No one needs to tell you that putting your brother-in-law on your company’s board of directors smacks of poor judgment. But plenty of chief executives do just that.
Or, they fill up their boards with golfing buddies, clients and even managers from their own company.
10 Common Board Mistakes Companies Should Avoid
Here are the 10 most common mistakes you can make when putting together and working with a corporate board:
1. Failure to Recruit Strategically
Too often being nominated to a board has more to do with the potential board member’s relationship with the chief executive officer or other board members, rather than whether the person can bring to the board something beneficial to the company.
2. Too Many Insiders
Employees on a board will either be intimidated by or inhibit the CEO.
An insider’s allegiance is likely to be to his or her boss, the CEO, rather than the shareholders. Similarly, a CEO may be reluctant to discuss certain issues in front of board members who are employees.
3. Too Many Paid Consultants
Putting paid consultants working for the organization on the board creates a conflict. When a conflict exists, it most likely will surface during the very crises the director is there to help resolve.
4. Too Much Family
Family controlled boards may act in the best interest of the family, not necessarily the company and shareholders.
An independent, strategic board will validate and balance the interests of the family, employees, shareholders, investors, clients and the financial community.
5. Too Many Cronies
When a board is filled with the CEO’s friends and colleagues, the knowledge base is limited. Objectivity can be compromised, and allegiances are likely to be to the CEO rather than the shareholders.
6. Getting the Money Wrong
Directors should receive more compensation for their services from stocks, not yearly salaries and meeting fees.
Board members should also set corporate salaries and not cede the responsibility to consultants, who tend to benchmark, rather than assess, and who are paid by the very executives whose compensation they are evaluating.
7. Fear of Diversity
A homogeneous board will generate the same predictable solutions over and over again.
A board with diverse experiences, as well as ethnic and cultural backgrounds, is more likely to develop innovative solutions.
8. Information block
Directors can’t offer sound governance if they don’t have information. Too often, management filters information to their board.
Directors should receive full information, as well as access to employees, investors, analysts, customers and other key constituencies.
Management must also make every effort to educate directors about the company, industry, technology and competition.
9. Passive Boards
Boards that exist solely to stamp their approval on management’s decisions rarely succeed.
To protect the shareholders and avoid liability, a board must be proactive in its oversight duties. CEO and director evaluation and succession planning are critical ingredients of good governance.
10. Failed Leadership
In too many cases, the CEO doesn’t engage the board.
The CEO imprints the board, empowers it and shapes its culture. The CEO must provide information, foster open communication and respond to the board’s advice.
Wanted to share any mistake(s) you made building board of directors, do in the comments!