Beverly BehanPartner, Corporate GovernanceMercer Delta Consulting, New York

Effective Board-Building

June 7, 2006

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What Is an Effective Board?

When you think of a “high- performing” or “world-class” Board:

– What attributes of this Board come to your mind?

– What is such a Board particularly good at?

– What is the relationship like between this Board and the CEO?

– If you walked into this boardroom, how would it feel?

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What Is an Effective Board? (cont’d)

Effective Boards

– Include the right people (composition)

– Develop the right work processes (succession planning, CEO evaluation, strategy, etc.)

– Do the right work (agendas)

– Consider the right information (presentations/pre-reading materials)

– Have the right culture - engaged, constructive (leadership/dynamics)

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How Does a Board Add Value to an Enterprise?

Board members can provide an outside perspective on opportunities and risks that management may overlook

The Board can support, counsel, and challenge the CEO and bring higher levels of performance to the enterprise

Engaging the Board properly in fiduciary oversight, corporate strategy, and succession can have a significant impact

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Boards as Teams

Board Engagement

Board-Building

Important Concepts

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The Board as a Team

Unique characteristics of Boards as teams:

– Partial inclusion

– Episodic interaction

– Limited time and information

– Membership comprised of leaders

– Unclear or complex authority relationships

– Changing expectations for work

– Aura of formality

– Majority of work done in meetings

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The “Passive”

Board

The “Operating”

Board

The“Intervening”

Board

The “Engaged”

Board

The “Certifying”

Board

Functions at discretion of CEO

Limited activity and participation of Board

Limited accountability Ratifying management

preferences

“Certifies” to shareholders that: CEO is doing what Board expects; management is capable of taking corrective action when needed

Emphasizes outside/ independent directors; meets independently without the CEO

Stays informed of current performance; designates external Board membersto evaluate CEO

Establishes an orderly succession process

Is willing and able to change management to be credible to shareholders

“Partners” with CEOto provide insight, advice,and support to CEO and management team on key decisions and implementation

Also recognizes ultimate responsibility to overseeCEO and company performance; dual roleof guiding/supporting as well as judging the CEO

Board meetings characterized by useful, two-way discussions of key issues/decisions facing the company

Board members need sufficient industry and financial expertise to add value to decisions

Time and emphasis spent on defining role and behaviors required of Board members; boundaries of CEO/ Board responsibility

Typical mode during a “crisis” situation

Board becomes intensely involvedin discussions of key decisions facing the organization and in decision-making

Frequent and intenseBoard meetings, often called on short notice

Board makes key decisions; management implements

Not uncommon in early “start-ups” where Board members are selected to “fill gaps” in management experience

Degree of Board Engagement

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Board Evaluation in the Context of Board-Building

Board Leadership

Taking Stock of the Board

Taking Stock of the Board

Determine Required

Engagement Focus and Scope

Determine Required

Engagement Focus and Scope

Getting Right Board MembersGetting Right

Board Members

Build Processes and Structures

Build Processes and Structures

Provide Needed Information

Provide Needed Information

ShapeCulture of the

Board

ShapeCulture of the

Board

CreateValue-Added Engagement

CreateValue-Added Engagement

Assess Quality of Engagement

Assess Quality of Engagement

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Board Evaluation: What is the Focus?

Policy Review

Focus: Ensuring all appropriate policies are in place and documented

Fosters institutional memory

Best undertaken by General Counsel who understands the legal and regulatory environment in which the Board functions

Board Effectiveness

Focus: How effectively the Board is working together and working with management

Highlights current strengths to build upon these

Identifies opportunities to further enhance Board effectiveness to add greater value for stakeholders, management, Board members

Discusses how policies are being “operationalized” – may identify gaps

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Proposed Board Evaluation Process

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22

33

44

55

66

Interviews with Steve and Roberto to talk about unique factors impacting the mandate and operation of the Fresno County Employees’ Retirement Association Board

Development of an Interview Protocol covering key parameters of Board effectiveness but tailored to reflect the unique mandate and issues of the FCERA Board

Interview Protocol distributed to all Board members and telephone interviews of 45 minutes each are scheduled; interviews may also be conducted with key senior managers who regularly interface with the Board to get their perspectives, if appropriate

Interview feedback is summarized and analyzed. Key themes are developed from the analysis – areas of unique strength/effectiveness, opportunities for further enhancement

Summary Report of the interview feedback is distributed to all Board members for review

Working session of the Board of FCERA to discuss the Summary Report – agree on areas of strength, discuss areas for enhancement and determine priorities. Discuss alternatives and create an action plan to address those opportunities considered most worthwhile.

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Process Can Also be Used to Develop Board Expectationsand Priorities: Sample Expectations - ABC Co.

Of the Board Devote the time, energy, and effort

to understand the company’s business and prepare for Board meetings

Open, honest, and constructive feedback. Be respectful in expressing your views, but say what’s on your mind.

Active engagement and participation Timely and sound decision-making Once a decision is reached, support

management in moving forward with it

Refrain from micromanaging

Of Management Honesty, integrity, and the highest

ethical standards No surprises - keep the Board

informed of significant issues, transactions, and events. Be honest if there’s a problem.

Come to the Board with a point of view but provide a balanced perspective

– Pros/cons of alternatives– Risks/implications

Run the business effectively Execute on the strategy

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Process Can Also be Used to Develop Board Expectationsand Priorities: Sample Priorities - ABC Co.

For the Company Developing ABC’s strategic plans

–Growth strategy for ABC, including diversification

–Capital allocation decisions–Growth strategy for the utility

business - buy or generate?–Growth strategy for the

Florida properties Reputation/communications

issues within NE Minnesota CEO and executive succession

planning

For the Board Corporate growth strategy -

engaging and aligning with management

CEO succession planning - emergency and long-term

Restructuring Board meetings to make them more effective

Board succession planning

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Questions/Discussion

What are the objectives of the Board of FCERA in undertaking the Board evaluation?

– What would you like to accomplish?

– What would you like to avoid?

– What would be the most helpful and productive outcome of this process?