Michael is the CEO of Foxford Capital a strategic financial advisory and investment firm. He is also a General Partner at Eastward Capital Access Fund, a late-stage venture debt fund, serves on several Boards including the board of Veritiv Corporation, a public company where he is the chair of the Audit Committee, iAnthus Capital Holdings, Epicenter Experience, and he serves as a member of the board of advisors to Dubai-based Botho Emerging Markets Group. Michael has also been a guest lecturer at Harvard Business School since 2011.
In this episode he discusses different roles boards and board members play and the importance of treating being a board member as a job.
Relationship between Board and Management
“I think fundamentally having an open channels of communication where the board is free to express their perspective and opinions and advice is ideal, and this is beyond just a pure governance role.”
I want to just get back to the amount of time you’re spending as chair of the audit committee. We talk a lot on some of these podcasts about the fact that being a board member is a job. When boards are seeking new members, they often write job descriptions, and that’s an appropriate thing to do. This job, chair of a public company audit committee, takes ten percent of your available time, which is something like twenty days a year. So not only is it a job a job – but it definitely not a nine-to-five job!
I think boards tend to be risk averse in the sense that their role is to safeguard the assets of the enterprise, a role, it’s not necessarily the only role.
The general approach is to look at enterprise risk, financial risk, operational risk, anything that could impair an asset or create liabilities for the company. In general, what that often entails is looking at a heat map, which would identify all the various vulnerabilities a company could face and then trying to assess the likelihood of that occurrence taking place as well as the severity. So, depending on where the high risk, high severity initiatives come into play, the focus would be on trying to mitigate those risks from a risk management perspective.
Yes, but the job of a really effective board is to consider how aggressive a company should be in taking risk – not just avoiding risk. How much risk is a company willing to accept, how much should it accept, in creating value for its stakeholders.
Relationship between Board and Management
It’s important that the management team and the CEO are comfortable reaching out to an individual board member or multiple board members to bounce ideas off of them or discuss thorny issues that they’re facing to try to get perspective on whether that board member has encountered the particular issue or what advice they may have outside of a formal board setting.
Joe: [00:00:00]Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization its – board of directors or advisors, as well as the important issues that are facing boards, company leadership and stakeholders.
Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.
Joe: Our guest today is Michael Muldowney. Michael is the Chief Executive [00:01:00] Officer of Foxford Capital, a strategic financial advisory and investment firm. Previously, Michael served as CFO of Gordon Brothers, a global advisory, restructuring and investment firm, as well as the CFO of Houghton Mifflin, Harcourt Company, a global educational publishing company.
Raza: Previously Michael served in various capacities, including COO CFO president and director at NexterraEnterprises and has held various positions with Marsh McLennan companies. He’s also a General Partner at Eastward Capital Access Fund, a late stage venture debt fund. Michael has been a guest lecturer at the Harvard business school since 2011 in a course entitled “Adding Value through Restructuring”.
Joe: He serves on several Boards of Directors, including the board of Veritiv Corporation, a public company where he is the chair of [00:02:00] the Audit Committee,. iAnthus Capital Holdings, Epicenter Experience, and he serves as a member of the board of advisors to Dubai-based Botho Emerging Markets Group.
Michael, welcome. Thanks for joining us today on On Boards.
Michael: Well, good morning. It’s my pleasure.
Joe: One of the most important roles in a board of directors is as Chair of its Audit Committee, especially a public company. You serve as the chair of the audit committee of Veritiv. Tell us a little bit about it. How long have you been on the committee? How long have you been chair, and how has your role changed since you took the chair of audit?
Michael: So, I’ve been on the board since its inception and Veritiv was the product of two companies merging in a Reverse Morris Trust triangular merger, and that was a spinoff of Xpedx, which is part of International Paper and Unisource, which [00:03:00] was held by Bain Capital and Georgia -Pacific.
I was part of a new board that was being formed when that company went public, and I have been on the audit committee since its inception which is six plus years now, and I’ve shared this is the third year I’ll be chairing the audit committee.
In terms of the role from a member of the audit committee to chairing the audit committee, it’s quite expansive and probably twice the time commitment. So, essentially, the role would be to work with the management of the company, setting the agenda for upcoming audit committee meetings, going through the presentations on a dry run with the management team ahead of the audit committee meetings, liaising with the internal audit function, as well as the external auditors, determining if there’s anything that needs to be discussed in executive session.
