EP 004 – Society for Corporate Governance

[00:00:00] Doug Chia: Welcome to the Public Company Series podcast, powered by OnBoard: giving boards the clarity, security, and insights they need to make better decisions and deliver lasting value. I’m your host, Doug Chia. This podcast series is designed to give corporate directors, executives, and governance professionals the insights and tools they need

[00:00:29] Doug Chia: to build boards that are agile, resilient, and prepared for the future. It’s based on the book Board Structure and Composition, which is part of the Public Company Series published by the New York Stock Exchange and JP Morgan. Our guest for today’s episode is my longtime friend, Paul Washington, president and CEO of the Society for Corporate Governance.

[00:00:52] Doug Chia: Paul authored chapter of the book entitled Balancing Workload and Responsibility of the Board and Its Committees. Paul, welcome to the show.

[00:01:03] Paul Washington: Thanks so much, Doug. Delighted to be with you.

[00:01:05] Doug Chia: So the underlying challenge that Paul addresses in his chapter of the book is that the three committee structure that may have become out of date, given the challenges that boards face today, public expectations of what boards are supposed to be overseeing keep growing,

[00:01:24] Doug Chia: yet committee design has largely stayed frozen. Paul raises the question whether the commonly accepted structure of board committees and their respective responsibilities match the kind of decisions, risks and demands that companies face today. In the chapter, Paul walks us through how this seeming misalignment developed and why simply throwing new issues into existing committees is less than ideal.

[00:01:53] Doug Chia: He offers a clear step-by-step process for boards to reassess where committee work is done and where it should be done. So Paul, with that, let’s take a deep dive. If you look at the committee structure of a public company, it’s always the same three. Audit, Compensation, Nominating Governance. How do we get here?

[00:02:17] Paul Washington: It’s a great question. Yeah, those three committees exist in about 99% of public US companies. And how did we get here? We got here because of the Enron and WorldCom crisis, and then the stock exchange listing standards that were adopted in response to that over 20 years ago. And so the, the notion at the time, the analysis of the problem at the time was that there was a lack of effective independent board oversight of misbehaving or self-interested management at Enron, WorldCom, and other companies.

[00:02:53] Paul Washington: And so the idea was to have three committees composed entirely of independent directors, directors who are independent of management who would oversee or make decisions in key areas. So first, the financial statements and oversight of the auditor. Well, that was given to an audit committee. Second, executive compensation, well, that should be decided by independent directors with no ties to management.

[00:03:17] Paul Washington: And third was the nominating Governance Committee. Where you wanted to have a committee that was independent of management and chose directors who were also independent of management. So the whole notion here was these three committees are necessary to provide independent board oversight of potentially self-interested or misbehaving management.

[00:03:40] Doug Chia: Some of these committees actually existed before, like audit committee I think did.

[00:03:43] Paul Washington: Yeah. Correct.

[00:03:44] Doug Chia: But it was still populated by not all independent directors, but still a lot. And boards themselves had a lot more

[00:03:51] Paul Washington: Yeah,

[00:03:51] Doug Chia: non independent directors.

[00:03:53] Paul Washington: That’s right. And yeah, there was precedent for all of these types of Kennedys before, so it wasn’t just coming out of whole cloth.

[00:04:00] Paul Washington: But the, the stock exchange listing standards codified the requirement to have those committees or something like them, and that they all be composed of independent directors, and they provided in the listing standards what those committees were supposed to do.

[00:04:15] Doug Chia: So it’s fair to say you see this current setup as leaving some big gaps.

[00:04:20] Paul Washington: Yeah.

[00:04:20] Doug Chia: In the chapter, you point out nowhere do the listing standards address the board’s or committee’s roles in either a decision making or oversight role, in strategy, operating or capital plans, budget, capital allocation, or in key areas such as the company’s technology, workforce, facilities, public policy, and so on.

[00:04:45] Doug Chia: Let’s talk a little bit more about that in terms of the, the gaps that you’ve identified

[00:04:53] Paul Washington: the gaps here lead to a lot of frustration by boards and members of management over and over again. You see management thinking that the board’s not really doing its job and you see boards expressing frustration with their board materials and the meetings and so forth.

[00:05:11] Paul Washington: And I think there’s something that sits beneath all of that, which is there is a desire, certainly by directors. These are some of the smartest, most experienced people in corporate America. They wanna do more than sit on a nanny state board that’s overseeing the decisions made by someone else. They want to, at a minimum, be strategic thought partners and engage with management in thinking through the company’s activities in the marketplace, the products and service itself, and it buys in the workplace, its operations and its workforce, and in the public space, its communications, its government policy and so forth.

[00:05:45] Paul Washington: So there’s a real desire by directors to be engaged more thoroughly. Now, management sometimes doesn’t want the board to get into those interesting areas, but a lot of folks in management do actually say we’d like our board to add more value in those areas. But both at the board corporate governance guidelines level and at the committee level, those fundamental business areas are just not addressed and have in many cases remained unaddressed for two decades.

[00:06:17] Doug Chia: I guess one way to look at it is that those are just understood. You know? It’s like, yeah, a board’s there for, you know, to advise on strategy and we brought these board members in to help us do certain things, and those are like more business type things, and so we don’t really have to write these down, so maybe by not writing them down in the rules, the uninitiated types out there, they just read the rules and they’re like, oh, this is what these guys are supposed to do.

[00:06:46] Doug Chia: And it doesn’t mention anything about strategy. So you know, like a lot of lists, you only think about what’s on the list. You don’t think about what’s not on the list.

[00:06:54] Paul Washington: Right, and that leads to a lot of frustration by directors. Like that’s when they talk, you know, we’re just to check the box board and they don’t want to be.

