A solid start for a spinoff board. (Spencer Stuart Governance Letter).

Constructing a board for a spinoff presents a full agenda of challenges and opportunities. 'Start small and build' may be the best advice.

IN BOARD RECRUITING, each company presents a unique set of challenges and objectives. Variables ranging from the traditions and history of the company, its range of businesses and products, and strategic goals, must be carefully considered when helping companies determine the resources they need on their board and what they will require in the future. Creating a board for a spinoff -- when a board must be constructed, sometimes virtually from scratch, and is expected to be up, running, and attending to a company's business, all within a relatively brief span of time -- adds a number of new variables to the mix.

Spinning off a high-growth or non-core business is often a way of achieving two complementary goals: bringing energy and needed focus to a parent company while liberating one of its businesses to pursue growth unfettered by a parent's culture and priorities. When capitalized to its fullest potential, a separation promotes the transformation of company strategy, structure, operations, and performance.

Having the right board in place to help guide the spinoff in determining strategy, as well as overseeing management and fiduciary matters, can be a critical element in the ultimate success of the spinoff as a stand-alone business. We have worked with many spinoffs in helping them to create their boards -- including Accenture (Arthur Anderson & Co.), Agilent Technologies (Hewlett-Packard), Allegiance (Baxter International), EDS (General Motors), and Marathon Oil (USX) -- and observed many others. As in all other areas of corporate governance, there are best practices that correlate highly with success of the entity going forward as well as practices that are far less likely to produce desirable results.

Opportunity knocks

While the number of directors that must be recruited to create a board for a spinoff may appear overwhelming, if the task is approached systematically and relies on established best practices and common sense, with an eye on possible pitfalls, it should yield a successful board. In reality, a spinoff presents a rare opportunity to carefully plan for each director who will be added to the board and make sure that he or she brings the skills and experience that will be most relevant and valuable to the new company to the table. How often does a company have the chance to start the board recruiting process with a virtual blank slate, focusing on the company's strategy going forward and then carefully selecting directors to 611 each slot?

Of course, it is not likely to be a completely blank slate; it is standard practice for some directors of the parent board to migrate to the spinoff's board, a practice that benefits both parent and spinoff. But which members of the parent, and how many, are determined according to the particular circumstances of the new stand-alone.

Getting an effective board assembled, and the right structure and practices in place, begins with asking the right questions. Some key questions to consider when building a spinoff board include:

* Who should lead the recruitment process?

* What is the optimal board size?

* What is the most effective relationship between parent and spinoff on the new board?

* What are important considerations when deciding on a meeting schedule?

* What about director compensation?

* What committees are needed?

* How do you determine what directors the board needs?

* How can you best get the new board assimilated and off to a good start?

These issues must be carefully considered. Handled well, they will set the right tone and create a template for the new board going forward, ensuring a strong board and solid governance process to guide the spinoff, whether it is an established or fledgling business. If approached thoughtfully and strategically, the board will serve as a critical competitive asset to the spinoff - providing a combination of continuity and fresh thinking.

Who leads the charge?

Determining who is best equipped to lead the director selection process should be the first order of the day. Depending on the particular situation, experience, and personalities of those involved, the leader of the process may range from an executive of the parent company, to the spinoff CEO, to a nonexecutive chairman. While there is no one right way to do this, resolving this and other leadership issues early on will help the newly independent entity get off to a good start. What role will the CEO and senior management of the parent company play in both long-term strategy and day-today operations? Awareness of parameters and expectations upfront will help to avoid problems down the road.

An important factor in deciding who leads the charge in building a new board is the background and experience of the spinoff's CEO. An experienced CEO will likely be ready to take charge from the beginning - including leading the director selection process - while a less-experienced chief executive may benefit from having a nonexecutive chairman in place. Particularly in the case of a new CEO, it may be wise to bifurcate operations and governance responsibilities. This allows the CEO to focus on the business, while the chairman can help pull a board together that will operate effectively as a unit from day one.

Nonexecutive chairmen are often newly retired executives from outside company ranks, who consequently can make the necessary time commitment to board selection and ongoing governance responsibilities, which can be significantly more demanding for a spinoff company than for an established board. Ideally, they will also bring extensive board experience and a legacy of proven hands-on leadership that only a CEO can be expected to possess.

Size and organization

While there is a great deal of variation by individual company, the trend among both spinoff and established companies is toward smaller boards. Particularly if it is a newly assembled board and directors haven't yet forged a working or social relationship, a smaller board, at least initially, is the way to go; it can be pulled together and integrated more quickly, and always added to later. Moreover, smaller boards are typically more nimble and quicker to make decisions, and the culture of small boards tends to promote greater interactivity and involvement from all directors. "Start small and build" may be the best advice to constructing a spinoff board. After assembling a good core working group, the board can always add additional directors with needed skills one to two years down the road.

