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5 Top Tips for Building a Board of Directors

February 28, 2018

In this article, Coeditor John Foehl draws on his considerable experience as a board member and company officer in the captive insurance and finance industries to offer his insights on what to look for when choosing members for an effective board of directors.  

As I write this article, I am currently serving as an incorporator for a new captive insurer being formed. As part of this process, the incorporators have been charged with assembling the first board of directors who will assume the responsibilities for overseeing the captive from the incorporators. As a result, we have had some serious discussions on how to build the board for the new captive. To some degree, all new captives struggle with this issue; therefore, for this article I have collected some top tips for consideration when building a board of directors. And, while this discussion is geared primarily toward new captives, even mature captives would do well to consider whether their boards could use some reinvention.

Anyone who has ever served as a board member probably has at least one anecdote of a dysfunctional board. These range from boards that do nothing more than rubber-stamp the decisions of management to others where no consensus can be reached and the board remains hopelessly deadlocked. Other examples are boards where members jockey for position and power and others that spend their entire board meetings looking at historical information. (See the article "Does Your Captive Board Spend Most of Its Time Reviewing the Past? Should It?") So, if you could create the ideal board of directors, how would you go about it? 

1. Develop and Articulate a Clear Vision/Mission

Before you even begin to think about recruiting potential board members, incorporators or whoever is serving in this function need to develop a clear vision/mission for the captive. As you interview prospects, this becomes part of your recruitment pitch. Here is what this captive stands for, believes, or wants to achieve. Does this board member believe in the vision? Why would he or she want to be a part of an organization with this vision? Can he or she provide evidence that his or her character is in alignment with the vision? The objective here is to try to assemble a dream team. While this is certainly a lofty aspiration, the more time you put into this effort by crafting a clear and concise vision and incorporating it into interviews, the more likely you are to synthesize a great board.

2. Recruit and Interview for Skill Sets

My experience with group captives suggests this may be a more difficult assignment than for many traditional insurance companies. Given their very nature, group captives try to be inclusive of all their members. This invariably can lead to a decision where each member also has a seat on the board of directors. The problem with building a board in this fashion is twofold: (1) you may not get the right mix of skill sets necessary for the board, and (2) where the group captive is fairly large, so is the board. The size of the board then complicates the decision-making process and the ability to reach consensus and move forward.

Where at all possible, captives should seek to build a board with a diverse set of key skill sets, such as finance, investments, risk management, etc. Doing so increases the likelihood that questions get raised concerning all aspects of the captive's operations. One of the best ways to accomplish this goal is to interview prospective board members to identify why they wish to serve on the board and what unique skills they can bring to bear.

3. Build a Right-Sized Board

As I noted above, from my way of thinking, board size matters and smaller is better. Back in 2014, the Wall Street Journal commissioned GMI Ratings to conduct a study on board size (see "Smaller Boards Get Bigger Returns," by Joann S. Lublin, August 26, 2014, Wall Street Journal). The Wall Street Journal reported that the study concluded as follows: "Small boards at major corporations foster deeper debates and more nimble decision-making." While it is true that captive insurers are not major corporations, at least to this author it seems intuitive that the same would hold true within our organizations.

So, what constitutes a small board? The typical range seems to fall between 8 and 10 board members. In "Evaluating the Board of Directors," Investopedia cites a study by the Corporate Library that found the average board size is 9.2 members. 

This brings up another question: Should the board have an even or odd number of members? The argument for an odd number is this arrangement precludes the board from ending up with tied votes unless a board member abstains. However, we have seen boards with an even number of members function well where the chairman normally does not vote. In this case, the "odd" number remains in effect. Regardless, it is important for the board to develop a set of governance rules and responsibilities.

4. Develop Board Roles and Responsibilities

Good governance does not happen by accident. In looking at almost all companies that are recognized for their governance prowess, invariably you will find they have a set of standard roles, responsibilities, and rules that govern their work.

Roles include how many officers the board should have and what each of those officers is responsible for. I will argue that the chair is probably the most critical individual on the board. The chair serves as the conduit between the board and the management team (either internal or external). I liken a board chair to the conductor of an orchestra; his or her role is to make sure the board is all working off the same music sheet. The best board chairs are seen but not heard very often. While they are primarily responsible for setting the agenda of the board, they then need to step back and ensure all of the board has an opportunity to weigh in on the issues under discussion.

Besides what officers the board should have, decisions also need to be made about the role of committees within the board and what committees should be created. Some boards choose to delegate responsibility for resolution on matters to the committees with the board only ratifying the outcome. Other boards prefer to keep all decision-making at the board level. Both alternatives have pros and cons. The important point is to determine how your board will operate and conduct business in this fashion.

Finally, a set of rules, such as Robert's Rules of Order or any other written set of governance rules, should be adopted and approved by the board at its formation. Doing so will alleviate countless headaches later on.

5. Build a Culture That Invites Debate

From my own career, there is nothing worse than a board where debate is frowned on. I believe that when boards strive for congeniality over healthy debate, ultimately there are governance problems that occur. Unfortunately, in today's society, debate has become a highly sensitive topic. The following quote is taken from an article titled  "How Do You Build a Culture of Healthy Debate?" June 28, 2013, by Scott Berkun.

Most heated debates involve people who have trouble separating their opinions from their identity (the lack of ability to find any humor in a debate is a good sign that someone is taking the issue too seriously).

Mr. Berkun's insight is a useful piece of knowledge to employ when interviewing prospective board candidates. You want individuals who are comfortable with who they are and therefore open to having their ideas and thoughts challenged without it being perceived as a personal attack on their character. Boards have no room for "safe spaces"; the consequences of not fully looking at both sides of an idea or issue can have profound monetary and legal ramifications.

None of these five tips necessarily is new or earth-shattering; in fact, building a board of directors often relies on a lot of common sense. But sometimes we just need to be reminded of how to go about it.

If you have other tips you think are key to a great board, please feel free to share them with us. Contact us.

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