Essential Consideration when Evaluating a Board: the Life Cycle Stage of the Organization

September 7, 2011 at 5:28 pm 2 comments

In the wake of the boardroom deficiencies uncovered during the 2008 Wall Street crisis, more attention than ever before is placed on sound responsible corporate government practices.

It’s true that boards of directors come in all shapes and sizes. And it’s true that there is no magic one-size-fits-all formula that can provide organizations and shareholders with all of the tools they need to avoid the many pitfalls inherent in the modern corporate governance environment. But conducting an annual evaluation of your board of directors, preferably by an outside independent firm, can help pinpoint shortcomings in corporate governance practices, director training, risk management, the makeup and size of the board, standing committees, as well as board independence. However, one vital criterion that’s often overlooked when making a board assessment is the life cycle of the company to which the board serves.

Evolving Corporate Stages

Organizations evolve and mature over time just like people do. For example, a young technology startup in the pre-IPO stage may focus its board activities within the framework of luring investors, networking, public relations and marketing and obtaining legal advice. But as the upstart tech company goes public, the priorities of the board and the organization may need to shift gears to properly implement more thorough governance and accountability. As a company matures, grows in size and becomes more diversified with perhaps multiple global outposts, the makeup and focus of the board of directors should evolve as well. A more mature company may require additional independent directors, more diversity of a variety of sorts and even less time from its directors as circumstances become more structured and predictable.

It is thereby important to consider the evolution and stage of the company when evaluating or structuring its board of directors. Just like the company executives, the board should transform (albeit slowly) over time. An example can perhaps better illustrate this point.

Amazon.com went public in 1997 and by 2002 it had revenues of $3.9 billion. The company’s board consisted of 6 directors including Jeff Bezos, the company founder and two venture capitalists. There were two CEOs on the board, one with strong consumer products experience and the other with a blue-chip retail background. Patricia Stonesifer, at the time Co-Chair of the Bill and Melinda Gates Foundation rounded out the group.

Today Amazon.com is a diversified online retailer that has grown steadily both organically and through a number of successful acquisitions including Zappos.com. Forty-five percent of its $34 billion in revenues come from outside North America and accordingly its board of directors looks quite different. The board today has eight directors, only three of which are the same as in 2002. This slightly larger board is both more appropriate for the current size of Amazon and allows the company to benefit from more varied experience with the two additional members. There are still two VCs on the board, one from the original group. One director is based in Singapore and has significant international experience, quite important given where its revenues are coming from. Interestingly, another director on the current Amazon board  has Palm Inc. and Apple experience and is currently head of Hewlett Packard’s Personal Systems Group. This certainly tells us a great deal about Amazon’s current strategy and corporate priorities. What is important to notice from this illustration is that the board of this very successful company has significantly changed over a mere nine years. One can only assume that these board changes have come about at least partially as a result of regular board evaluation in light of the company’s strategy and a consideration of the stage at which the company is at.

Identifying and paying attention to the relative life cycle of a company allows appropriate adjustments to be made to the structure of the board and the scope of the board’s mission. As the goals and strategic objectives of a company evolve over time, so should the board of directors.

Corporate Governance Life Cycle

There is a large body of research and analysis connecting sound corporate governance to the evolving organizational life cycle of public companies. The dynamic view of corporate governance dictates that corporate governance can’t be practiced in a vacuum. The life cycle bible, “The Life Cycle of Corporate Governance,” authored by Igor Filatotchev and Mike Wright, analyzes governance issues through the prism of financial, industrial and institutional life cycles and the chaotic transitions between these shifts. In a nutshell the conclusion is that the requirements for responsible corporate governance should be continually evaluated to account for the present-day realities of an organization’s structure.

A thorough top down approach to board evaluations that includes a consideration of both the organizational and board life cycle will hopefully result in a finely tuned board of directors that is ready and able to govern responsibly.

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Entry filed under: Business, Corporate Governance.

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