Of the various committees of the board. I think the audit committee is probably one of the most [00:04:00] time-consuming roles, particularly, the chairman. And in terms of how it’s evolved. I would say the regulatory environment hasn’t changed dramatically. What has changed is the risk management scope of audit committees in general, and in particular as it relates to technology, cybersecurity in particular, and whether that’s best within the scope of an audit committee or whether it warrants a discreet committee focused on technology and cybersecurity. In the boards I’m involved with, it’s part of the audit committee ‘s scope.
Joe: Okay. So, let me go back a little bit. I want to just get back to the amount of time you’re spending as audit chair. We talk a lot on some of these podcasts about the fact that being a board member is a job. When boards are seeking new members, they often write job descriptions, and that’s an appropriate thing to do. So, this job, I think when we spoke [00:05:00] prior to today, you had said that it takes ten percent of your available time, which is something like twenty days a year. Is that about right?
Michael: It is. So, there are roughly two hundred sixty business days over the course of the year, and much of the board work actually happens on weekends, and the way I think about a board role is half of the time, it’s generally in-person meetings. The other half is preparatory work, reading board materials ahead of the board meetings, and those are generally available over a weekend prior to the following week’s board meeting. So, typically, it would be one or perhaps up to two days on the weekend, preparing for a board meeting.
In my mind, there are really two profiles of board members. There are professional board members whose principal activity is serving on boards, and then there are executives who also serve on boards or have full time positions outside of [00:06:00] board work, and the concept of overboarding is generally four boards, and if you divide four, obviously, by the calendar days in the year, it would be twenty five percent commitment each board relative to a full-time job.
So, I do have a role outside of my board work and that’s where I’ve kind of limited my public company board roles to two, and while much of the board commitment is predetermined with schedules that go out three years in advance because multiple board members sit on multiple boards and scheduling tends to be concentrated around quarterly events. So, that has a pretty high line of sight in terms of what the time commitment there is.
It’s the things that would come up outside of the ordinary course. These could be strategic alternatives. It could be M&A transactions. It could be a capital market share issuances, [00:07:00] and those can be all times of the morning, evenings and weekends. And that’s where flexibility is important as a board member to be able to be available as things come up. I’ve been on a board that had a variety of unique circumstances come up which required almost half a time commitment. If not, a full time commitment for very concentrated time periods; three, four months at a time where there’d be daily board interaction.
Joe: I was going to say, so it’s a job, but it’s not a nine-to-five job. It is a job that you got to do whatever you need to do when the role requires it. And that goes for public companies, that goes for private companies. It can go for non-profit organizations. It really doesn’t change.
I do think your comment about what’s a saturation point for the number of boards, I think four is actually a lot, unless you’re very focused and really have that kind of time. [00:08:00] But I think what is important is that people kind of understand it’s a big job, and if you don’t have the bandwidth, it’s not fair to the company or organization to take the role of being on the board because boards need to put in the time when it is required.
Michael: That’s right, and particularly given the diversity of challenges that companies face, the board members tend to need to reflect that diversity of experience, and while boards could have depth in financial experts, and I’m fortunate the boards I serve, each of the audit committee members is a financial expert, but there are going to be subject matter experts on the board that will need to kind of weigh in disproportionately to other board members given their domain expertise.
Joe: Right. So, one of the things you mentioned about audit committees is their role in risk [00:09:00] identification and management, which is, I would say, an increasingly important role. So, let’s talk about how your audit committee now addresses that role for the company that you’re serving.
Michael: So, the general approach is to look at enterprise risk, and that’s financial risk but operational risk, anything that could impair an asset or create liabilities for the company. In general, what that entails is looking at a heat map, which would identify all the various vulnerabilities a company could face and then trying to assess the likelihood of that occurrence taking place as well as the severity. So, depending on where the high risk, high severity initiatives come into play, the focus would be on trying to mitigate those risks from a risk management perspective.
Joe: So, one of the things we had [00:10:00] talked about earlier is that in the past many companies have managed the financial implications of risk through insurance; business interruption, D&O, et cetera. But as you pointed out, that doesn’t prevent risk from occurring in the first place, and it also, I would suggest, really characterizes a narrow view of what risk is.
Because part of the job of a really effective board, and I would say, the audit committee, of course, since it often resides there, is to think about how aggressive a company wants to be in taking risk, not just avoiding risk, how much risk is a company willing to accept in building its plan and creating value for its stakeholders. And I’m wondering how that has evolved since you’ve been on the audit committee of Veritiv.