[00:07:01] Paul Washington: But if something’s written down as required, then all the government’s professionals out there will make sure the board and the committees all do what’s required. But they may not step back and say. Do they do what’s required by regulation and maybe not what’s required or advisable in terms of running business?

[00:07:17] Paul Washington: I did a poll in a, at a conference not long ago where I asked how many people in the room had their board actually vote on their corporate strategy versus review their corporate strategy. Literally, only two hands went up in a room, about 200 people who said the board voted on the strategy.

[00:07:35] Doug Chia: Yeah.

[00:07:36] Paul Washington: That can be okay.

[00:07:37] Paul Washington: I’m not saying that’s wrong. But I am saying that there’s also a lack of clear definition of what is the board’s role with strategy? Does it vote on it? Does it just review it? What counts board review? And, and I think that’s one of those areas, and we can get into the committee structure aspect of this, but you know, if you don’t have that clarity, it can lead to calamity.

[00:07:57] Paul Washington: So at Lehman Brothers, for example, if you read the bankruptcy examiner report there, it said the board’s responsibility was to review risk tolerance levels. Well, the board regarded that as well, management sets them and we just look at them and management regarded it as the board approves them. And so that sort of lack of clarity, the lists you put in, you said, I mean, that can lead to real problems because it’s not clear who’s got the ball.

[00:08:24] Doug Chia: Definitely. So when I look at the traditional board committee structure, you know, there the three committees that everybody knows about. Um, let’s just call ’em the big three. You know, this occurred to me when, a couple years ago to mark the 50th anniversary of Milton Friedman’s death, or was it the 50th of, of that New York Times magazine piece, whatever it was.

[00:08:48] Doug Chia: All of a sudden people are, the whole idea of shareholder primacy was being kind of trashed and people, including me, were saying that we need to bring back the stakeholder model, employees, customers, community and shareholders too. And if, if everything kind of, everything should balance out. But it shouldn’t just be like, let’s just think about the stock price.

[00:09:12] Doug Chia: And then I was thinking, okay, if that’s the case, then shouldn’t the committees also be addressing each of those constituents? And when you look at each of the three committees, they don’t. They really only protect the shareholders’ interests. You know, the audit is looking at their, after the financial statements.

[00:09:33] Doug Chia: Comp is really at the time was only looking at executive comp and not the rest of the, um, the employees. And the nominating, nominating obviously was really there to populate the board. I obviously see this as kind of a problem. I don’t know what you, what, what’s your take on this?

[00:09:52] Paul Washington: It’s a great question.

[00:09:53] Paul Washington: So. My own view is that companies have a fair amount of latitude under the law to decide where they want to be on the sort of Gordon Gecko to tree hugger spectrum, right? They have to still serve the interest of the corporation, right? The board has to serve the interest of the corporation and the shareholders, right?

[00:10:11] Paul Washington: But, in doing so, they can take into account a lot of other stakeholders in that process. I think there’s a fundamental issue here that committees are part of which is first the boards have to kind of talk about it in the context of their own strategy and their own corporate culture, where they want to be on that spectrum, right?

[00:10:32] Paul Washington: And then the second thing is they need to figure out how to bring different stakeholder perspectives or impacts or relationships. ’cause there are many ways you can think about stakeholders. You can think about them. Do we have a good relationship with them? Are we serving their interests? Are we responding to their most recent requests?

[00:10:52] Paul Washington: Right? There are a lot of different ways you can think about your stakeholders, but you ought to bring some version of that into corporate decision making. So how does it play out at the committee structure level? Well, we have seen committees take on responsibility for certain stakeholders. So the compensation committee now often oversees the workforce at some level as well, so that’s

[00:11:15] Paul Washington: employees. You have seen nominating governance committees, take on responsibility for philanthropy, community relations, sometimes, public policy or there may be a separate committee there. So you’ve got that. And then the audit committee occasionally gets enlisted into reviewing things like ESG reports.

[00:11:36] Paul Washington: So that can be a multi-stakeholder endeavor. The issue is that each of those winds up being kind of siloed. Right? And so those stakeholder perspectives do not actually roll up into broader corporate decision making. So I think part of the issue here is, if you’re going to take more of a stakeholder perspective, you have to have a way of not.

[00:12:01] Paul Washington: Putting these in committee cul-de-sacs, but actually integrating stakeholder perspectives, throughout your decision making process. And committees can be part of that. They should facilitate that, not actually send dead ends for employees, but we look at them at the, at the Comp and Human Development Committee,

[00:12:19] Paul Washington: so we don’t really need to consider them any other time when we’re doing an M&A transaction or when we’re doing a budget or anything else like that. I think that’s where committees can actually stand in the way of, taking into account stakeholder perspectives and impacts.

[00:12:33] Doug Chia: You know, I think we know that the law allows companies like in an M&A deal to consider other stakeholders, but

[00:12:42] Doug Chia: companies usually take, okay, the safest route is just shareholder primacy. So if we just do that, we’re fine. Um, we start, you know, introducing other factors, then we’ll get sued and we’ll, you know, so it’s like we don’t want that, so let’s just take the path of least resistance and then call it a day. The other thing about the committee structure

[00:13:03] Doug Chia: is that everything it addresses, everything that the charters address are really defensive. It’s about risk mitigation, right? And these three committees, audit, comp, and nominating governance, they don’t address opportunity. You know, I think you and I have been on not-for-profit boards that have strategy committees.

[00:13:25] Doug Chia: When was the last time you saw a public company have a strategy committee? So what do you think about this kind of notion of maybe there should be like an opportunities committee. It’s like the business committee.

