Educating the board: HR plays an increasingly vital role in helping directors gain the skills and experience they need to oversee complex corporate activities

HR Magazine, Feb, 2005 by Susan J. Wells

Today's boards of directors--driven largely by far-reaching regulatory reforms and heightened corporate expectations in the post-Sarbanes-Oxley era--are feeling an insatiable hunger for orientation, education and evaluation. And while responsibility for satisfying that hunger traditionally falls to general counsels, corporate secretaries or financial executives, there's growing evidence that HR professionals also are helping corporate directors gain the hands-on knowledge they need to become more valuable players in the boardroom.

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HR professionals' experience in bread-and-butter corporate areas such as compensation, benefits, succession planning, employee training, recruiting and due diligence uniquely positions them to work in concert with their companies' corporate governance team. While many board compensation and nominating committees tap HR officers to advise them on pay and retainer issues and to research board appointments, the potential exists for them to get even more deeply involved.

"We are seeing more and more involvement of HR with the board and, in fact, HR is expected to get more active at the board level," says Edward Lawler III, distinguished professor of business and director of the Center for Effective Organizations at the University of Southern California's Marshall School of Business. "It's a tremendous opportunity for HR, as many issues that boards face are issues that HR could--and should--be able to contribute to and influence."

Lawler, who is also an author of Corporate Boards: New Strategies for Adding Value at the Top (Jossey-Bass, 2001), notes that in the wake of high-profile corporate financial meltdowns that made headlines nationwide a few years ago, companies continue to refocus their corporate governance priorities. The result: "Clearly, there's a lot of pressure for boards to be more educated, knowledgeable and accountable," he says.

Just one sign of this growing trend: 80 percent of 2,588 global companies now provide training to corporate directors vs. 14 percent in 2002, according to 2004 research by GovernanceMetrics International in New York.

What's Behind the Trend?

Several factors have converged to fuel the "back-to-school" momentum among today's boards of directors.

The demand for greater scrutiny and accountability of corporate directors has been driven primarily by the Sarbanes-Oxley Act of 2002, which ushered in a new governance environment--one in which corporate boards were dealt a host of new responsibilities. Among the changes: Board audit committees for all publicly listed companies were required to have at least one financial expert by 2004.

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Since passage of the act, other organizations have joined the movement to increase accountability for board members and to ensure that their skills and experiences are equal to the tasks for which they are responsible.

Last year, the New York Stock Exchange (NYSE) started requiring boards of its listed companies to conduct annual self-evaluations to determine whether they and their committees are functioning effectively. While the guidance doesn't specify exactly how boards should measure themselves nor what approach to take to do so, it does put responsibility for regularly judging and improving performance in their hands. Some governance experts expect such exercises to become the norm for any large public company--regardless of where it is traded.

(Nasdaq listing standards don't require board evaluations, but many listed companies are doing them as a best practice.)

The NYSE also now requires listed companies to adopt and disclose their corporate governance guidelines, including those relating to director orientation and continuing education.

In addition, director education is now one of eight "core categories" used by Institutional Shareholder Services Inc. (ISS) to calculate its corporate governance quotient (CGQ). The CGQ scores carry considerable clout: Analysts, portfolio managers and research directors use them to gauge the impact that a company's corporate governance structure and practices might have on a portfolio's performance. ISS uses the CGQ to rate 7,500 companies.

Along with the slew of outside entities looking over directors' shoulders, companies themselves are fixing the spotlight on their boards. According to the GovernanceMetrics research, 90 percent of companies surveyed now have policies for evaluating boards and/or their individual members, up from 35 percent two years ago.

And businesses are increasingly making use of those policies: 73 percent of nearly 1,300 public companies formally evaluated their boards in 2004, compared to 50 percent in 2003 and 33 percent in 2002, according to an annual survey of boardroom practices by Corporate Board Member magazine and consulting firm PricewaterhouseCoopers. Furthermore, 35 percent of those companies' boards evaluate individual directors on a regular basis, compared to only 23 percent in 2002.