The shouting about overpaid and underperforming directors has raised some more fundamental questions about what qualifies someone to be a board director of a public company. In the past, anyone who held a directorship of one company was deemed almost by definition to be a suitable candidate for a similar role at another company. There was never any talk about board diversity, bloated boards or problems of board directors having conflicts of interest. But that’s all changed, as this year’s proxy round showed.
And for directors themselves, the pressure is mounting to such a pitch that some are wondering if the prestige and perks offered by holding seats on corporate boards are really worth the candle. Into this climate, and with impeccable timing, Stephanie Joseph launched her New York-based The Directors’ Network to offer corporate boards the chance to go back to school for a day, to be taught the tips of the director’s trade.
For Joseph, the launch followed a period of quiet consideration after a 14 and-a-half year career with American Express. After qualifying as a lawyer and becoming the first woman corporate associate at Shearman & Sterling in New York in 1971, Joseph joined Amex in 1979. She moved swiftly up the ranks of American Express, across a range of divisions, finally becoming associate general counsel – the number two lawyer at the group – in 1984. ‘I was responsible for everything that had to do with American Express as a public company,’ Joseph explains. ‘I had a staff of about 40 people, 20 or 25 of them professionals, the rest paralegals, clerks and support staff.’
This position put Joseph at the legal frontline of areas like public filings, financial disclosure, acquisitions and other corporate finance transactions, litigation and so on. ‘I had to know everything that was going on so that I knew what was or wasn’t material.’ And there was a lot going on: IPOs, takeovers, SEC investigations and more. ‘Intellectually it was fabulous,’ she says.
But by 1992 when Joseph left – about six months before former chairman James Robinson quit – she was ready for a change. ‘By then I was 45 and I figured that if I was ever going to do anything on my own, I’d better do it soon.
In fact her first decision was to take some time off – about a year, in the event – to read and think and focus on what that might be. ‘I was reading all these corporate governance articles. There were no programmes on corporate governance then – at Harvard, or Wharton, or Stanford. The only group with a programme was the NACD and at that point I’d never heard of them. So I was reading and reading and all of a sudden I got to thinking: isn’t it amazing that the only people in a corporation who are not trained to do their job are the directors? What are their qualifications? What do they know? How is it that they can do all these things?’
Therein lay the germ of the idea that got The Directors’ Network off the ground. Joseph was particularly struck by the proliferation of companies – such as those listed on Nasdaq – who were not in a position to get the Henry Kissingers and the Walter Wristons of this world onto their boards. ‘Where were their directors coming from?’ she wondered. ‘And how were they dealing with all these issues?’
But identifying a need is only part of creating a business; Joseph knew that she would have to come up with some kind of incentive if she was to get corporate boards to offer themselves up to be educated.
‘There are some CEOs who are very forward-thinking,’ she concedes. But for most of the rest, the idea of putting their board together in a room to be trained looks threatening. ‘You have to be a very secure person to do it. You have to believe your board is there to help you. And that’s a minority,’ she says. ‘At the other extreme is a larger group made up of the CEOs who will never do it because they don’t want their boards to know anything; they want to control them.’
In between these two lies Joseph’s target market: the great mass of corporate America. ‘My question was what kind of inducement to offer someone in the middle who is unsure about what to do or even whether to be concerned,’ explains Joseph. And the novel answer she came up with was the key to getting her Network going. ‘I figured that everyone has to have Directors & Officers Liability insurance. You can’t get a director to be on a board without giving them D&O insurance cover. So what if the insurance providers would give a benefit to companies whose directors were actually trained?’
This inspiration sounds almost self-evident now, but Joseph still had to make it happen. That meant putting together a business plan, formulating a curriculum and assembling a faculty. The latter turned out to be easier than anticipated, says Joseph, whose speakers include representatives from firms like American International Group, Deloitte & Touche, William Mercer Inc, and Skadden Arps Slate Meagher & Flom. ‘In fact nobody turned me down.’
But the all-important link was getting the insurance benefits in place. ‘I went to National Union who rightaway agreed, saying they would like to target IPOs because they need help the most.’
Now with a healthy list of clients behind her, Joseph notes that the insurance incentives are far from being the only reason for companies hiring her services.
Some of the CEOs that come to her have inherited their boards, having been brought in to turn the company around. ‘In that situation the CEO may recognise that the board is part of the problem, but he can’t say that to them. It’s too early to start bringing in new directors because he hasn’t really taken control of the company yet. But if he brings me in I can talk to the board about how it is organised, its effectiveness, how the directors are a support to the CEO. I can get them thinking positively in a way that he can’t. I’m an outsider and he can disavow me if they don’t like me; or take credit for me if they do. I give him an opportunity to change the status quo.’
In some cases, client companies take up Joseph’s training programme simply because they believe it’s the right thing to do; others have had a problem, which has frightened them into doing something to shore up their defences.
But there are certainly others – such as those worried about the cost – for whom the insurance benefits provide the financial justification they need to make the commitment. The precise nature of those benefits varies according to the profile of the company concerned – whether it represents desirable business to the insurer, for example; and the current state of the insurance market. In some cases any saving may be minimal; but at best, in a competitive situation for example, ‘The company could get my whole programme paid for,’ says Joseph. ‘And even if financial incentives aren’t available, the insurers will at least give them improved terms.’
Whatever the cost – or saving – in dollars and cents, if a company takes up Joseph’s programme its directors will have to commit a day of their time for an intensive training session at the corporate headquarters. ‘It should really be three days,’ laments Joseph. ‘But you’ll never get a board to sit in a room for three days. So what I’ve done is put together a really dense day’s curriculum. I get hold of all the company’s published documents – their filings and so on – and identify the speakers best suited to its particular needs in advance of the day. I then work with those speakers to ensure that the important issues are raised and with the company, itself on the detailed curriculum.’
The curriculum more or less follows a standard model, under the heading The Essentials of Corporate Governance, but is tailored to each company. The IPO curriculum is the most basic, starting with fiduciary duty and legal responsibilities – including disclosure requirements, insider trading and so on. ‘This is really explaining what it means to be a director,’ says Joseph.
Other standard sessions look at how the board works, its composition, structure and dynamics; crisis management; litigation; board liability exposures; accounting and auditing; and executive compensation. Typical special sessions – which may be squeezed in over lunch or at the end of the day – cover matters like derivatives, media relations and investor relations.
It’s a lot to pack in. But as the frequency and high price of defending litigation brought on behalf of shareholders grows, and as media attention increasingly focuses on board compensation, composition and competence, demand for director training seems bound to grow as well.
Joseph certainly sees the boardroom world changing: ‘Everything has changed in the last ten years,’ she says. ‘It used to be the rule that in the boardroom every decision was unanimous. Any dissent stayed outside. Any lobbying took place behind the scenes. But that doesn’t always happen any more because there are different people in the boardroom now; they are more diverse. They don’t all know the old rules.’
Indeed, the advent of board diversity is perfect for Joseph’s business, as are the mounting demands for change in nearly all aspects of board structures and dynamics. ‘The big established companies are now having to look outside themselves and realise that they will get into trouble if they are not thoughtful enough or creative enough,’ she says, citing companies like ADM, Morrison Knudsen and W R Grace. ‘On the other hand, you have all the Yahoos and Netscapes. All they’re doing is trying to get through the day and make their money. They’re not thinking about governance issues at all. But when everything hits the fan, and they get a huge lawsuit, they are going to have to get religion.’
These two groups have little in common, except that both could do with some board training; and neither is likely to call on Stephanie Joseph unless or until something goes wrong.
