Category: Risk Management

It’s the “Dumb Questions” That Can Save The Company

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Karen Kane provides CEOs and boards with strategic counsel in developing effective shareholder engagement programs, board agendas, board assessments and more effective board meetings. A former board secretary and former highest-ranking woman of the Federal Reserve Bank of Chicago, she attended NACD’s Director Professionalism course in Houston, TX, in early May.

It’s the Dumb Questions That Can Save the Company

Wayne Shaw encourages directors to ask “dumb questions” when it comes to reviewing the financials of any company. The Helmut Sohmen Distinguished Professor of Corporate Governance at Southern Methodist University notes that it is sometimes the question that wasn’t asked that gives directors insight into assessing the integrity of the firm’s financials. His presentation was part of NACD’s Director Professionalism® course in Houston, May 4-6.

Rather than getting caught up in the minutia, directors should ask management, “Are we on track to meet our financial goals and if not, what is the company doing about it?” He encourages directors to ask the CFO if the CFO is comfortable with the financial demands of the CEO, and to ask, “Is there pressure to make the numbers?”

Directors should ask internal auditors if they have any concerns with accounting or reporting issues. In following up with the external auditors, directors should ask how the company differs from others in the industry? What weaknesses did they find? How aggressive is the company’s accounting policies relative to the competition? And, is management responsive to the issues they raise?

Shaw cited chapter and verse of well known companies whose directors didn’t ask the basic questions. Asking some obvious questions would have saved millions of dollars of shareholders’ investments and sometimes the company itself.

See dates and locations for upcoming Director Professionalism courses.

Risk Mitigation on a Budget

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It is poignant to speculate that if the largest financial institutions in the U.S. had simply spent more of their extensive budgets on better board education with respect to complex financial instruments that a $15+ trillion mess could have been avoided. During a recent board meeting I attended where this subject was being discussed though, one director instructively commented that “effectively managing risk isn’t a function of expenditures for director education, because thousands of small public company boards expertly manage risk on a daily basis, where the budget for director education isn’t large enough to buy a cup of coffee!”

Adam J. Epstein

Especially since so much of the discourse in corporate governance focuses upon large-cap, headline-making events (e.g., Enron, Lehman, etc.), it’s easy to overlook that in excess of seven out of every ten public companies in the U.S. have a $500M market capitalization or below. At many of these companies, boards are not only leanly-staffed, but the annual budgetary expense for the entire board can be less than the amount a large-cap company expends on just a couple of directors. When taken together with the fact that small-cap companies have demonstrably smaller margins of error in managing risk, what can the governance community at large learn from the way risks are managed at the smallest of public companies?

1)      Risk is relative. Small-cap companies are immune suppressed versions of large-cap companies; a poorly mitigated risk that gives a large-cap company a “cold” will kill most small-cap companies. Accordingly, small-cap companies are uniquely attuned to survivalist risk mitigation; whether a risk is simple or complex is neither here nor there, rather risks that have serious corporate consequences require serious oversight.

2)      The answers are not in the boardroom. The first step in managing risks is to identify them.  But the majority of small-cap companies can’t afford to retain board consultants to identify and confirm risks. Instead, financial restraints compel small-cap directors to be more hands-on—speaking with employees, customers, and suppliers in the field.  As Laban Jackson and Suzanne Hopgood so eloquently stated to a room full of directors at the Directors Forum in January, the answers to most governance questions are not in the boardroom.

3)      Read trade publications. Small-cap companies can rarely afford to purchase proprietary third-party industry reports.  Accordingly, many directors of small-cap companies develop the requisite industry expertise by reading relevant industry publications, which are often compelling sources of statistics, trends, and analyses.

4)      Take advantage of publicly available information. The public filings and quarterly earnings calls of publicly-traded competitors are treasure troves of information about macro and micro risks, and the steps taken to mitigate them. For example, are there risks which similarly situated companies seem to be more (or less) concerned about than your company? Does your company seem to be facing risks that your competitors are not? Do your competitors have creative ways of managing some risks which your board hasn’t entertained?

