DESPITE NEGATIVE press reports about inbred boards of public companies, the number of independent directors is actually on the increase. According to a recent study of 1,500 companies conducted by the Investor Responsibility Research Center, the independent director representation on boards has increased in the past five years to 83 percent, up from 72 percent. Although encouraging, these numbers don't reflect what is needed to ensure the success of independent board members: improved director education.
Much of that education, which typically is imparted at business schools and forums, concentrates on the role and responsibilities of directors. What these seminars cannot provide, however, is information specific to the companies on whose boards these new directors serve. To meet that need, companies should establish in-house programs with the aid of--or led by--the investor relations officer (IRO).
Since the IRO is the company's primary contact with the investment community, it makes sense for that person to brief new board members on the culture and operations of their company and the characteristics of the industry sector(s) in which it operates.
Directors need to know what drives the company's shareholder value. Increasingly, what drives long-term value are not quarterly earnings but non-financial factors, such as: the caliber of management and its ability to deliver on the company's strategy; the quality of its corporate governance; what the company is doing to enhance its human capital; its corporate branding and reputation; its use of technology to enhance business operations; and innovation and new product development.
These are factors that directors can focus on in their oversight role and ensure that the company is effectively communicating this information to the investor community.
As the shareholder democracy movement gains momentum, the SEC has passed new shareholder communication rules under which companies have to establish procedures for investors to communicate directly with independent directors. The board needs to be prepared to fulfill this non-traditional role. The SEC rules are not designed to encompass product and service issues but are primarily focused on governance matters. And, as we are witnessing, the definition of what constitutes board governance seems to be expanding. Clearly, overall corporate performance can be an issue that the board may need to respond to.
While boards tend to look to the general...