Board Membership 101: Fiduciary Duties

Board Membership 101: Fiduciary Duties

The foundation of a board member’s service is their fiduciary duty to shareholders. Before we jump into what kinds of duties are involved, let’s look more closely at the word “fiduciary:”

fiduciary (adjective): involving trust, especially with regard to the relationship between a trustee and a beneficiary.

It’s a word that we hear a lot in the corporate world, but its basic meaning often gets overlooked. Simply put, the word fiduciary is all about trust, and that’s exactly what’s required of directors under corporate governance law.

The Three Types of Fiduciary Duties:

  1. The Duty of Care

According to Investopedia, the duty of care “applies to the way the board makes decisions that affect the future of the business. The board has the duty to fully investigate all possible decisions and how they may impact the business. Because a company’s board of directors is tasked with making very important decisions, it is necessary that each member takes each issue seriously and adequately considers all options.”

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Board Membership 101: The Role of a Board of Directors

Present day corporate directors are faced with increasing responsibilities, expectations, and risks. Over the last twenty years, government standards for board oversight have grown more stringent than ever as the role of a board of directors evolves.

Role of the Board

But why exactly do boards of directors exist, and what is the role of a board of directors? Ultimately, boards exist to provide strategic oversight for a company and to protect shareholders’ financial interests.

In order to accomplish those goals, individuals who wish to serve on a board must be willing to take on the responsibilities expected of a director.

Below, you’ll find eight factors that outline the role of a board of directors.

  1. Provide strategic guidance.

Literally, board members are expected to provide the vision, mission, and goals for an organization. Metaphorically, they’re also responsible for the “big picture” vision for the company: where is it currently headed? Where does the company want to go from here?
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Cyber Security Becomes a Boardroom Priority

Data breaches from cyber attacks have wreaked havoc on major industries in recent years. Prominent companies like Target, Anthem, Home Depot, JPMorgan Chase, and EBay have all been affected by targeted attacks. These attacks, which typically put individuals’ private identification numbers and payment methods in jeopardy, come at a great cost to corporations.
Internet security concept open red padlock virus or unsecured with threat of hacking

The Ponemon Institute found that, on average, each individual data loss costs a company approximately $154. Multiply that number by 83 million users, and JPMorgan Chase’s recent loss totaled in at around a staggering 12.78 billion dollars—and that’s just a rough estimate; the number is likely higher.

Obviously, these high-profile hacks and breaches have pushed cyber security to the forefront of board members’ concerns. According to PWC’s most recent Corporate Directors Survey, board members are becoming more engaged with IT strategy—namely cyber security risks.

The study states, “83% of directors describe themselves as at least ‘moderately’ engaged with overseeing the risk of cyber attacks.”
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Board Tenure: To Limit or Not to Limit?

Statistically, executives tend to linger once they begin serving on a board. In fact, the Wall Street Journal reports, “At 24% of the biggest U.S. companies (S&P 500), a majority of the board has been in place for at least 10 years…It is a marked changed from 2005, when long-term directors made up a board majority at 11% of large companies.”
Board Tenure: To Limit or Not to Limit?

Moreover, some of those long-tenured directors have been serving on boards for upwards of 40 or 50 years.

The conversation about board tenure is a somewhat new one. For decades, seasoned board members have been considered a major asset to corporations—especially at companies where growth has been consistent.

As activist shareholders put more pressure on boards and the call for board diversity (of all kinds) grows, though, companies are beginning to consider the potential benefits of board term limits. In 2012, board turnover hit a 10-year low—forcing companies to face the dilemma of simultaneously seeking diversity while also having very few board positions to fill.

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The Case for the Millennial Board Member

With the median board member age hovering around 63, it’s safe to say that the Baby Boomer generation is well represented among corporate directors. Generation X also fills its fair share of boardroom chairs. But what about the Millennials?
millennial board member

You may be thinking, “There’s no way that a Millennial could be prepared to help lead a corporate board; they’re just too young.”

However, the truth is that some Millennials are reaching their mid-30s and bringing some truly extraordinary accomplishments along with them.

Starbucks was one of the first prominent companies to take a leap of faith on a youthful board member. In 2011, they replaced outgoing Sheryl Sandberg (COO of Facebook) with 29-year-old newcomer Clara Shih—except Shih wasn’t exactly a “newcomer.” She had already become the very successful and self-made CEO of Hearsay, a booming social media marketing company.

Now, five years later, it looks as if Shih has proven her aptitude by helping to successfully guide Starbucks into the ever increasing mobile and social media realms—all while not fitting the standard board member profile.
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Research Shows Board Service Supercharges Careers

Just last week, we discussed how public company board membership comes with increasing personal risk these days, yet executives are still doing their best to secure those coveted positions.
Vector illustration of the businessman superhero - stock vector. EPS 10 file.