[00:13:35] Paul Washington: It’s a great observation. I think it’s a great observation ’cause I agree with it. Now I had a conversation with a CEO worked with and he just talked about the natural incentives for corporate directors is to protect their own reputation,

[00:13:49] Paul Washington: ’cause they don’t usually have enough money at stake. So what’s really at stake for directors is their reputation. So that naturally will make them more risk averse. Right? Management has more money that they can make by taking advantage of

[00:14:00] opportunities. So they’re gonna be a little more aggressive. Our committee structure reinforces that risk focus predilection among directors.

[00:14:10] Paul Washington: And I think that that is in fact a real issue because if you’re thinking about the transformative trends that are affecting corporate America, whether it’s technology and generative, or AI or it’s sustainability or it’s economic shifts with tariffs and so forth, you need to have a board that is not only focusing on the risk, but focusing on the opportunities.

[00:14:37] Paul Washington: I wrote a piece on this where companies ought to have an enterprise opportunity management system, not just enterprise risk management system. So, and at the board level. And what does that mean in terms of committees, which is how do you enlist the full board and it’s committees in as a constructive partner in developing, approving, or reviewing and overseeing the implementation of the company’s strategy.

[00:15:02] Paul Washington: Now the issue is that’s something management loves to have full say on, right?

[00:15:06] Doug Chia: Sure.

[00:15:07] Paul Washington: And yet, if you view the board as a strategic asset. If you’re paying these people a decent amount of money to show up a few times a year and consult with them throughout the year, you kind of wanna make sure you’re getting the most out of them.

[00:15:20] Paul Washington: And so I think that it’s a really big opportunity out there for companies to look at their committees and say, okay, how can they help us more fundamentally execute our strategy? Which is not just the risk side of the equation. It’s frankly that puts everyone to sleep. No one wants to spend all day talking about risk, but enlist them on the opportunity side, which is really what gets the blood flowing.

[00:15:43] Doug Chia: Yeah. So I guess some people would say, okay, well that’s what they call a full board issue. But I think, to me, everything’s a full board issue at the end of the day. Right. And so, you know, going back to this idea of a strategic planning committee, there’s nothing stopping them from creating another committee that’s populated by board and management.

[00:16:04] Doug Chia: So it’s like this other type of committee that’s just a blend.

[00:16:08] Paul Washington: And you’re right by the way, that not-for-profits actually tend to have more of those sorts of committees, so for example, I lead the Society for Corporate Governance, right? And we have committees that directly relate to our call it business activities.

[00:16:24] Paul Washington: Right one of the things we do is we advocate on the public policy arena. So we have a policy advisory committee. One of the things we do is provide educational programs and conferences and online programming and so forth. We have an education committee. Right. And then we also have, on the revenue side, we have membership and we have sponsorships.

[00:16:42] Paul Washington: And so we have a membership committee that looks at all of that. So we actually, because you know, we also have an audit committee, we have a executive committee that serves as a comp committee, but because we’re a not-for-profit, that looks to maximize the value of our board. Right? We actually have committees that enlist our board in helping us think through core business areas.

[00:17:03] Doug Chia: And then, so the board is not just approving or reviewing, they’re actually involved with the

[00:17:10] Paul Washington: Yeah..

[00:17:10] Doug Chia: Creation of the strategy.

[00:17:12] Paul Washington: Absolutely.

[00:17:13] Doug Chia: So companies have tinkered with their committees over the years, but the way they’ve done that is usually by expanding the scope of an existing committee, usually the audit committee, you know, there’s that pile on effect and nobody wants to serve on that committee as a, as a result to take on whatever

[00:17:31] Doug Chia: like the issue du jour is, you know, cyber, crypto, AI, whatever. But that’s just shoehorning new things into, you know, what feels like, okay, what, which, which of the three committees is like close enough that we, or, or you know, these guys have more time in their meetings, we’ll just give it to them. But you, in the chapter, you identify that’s something bigger is going on here.

[00:17:59] Doug Chia: Let me just read from it. It says it reflects a widening gap between today’s imperative that the board and committees serve as strategic thought partners with management in guiding the direction of the corporation and the more limited role of the board and committees codified in the stock exchange

[00:18:18] Doug Chia: listing standards adopted over two decades ago, which focused on the board’s responsibility for independent oversight. So, you know, this gap kind of goes back to balancing, you know, the foot board’s, three main roles, advisory, oversight, monitoring, you know, but as we’re talking about, a lot of directors complain that, okay, this is like too much monitoring going on.

[00:18:44] Doug Chia: And it just takes up all of the agenda. And then we see in the public, you know, where was the board? Why didn’t they prevent any bad thing from happening? Is that just kind of like where we are today?

[00:18:55] Paul Washington: I think it’s actually always been what boards could be doing and, and used to do, when they were more composed by non, independent directors.

[00:19:08] Paul Washington: And then we’ve swung in the favor of independent directors. They focused on independent oversight. But that’s led to a ton of frustration. It’s also led to, you know, some big court cases that said the board wasn’t paying attention to the business side. And, and so, I think what you’ve seen is interesting,

[00:19:27] Paul Washington: something like 74% of the S&P 500 now has more than three committees, right? So they’ve added some additional committees. As you said, they’ve shoehorned some issues into existing committees. And I’ll give you one that actually concerns me a lot. Which is people who have been given responsibility for ESG or sustainability to the nominating governance committee.

[00:19:49] Paul Washington: Now, if you take sustainability seriously, so you take environmental social responsibility seriously, you think that it can be a competitive advantage for your company. Why would you put those issues, which are fundamental business strategy issues, under the nom and gov committee, which may have no experience in sustainability matters, right?

[00:20:09] Paul Washington: True, they got the G in ESG. But if you’re looking at, you know, reducing carbon emissions or you’re looking at, protecting biodiversity, if you’re looking at fair wages and fair labor conditions, which is the number one sustainability issue for CEOs and consumers and employees alike, why would you give that over

[00:20:28] Paul Washington: to the nom and gov committee. So there is a real mismatch these days where people have just dropped stuff into committees without as we’ll get to, I guess, and I talked about in the chapter, taking a step back and taking a more back to basics, fundamental analysis of what do we want committees to do and where can they add value?

