The ABCS of Board Education
Becky Bergman

In the post-Enron era, there's no excuse for bank directors who fail to take advantage of the many educational resources available on corporate governance.

The last thing the banking industry probably needed in 2002 was a New York Stock Exchange recommendation coming on the heels of the Sarbanes-Oxley Act about how to tweak its corporate governance plan–again.

So when the NYSE Corporate Accountability and Listing Standards Committee updated its guidelines that year to include a strong urging for public companies to adopt an orientation and continuing education policy, no one could blame directors if they started mumbling under their breath.

Turns out, orientation for new board members and director continuing education might just be the best concept to emerge from the shadows of this decade’s corporate scandals.

“When Sarbanes-Oxley came out, there was not a bank board out there that didn’t have their directors lectured on about oversight issues, accounting practices, and bank policies,” says attorney Bennet Koren with McGlinchey Stafford in New Orleans, who has specialized in bank regulations for more than 20 years.

Sure, financial execs are feeling a little jittery these days—but who isn’t? And the biggest governance brouhaha in 2006—the illegal backdating of stock options—probably isn’t helping calm corporate nerves.

More qualified directors needed
Much like Sarbanes-Oxley, the recommended guidelines are a direct consequence of the accounting scandals that battered several large U.S. companies and damaged public and shareholder confidence several years ago. Some analysts say there may come a day when only certified directors can serve on corporate boards.

“Any director who doesn’t get continuing education is crazy,” Koren says. “Directors have a responsibility to keep up on all the changes in the banking industry. If anything goes wrong, they can prove that they took their responsibilities seriously.”

For directors, the benefits of going back to school are numerous. Continuing education lets them fine-tune their strategic plans, learn to build and manage relationships, and hone their skills for the committees on which they serve while gaining a deeper understanding of how all the other pieces fit together.

Katrina Randolph, general counsel at Brightline Compliance, a legal e-learning training company based in Washington, D.C., takes it a step further. She believes directors owe it not only to their shareholders, but to peers, customers, employees and the community.

“Directors need to be getting into this even if it’s for modeling purposes. It’s critical for the rank and file to see directors taking their job seriously and doing what’s right,” she says.

Although the NYSE largely left it up to individual companies to devise their own policy the way they see fit, the initial idea behind creating the director education guideline was to ensure that public companies have a consistent plan in place that promotes good corporate governance and increases director and board effectiveness. This concept makes good sense for all banking institutions—public and private.

Steve Philpott, executive vice president and general counsel at Portland, Oregon-based Umpqua Holdings Corp., spends several hours conducting informal board orientations whenever a new recruit joins the board, and he starts by recapping a few key points specific to the banking industry. From there, he briefs the director on the bank’s policies and regulations and introduces him or her to other key executives.

In all, Philpott spends several days helping the new director get familiar with the bank. At any time, the director has the option of signing up for educational courses, for which he or she is given an allowance, according to Philpott.

Although Umpqua bank officials did not disclose the maximum reimbursement or annual cap for directors’ continuing education, Diane Miller, chair for the compensation committee at the $7.2 billion bank, estimates she attends roughly 60 hours of schooling each year.

Corporate support for education
But not all companies are on the education bandwagon. A Robert Half International report of 1,400 chief financial officers surveyed earlier this year found that only 29% provided full reimbursement for continuing education; 17% provided a partial reimbursement, and a whopping 50% said they did not reimburse for continuing education.

“Companies that support continuing education signal they are committed to the professional development of their staff, which could give these firms an edge in their recruitment and retention efforts,” says Max Messmer, chairman and CEO of RHI, a Menlo Park, California-based staffing company.

“While education benefits rarely are the sole criterion for accepting a position, they can tip the scales in an employer’s favor in a competitive hiring environment,” says Messmer. “Employees who earn professional accreditations establish themselves as leaders in their field and in the process gain insight into industry trends and best practices.”

In a separate report, “Evolving to Meet Boards’ Needs,” published by New York-based executive search firm Spencer Stuart, a majority of those surveyed said they have some sort of director education program in place.

However, a whopping 80% admitted their company did not have a formal budget, while the remaining 20% said they allocate funds ranging from $36,000 to $60,000 annually.

Washington, D.C.-based National Association of Corporate Directors (NACD), a 9,000-member nonprofit educational organization for board members and advisers, recently surveyed 700 companies and found that 69.7% said they reimbursed executives for external education courses.

“Budgeting for continuing education is a fairly new thing,” says NACD spokesperson Doreen Ruyak, “But clearly, companies are supporting it.”

Programs run the gamut
The NACD offers various courses, seminars, and resources throughout the year, including its continuing education program, Certificate of Director Education, and the cornerstone of its curriculum, a two-day Director Professionalism Course (see box), held in major cities around the country (see www.nacdonline.org/cdinstitute for more information).

When it introduced its Code of Conduct and Educational Values Pledge as part of its Certificate of Director Education, along with a commitment to enroll in eight credits of coursework each year, more than 500 execs signed up in the first year, according to Ruyak.

“Boards are seeking programs tailored to a variety of needs. These can range from general education on governance trends, regulations, and responsibilities to more arcane and technical financial requirements that may need to be thoroughly understood only by audit committee members,” according to the Spencer Stuart report.

“Director education providers have responded to this need, providing a wide range of programs, sometimes carefully tailored to the needs of individual boards under the assumption that one size does not fit all. There seems to be something for everyone,” the report continues.

Eighty-four percent of boards surveyed by Spencer Stuart indicated they opt for internal training because it allows them to customize the program to the specific needs of their board. That’s not surprising, says Brightline Compliance’s Randolph.

“An in-house training session lets directors speak the same language. Trainers can customize the program so that everyone is on the same page,” says Randolph. “And it’s great for directors, too, because they can ask questions and speak openly.”

