the coming months should board members and executives collaborate with these following tips in mind.

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The Origins and Evolution of Corporate Governance

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To understand the important job that board directors uphold, we must first take a look into the complex origins of how governance boards came to be. While the foundational pillars of governance have remained constant, the dynamics of how they operate have since evolved to encompass broader roles. We will examine the historical emergence of boards to gain an understanding of the framework of modern governance, providing a necessary foundation for directors today.

The role of boards of directors is and always has been to protect and enhance the well-being of its corporation. The overarching definition of governance can be stated as a system to control the decision making processes surrounding resource allocation and risk tolerance. Different governance structures have emerged and evolved to perform this definition, but ubiquitous commonalities between these structures remains — the presence of intermediaries operating control between multiple owners, periodic reports of fiscal status to owners and an elected authority to appoint the leader.

The first demands for such a structure can be dated back to the early 17th century, when the Dutch battled for control of trade in the East Indies. With the launch of the Dutch East India Company (Verinidge Oostindige Compagne or VOC for short) in 1602, the Dutch were the first to introduce a stock market to Amsterdam, transforming its regional market towns into a dominant financial center. The VOC was an aggregation of private trading companies into a single entity, where the economic participants and managing directors acted as shareholders whose liabilities were limited to the paid-in capital, or what is today known as a limited liability corporation (LLC).

The Dutch Become the Predecessors of Corporate Governance

Alongside being the world’s first LLC, the VOC set the precedent for many other business practices such as establishing the world’s first stock exchange (the Amsterdam Stock Exchange) and releasing the first initial public offering (IPO). These progressive changes to corporate trade and allocated wealth created demands for new management strategies, leading to the early semblances of a governance board.

Governance of the VOC was organized into six chambers based on various ports. Seventeen delegates were selected from the managing shareholders to represent each chamber, with the last seat in rotation. They convened to administer executive decisions such as defining general policy, delegating operations, etc. 

The key feature of success in this early board was the carefully balanced representation of shareholder interests — an effective assurance that policies benefit the overall company. Another important feature of this board was that its directors did not originate from its passive shareholders, rather it was managed by the preexisting individual merchants that collectively held legislative and adjudicative power above the investors. This separation of ownership and control is a fundamental property that must be held in order to advance a company’s well-being, and we will see this as a common source of pitfall in boards moving forward.

Early Corporate United States

Shifting our focus to colonial America, as it strived towards an independent nation, they needed to learn how to operate as a confederation of states and redefine the roles of government. Examining the first 150 years of American history in the context of socioeconomic organization reveals the early origins of corporate America and how modern board practices came to be.

At the time the Declaration of Independence was written, large corporations were frowned upon for their unpredictable influences on the economy; hence only special corporations were allowed rights to formation under government authorization or a royal charter. However, the shifting power structures in post-revolutionary America incited national debate over private vs. federal control of corporations. In 1811, New York laid the groundwork for an incorporation law that established a simple procedure to register a corporation sans legislative permission and allowed investors limited liability. The incorporation law created a set of legal guidelines for corporations, including provisioning control to a board of directors and maintaining maximum capital under $100k. These policies reflect the formation of the modern board, as well as the ongoing dichotomy between corporate and political power.

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Scandal Outbreak Leads to Corporate Boardroom Reforms

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The fundamental pillars of corporate governance revolve around independent, non-biased decision making that serve the best interest of the company, though early boards lacked the legal and structural framework to uphold these principles. As numerous scandals led to rising public scrutiny, the role of the the board evolved to encompass a separation of director interests from those of upper management to prevent the reoccurrence of corporate collapses at firms such as Enron Corp., WorldCom Inc., and Global Crossing Ltd.

Post WWII Developments

The economic boom following World War II allowed corporate power to flourish, making the role of governance boards increasingly important. During this period of market growth, corporate managers were leading the reigns while board directors and investors were expected to follow. With corporate powers mushrooming out of proportion, the board of directors served more of a symbolic role than actual oversight which led to an era of scandals and financial fraud, one of the most notable being the wreck of Penn Central. 

Penn Central’s collapse in the 1960s was caused by its board’s misinformation, poor monitoring of capital and its further debt propagation of $100 million in dividend approvals. The story caused a widespread backlash against inside directors and fueled the shift in board structure from the advisory to oversight model. As more firms such as LTV, Ampex and Memorex came under fire for fraud and mismanagement, recognition grew for the significance of independent directors. Reform was on the horizon.