[00:20:48] Paul Washington: If you go through that analysis, I think it could highlight some real opportunities. Maybe not to do a complete overhaul of your committee, but at least, make some more meaningful and thoughtful adjustments to their remit.

[00:21:00] Doug Chia: Yeah, and as you point out, you know, you throw something into a committee, have you actually thought about who is on those committees?

[00:21:08] Paul Washington: Right.

[00:21:08] Doug Chia: You know, is the makeup even appropriate or are you going to kind of adjust the makeup to what you guess just gave them?

[00:21:16] Paul Washington: Right.

[00:21:17] Doug Chia: And so,

[00:21:18] Paul Washington: right.

[00:21:18] Doug Chia: I mean, nowadays I see people shutting down ESG and sustainability committees for various reasons, so we’ll see if, if it goes back to that at some point.

[00:21:28] Doug Chia: So, you know, you, you mentioned the mismatch. So in the book you say, for all these reasons, the fundamental mismatch between the roles of the board and the required committee structure resulting gaps that can cause losses and loss opportunities, and the suboptimal attempts to fill those gaps is at least arguably worth boards taking a fresh and comprehensive look

[00:21:54] Doug Chia: at their committee structures. So how do you suggest you do that? I think you have five steps.

[00:22:03] Paul Washington: Yeah. I’m a lawyer. I like to number things and you know, so I think the first thing you do is you look at existing boarding committee responsibilities together, right? Because sometimes people look at each committee in a silo.

[00:22:15] Paul Washington: They don’t even look at how that matches up against the board responsibilities. So you can say, okay. What do we currently enumerate in our governance documents that the board and committees are supposed to do? You do an inventory. That’s pretty straightforward. But then step two is the biggest one, and we can talk some about this.

[00:22:33] Paul Washington: That’s when you consider how the board and committees could add value. The potential ways you could add value right through through committees, whatever those committees may be. Then you conduct a gap analysis between what could the committees be doing for us? That’s step two versus what do we have now?

[00:22:54] Paul Washington: That’s step one, right? That’s the gap analysis. Then the fourth thing you do is you say, okay, in light of all that, let’s have a defined committee structure with the responsibilities that go along with it. And step five is you develop and implement a plan to get there. So it’s pretty basic, but I think this is a time to go back to basics.

[00:23:13] Doug Chia: Yeah, and, and you know, in the book you spend most of the time or a lot of the time on step two, consider how board and its committees add value, which Yeah.

[00:23:25] Paul Washington: Yeah.

[00:23:26] Doug Chia: I, I don’t think people think about committees as adding value. I think they think about ’em as, okay, yeah, we just gotta do this kind of thing,

[00:23:34] Paul Washington: Right.

[00:23:36] Paul Washington: Yeah. And so if we focus on step two and really is the critical, and this is where the, the hardest thinking, but in some ways the most fun thinking happens, and for those of us who like to think this is, this is the enjoyable stage, right? So, I think the first thing to do is you think about, and let’s think about it into context of executing company strategy.

[00:23:56] Paul Washington: So company strategy is essentially executed in three broad areas: in the marketplace, the workplace and the public space. So the marketplace are the products and services you sell and those you buy upstream. Your supply chain. The workplace, well that’s your employee base, but it’s also your operations. And the third thing is the public space.

[00:24:17] Paul Washington: And that’s your communications, your government affairs, your corporate philanthropy and so forth, right? So those are the three areas in which you execute your strategy. And then you say, okay, that’s great. Map that out. And then you say, okay, well how can committees add value with respect to those areas?

[00:24:37] Paul Washington: And there are a few ways committees can add value. The first is they can review stuff before it goes to the board. So you’ve vet some issues before they go to the board. That’s fine. That helps the board in its decision making role. The second thing is they can provide heightened oversight, right? But we really pay attention.

[00:24:53] Paul Washington: We’re drilling down so someone else doesn’t have to, regardless of whether it goes to the board. The third thing committees can do is they can make decisions. And the fourth thing they can do, which is really important like in the area of strategy, is forge a consensus when there’s disagreement. So what you wanna do is you wanna do a matrix, you want to do a chart that looks at those three areas of activity, and you’ll look at those ways the committees can add value and you figure out

[00:25:19] Paul Washington: what the committees ought to be doing. So let me give you a concrete example to bring that to life. So let’s say AI is gonna have a transformative impact on your firm, and you want to be ready for it, right? You wanna have a committee structure that enables you to adapt to that. So AI is gonna have an impact on the marketplace.

[00:25:39] Paul Washington: It’s gonna affect the products and services you sell and you buy. Let’s say you’re a movie company, it’s gonna have a big impact. It’s gonna have impact on your workplace, on your operations, on your workforce. Right? And it’s also gonna have an impact on your public policy, likely, right? So it’s gonna have a big impact.

[00:25:54] Paul Washington: So what do you want committees to do? Do you want to have a committee that reviews your AI marketplace activities in advance before it goes to the board? Or do you want to have it at least provide heightened oversight? Do you wanna forge a consensus? So you can go through and say, okay, here’s the big issue that we’re facing.

[00:26:14] Paul Washington: How does it play out in these three areas? And then what where can committees add value? Right? And so what you may wind up saying is, okay, we want to distribute AI responsibilities across committees but we’re gonna be very clear about it, that your role is to provide oversight in this area. Like your human development committee, your Company Human Development Committee is gonna provide heightened oversight of AI’s impact on your workforce.

