It all starts with well-chosen directors.

• Author: Stout, John
• Position: BOARD COMPOSITION

Gary Schmidt's article addresses what I believe to be the most critical and challenging current governance subject: board composition is the core of good governance and poor governance, and we've seen some of the former and some glaring, costly examples of the latter recently and in the not too distant past.

Boards which lack a thoughtful, balanced composition have been passive in the face of strong management, overly deferential to management, shareholder- or finance-centric, lacking in their understanding of what it means to be a fiduciary, poor at shareholder and other stakeholder engagement, blind to conflict of interest issues and consequences, and underperforming in management, risk and culture oversight. To be sure, there are examples of excellent board performance, but in too many instances boards have failed to protect and serve the best interests of companies, failures which I ascribe to poor board composition. It takes very thoughtful analysis and recruitment to bring together the balance of personal qualities and skills needed to effectively serve the complex companies which exist today.

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Schmidt's insights as to the value of a legal director are extremely important and apply as well to other board needs.

Example: Separation of the chair/CEO roles, or appointment of a lead director. If there is no one on the board who understands and can effectively execute the role of independent chair, or lead director, the separation of roles, or creation of a lead director position, can do more harm than good. it can result in a divided board, strained relations between the board and CEO or uncertainty internally and externally about who speaks for and/or leads the company.

Example: Risk oversight. Where are the directors who have made careers of the study of risk and risk mitigation? Candidates with industry and subject matter specialties can be found in the insurance industry, accounting firms, law firms, and consulting firms.

Example: Building shareholder value. With shareholders increasingly demanding greater effort from boards to improve shareholder value, where are the directors who have made careers out of analyzing what decisions and actions add to and detract from shareholder value? Many excellent candidates make their livings as analysts in a variety of organizations, including investment banking firms, valuation specialists, and securities firms which make markets in various stocks, etc.

Example: Getting the...