| 
back
to newsletter repository
July 2003
ANNOUNCEMENTS
Herb Rubenstein Consulting
DEVELOPS A BOARD OF DIRECTORS SCORECARD FOR COMPANIES AND NONPROFIT
ORGANIZATIONS
Herb Rubenstein Consulting has developed
a new set of standards for corporate boards and for nonprofit boards.
Below are two short articles. The first one articulates the new
standards we find appropriate for boards of directors. The second
article shows the factors that we analyze when we evaluate boards
of directors. We have recently completed a review of a lawsuit in
the District of Columbia where each member of a board of directors
of a nonprofit has been sued for $150,000 (the size of the organization’s
outstanding line of credit) for failing to monitor the operations
of the non-profit, failing to install sufficient internal financial
controls and failing to take quick action when they knew or should
have known that financial irregularities were occurring in the organization.
This case will set the tone in the future for defining the roles
of boards of directors and their liabilities if those roles are
not properly performed.
Herb Rubenstein Consulting has a program
to evaluate boards of directors and provides ongoing consulting
to boards to improve their operations and the value they add to
the businesses and organizations where they serve. Recently, Herb
Rubenstein was asked by a representative of the Bethesda-Chevy Chase
Chamber of Commerce regarding “At what size should a company
begin to think about creating a board of directors or board of advisors?”
Our answer is “If your organization has two employees or more,
you need a board of advisors and if you have more than five employees,
you need a fully functioning board of directors.”
We hope you
find our articles and services useful. You can find additional Herb Rubenstein Consulting
articles at our website plus at the following locations on the web:
CLIENT
OF THE MONTH: JOY OF SPORTS FOUNDATION, INC.
Herb Rubenstein Consulting has provided
pro bono services to the Joy of Sports Foundation, Inc. for many
years. We wanted all who read our newsletter to learn more about
this great organization. The Joy of Sports Foundation (JSF) is dedicated
to using sports to help children, particularly those growing up
in disadvantaged circumstances. JSF’s programs teach children
communication, self-esteem, team building and other life skills
necessary to assist them in fully developing themselves in body,
mind, and spirit. Since 1989, JSF has served more than 24,000 children
in the United States and abroad. JSF programs have been recognized
as models by the President's Council on Physical Fitness and Sports,
the Boys & Girls Clubs of America, the United States Tennis
Association, and many other organizations. In appreciation of JSF’s
accomplishments, the White House in 2000 honored Joy of Sports as
a Point of Light award recipient. This year, JSF has pioneered a
major new initiative, Healthy Kids 2005. This program offers a comprehensive
approach to helping children reduce obesity and build health. It
combines JSF's uniquely effective physical activity programs with
nutrition education for children and their parents. Healthy Kids
2005 was launched in San Diego through a $400,000 grant from The
California Endowment. The first year of the program has been extremely
successful. JSF plans to bring Healthy Kids to the Washington, DC
and San Francisco areas in the near future.
For more information
on Joy of Sports Foundation, contact Founder/President Andrew Oser
at adoser@joyofsports.org
or check www.joyofsports.org.
ARTICLE
EVALUATING
BOARDS OF DIRECTORS: NEW STANDARDS AND FACTORS TO CONSIDER
Presented to
the International Leadership Association Annual Conference
Guadalajara, Mexico
Herb Rubenstein
Founder & President, Herb Rubenstein Consulting
Introduction
It is often
said that we learn from failure and mistakes. However, the question
remains, "What do we learn?" If all we learn is not to
make that mistake again, that is not a really powerful "learning."
The way we ultimately learn from mistakes and failures is that we
set new standards as a result of analyzing mistakes and failures.
Boards of Directors, in 2003, obviously need new standards.
Current
Failures – New Standards
The failures
of Enron and Anderson Consulting, and the mistakes of United Way,
MicroStrategy, The Washington Teachers Union, Ullico, Tyco and other
modern day business and non-profit tragedies have much to teach
us. One lesson is clear. In each one of these situations, a big
part of the problem was a failing of the Board of Directors. However,
since there was very little written on explicit standards for boards
of directors in 2000 and 2001, those boards may not have realized
prior to their mistakes that they were on the road to self-destruction.
This article sets a new direction in the literature on Boards of
Directors.