[00:26:39] Paul Washington: You could do that if you wanted to, or you could say, I wanna have a standalone AI committee, right? Temporarily perhaps to develop, forge a consensus on AI strategy. So, but you go through it and you think about what are the fundamental areas that you’re trying to address with your strategy. And how do committees, given who they are and how they operate, how can they add value?

[00:27:00] Paul Washington: You develop a map and that gives you a sense of what should our committees actually be spending time doing, not just what’s in the New York Stock Exchange or NASDAQ listening standards.

[00:27:10] Doug Chia: Yeah, so I think AI is a great example to look at in terms of, for the nominating governance committee kind of technically, or you know, charter wise.

[00:27:22] Doug Chia: There’s not that much AI they’re looking at. The audit committee is kind of like, okay, let’s oversee risk.

[00:27:28] Paul Washington: Right. Right.

[00:27:29] Doug Chia: ’cause they oversee risk of everything.

[00:27:31] Paul Washington: Right. Yeah.

[00:27:31] Doug Chia: Enterprise, you know, risk management. That’s definitely part of it. And then comp, which is now expanded in any, even most companies to cover workforce.

[00:27:43] Paul Washington: Yeah. Half of the S&P 500, yeah.

[00:27:44] Doug Chia: You know, they, yeah. They, they are thinking about, okay. What do we do about, what’s all this talk about it’s gonna replace half of our workforce? Is that true? How do we adapt to this, that, and the other thing. But the blind spot is like, where’s the opportunity? Right?

[00:27:59] Paul Washington: Right. It leaves open, it leaves completely unaddressed what are the business opportunities in the marketplace, the odd products we sell and we, you know, and those, that services that we buy, what are the opportunities in the marketplace? What are the opportunities in our operations? Now, some banks particularly have operations and technology committees, but what are our opportunities with our operations and you know, and what should we be doing on public policy?

[00:28:26] Paul Washington: So those whole areas are, are missed. And so a good question is, okay, would it be useful to have a committee add value in either forging consensus, doing pre-review or heightened oversight in any of those areas to help us out? Right? And so, you’re right. It’s a good example of highlighting where there are current gaps and you can go through almost other, every area.

[00:28:49] Paul Washington: It’s not just the emerging areas like technology and sustainability where you can figure out there are gaps, but it could be core business ones where, you know, supply chains. You know, people paid a lot of attention to supply chains during the pandemic. They’re still not entirely satisfied with where they’ve come out, but do you want a board committee

[00:29:12] Paul Washington: or some way, or cut the board or someone look at supply chain issues, which are going to continue to be a hot button in the area of increased tariffs, right? So like that’s the kind of stuff that maybe sort of core everyday business stuff, but maybe, maybe, maybe at least ask the question. Would it be helpful to have a board committee to look at that as part of some of other responsibilities?

[00:29:34] Doug Chia: I actually think a lot of directors would love that.

[00:29:38] Paul Washington: Yes.

[00:29:38] Doug Chia: You know, it’s like, ooh, a committee to look at, you know, kind of the prospects of AI in our business. I, I wanna be involved in that now. People say, well, then, then it just makes it a whole board issue. But I, I don’t think the whole board is looking at it in that kind of like deep dive type level.

[00:29:58] Doug Chia: And it can’t. Right?

[00:30:00] Paul Washington: It can’t. And, and because there’s only so much time and that’s why committees exist, right? Because they give you, ’cause you know. Boards only have so much time where you can sit there paying attention to things before people zone out. So you have to allocate responsibilities to other committees so they can spend more time on it.

[00:30:15] Paul Washington: Right. And that’s, that’s the advantage of pre-review. It’s the advantage of having a committee that does that, or heightened oversight. So, you’re right. A lot of boards would love to do that. Now, of course, management might say, okay, but boards,

[00:30:27] Doug Chia: yeah, yeah. Slow down here and take just everybody. Take it easy.

[00:30:31] Doug Chia: Yep.

[00:30:32] Paul Washington: But what this does is it doesn’t necessarily. Rethinking your committee structure in this way does not necessarily result in redrawing the line between the board and management’s responsibilities. Management can still do everything that it wants to do. It can propose and so forth. But even if the board is in a relatively, and board committees are in a relatively passive role.

[00:30:56] Paul Washington: Bob Park, who former Dean of Harvard Law, served on our board at Time Warner, where I worked for 20 years, and he wrote just about the salutatory benefit of having board or committee oversight simply ’cause it forced management to do a better job thinking things through.

[00:31:13] Doug Chia: Yes, absolutely.

[00:31:14] Paul Washington: So even if we don’t draw the line any differently,

[00:31:17] Paul Washington: having a committee or having the board look at something, you gotta sharpen your thinking. You also have to do it on a particular schedule. Right? So it can help management do a better job, even if the board has a fairly light touch.

[00:31:32] Doug Chia: Yeah. Yeah. It, it has a way of making it a priority for you

[00:31:36] Paul Washington: yeah.

[00:31:37] Doug Chia: If you know what the next meeting, they wanna discuss this, which they said at the last meeting.

[00:31:42] Paul Washington: Right.

[00:31:42] Doug Chia: I think this really goes back to what we were talking about in terms of kind of today’s role of committees, how they were looked at. Maybe even how they were created because this is like, oh, it’s Sarbanes Ox League, you know, kind of creation of that. And it’s the mindset that this, these are not committees to get creative with.

[00:32:04] Doug Chia: These are not collaboration committees. These are really oversight monitoring committees. If you don’t do certain things, you know there are consequences. There’s supposed to be consequences. I want to see a report on all of the bad things that happened, or gaps or employees that were, you know, patting their expense reports and that kind of stuff.