[00:11:00] Michael: Well, you’re right that the traditional approach to control environment is thinking about things in two dimensions; one is preventative controls and then detective controls. So, as they each sound, preventative controls are those controls put in place to prevent the issue from occurring in the first place, and in the second instance, it’s if that line of defense was not successful, are there detective controls in place to recognize that and then take remedial action?
So, those tend to be, in broad sense, how financial, operational and technology controls have been structured traditionally. What you’re raising is a very interesting concept, which is broadening that to strategic risk that a company may proactively assume by investments, mergers and acquisitions, and in that instance, it largely falls within the strategic planning process, but not [00:12:00] narrowly focused on the spectrum of the degree of risk that’s been incurred by pursuing the plan that ultimately gets enacted.
One instance, historically, the way we tried to address that was a kind of a red and a green team where one team is preparing an initiative as to why the company should proceed down a certain course, and the alternative team, the red team, is pursuing a strategy that says, “Here are all the things why we shouldn’t do that,” and then making an informed decision with management’s recommendation and the board understanding the risks and opportunities.
Candidly, one of the difficulties, while that is a kind of a duty of care, which is one of the principal roles of board has, it could create an uncomfortable situation for a board if they green lit the [00:13:00] proactive strategy recognizing all of the inherent risks that the red team outlined.
Michael: So, again, litigation risks shouldn’t dictate a company’s approach, but that is one factor of a public company that could lead to not having a fully healthy discussion on the appropriate level of risk, and inherently, I think boards tend to be risk averse in the sense that their role is to safeguard the assets of the enterprise, a role, it’s not necessarily the only role.
So, where a company fits on the risk spectrum of their strategic plan, it is an interesting question. In the boards I’ve been involved in, that tends to be a full board discussion as opposed to any subcommittee taking on a principal role of looking through the lens of, is it too much risk or not enough risk relative to shareholder value that would be created?
Joe: Yeah, I think at the end of the day, whether it resides in the audit committee or a separate risk [00:14:00] committee, it ultimately is a board responsibility. We’ve had a guest, David Koenig, a good friend of our show, and also the founder of the DCRO, where they’re now giving certification for risk management. One of the things that he advocates is that businesses exist to take risk, and that maybe the question that boards should be asking is, are we taking sufficient risk to add appropriate shareholder value?
So, just minimizing exposure to litigation, and as a former trial attorney, I very much appreciate being aware of that and I’m sure that the board of directors of Boeing wished they had maybe paid more attention to that at one point, but it’s not the only thing that a board of directors needs to be doing. Part of their job is to add enterprise value to create value for the shareholders. And I would suggest that not taking enough risk [00:15:00] might mean that the board is not actually fulfilling its full job to the shareholders and other stakeholders to whom they’re responsible. What do you think about that?
Michael: I would agree with the concept, and I’ve seen that calculus applied is trying to assess a probability-based outcome, which would be what is the upside of the actions we’re taking in terms of shareholder value, what’s the base case that we think will happen, and then what’s the downside scenario, and then effectively trying to run an analysis that would yield what the economic outcome of each of those three scenarios are, and then taking a profitability, assessing it, and then taking a weighted average coming out of that and saying, “Okay, is the basket of risks on a probability-adjusted basis and outcomes sufficient to [00:16:00] justify the initiative being undertaken?
All of those are variables that nobody has a crystal ball, but that is one way I have seen where managements and boards have tried to approach the problem that you’re raising, which is, are we taking enough risk or are we taking too much risk?
And partly, I think, it’s the facts of the circumstances. It could be a function of the shareholder base, what type of company is it? Is it a utility where people are investing to get the dividend and not looking for a huge equity return necessarily? Or is it a high tech, high flyer company?
So, I think in part it would be a function of the profile of the company, the industry, and candidly, the shareholder base on how much risk are they expecting that their investment will yield.
Joe: Yeah, I think there’s no question that it does depend on the company. It depends on a lot of factors, but I would say that both David [00:17:00] Koenig and James Lam, another risk expert that we’ve had on the podcast, that their notion that the more narrow view of risk really needs to be expanded really does make sense.
There’s no one size fits all, of course, but the notion that you can insure against risk is a comforting thought, but it may be missing the boat to some degree.