Things began to change in the 1970s when the Securities and Exchange Commission (SEC) introduced new regulations that cracked down on the structure of boards. In 1976, the SEC pushed the New York Stock Exchange (NYSE) to require audit committees be composed of independent directors with access to accurate accounting information and outside auditors should they see fit. Other legislative reform proposals placed emphasis on shareholder representation and the distinction between management and oversight members. This era of corporate governance reforms had the collective effect of reconceptualizing the board’s purpose and composition in favor of actively informed, nonpartisan decision-making.

The Rise of Institutional Shareholders

Moving into the 80s, corporate governance focus shifts back to shareholder’s rights and deregulation that corresponded with a political rightward shift. Lawmakers and corporate advocates let corporate governance reside to align itself with the market mechanisms. During this decade, “The Deal Decade,” institutional investors bought more shares and held more than 40% of the U.S. equity markets, giving them more control to exercise hostile takeovers. The cycle of mergers and acquisitions that ensued were mainly motivated by quick returns.

Fearing takeovers, executives and legal courts turned to the idea of independent directors to decide on hostile bids and compare them against the value of the company. In a series of cases, the Delaware Supreme Court gave boards permission to adopt a “poison pill,” a corporate finance technique designed to drive away hostile bidders by imposing them with high costs. Placing the responsibility on independent directors re-enforced the oversight and judgement role of directory boards. 

The value of independence continued to grow at the turn of the century, as reflected by continued tightening of standards for disqualifying relationships of directors, reinforced legal frameworks for fiduciary duty violations and equity linked compensation rewarding vigilance. Beyond this, internal structure developments led to the formation of nominating committees to shift the power of director selection away from CEOs. In 1996, the federal government further established the board independence standard through Section 162(m) of the Internal Revenue Code which appended a set of eligibility criteria that prohibited former officers of a corporation or anyone who has received compensation, either directly or indirectly, from said corporation to act as directors. These IRS regulations divorced economic interest from corporate governance and became important guiding points for future evaluations of board independence.

Post 2000 Board Refocus

As the economy continued to grow in the early 2000s, the lack of robust legal standards, and growing market conditions ripened the scene for numerous cases of fraud, such as systematic financial mis-reportings and deceitful accounting practices. One of the most severe and prevalent forms of profiteering was stock option backdating. Following a 1972 revision (APB 25) to accounting standards, companies were able to report executive incomes in the form of “at-the-money” stock options as business expenses for the purpose of increasing executive compensation while misinforming shareholders. Many companies then discovered that by backdating stock option grants, they were able to generate additional income that was both tax-deductible and held an underlying lower stock price. This resulted in widespread earning overstatements and record falsifications.

Enron Scandal Leads to Sarbanes Oxley

Enron Corporation, a major energy, utilities and natural gas company, was exposed in major case of institutionalized accounting fraud that generated a vicious cycle of insider trading and money laundering among its executives. In 2001, Enron filed for bankruptcy and emerged from it in November of 2004, reorganizing under the name Enron Creditors Recovery Corp. and continuing its streak of fiduciary failure, high risk accounting and “off-the-books” activities — all of which was facilitated by their lack of independent auditors and board members. Enron’s board was comprised of members who held financial ties with the company and inappropriate conflicts of interest that fueled the wildfire of diverting funds, overstating profits, and growing debts. 

In the wake of major scandals from Enron to Worldcom, the federal government cracked down on lax corporate laws which led to Congressional hearings that focused on the responsibility of board directors in such matters. Following the hearings, the Sarbanes-Oxley (SOX) Act of 2002 was quickly developed and passed which mandated, among other things, independent board audit committees, the creation of the Public Company Accounting Oversight Board (PCAOB) to regulate auditing processes, internal control tests, and required that CEOs and CFOs to attest to their financial statements. The principal goal of SOX was upholding financial integrity, though it accomplished sweeping accounting reforms beyond this by reestablishing the expected roles of corporate boards.

SOX continues to have a profound impact on capital markets and boardrooms today. By enforcing independent audit committees, it strengthens the board’s role in overseeing management’s accounting practices to separate conflicting interests and ensure that no misreportings slip through to the public. In addition, SOX imposes harsher punishments for securities fraud by sentencing up to 25 years in prison if top management knowingly signs off on falsified reports. The company also loses credibility and investor confidence when they publish the required accounting restatement stating management’s misconduct. Finally, SOX strengthens disclosure between companies and the public by closing the loopholes for off-the-books activities. 

