Tag Archive: red flags

Five Boardroom Deficiencies: Early Warning Signals

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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:

Hu, Valukas, and Markopolos on Corporate Governance

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As the country emerges from the worst financial downturn since the Great Depression, directors, executives and other corporate governance experts gathered to honor the 100 most influential players in the boardroom and analyze recent mistakes and how they can be avoided at the NACD Directorship 100 Forum held Monday and Tuesday in New York City. The 100 honorees were commended at a dinner Monday night in a keynote address by Henry Hu, director of the SEC’s Division of Risk, Strategy and Financial Innovation.

Hu presented his “decoupling” concept, and explained how it relates to boards’ current challenges, especially as directors face the new Dodd-Frank Act. He pointed to the Act as the “most comprehensive change in generations… representing a new era for corporations and boards that introduces new challenges and new opportunities. It is important to get the balance between corporate governance and financial innovation right.”

The Forum’s second day featured Anton Valukas, court-appointed examiner in the Lehman Brothers’ bankruptcy, explaining the actions that the Lehman board could have taken to better prepare for the company’s failure. While Valukas does not believe that failure was preventable, he did explain that, had the board asked more important questions, the fall would have had less severe of an impact on the U.S. economy.
“In this case,” said Valukas, “one word would have made the difference: transparency.” (read Valukas’ full report here)

Also featured was Harry Markopolos, author of No One Would Listen, which details his ten-year-long investigation of Bernie Madoff’s Ponzi scheme, the largest in history.  Markopolos took a firm tone with the directors of the room, imploring them to “use your experts and don’t take numbers from management, for the sake of your shareholders and stakeholders. That’s your job.”

NACD Insight & Analysis for September 17, 2010

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Recently, interim CEOs have found themselves in the media spotlight.

This week, the Fortune magazine article “Should CEO be a Team Job?” notes that interim CEOs could be found at companies such as Borders, Sara Lee, and GM, while the boards searched for appropriate replacements. Though an interim CEO may be part of an “emergency” succession plan, boards must prepare to fill leadership roles when needed. Three to five years before a CEO transition is expected, the board should begin to develop long-term succession plans.

CEO Succession Planning - NACD According to the 2010 NACD Public Company Governance Survey (available Oct. 2010), most boards have taken the necessary steps to prepare for an abrupt CEO departure:

  • 70% include development of internal candidates
  • 69% include plans to replace the CEO in an emergency
  • 57% include long-term succession planning (three to five years before an expected transition)
  • 21% include engagement of an executive search firm to identify external candidates

To continually ensure that the current leadership is meeting the needs of the company, directors should engage in CEO succession planning. Well-timed transitions to new leadership enhance long-term shareholder confidence and value.