by Kevin N Hall
Dec 15 2016
Today, Board Members offer tremendous value in the corporate world; and I believe, for the most part, that there is a total disconnect between the value a Board Member brings to a company (i.e. depth and breadth of experience, industry knowledge, network, reputation and marquee value) and how they are compensated. Unfortunately, too few companies seek the brightest and best in recruiting board members. Instead, they tend to gravitate to using a limited network; like-thinking individuals; or are drawn solely to marquee names.
Attracting the Right Board Members
Board Member compensation is not the key driver to attract experienced and qualified individuals to a Board. Board Members are primarily attracted by the reputation of the company and the other Board Members; the dynamic nature and growth potential of the business; an opportunity to “add value” and expanding their personal business network.
In considering an opportunity, Board Members will initially look very closely at their potential Board peers and the adage “You are known by the company you keep” rings true. It is very difficult to hi-grade an established Board populated by “under-performers” or “board resume builders.” My advice to a founding board is to “aim high” as you will be pleasantly surprised at the calibre of individuals you can attract to a growth-orientated board opportunity even with lower quartile compensation.
The primary single influencing factor in having a high-performing board is the Chair. Show me that board and I will show you an exceptional Chair who is a confident leader, has a good but sometimes testy relationship with the CEO, values constructive debate, knows how to effectively utilize other experienced Board Members, is ready to make tough decisions, and has a finger on the pulse of the company and industry. Unfortunately, Chairs who can do this are few and far between and if you find one, they are worth their weight in gold.
Companies generally need to be much more strategic on the skills and experience needed at the board level to effectively guide the organization through both growth and challenging times. Too often there is a tendency to revert to individuals who are known and won’t disrupt the balance within the board. There are a plethora of under-performing CEOs seeking board positions as they believe that they have the skills and experience to lead other companies. Ironically most get appointed.
Board Member Compensation
Generally board compensation can be differentiated between publicly-traded and privately-held companies.
Publicly-traded companies disclose its Board Members, their careers and board history, and how they are compensated. This makes it easy for companies operating in similar industry sectors to benchmark compensation against its peer group typically adjusted for market cap, revenue, geographic and product/services, and growth.
Privately-held companies typically have the “family” or “major shareholder/investor” factors to work with. Founders tend to gravitate towards friends and family to populate a board. This is often through self-interest (i.e. not wanting decisions questioned – “no-one knows my business like I do”) or a lack of understanding or appreciation of the value board members can bring to a company. In my experience, the governance structure is often an issue, as is dealing with succession. Major shareholder/investors will often appoint a representative to the board and/or an industry sector expert. They typically require independent thinking around strategy, operations, performance of the executive and management team, risk, corporate development (i.e. product/service /geographic expansion), disruptive innovation, brand and reputational risk and monetization alternatives. Board Member compensation is often more tactically, rather than strategically, determined.
Companies typically have a range of compensation plan alternatives available to attract, retain and/or reward board members including:
- Cash. The foundation of most privately-held company plans. Simple, basic and quantifiable. Easy to benchmark and value.
- Deferred Share Units (“DSU’s”). Cash equivalent in shares which vest at a future date (e.g. upon departure from the board). An accumulating at-risk ownership position, tax efficient and transparent. Attractive where companies require Board Members to maintain a minimum share ownership position.
- Restricted Shares (“RSU’s”). Shares vesting annually over a specified time period (e.g. three years). An accumulating at-risk ownership position and transparent. Again, attractive where companies require Board Members to maintain a minimum share ownership position.
- Common Share Purchase Options. Leveraged performance incentive award used extensively in the hi-tech and commodity industry sectors. Favoured by start-ups where cash conservation is a priority. Can align interests – performance rewarded and award at-risk with non-performance. Dilutive and true cost/benefit is not always transparent.
Other compensation plan alternatives not as widely used include Performance Share Units and Performance Warrants.
Historically, Board Member compensation was simple and straightforward but now blends of the aforementioned compensation alternatives are very often used. Most often in publicly-traded companies the combination includes cash, DSUs and/or RSUs, while in privately-held companies it is usually a combination of cash and/or stock options. Very rarely have we seen excessive compensation plans for Board Members. However, we have seen many situations where the Board Members were inept and failed to earn what they were paid.
In determining a compensation structure for its Board Members, a company should carefully consider: its comparator group for benchmarks; current best practices; calibre of individuals to be attracted; lifecycle phase; risk factors; financial resources available; and the need to strategically refresh the board in future years.
In addition to an annual retainer, publicly-traded and larger privately-held companies also typically pay: additional fees to the Chairs (Board and Committees); meeting attendance fees (in-person/conference call) and for travel time. There is however a trend toward a single annual fee for Board Members.
The path to success for any company in high-grading their board is to be strategic and disciplined in the appointment of the Chair/Board Members; have a clear understanding of the skills and experience required of Board Members; have a board compensation structure which makes business and financial sense for the company; to revisit the compensation structure on a regular basis; to refresh the Board as the needs of the company change – important but can be difficult to do; and to independently assess the board and its members annually.