5)      Ongoing dialogue with other directors. Because the process of identifying and managing risk is more the same than it is different, industry notwithstanding, having an ongoing dialogue with other directors outside of your company is always time well spent. Local NACD chapter meetings and director education forums are great venues for such interaction.

Whether it’s a visit with a large customer that gives rise to material doubts about the scalability of your legacy ERP system, a passage in an industry trade publication that identifies a new, well-funded Brazilian competitor, a comment from another company’s CFO during their earning call about a creative new way they found to hedge currency risk, or a conversation with another director over coffee wherein you learn about a problem they found with their existing insider trading policy, all of these risk mitigation tools have one thing in common – they fit any budget.


Adam J. Epstein is a director of OCZ Technology Group, Inc., and is the founding principal of Third Creek Advisors, LLC (“TCA”), which acts as a special advisor to small-cap boards with respect to corporate finance and capital markets. Prior to founding TCA, Mr. Epstein was co-founder and principal of Enable Capital Management, LLC, an investment firm whose funds have invested directly in hundreds of small-cap companies.  Preceding several senior operating roles in retail and technology, Mr. Epstein began his career as an attorney at Brobeck, Phleger & Harrison.  Mr. Epstein has been featured on CNN, ABC News, and in The Wall Street Journal.  Mr. Epstein can be contacted by email at

Board Minutes Must Be Clear, Artful

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Gerard F. Hurley, CAE, is president of Association Executive Resources Group, Gaithersburg, MD. AERG employs a spectrum of board governance guidelines and policy instruments in a “Foundation First Governance” publication series designed to assist nonprofit organizations.

Board minutes, by definition, can loom large after the fact, to which defendant organizations in discovery will attest. Unfortunately, it is all too easy for directors—fiduciaries all—to skip over the board minutes each received weeks or months earlier and, when asked at the next meeting if they “accept the minutes of the last meeting,” to suffer a brain cramp. “Okay, let’s move on,” the chair usually intones.

The precision of one’s board and committee minutes is critical to recording what actually took place, the decisions made, budgets authorized, and who has been charged to do what, when and where. That assumes there was action to report. Minutes are not to intimate otherwise, or gloss over issues considered delicate, leaving unaddressed matters which can haunt for years.

Board Minutes--rarely plain sailing

The “academy,” so to speak, is not exempt. In his book, Known and Unknown, former Defense Secretary Donald Rumsfeld observed that some (obviously secure) minutes of the National Security Council failed to state what had been decided, or even discussed, leaving participants with differing views on what had been decided and the next steps to take. Such imprecision, though possibly intended for other reasons, seems unconceivable at that assumed level of sophistication. It happens regularly in middle America.

Another NSC practice regarding minutes, according to former Secretary Rumsfeld, was to assume that a matter had been decided, simply because “no objections were voiced.” He insisted that nothing be deemed “decided” unless and until the meeting participants agreed to decide.  Was silence simply a matter of “after you, Alphonse,” or was the “minutes technique” an attempt to move an agenda? The “unless we hear from you” practice employed anywhere is wide open for abuse and misunderstanding.

 It can be risky to offer too little for the record, as well. I recall the comments of the Hon. William B. Chandler, III, chancellor of the Delaware Court of Chancery, to NACD’s 2004 Corporate Governance Conference, on the Disney Corporation/Michael Ovitz separation decision just rendered. It was his observation that Disney records did not support the level of due diligence it claimed when contemplating the Ovitz separation. Was it three hours, or one hour, or 15 minutes, he shrugged, rhetorically. In his September 10, 2004, decision, on page 21, he said “It is unclear from the record whether a majority of any group of [Disney] disinterested directors ever authorized the payment of Ovitz’s severance payments.”

 The quality of the minutes reflects the meeting. The document is to show only the topics discussed and the actions taken, if any. It is not a verbatim record. Was the consensus agenda properly constructed to point toward known objectives so as to focus directors on a needed a decision? Were the discussions crisp and pointed, the decisions clear and repeated for all to take note? Were the draft minutes then reviewed for accuracy by the chair and other principals before distribution?

Are we not to insist on the specificity in our minutes necessary to support the record and defend our decisions. . . and no more than that?