Tuesday, August 2, 2011
Corporate Boards and Risk Management
We always hear about the Corporate Compliance Officer, the Audit Committee or the Compliance Committee, if a company has created one, and how they are all supposed to act. But let's look at the most important actor of them all -- the Corporate Board. Of course, there are numerous corporate committees which have important responsibilities, but in the end, when the rubber meets the road, the entire board itself is going to make the critical decisions.
The dynamics of corporate boards vary depending on the industry, the make up of the board and the company itself. The "independent" board members play a critical role in ensuring that the board as a whole carries out its fiduciary duties. As I have noted in prior posts, board members themselves are being challenged in civil suits and government enforcement actions for failures to act or even deliberate forms of misconduct.
A company's board can set the tone for how a company is going to comply with the law, and how the company will respond to potential violations and misconduct. Corporate boards can be proactive and anticipate emerging risks and seek to manage them in a responsible manner. Or they can avoid issues and choose only to respond when an issue arises.
The mix of unethical values, potential profits and pride can create compliance combustion -- denial of responsible actions, scapegoating as a way to avoid pitfalls and liability, and cover ups. Such strategies never work and usually cost the company money, reputational harm and positions on the board itself.
A more reasoned and compliance-oriented approach should be employed, relying on enterprise risk management strategies. All too often, mid-size and smaller company board members are being asked to manage risks they do not even understand. That has to change.
Board members need to have certain skill sets and commitment to manage risk. Nominating Committees need to take more time in identifying board members with the right skill sets. Too often the need for such skills are overlooked, especially when it comes to non-independent board members. This is the critical issue which needs to be addressed before a board starts to assign members to committees. The skill sets and experiences needed have to be defined and have to be adhered to when judging the qualifications of potential board members. A board that truly serves as a strategic asset to investors is one that brings together a team whose skill sets are aligned with the goals of the company.
Recruiting directors who have the necessary expertise to identify and deal with significant risks is the challenge for corporate governance experts. Nominating Committees need to retool with these objectives in mind.