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What is the Role of a Board of Directors?

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In simple terms, boards are the governing bodies of corporations elected to make major decisions concerning financing, mergers and acquisitions, selling the company, nominating the CEO, and when or if they should release an IPO to take the company public. 

The board serves the corporation as its agent and makes decisions in an unbiased service of the company and its shareholders’ best interests. An important distinction to note between board members and management teams is that it is not the board’s responsibility to run the company. Their responsibility falls more under oversight and ensuring that the right people are running the company. Boards that get too involved risk undermining the management team and fail adherence to the crucial board principle of acting with independence. 

The sum of these responsibilities is a board’s fiduciary duty, meaning they must place the company’s best interest before their own. This sounds simple in theory, but in practice, many boards run into trouble when faced with difficult decisions that go against their personal interests. Therefore, it is poor practice for board members to have strong financial ties with the company that will inhibit them from acting ethically. 

High performing boards will maintain an active spirit of debate. Because every matter of strategic importance needs the board’s approval, good directors must always be on their toes and highly involved in deliberating the best course of action. Additionally, good board members must listen carefully to and respect opposing opinions. Only then can a consensus be reached efficiently and smoothly. 

The leader of the board, the chairman, must ensure that everyone remains in check and leads the decision-making process. The chairman should not be affiliated with the CEO and should weigh the CEO’s opinion of no greater importance than the board directors. A strong chairman will drive its board to ask the necessary hard questions, challenge the status quo, and continuously evolve to develop highly informed, up-to-date perspectives.

The trending evolution as of late has been a sweeping move to incorporate more diversity members and women on boards. A more diverse board reflects an independent board selection process and predicts a greater ability of the board to make unbiased decisions that have been considered from all angles. 

Diversity standards typically mean having at least one person of color, one woman, and one independent director on the board, though recent growing pressures to increase diversity have caused some companies to raise the standard to at least two people of color and women. The current top-three public companies ranked by board diversity are leading this movement with numbers as high as 60% female directors in Stitch Fix, 50% ethnic-minority directors in Hewlett-Packard, and 92% independent directors in Verizon. Further proof of the diversity movement is seen through Goldman Sachs CEO David Solomon’s statement that the bank will no longer take companies with all-male, all-white boards public. 

It will be interesting to see how these shifting board dynamics play out, but in the meantime, we can rest assured that the overarching roles of boards are not changing anytime soon. 

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Overview of Board Committees

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In the ever-changing digital age, board committee structures must constantly evolve to keep up with changes in capital markets and trade policy. Board members face new challenges everyday regarding the complexities of corporate values, strategy and risk management. 

A recent Harvard Law School study tracked board structures since 2013 to examine how S&P 500 companies are using board committee structure to address oversight needs. They found that although boards have been growing to encompass additional committees, the underlying framework has remained largely the same and rely on three key committees– audit, compensation, and nominating and governance– that are required by the stock exchanges. Bank holding companies (BHCs) are required to have one additional risk committee to review their global risk-management framework. Beyond this basic structure, most institutions have one additional standing committee to oversee finances or executive order.

During 2013-18, the portion of companies with at least one additional committee grew marginally from 74% to 76%, and the average number of additional committees remained largely consistent.

Harvard Law School Forum on Corporate Governance

Top Additional Committees

Findings on the top additional committees in 2012-18 are as follows.

Executive Committee: Exercises authority of the board when the board is not in session, except in cases where action of the entire board is required by charter, bylaws or applicable law. (36% of S&P 500

Finance Committee: Oversees capital allocation, financial policies, strategies, capital structure, and annual operating and capital budget. The finance committee may also oversee investments, dividend policy, credit and other market risks, share repurchases, and mergers and acquisitions. (36% of S&P 500)

Compliance Committee: Oversees programs and performance related to legal and regulatory risks, as well as implementation and maintenance of the company’s code of conduct and related matters. The compliance committee may have special focus on compliance in a specific area, e.g., environmental, health, safety and technology. (16% of S&P 500)

Risk Committee: Recommends the articulation and establishment of the company’s overall risk tolerance and oversees enterprise-wide risk management to identify, assess and address major risks facing the company, which may include credit, operational, regulatory, interest, liquidity, investment, funding, market, strategic, reputational, emerging or other risks. The risk committee reviews and discusses management’s assessment of the company’s enterprise-wide risk profile. (11% of S&P 500)