[00:32:26] Doug Chia: And that, I mean, that’s no exaggeration. So I think it, yeah, it does go back to this mindset, but there’s nothing stopping anyone from sitting down let’s, you know, just for funsies, you know, start with a blank sheet of paper and see what this would look like. If we could just create this thing, you know, in our own laboratory instead of the New York Stock Exchanges laboratory,

[00:32:50] Paul Washington: There isn’t anything legal with stopping people from doing this, but there are reasons why they don’t do it.

[00:32:54] Paul Washington: Right? The first is that, it takes time to do this, right? And to do well, it takes senior executive time. It takes some real thought. And it takes a level of trust that if the management comes up with something, the board is going to be able to responsibly carry out its expanded responsibility.

[00:33:18] Paul Washington: So it takes an environment of trust between management and the board. It’s gonna take some staffing with whatever new committee structure you come up with. So that that’s something. But I think the primary, barrier here is what you pointed out. It’s actually attitude, which is a combination of couple things.

[00:33:37] Paul Washington: First is. ’cause a lot of people who are in this area, like you and I are lawyers. And so you think about, corporate governance as constitutional offer companies, and you think constitutions don’t change. Well, the beauty of corporate governance is it can change and it can adapt. So part of it is you just, you know, you think of it as constitution, so it’s set in stone.

[00:33:57] Paul Washington: It isn’t set in stone. So that’s part of it. And then the other part of it is, let’s not do more than is required because, again, lawyers risk averse. There’s all sorts of scary monsters out there if we ever unleash the board and board committees in these areas. So we may create an uncontrollable beast.

[00:34:16] Paul Washington: Well,

[00:34:17] Doug Chia: I mean the, the phrase unintended consequences

[00:34:20] Paul Washington: Yeah.

[00:34:20] Doug Chia: Is bound to come out at some point, right?

[00:34:22] Paul Washington: Yeah, yeah. But if you have done a good job of recruiting good directors, right? If you have done a good job of putting in place a management team that has the right processes to address some of these transformative issues.

[00:34:39] Paul Washington: What’s the real harm of bringing the board through its committees, under the tent, into the decision making process, the opportunity identifying process, and not just the post hoc nanny state picking at you for having failed to do your job right, management work.

[00:34:56] Doug Chia: Now. Now what I’ve seen,

[00:34:58] Doug Chia: I think you and I have have seen up close is,

[00:35:02] Doug Chia: you know, someone comes up with an idea of, you know what? We’re thinking of another committee, and immediately there’s this knee jerk reaction of, no, no more committees. Uh, we have enough committees. Forget it.

[00:35:13] Paul Washington: Yeah.

[00:35:13] Doug Chia: What’s going on there? Like, why, why is there such a knee jerk reaction to this?

[00:35:17] Paul Washington: I think part of it is, um, the size of boards and the workload of boards, right?

[00:35:24] Paul Washington: And so. Board shrunk. When I got into this, you know, you often had a 15 or 16 person board, and now they’re more like 10 or 11. This is a public companies, so fewer directors, and so to populate board committees, no one can really be on more than a couple. If you put ’em on all three, what’s the point of having the committees, right?

[00:35:43] Paul Washington: So you’ve got a board capacity issue, plus you’ve got staff capacity issue. So there’s a hesitance to sort of. And new committees just because of the size of the board and how many committees they can serve on. And I would say [00:36:00] that given that 74% of the S&P 500 actually already have, um, more than

[00:36:07] Paul Washington: three committees, 30 some percent I think actually have four committees. So you actually already have more than three committees. So you do have, you’ve proven S&P 500, you have the capacity to have more than three committees. A lot of you have proven that you’ve got capacity to do more than that.

[00:36:22] Paul Washington: Maybe you do add a director or two to help manage the workload. You’ve proven you got the capacity, so let’s take that capacity and apply it more efficiently. Let’s cut back. Let’s meet all the regulatory requirements, but let’s cut back on some of the other things that you just talked about, Doug. Like give me a report on all the people who overspent their t and e.

[00:36:43] Paul Washington: Okay. Well, that that may not be the best use of a board committees or board’s time. Not saying you don’t do it at all, but maybe it’s more important for them to sit down and actually talk about how artificial intelligence is going to transform their workforce.

[00:37:01] Doug Chia: Well, I guess it’s like any kind of filling someone’s plate with work, right?

[00:37:06] Doug Chia: It’s kind of like, okay, you know, you’re gonna add something. Well, let’s think about something that we really

[00:37:12] Paul Washington: Yeah.

[00:37:12] Doug Chia: Could stop doing or maybe we just shouldn’t be doing anymore. ’cause it’s not, it is kind of a waste of waste of smart people. Uh, time.

[00:37:21] Paul Washington: Yeah.

[00:37:21] Doug Chia: Time I think is one thing that really stops people.

[00:37:24] Doug Chia: They, they’re thinking of, okay, well the board comes in for one full day. We don’t have enough time unless we start meeting at night. And we don’t want to, we, we don’t have to want to drag this into two days or other boards. Yeah. We don’t wanna drag it from two days to three days. So I, I think there’s kind of this like, logistical mindset of, you know, we have to get it done within this timeframe.

[00:37:49] Paul Washington: Yeah. And, and, and look, those are real, they’re, they’re valid questions and concerns, but I think part of it is, how do you structure the board’s time to get the most out of it? And you may need to to spend a little more time. So the way I think about this is, you know, if you’re a company, as many companies are that are going to go through a period of transformation, the business as usual, governance structure

[00:38:18] Paul Washington: may not help you adapt to this transformative time for your company, whether it’s driven by technology or economy or demographics, or environmental issues or social issues, whatever it might be, right? If you’re going through this transformative period, you don’t necessarily want business as usual governance, right?

[00:38:35] Paul Washington: You wanna make sure you’ve got the right committees. So it might be for all those companies that have executive committees, maybe they don’t have the executive committee serve as sort of a dress rehearsal for the board, or a committee that acts in, just in lieu of the board, maybe they repurpose that executive committee to be a much more like a strategy committee.