Michael: Yeah. I mean, one example is acquisitions, and there’s a traditional rule of thumb in the capital markets, don’t do a dilutive acquisition, but that might not be the right answer. Ultimately, companies are doing acquisitions because they think it’s going to create long-term shareholder value and it could be dilutive in year one and year two, and non-dilutive in year three and accretive in year four, and that could make perfect sense for the company, but oftentimes companies get punished in the short term if they have a dilutive transformative acquisition [00:18:00] that changes the profile of the landscape of the company.
Raza: Michael, between the board of directors and management, what would you characterize as the relationship? What type of relationship should it be and what are the characteristics of a good, healthy relationship between boards and management?
Michael: I think fundamentally it’s having open channels of communication where the board is free to express their perspective and opinions and advice, and this is outside of just a pure governance role. It’s more on the advisory aspect of a board member, and vice versa, having the management team and the CEO feeling comfortable that they could reach out to an individual board member or multiple board members to bounce ideas off of them or thorny issues that they’re facing to try to, again, get perspective on whether that board member has encountered the particular issue or [00:19:00] what advice they may have outside of a formal board setting.
I think the second aspect of that would be to be able to be comfortable having a free dialogue on alternatives to what may be a management’s recommendation, not necessarily second guessing it, but more of an inquisitive approach of how have you thought about this particular issue or this particular risk or why did the management team conclude that this was the recommended approach versus the alternative.
I think that is an area where it can be a little bit difficult to do it in a constructive way without appearing as though management is being second guessed and, ultimately, a board is only going to be so knowledgeable about the business and the industry and ultimately the management team is going to be far more familiar with all the [00:20:00] intricacies that may be involved in implementing a particular strategy or approach.
So, I would say relative to your question, open channels of communication, leveraging the board and their expertise in an informal manner when, and if needed, and then a free exchange of ideas in open debate, and the last piece I would say is that the board needs to support management until it’s clear that isn’t the ultimate best approach in the sense that it’s appropriate for there to be a change in management.
So, whenever that time were to come, then that’s where looking at succession planning or things of that nature, but I think in the ordinary course, boards are looking to be supportive of management and helping them get to the right decision.
Raza: I think that’s a really good approach. Although in the real world, there is an air gap between management and the board, so [00:21:00] sometimes it’s harder done than said and sometime bad news does not travel as easily upwards, or maybe even downwards from the board.
In the same manner, what will be your view or how would you feel between the splitting of the role of the CEO and the board chair in companies?
Michael: Obviously, that’s a hot topic and the Glass Lewis and ISS have their perspectives on that and other proxy advisory firms. I think it really depends on the profile of the CEO and their experience as a CEO and then determining what would be in the best interest taking that into account.
Having been a CEO, it is lonely at the top, and there aren’t a lot of avenues to pursue [00:22:00] outside of a good working relationship with several board members to help get to the right answer, and so I’ve been involved in a board where the CEO and the chairman role were split. And in part, it was based on the profile of the CEO and the chair had industry experience, had been a prior CEO of public company and the decision was made to split the role.
It’s not a one size fits all in my mind. It’s really looking at the CEO, their credentials, their profile, and determining whether it makes sense to bifurcate the role into a chair and a CEO or to combine it.
Raza: Sometimes I think the regulators have to step in as in the case of Tesla where they had to then ask the chair to be different than the CEO.
Joe: I want to ask one question to go back. In talking about splitting the CEO and chair roles, you mentioned the influence of Glass [00:23:00] Lewis and ISS and I’m curious, it seems like proxy advisory firms are having an increasingly significant impact on governance of public companies.
Do you think that’s a positive development?
Michael: I think it is a positive development because they’re representing shareholders’ interest and more and more investors are taking into account the recommendations of the proxy advisory firms when it comes to shareholder vote. So, it is an important constituent and it is a representative of a large base of the investors who are more and more taking those proxy advisory positions into account when they’re voting for shareholders in proxy matters.
Joe: Michael. It’s been great speaking with you. Thanks for joining us today.
Michael: My pleasure, Raza. Thank you very much for inviting me.
Joe: And thank you all for listening to On Boards with our special guest, [00:24:00] Michael Muldowney. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on the Apple Podcast app. It really helps others find and discover our podcast.
Raza: You can go to the Apple Podcast app, but all of our episodes are also available on our website, www.onboardspodcast.com. That’s onboardspodcast.com. All of our episodes are available there and you can even contact us with your questions, comments, and suggestions on the website as well. We’d love to hear from you,
Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. Raza, you take care, too,
Raza: You too, as well, Joe.
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