Preparing your new directors.

• Author: Freidheim, Cyrus F., Jr.
• Position: Includes related articles - Advice to the Rookie Director

Few companies do much to indoctrinate new directors, but the commitment to a thorough orientation program will pay big dividends.

In life, there are many occupations and activities that we assume people are prepared for with no training whatsoever. Fatherhood jumps to mind. Our golf courses are filled with do-it-yourself athletes. And so it has been with directors...until recently. The spotlight on director performance, and liability, is so intense that any sensible person should demand a thorough briefing before taking the responsibility.

A recent study by Heidrick Partners showed that 46% of the 181 Fortune 1,000 companies in their survey have formal indoctrination programs, up from 36% just five years ago. Formal programs are relatively new and strongly supported by companies and directors who have them. Interestingly, even companies that do not have structured programs have little doubt about their usefulness.

In considering how to prepare your new directors, recognize that the knowledge and understanding of a company required to be an effective director cannot be achieved in a one-time orientation program. The education of the director should be viewed as a continuing task with a well-thought-out orientation as a crucial first step. While this article focuses on that first step, the framework can be used for deepening the understanding of all directors over time.

Like any team with a common purpose, the board should have a set of objectives and performance expectations. Those objectives and performance expectations which arise from the board's legal and fiduciary responsibilities as well as from their bosses, the shareholders, should be the foundation around which the orientation program should be designed.

Management takes responsibility for indoctrination - what's in and what's not, how the story is crafted, who gives the message. In my view, that's not right. There is a real role for directors' input. Directors should review the orientation program developed by management to ensure that it does what the directors want it to do. The nominating committee or its successor, the governance committee, would be a logical place for such a review.

The orientation program should focus on preparing directors along two important dimensions: the company and its businesses, and the governance process.

The Company and Its Businesses

Every director should have a good understanding of three major aspects of the company:

* The company - its businesses, economics, financial condition, strategy, people, and culture.

* The environment in which it operates - the market, competition, regulatory/legal matters, stakeholders.

* The key challenges and opportunities facing the company - e.g., near-term bankruptcy, billion-dollar litigation, obsolete production, new secret weapons, near-term acquisitions.

A good test of the effectiveness of an indoctrination program is to ask the question: How well does the new director understand each of the above points? Grade on a scale of 1 (barely) to 10 (fully). In most companies, honest answers will be a breath away from "barely."

Rather than throwing in the towel in despair you can and should do something about your orientation program. It is tough for even the smartest and best intentioned director to be helpful without a good understanding of the three key areas. The indoctrination is only a first step, though a crucial one, to bringing directors up to speed and keeping them current.

The Company: Business, Economics, Financial Condition, Strategy, People, and Culture. How can a new director possibly learn enough about all of these topics in a short time? The answer: They can't...but they can begin.

One of the most thorough company indoctrination programs I've seen is Household International's. Each director is given a well-organized book covering the mission, values, goals, balance sheet, and overall performance of Household and a description of each business, including its strategy, financials, major issues, organization, and people. The book is an excellent reference document. Equipped with a large dose of facts and descriptions, the new director spends one to two hours individually with six or eight top executives reviewing their areas with plenty of time for questions. In my case, I missed one executive who subsequently came to my office to describe his business. The chairman personally reviewed the strategy with each new director.

Culture was communicated at Household in many different ways, starting with the thorough handling of the indoctrination. A tour through one of its offices showed the diversity of people employed by Household, and their upbeat attitude told how they are treated. Household is the kind of firm that values its top 100 ranking in Working Mothers almost as much as its bond ratings. Another example: Executive assistants of all board members are...