[00:38:54] Paul Washington: And right now our biggest strategic issue is X. So the executive committee, which has representatives from all the other committees, but plus a couple other directors on it, is going to tackle that to give forge consensus, to give pre-review before it goes to the board. Like you can repurpose some of your existing committees and make them more meaningful.

[00:39:14] Doug Chia: Yeah, but I think that you know what you, and I know kind of the dirty little secret here is that most people don’t know that these executive committees generally don’t meet, you know? Right. When you ask companies like, oh yeah, we have an executive committee, but we don’t meet unless there’s something we need to like approve in between meetings or something like that, then we’ll do it.

[00:39:37] Doug Chia: And even if we’re doing that, we’re just ratifying. So you know, we’re not actually taking action that people don’t generally agree with already.

[00:39:44] Paul Washington: Right. And the to address the time question is if you don’t devote the time, now let’s take generative AI to address what it means for your business. Then there’s a really good chance your board is gonna be meeting 15 or 20 times a year in a few years to figure out how do you scramble back and take this incumbent company and make it relevant in a time, a few years too late when you’re in crisis mode. ’cause you’re gonna be meeting a lot if, if you’re being bought by someone else, you’re gonna be meeting a lot if you’re not meeting your numbers, right? So investing some more time now and, and enlisting your board as a strategic thought partner to get ahead of these transformative

[00:40:29] Paul Washington: topics and even some of the more day-to-day topics is gonna save you time later on. I mean, you just look at the records of companies that have undergone crises and you see how many times they met in the weeks and months after a crisis appears, right? It’s off the charts. And wouldn’t have been better to spread some of those meanings out earlier to get ahead of those issues.

[00:40:52] Doug Chia: Yeah. Yeah. You know, you talked about a lot of companies, I forget what percentage you said, have more than three committees. 

[00:41:00] Paul Washington: Yeah,

[00:41:00] Doug Chia: I think the number you cited was surprisingly high to me based on kind of my, you know, outdated knowledge. What, what are like the most common ones?

[00:41:14] Paul Washington: Yeah. The, the most common ones are, so the, and the numbers are, this is as of mid 2023, and this data come from public disclosures that were digested by the conference board.

[00:41:24] Paul Washington: So 74% of the S&P 500 had more than three committees, 36% had four, 21% had five, and 13% had six. So what are the common other committees? The most common other committees are executive, finance and risk. Risk is

[00:41:42] Paul Washington: required for a lot of financial institute.

[00:41:44] Doug Chia: Yeah, I, I’d say I don’t count those. That’s kind of, that’s padding your stats.

[00:41:50] Paul Washington: Yeah. And some of those, as you said, don’t necessarily meet

[00:41:53] Doug Chia: Well, they don’t meet or, or they’re required, you know, if you’re a bank or insurance company, yeah, you’re required to have a risk committee. So again, I don’t think that counts.

[00:42:03] Paul Washington: They certainly count in helping, but they don’t necessarily address the, the, these areas that we’re talking about, of

[00:42:11] Paul Washington: core business strategy, which again does rest, as everything, almost everything does ultimately with the board. But wouldn’t it be nice to give the board a helping hand at the committee level? So you are seeing some other committees crop up. You’re seeing committees focused on public policy. At some companies like your former one, you’ll have ones on R&D or science or technology, some on sustainability.

[00:42:32] Paul Washington: But it is a bit of a hodgepodge. And I do think what’s missing, and this is something I’ve been thinking about for a few years, is why not at least have a temporary strategy committee?

[00:42:41] Doug Chia: Yeah, kind of every three years or something like that.

[00:42:44] Paul Washington: Yeah.

[00:42:44] Doug Chia: At J&J we did have like this science and technology committee, and I see that a lot with companies in the healthcare space or technology.

[00:42:53] Doug Chia: I guess the criticism there from board members is, well, should this committee even exist? This is just kind of like a show and tell dog and pony show for new stuff. And it’s like, well, it doesn’t have to be that,

[00:43:09] Paul Washington: Right.

[00:43:09] Doug Chia: Let’s think more strategically, or let’s talk about more strategic stuff.

[00:43:14] Paul Washington: So let’s think about what is the value of this committee?

[00:43:17] Paul Washington: Is it, is it to review stuff before it goes to the board for a decision? Well, maybe, maybe not. Is it there to provide heightened oversight because you have people there and you wanna make sure that your science is done in a responsible manner, so maybe that’s their responsibility. Are there big issues to debate?

[00:43:31] Paul Washington: Do they help to forge consensus or does that committee actually do give that committee some decision making power? Right? Like you could maybe, maybe not, you know, it’s up to you, but I think part of it is, it’s the lack of clarity of thinking about where does this committee add value, and if the committee’s charter just uses the word review, review, review, review or oversee, my guess is you haven’t thought it through really clearly, like how that committee is gonna add value.

[00:44:00] Doug Chia: Yeah, I mean that, I think that goes back to kind of the people who wanna see more and more in the proxy statement. They wanna hear about stuff about risk. They’re, they’re never asking you for things about strategy. One of the committees that I think every company should have is some kind of public policy committee.

[00:44:19] Doug Chia: We talk so much about, oh, in today’s day and age, especially United States, the uncertainty of what the government, how the government’s gonna behave is like our number one concern. Tariffs, government wanting to take 5% of our company, all of a sudden, these kind of things, it’s like, okay, well shouldn’t you know, do you guys talk about this at the board more than like once a year?

[00:44:44] Doug Chia: You know, that kind of thing.