The initial core group of directors will usually include one or more executives from the parent company, a practice that provides benefits for parent and spinoff alike. At least in the beginning, the involvement and guidance from the parent company help to ensure that the two entities continue to work in harmony and develop a symbiotic relationship. For a spinoff, the presence of parent-company directors adds an historical perspective and ensures an intimate knowledge of the company and its business. Often, however, this formalized involvement is only necessary for an initial period of time.

To ease the transition to a board that may be more appropriate to the spinoff at a later stage, older parent-company directors often serve on the spinoff's board. After they have had the opportunity to contribute their perspective and expertise, these directors may drop off the board, making room for new directors with different skills. Deciding who from the parent company will serve on the spinoff board is an important issue to consider, and several questions should be answered: Should some directors serve on both boards? Are there parent-company directors who would better serve the spinoff? What's the anticipated ownership structure and how will it impact board representation?

Determining logistics such as meeting dates is also critical before recruiting directors. Knowing when, where and how often the board meets will allow the selection committee to approach directors without the potential for schedule conflicts. If there are directors who will be serving on both parent and spinoff boards, it is advisable to hold the two board meetings back-to-back, making things far more efficient for directors.

Compensation

Drafting a competitive board compensation plan can be a time-consuming and complicated task, but is also important before assembling the new board. Because a spinoff is often in a hurry to ramp up, it is common practice to adopt the parent's policies in this area. One word of caution: If the spinoff operates in a different industry or is a significantly different size from the parent, the same director compensation practices may not be appropriate. If, for example, the spinoff operates in a higher-growth industry than the parent, a heavier proportion of stock-based pay may be called for. These factors should be examined closely before finalizing compensation practices, because once a policy is adopted, the board will not want to have to make a dramatic change.

It is also important to plan thoughtfully and carefully before adding to the board's infrastructure by creating committees. As they are typically smaller in size, spinoff boards generally have fewer committees, and it is wise to start with only those that will be essential to transacting the new board's business, namely compensation and audit. The board should not be overburdened with too many committees, particularly if it is a small board to begin with, and additional committees, if they prove necessary, can always be added later.

Getting started

With size, composition, and essential practices and ground rules established, deciding on the key skills and experience that will be needed on the board should be tackled. Building a board from the ground up means looking at the company's short- and long-term strategy, and deciding: What will the board and company need to accomplish over the next several years and what complement of skills will be required in individual directors for the board to succeed in its mission? While the task of recruiting multiple directors may be somewhat challenging, the opportunity to handpick directors with specific skills and experience may present one of the best strategic opportunities a company will ever have.

Specific director requirements will undoubtedly vary according to each company's specific profile, but there are a few important bases to cover on the board, regardless of industry and strategy. It is essential to have one or more directors with specific knowledge and experience relevant to the spinoff's industry as well as at least one director with strong financial skills and experience to chair the audit committee. The experience and operating acumen of an outside CEO, whether or not he or she is a nonexecutive chairman, is also critical to have on board. Other essential skills should be determined on a case-by-case basis. A director with contacts or experience in a particular market may be important, for example, if that will be key to the strategy of the spinoff going forward, or perhaps someone with particular technical know-how that will be useful to the company.

For a spinoff, being able to assemble a cohesive and well-oriented board of directors quickly is essential, but also a significant challenge, particularly for outside directors. They will need to learn the fundamentals of the business while getting acquainted with each other and the inside directors selected for the new board. To hasten the climb over the learning curve as well as the team-building process, it is advisable to provide opportunities to bring directors together prior to the formal announcement of the business. This will give them time to bond as a group and become familiar with the issues they will be confronting. Exposing directors to as many different perspectives on the company as quickly as possible - including senior management presentations and possibly visits to company facilities - will enable them to soak up information that will be invaluable when they are charged with carrying out their management oversight and fiduciary responsibilities.

Enhancing the odds

It would be impossible to create a blueprint for establishing a spinoff board that would work for all companies. After all, the culture and management of these companies are infinitely varied. But we can learn from some established practices that have enabled the many spinoff company boards we have worked with and observed get off to a solid start. Using these practices as a guide, and being aware of potential pitfalls, particularly building too large a board and too cumbersome an infrastructure early on, should greatly enhance the spinoff's odds of beginning its independent life with a capable board - one of the greatest assets a company can have today.

Julie Hembrock Daum is managing director of U.S. Board Services with Spencer Stuart.

Thomas B. Neff is chairman of Spencer Stuart U.S. Both are based in the firm's New York office.