Started by two former Department of Justice attorneys, Brightline Compliance has trained more than 1 million people and currently has 400 clients. The specialty training company designs and implements in-house programs for company boards throughout the U.S., covering a vast spectrum of industries. By working closely with a board, trainers can develop a program that addresses the issues directors need to focus on the most.

During the training session, participants often play out specific scenarios and practice the verbiage they might use in real life, according to Randolph.

The firm steers away from training sessions packed with to-do and don’t-do lists and instead explores “gray areas” with specific questions and solutions.

“Let’s say you need to make sure everyone on your board reviews a policy that outlines the code of conduct before it’s formally implemented,” says Randolph. In doing so, one question to consider is, “What process does your organization go through to educate the people about that policy?” she says.

“You can’t just have them sign off that they received a copy of the policy and drop that in their file,” she adds. “If that’s all you do and then that policy is violated, someone is going to be asking what you did to prevent this, and you don’t want to say ‘nothing.’”

Formal schools and certifications
Directors who turn to external education programs—via conferences, seminars and universities, for example—do so typically because they are seeking specialized information, networking opportunities, and exposure to other boards and their methods.

That was exactly the case for Miller, who joined Humboldt Bancorp three years ago just before Umpqua acquired it. At the time, the human resource and management consultant had one hurdle to overcome before she could stake a claim on the board: She was unfamiliar with the inner workings of the $1.5 billion bank and the specific—often times rigid—regulations that drive the financial industry.

“While I had never served for a bank before, I had worked on several larger nonprofit boards and chaired a couple of them,” says Miller, president and shareholder at Sacramento-based executive search firm Wilcox, Miller & Nelson. “Good governance practices resonated with me on a deep level, so that was a good start.”

She didn’t waste any time signing up for the $6,000-plus Director Training and Certification Program at the UCLA Anderson School of Management, a weeklong course that covers the latest regulations and current best practices in corporate governance for roughly 2,000 participants a year.

In addition to the UCLA program, Miller has also taken advantage of a myriad of resources at the NACD, earning numerous certifications in audit, compensation, management, compliance, and security. She has also devoted countless hours to various corporate governance initiatives and currently serves on several boards for nonprofit groups, including the NACD’s Northern California chapter.

Of the boards surveyed by Spencer Stuart, 78% provided some sort of external training for directors. Of those, 56% allow directors to select which program to attend while 35% provide directors with a list of programs from which to choose. Only 9% of the boards require the programs to be Institutional Shareholder Services (ISS)-accredited, which simply means that such programs have been evaluated and meet or exceed ISS’s standards based on the promotion of strong corporate governance practices. For the past four years, the Rockville, Maryland-based provider of governance and proxy voting services has accredited corporate director programs, which must include at least eight hours of instruction to qualify.

Among the 60-plus ISS-approved director education programs are the Stanford Law School Directors’ College (see box); the Directors’ College at the University of Delaware in Newark, Delaware; the Corporate Governance Program at Northwestern University’s Kellogg School of Management in Chicago; the Directors’ Education Institute at Duke University in Durham, North Carolina, and the University of Georgia’s Terry College of Business’s Director College, which also sponsors an annual directors’ conference specifically aimed at bank board members.

As part of the ISS-backed Stanford Directors’ Forum, for instance—a three-day session offered by the Stanford Graduate School of Business and Stanford Law School that attracts about 55 corporate directors annually—participants learn about CEO selection and succession strategies, financial reporting, executive compensation, and litigation risks.

The Corporate Governance Series at Harvard Business School’s Executive Education program recently added new class sessions to accommodate the increasing number of participants. Its flagship course, Making Corporate Boards More Effective, teaches participants about improving the board and setting and achieving goals in a challenging era.

In June, the program will host its Audit Committees in a New Era of Governance, a three-day session that features everything from learning how to operate successfully amid new regulations and emerging governance trends to helping executives identify and address critical challenges. The course also touches on how to rethink the audit committee’s activities and formulate approaches for dealing with the challenges facing those committees today.

For the last three years, the Forum for Corporate Directors, located within the Paul Merage School of Business at the University of California in Irvine, has offered its eight-hour Director’s Institute course. This ISS-backed program also hosts a director’s roundtable three times a year, giving board leaders an opportunity to speak candidly with their peers about actual problems and issues confronting management and the board.

ISS is well known for its ratings of companies’ corporate governance practices. It measures strengths, deficiencies, and overall quality of a company’s corporate governance practices and board of directors. One of the 63 criteria for the system is whether directors are trained and educated.

Choosing the program that fits
Director continuing education can appear overwhelming, say banking leaders, but when it comes to deciding on a program, a little soul-searching and a quick assessment can help narrow the choices.

Ask questions—Do you have a well-established board staffed with experienced business leaders or is the board, comprised of inexperienced execs, just coming together? Or, is it a combination of a young board and bank with veteran business leaders? How much history does the board have together? Look at your foundation and decide where you want your board to go and what values you hold.

Make goals—What kind of board do you want to be? What is the most critical issue that needs addressing? What are some weak areas of the board?

Get current—How well do you know about current events? Are you comfortable with your level of governance knowledge, worried that a new regulation could be impacting the audit committee negatively, or concerned about a recent event that calls into question the board’s position on ethics?

Network—What’s on everyone else’s mind? What concerns the compensation committee? Are any major changes occurring within the banking company in the near future? What are directors from other boards talking about?

By defining the board’s goals and identifying and understanding its strengths and weaknesses, directors can begin to develop a continuing education plan that provides the key information and skills they need not only to be successful directors, but also to contribute to enhancing the board’s performance, growing the bottom line, and, ultimately, satisfying the shareholders.

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