You might be asking, “Why?” Why would a well-paid executive spend extra time “on the clock” for a company other than their own? According to a recent study, there may be a clear answer: board membership helps advance executives’ careers and enhances their earnings.

The study, which was conducted by four academic researchers, utilized a sample set of 2,140 high-level executives at S&P firms from 1996-2012.

The researchers matched the executives who were serving on boards with executives in similar positions at comparable companies who had not served on a board.

The results were definitive. In the researchers own words, “We found that serving on a board increases an executive’s likelihood of being promoted as a first-time CEO to an S&P 1500 firm by 44%–and even if they weren’t promoted, we found that serving boosts an executive’s subsequent annual pay by 13%.”

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Corporate Director Pay Reflects More Risk

These days, executive level compensation is the subject of countless headlines. With CEOs earning wages in the tens of millions, people have a lot of opinions on the matter. Accordingly, the compensation for corporate directors (or non-executive directors) has also been rising.
corporate director pay

In fact, a recent article in The Wall Street Journal asserts, “Pay for nonexecutive directors of S&P 500 companies rose nearly 50% between 2006 and 2014.” That’s quite a leap!

The median pay for directors in 2015 was $255,000 a year, which doesn’t sound quite as high as you might expect given that they’ve seen a 50% raise in a single decade.

When you consider that a director might spend about 5 hours per week on board related activities, the number becomes more impressive, though.

So why the sharp increase in compensation for board members? For one, the role has become more demanding in recent years. After the passing of the Sarbanes-Oxley Act in 2002, standards for board compliance were enhanced with stricter guidelines for reporting among public companies. Therefore, many board positions call for longer hours and deeper involvement. In addition, the rise of shareholder lawsuits has made the corporate director’s seat one that comes with more personal liability.

For these reasons and more, the corporate director role comes with more than just the gratification of sitting on an S&P 500 board—it also comes with a greater amount of responsibility. Many of the largest companies are willing to pay substantial figures to have the world’s most accomplished leaders serving on their board.
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Want to Be on a Public Company Board? Not So Fast!

Securing membership on the corporate board of a publicly traded company is no small feat. In fact, based on recent calculations, there are only about 70-80 board openings for NASDAQ-listed companies in the United States annually. That’s just a handful more people than were accepted into the NBA last year!
public company board

Historically, corporate boards have favored a very narrow type of board member: former CEOs from Fortune 500 companies or prominent CFOs who can be labeled an “audit committee financial expert” in adherence with the Sarbanes-Oxley Act of 2002.

These kinds of board members have long been identified as the “gold standard” for corporate director appointments.

However, the public company board membership selection process has become increasingly competitive over the past couple of decades. Former prominent CEOs and CFOs can no longer expect to slide easily into board membership at public companies. Boards continue to place value on more modern types of expertise—think entrepreneurs or tech experts.

More than ever, executives with unique backgrounds have a shot at obtaining the most exclusive of board appointments. But in order to have the very best chance at one of these opportunities, we encourage you to follow this advice:
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The Benefits of Diversity in the Boardroom

DiverseOver the last two decades, corporate board diversity has been growing steadily. In 2015 women held nearly 18% of the board positions at Fortune 1000 companies—a percentage that has doubled over the last 20 years.

As for racial minorities, they hold about 15% of board roles in Fortune 250 companies and are continuing to make gains.

Regardless of where the current statistics fall, though, the bottom line is that studies show diversity in the boardroom brings many benefits.

We’ve compiled a few of these benefits to share with you:

A diverse boardroom provides a diversity of thought

All board members bring their own personal background and experiences to their position in the boardroom. Each individual mind is capable of offering unique ideas, solutions, and strategies. For boards with a more diverse membership, the breadth of personal experience is wider and more comprehensive.

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Respectfully Removing a Board Member

According to the PwC Directors Survey we covered last week, 40% of board members believe that at least one member of their board needs to be replaced. With boardrooms standards rising higher than ever, it’s no surprise that some board members just aren’t measuring up.
removing board member

Removing a board member, however, is an extremely sensitive process that few are willing to undertake. Here are our tips for proceeding with the utmost respect and consideration. (Keep in mind that the procedures for companies vs. nonprofits will vary slightly according to individual rules of governance.)

Review your bylaws and follow them

Before taking any action, determine whether the member in question truly isn’t meeting the standard for his or her outlined duties. Make sure that you collect fact-based evidence only. Look at the bylaws for your organization, and utilize the processes it will likely lay out for this sort of scenario.

According to Sam Ashe-Edmunds of Demand Media, “Your bylaws might require the board to justify any removal based on fraud, conflict of interest, personal conduct, lack of fitness to serve or failure to perform.” You’ll need to establish exactly which aspects of the role the board member has not fulfilled or why their presence is no longer productive for the board.
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