[00:44:46] Paul Washington: Right. And so that’s, so that’s an area. Some companies do have those, sometimes they full them into nom and gov. Sometimes it’s governance, corporate responsibilities, public policy. You know, it can go in a number of places. But yeah, again, if you’re thinking about the areas where

[00:45:00] Paul Washington: the company acts, marketplace, workplace, and public space, it’s a miss if you don’t have anyone looking at your, it’s not just your corporate political activity like your, your PAC contributions, right? Which again is relatively narrow, but it probably should be looking more at what the government can do to you and what you might be able to do to influence the government that really is

[00:45:28] Paul Washington: you know, mission critical. So for example, you know, when I worked at Time Warner, Dick Parsons used to say we could compete against any of the big media companies out there, Disney or Viacom or any out there said, the only thing we really have to worry about is the government. Because compared to the government, like we’re a little VW Bug and they’re a big old bus and they can just drive us off the road.

[00:45:51] Doug Chia: Yeah. No one has more leverage than the government. Yeah.

[00:45:55] Paul Washington: The government can affect everything you do. It can affect why you exist. It can affect your purpose. It can make your purpose illegal. It can affect your strategy. It can affect where you carry out the strategy. It can affect how you report on the execution of your strategy. It can also affect whom you’re serving by executing your strategy.

[00:46:12] Paul Washington: So absolutely every aspect of a company can be touched and affected by the government.

[00:46:18] Doug Chia: Yeah. Anything else that you wanted to cover or highlight?

[00:46:24] Paul Washington: Yeah, so the thing I would say is. This sounds like a lot of work to go, oh gosh, we gotta go and look at everything a committee could do and we really don’t want to, you know, go through this exercise.

[00:46:36] Paul Washington: Well, you know, at the end of the day, you may not wind up doing a complete overhaul of your committee structure, right? You may say, you know what? We are gonna make a few tweaks. We’re gonna clarify a few things about this committee. Maybe we’ll set up an occasional strategy committee. So you may not make major overhaul, a major overhaul here, but what you might do in the process here is figure out the things that the full board ought to be doing, right?

[00:47:05] Paul Washington: So if you realize that there are activities that you’re engaging in, in the marketplace, the review of your products and services, your supply chain or the, your operations, and you realize, you know what, we don’t necessarily want a committee of the board focusing on it, but maybe the board ought to focus on it a little bit more.

[00:47:26] Paul Washington: So the end product here may be changing your committee charters changing the processes, but it might also just be what you do differently at the board level to engage the board at the board level as more of a strategic thought partner in executing your company’s strategy. That’s, I think, worthwhile, even if that’s the end result of this sort of analysis, because you do have to look at the board and committees together.

[00:47:52] Paul Washington: So I do think committees can play an important role here, but the end result of all of this might just be, you know what? We’re gonna take a fresh look at delineating the board’s responsibilities. And in light of this fresh look of the board of responsibilities, we’re going to be providing them with more meaningful agendas, more valuable

[00:48:12] Paul Washington: briefing materials and resulting in more engaging and constructive and value adding discussions at the board level. So although I’ve tucked this in, in this chapter on committees, I think what could really happen after this is a rethinking of the role of the board.

[00:48:28] Doug Chia: Yeah. So you bring up two really great points here.

[00:48:30] Doug Chia: One is that it kind of goes both ways. That in addition to thinking about what at the board could be, you know, focused on the committee level, you’re also thinking about what kind of things at the committee level really should be full board issues. And the other point you, you bring up, which I know a lot of people hate, is just going, you know, going through this process every once in a while is good, is good hygiene, as [00:49:00] they would say, even if you arrive at the same outcome.

[00:49:04] Paul Washington: Yes.

[00:49:04] Doug Chia: Like we’ve done the work and we decided that we don’t need to make any changes. Just the fact that you didn’t make any changes doesn’t mean the whole thing was a waste of time. Because yeah, I mean, confirming something every once in a while is there’s value there.

[00:49:20] Paul Washington: It’s just fine, in fact. But it might, the confirmation may also involve clarification.

[00:49:25] Paul Washington: ’cause you may say, after having gone through all this, you know what? We don’t have a board with the capabilities, at least right now, to add value in these areas. We just want management to do it, and that makes it quite clear what we expect management to do, right? So that that in and of itself can be of some value.

[00:49:44] Paul Washington: And the, the thing I’d say need to have to do this. You need obviously support of the CEO, meaning the governance professionals, corporate secretary, general counsel who can undertake this. But what’s really critical here is I think having a nom and gov committee chair or lead independent director who’s going to say, this is worth doing.

[00:50:06] Paul Washington: And it’s not just ’cause we’re, we wanna optimize our committees, it’s this has a knock on effect. This has a knock on effect on the board. It has a knock on effect of the board agendas, the materials, the board receives, the board’s purpose, right? And how the board spends its time. So I think if people feel like having gone through these board self-evaluations every year, that we’re still missing something, we’re still not optimizing the value of the board,

[00:50:32] Paul Washington: this committee review process could really help.

[00:50:35] Doug Chia: Paul, thank you for joining us. That concludes this episode of The Public Company Series Podcast, powered by OnBoard. I’d like to thank Paul Washington of the Society for Corporate Governance, for sharing his insights on board committees today, and I encourage you to read Paul’s chapter entitled

[00:50:57] Doug Chia: Balancing Workload and Responsibility of the Board and its Committees, which you can find in the book board structure and composition part of the Public Company series published by the New York Stock Exchange and JP Morgan. You can read and download the entire book at www.nyse.com/pcs. To learn more about OnBoard, visit www.onboardmeetings.com.

[00:51:25] Doug Chia: For additional resources and episodes, visit www.publiccompanyseries.com and don’t forget to subscribe to receive all new episodes of the Public Company Series Podcast and rate us and leave a review. I’m Doug Chia, and we will see you next time.