Rather than
discuss board of directors' philosophy (Carver, Boards that Make
a Difference, 2nd Edition, Josey Bass, 1997), best practices (Robinson,
Nonprofit Boards that Work, Wiley, 2001), board of directors selection
processes (Rubenstein and Grundy, Breakthrough, Inc.: High Growth
Strategies for Entrepreneurial Organizations, Prentice Hall/Financial
Times, 1999) or individual characteristics of non-profit leaders
(Nanus and Dobbs, Leaders Who Make a Difference: Essential Strategies
for Meeting the NonProfit Challenge, Josey Bass, 1999), this article
begins to delineate a new standard, consisting of twelve elements,
for Boards of Directors. There is much detailed work behind each
of the twelve elements of the Board of Directors Standard plus a
thorough evaluation framework for Boards of Directors that formalizes
this standard. This article is designed to give Boards of Directors
of businesses and non-profits a new, clear standard -- a north star
-- to guide their creation and operation. The standards are:
Standard
Number 1
Every business
and non-profit organization shall have a duly elected Board of Directors
with written role descriptions for each board position (member),
for the board as a whole, and the board shall set and ensure compliance
with all key standards, goals and values which define the organization's
identity.
Standard
Number 2
The Board of
Directors shall have an election/selection process that guarantees
that every skill, competency and aspect of human capital that the
organization requires to be successful is present at all times on
the Board of Directors.
Standard
Number 3
The Board of
Directors shall on a regular basis (no less than annually) evaluate
each of their members, the Board's processes, operations and actual,
measurable contributions to the organization and replace board members
and change their processes and operations that are not contributing
significantly to the success of the organization.
Standard
Number 4
The Board of
Directors shall be supported by organizational processes, including
a board book distributed to the board of directors one week in advance
of a board meeting. The board book will give board members timely,
accurate information plus a clear and cogent analysis so that the
board can make intelligent decisions free of undue influence.
Standard
Number 5
The Board of
Directors, each year, shall make at least ten decisions and take
ten distinct actions that contribute significantly to improving
the quality and ultimate success of the organization each year.
Standard
Number 6
Each board member
shall, each quarter, originate or sponsor at least one major action
or idea that contributes significantly to improving the quality
and ultimate success of the organization.
Standard
Number 7
Every board
member shall be allocated sufficient resources, including financial
resources, access to research, independent advisors and industry/competitive
intelligence, necessary to perform their job admirably.
Standard
Number 8
Each board member
shall take forceful action to discover, eliminate and permanently
eliminate any lack of integrity, ethical violation or failure by
the organization to follow the laws and highest ethical standards
of the society (ies) in which the organization operates.
Standard
Number 9
The Board of
Directors shall guarantee that the historical and contemporary financial
books and records of the organization are accurate, and kept in
accordance with the highest accounting standards. Further, the Board
of Directors shall guarantee that the financial projections of the
organization are well informed and serve as a excellent roadmap
for the future of the organization.
Standard
Number 10
The Board of
Directors shall be responsible for providing input into and approving
an annually updated business plan and budget, monitoring financial
and programmatic performance of the organization and providing input
the long-range (3-5 year) strategic plan for the organization.
Standard
Number 11
Each board member
shall take at least one action monthly to enhance the reputation
of the organization. The Board of Directors shall develop an annual
plan to improve the reputation of the organization in the community
and to insure that actions of the organization consistently enhance
the reputation of the organization.
Standard
Number 12
The Board of
Directors shall be actively involved in bringing substantial resources
to the organization and in creating, supporting and sustaining strategic
alliances for the organization. Each board member shall take at
least one action quarterly that brings in new or additional resources
or creates a new strategic alliance for the organization.
From
Standards to Clusters of Factors
These standards
must be translated into measurable factors in order to evaluate
a board's performance. The ten clusters of factors represent aggregated
scores which if measured accurately can shed great light on the
past performance and the performance potential of a board of directors.
The clusters include:
Cluster
1 – Human Capital Factors
- Does organization
know what competencies are needed for Board members
- Does board
currently have right people with right competencies
- Does organization
have system for identifying when new competencies are needed
- Does organization
have ability to add/subtract board members based on fit, competencies
and performance
- Does the
board have a nominating committee that takes competencies into
account
- Does the
board have a resume file or waiting list for board positions
- Is the board
willing to increase the size of the board to accommodate the need
for new competencies
Cluster
2 – Organizational/Leadership Factors
- Are board
rules in place and enforced
- Is board
structure appropriate
- Does board
have evaluation system for board as a whole plus individual members
- Does board
have someone responsible for ethics oversight
- Do board
members have written agreements with the organization that identifies
their roles and responsibilities
- Are the
CEO and Chairman different people
- Are board
member expectations consistently realized
- Are all
past board records accessible and well organized
Cluster
3 – Process Factors
- Does the
board meet as often as appropriate (at least quarterly)
- Is a board
book prepared and distributed at least 10 days in advance of a
board meeting
- Do board
members meet regularly without management
- Is board
attendance 80% or higher at every meeting
- Does the
board have a system for collecting information on best practices
of other boards
- Does the
board have a system for recommending best practices to the organization
and following up to see if they are implemented
Cluster
4 – Resource Factors
- Is there
a person who is the director of board relations
- Is there
an adequate budget for the board
- Do board
members actively participate in bringing new resources to the
organization, (i.e. money, strategic alliances, professional services,
customers, etc.)
