This is the third installment of a three-post series on the use of expertise boards for corporate compliance. The first post described state corporation law’s encouragement for use of an expertise board and the second post discussed the categories of expertise to consider. This third post will explain how to address any gaps in desired expertise.
The first post in this series addressed the state law duty of care’s encouragement for the use of an expertise board. Expertise boards are beneficial because an expert in a profession can make his or her expertise available to the board without being held to a standard higher than an ordinarily prudent person.
The second post advocated a gap analysis to:
Most states’ corporation laws allow a director to rely, and protect a director from liability to the extent relying, upon:
- Inventory the knowledge, skills, experience, expertise and other competencies present among the current members of the board and management.
- Project the knowledge, skills, experience, expertise and other competencies that are believed to be beneficial for achieving the agreed-upon future strategic direction. (A board and management often need help in identifying the categories of competencies that should be considered, which will be covered in this post.)
- Compare the current collective competencies with the desired future collective competencies and identify the gaps—this is simply deducting current competencies projected to remain among the board and management from those believed beneficial in the future. (This post discusses how to fill those gaps.)
- Officers or employees for matters the director reasonably believes they are reliable and competent to handle
- Professionals (such as legal counsel, accountants and compensation experts) for matters the director reasonably believes are within the person's professional or expert competence
- Other directors for matters the director reasonably believes they are reliable and competent to handle. This includes committees of directors (in which the director does not serve) that are duly established in accordance with a provision of the articles or the regulations and matters within its designated authority that the director reasonably believes to merit confidence.
Accordingly, gaps in expertise and competencies may be filled through the same persons upon whom a board is entitled to rely by:
- Hiring new officers or employees with— or training existing officers or employees to have — this missing expertise or competence;
- Retaining as consultants professionals with; or
- Retaining new directors with — or training existing directors to have — this missing expertise or competence.
Certain expertise and competencies may be most quickly provided by retaining professionals as consultants. This is especially true with tactical matters such familiarity with technology, gathering peer data and evaluating the advisability of non-repetitive transactions.
Training existing directors, officers or employees may more quickly result in acquiring missing expertise or competence than recruiting and retaining new directors, officers or employees. John Trott, former CEO of Hochheim Prairie Insurance Company, made the best case for training in a seminar a few years ago:
I learned the value of training when I was a high school football coach in Texas. High school football is important to Texans. And being a coach of a public high school, the players that showed up at the first practice were the only players that we were going to have. The only way we could make ourselves a better team was education and training. The same is true for running an insurance company. The best way to make us a better company is education and training.Recruiting and retaining new directors, officers or employees usually requires more time. Accordingly, an organization should go to the market to recruit expertise or competencies that are strategically important to the business or the organization. Because the role of a board is to delegate authority for management to execute and to oversee the execution of that authority, the first step may be to train or hire an officer or employee to be able to execute the delegated authority, and then train or retain a board member to be able to oversee the execution of that authority.
A parting thought as we conclude this three-post series: governing boards are not only the first line of defense against mismanagement and fraud, but also the best line of offense for good governance. Recent failures over the last dozen years show that all organizations can do a better job selecting their board members. Doing so, upon the basis of the collective expertise and competencies of the board as a whole, may reinvigorate confidence in corporate America.