Technology Committee: Oversees and assesses the company’s technology profile and related strategies and makes recommendations regarding the execution of technology enablement formulated by management. Technology committee members address opportunities and risks regarding technological strategies, including aspects of cybersecurity. (7% of S&P 500)

Public Policy and Regulatory Affairs Committee: Reviews significant legislative and regulatory initiatives by state, federal, or foreign government authorities, as well as other public issues likely to affect the company and its shareholders. They oversee the development of company policies in response to these developments and may have a related compliance function. (7% of S&P 500)

Corporate Responsibility and Sustainability Committee: Reviews policies and practices related to specific public issues of concern to shareholders, the company, its employees, and the general public. They maintain oversight of corporate responsibility, environmental sustainability, diversity and inclusiveness, and reputational risk. (6% of S&P 500)

Finding the right committees for your specific company depends on the company’s unique needs and must address the company’s major concerns in a forward-thinking manner that will motivate new strategic thinking. However, some common trends that span across all industries is a focus on technology and sustainability as we move into the new decade. Keeping these trends in mind when considering the most effective committee structures will be a smart move for companies who want to succeed in today’s hyper competitive, highly disruptive markets.

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Board Structure Strategy

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The board of directors is appointed by a company’s shareholders with the expectation that directors will govern according to the shareholders’ and company’s best interest. Their purpose is to discuss strategies and make key decisions on financial affairs that will lead the company towards long-term prosperity and sustainability, while protecting the interests of all shareholders and stakeholders. Ranging from corporate governance, to corporate ethics, to corporate social responsibility, board directors are expected to have individual areas of expertise and impart their knowledge during debates to collaborate with other directors on defining the best course of action. To execute this duty, boards are split into committees that each oversee a specific area of the company’s performance. The structure of these committees depends on the type of company it is and the company’s goals.

Best Practices for Board Structure

Typically, board terms are staggered to prevent hostile takeovers. The candidates are elected during a corporation’s annual general meeting by current board directors and shareholders, and should possess some level of managerial experience. Though today, many companies are changing their criteria for board candidates and reducing the amount of managerial or board experience required, instead focusing on the unique area of expertise a candidate can bring to the table that the company is lacking in. For example, a company may decide to appoint a former IT specialist or software engineer with no prior board experience if the company is trying to strengthen their technological strategies.

Having a certain quota of independent directors is also important regardless of the company type or direction because it minimizes bias and external pressures in the boardroom. The Securities and Exchange Commission (SEC) requires that public companies have a majority of their board be independent directors. The reason independent directors are preferred is because they are more likely to provide an objective opinion on what is best for the company and less prone to hop on bandwagon opinions that mostly serve upper management. Independent directors must also possess a strong level of business expertise in order to accurately translate their opinions into financial decisions and approve transparent financial statements. 

While board members are expected to bring at least one area of outside expertise to the table, nowadays, the most successful boards are composed of directors who are experts in multiple topics. It is currently well-encouraged for company boards to recruit recent college graduates with a major in business and minors in related fields such as cybersecurity, data science, or marketing management. This ensures that the board is composed of the most up-to-date, well-rounded intelligence. 

Another key topic to board composition is diversity. There has recently been increasing pressure for companies to appoint more women and people of color to their boards to reflect a more independent board selection process. The reasoning behind this is that companies with a predominantly white, male board most likely possesses some level of bias in their selection process and is not guaranteed to deliver a diversified range of opinions that serve public interest. The more diverse the board, the more diverse its range of robust expertise and perspectives. 

Finally, boardroom best practices recommend establishing term limits to consistently refresh and evolve board composition. In the past, board members could expect an automatic reappointment at the end of their terms. This is no longer the case because it leads to boardroom stagnancy and a recycling of the same perspectives. With today’s fastly evolving technological and corporate landscape, board directors are expected to serve a maximum of 12 years in tenure. This standard is meant to open up more vacancies for new, forward-thinking members. 

With these practices in mind, nominating committees have much to consider in electing the most qualified, highest performing board. The key takeaway to remember is that no matter the service a company provides or the industry it belongs to, all companies need a highly independent, diversified board with expert knowledge in a wide range of fields in order to successfully oversee management and lead the company to success.

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