At the most recent NACD Director Professionalism® Course in Charlotte, North Carolina, faculty member Michael Pocalyko, an experienced director and chairman of TherimuneX Pharmaceuticals, described five boardroom deficiencies that he has observed in almost every recent major corporate scandal or failure.
In his presentation on “Board/C-Suite Relations,” Pocalyko proposed that these elements pervade the board culture at troubled companies—and when identified, directors can use these red flags as a warning system for difficulties ahead:
A disconnect between the company’s stated core values and the way its executives, managers, and personnel behave. “When core values devolve into nice words while the way the company actually operates is antithetical to its codified ethics, serious problems are looming. Those problems involve not just lawsuits but orange jump suits.”
A deferential board of directors. “Every troubled company, public or private, including the one that will star in the next corporate scandal, has a board that is far too deferential to its CEO. This happens more often where the chairman and CEO roles are unified. Courteous challenge and vocal independence should not be perceived as affronts to power. They are essential to accountability.”
Inventive corporate finance. “When the non-financial board members especially have trouble figuring out exactly what the financial statements are saying, without significant interpretation, someone is being way too creative. Exotic finance often masks mischief, market gaming, or worse.”
Co-opted information technology systems. “They are tremendously expensive cost centers but absolutely essential to effective internal audit, SEC audit, and reporting. If the board has only an ephemeral understanding of these complex systems and their role in the audit process, IT can be co-opted fairly easily to the impediment of proper board oversight.”
Legal “fitting.” “Like a tailor fitting a suit, when legal counsel fits an opinion to comport with a desired action—rather than delivering an outright ‘don’t do this’ or even ‘it’s a terrible idea’—right then, the board is being brought complicit into future failure.”
NACD Director Professionalism is the foundation course for aspiring or new corporate directors, providing boardroom insight and skills in a highly interactive, two-day format covering the fundamentals of boardroom effectiveness. For more information about NACD Director Professionalism, please go to www.NACDonline.org/DP. During the remainder of 2012, the program will be offered at the following locations and dates:
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.