- Does the
board assist on a regular basis in developing a strategy for the
organization
- Is the board
compensated in any way for being on the board
- Is there
D&O Insurance for the board
Cluster
5 – Accountability/Financial Oversight Factors
- Are board
minutes, votes and action items identified all in order
- Is there
a procedure where a board member can question the actions of the
organization
- Is the board
meeting run by the Board Chair
- Are there
sufficient outside directors
- Is the board
exercising informed reviews and making key financial decisions
for the organization
- Do board
members sit on too many other boards, have other conflicts of
interest or are family members of other board members
- Is the board
exercising informed reviews and making key financial decisions
for the organization
Cluster
6 – Transformational/Communication Factors
- Does the
board have a clear statement of its deficiencies
- Does the
board have a board improvement plan that is being carried out
- Does the
board have a leader with a clear vision for the future of the
board
- Does the
board have a clear vision of the future of the organization? the
industry or sector?
Cluster
7 – Governance Factors
- Does the
board govern the organization or just provide advice
- Are their
five examples where the Board voted in key areas to the company
- The board
has a 3-5 outlook or plan to direct the organization
- Violations
of board rules or board set policies are dealt with quickly, publicly
and consistently
- Are there
term limits for board members
Cluster
8 – Reputation Factors
- How well
known is the organization and its board
- How well
respected is the organization and its board
- How many
articles, speeches and books have board members written or given
as a board member
- Does the
organization have a plan for promoting the board's reputation
and the organization's reputation
Cluster
9 – Performance/Results Factors
- Can the
board show it has contributed 10% to the top line/bottom line
in the organization in the past year
- Has the
board corrected or improved at least 3 major problems in the organization
in the past year
- Does the
board know and have a plan to correct or improve 3 major problems
the organization will face in the next year.
- Can each
board member identify a significant contribution he/she has made
to the organization within the last 60 days
- Can each
board member identify a significant contribution that he or she
will make to the organization in the next 60 days
- Can each
board member identify a significant contribution that each other
board member has made to the organization in the last 60 days
- Has the
board made 5 key financial decisions in the past 90 days
Cluster
10 - Alignment Factors
- Does the
board have general agreement regarding its major roles and responsibilities
- Does the
board agree on the major problems of the organization
- Does the
board agree on the major opportunities of the organization
- Does the
board agree on the key values of the organization
Disaggregating
the Individual Factors
These clusters
provide a strong indication of board performance. Mining the data
on the individual factors listed below will give a board more in
depth, valuable information. The factors below can be analyzed at
both the board level and at the individual board member level. We
recommend rating all of the factors in board evaluations using a
1-5 scale or "maturity model" where 1 is the most negative
or "never" response and "5" is the most positive,
"always" or "excellent" response. The individual
factors worthy of measurement in evaluating boards of directors
are:
- Recruitment
- Training
- Terms of
board members
- Use and
Availability of Outside Expertise
- Board Recordkeeping
- Oversight
- CEO Supervision
- Financial
Management
- Audit
- Fiduciary
Responsibility
- CEO Accountability
- Bylaws
- Board Duties
- Voting
- Leadership
- Resources
- Board Results
- Member Past
Results
- Member Future
Results
- Organizational
Results
- Board Processes
- Meeting
Process
- Board Expectations
- Board Member
PR
- Board Knowledge
- Compensation
- Communication
- Demographics
- Board Understanding
of Opportunities
- Board Understanding
of Problems
- Financial
Value of the Board
- Board Understanding
of Stakeholders
- Clarity
and Alignment of Purpose
- Competencies
- Experience
- Board's
Use of Technology
- Capacity
for Change
- Board's
Independence from Management
Conclusion
This article
is designed to reframe the discussion regarding Boards of Directors
to institute new national and international standards for Boards
of Directors. These proposed standards apply, in our judgment, equally
to boards of directors of large or small for-profit companies, non-profit
organizations and applies equally to large boards and small boards.
These standards,
as well as the individual and clusters of factors which evolve from
these standards, form the basis for evaluating boards of directors.
We welcome your comments and suggestions for refinements and improvements
in these new standards and evaluation factors for Boards of Directors.
Biographical
Information
Herb Rubenstein
is an attorney and the CEO of Herb Rubenstein Consulting, a leadership
and management consulting firm. He is co-author of Breakthrough,
Inc. – High Growth Strategies for Entrepreneurial Organizations
(Prentice Hall/Financial Times, 1999). His email address is herb@herbrubenstein.com
and he can be reached at (301) 718-4200 in Bethesda, Maryland or
(202) 236-7626 in Washington, D.C.
back |
