The Importance of Proper Board of Directors Governance

August 8, 2012

By HunterMaclean Attorneys

For Business in Savannah

Recent high-profile board scandals associated with major for-profit corporations such as Yahoo, Facebook, and Goldman Sachs as well as non-profit organizations such as the University of Virginia and Penn State have many people calling for greater transparency in board governance.

Historically, boards of directors have operated behind closed doors and in what many call a soundproof room. Often, political interests heavily influence board member selection, thus resulting in boards composed of major donors instead of qualified individuals. These practices, however, have been harshly criticized by investors, regulatory bodies, governance experts and shareholders who are now demanding significant changes on a wide range of issues including compensation (mainly applicable to for-profit boards), member recruiting, voting control, diversity and competence.

In a perfect world, a board of directors would include a group of diverse and independent individuals who actively invest and engage in and thoroughly understand the organization they serve. This governing body would ensure that the company or organization prudently manages its risks, with each member functioning at all times in a responsible, legal and ethical manner.

A complacent board jeopardizes an organization’s future. Complacency encourages idle behavior and lowers the quality of board performance. Non-profit and for-profit organizations suffer immensely when board members fail to ask difficult questions and hold executive directors or CEOs accountable for fiscal mismanagement and violation of ethical policies. Effective board oversight is critically necessary for non-profits and for-profits alike in the wake of the passage of the Sarbanes-Oxley legislation.

To create a more effective board of directors, it is important for board leadership to raise the bar on what is expected in board member performance and spotlight areas that require greater clarity and support. Boards should be particularly focused on activities such as board oversight, executive director/CEO oversight, adherence to mission, providing strategic support and expertise, and financial and legal oversight.

Providing sound financial and legal oversight is critically important and board performance in this area should be audited on an ongoing basis by internal and external sources to prevent unnecessary regulatory and public scrutiny that could have detrimental effects on a company or organization. In addition, boards must engage in open, productive conversation about the board’s role, its performance and the most important priorities for improvement.

An attorney with experience in advising and counseling boards on governance best practices can be an invaluable asset in evaluating the structure of established boards and instituting policies and practices for new boards. With this expertise, an attorney can help analyze board policies, detect current or potential conflicts of interest, identify overlapping board member roles and responsibilities, and pinpoint areas of deficiency in leadership. In addition, he or she can provide information essential to successful board recruiting. Consulting with experts who are equipped with the right tools to help a board of directors reach its fullest potential is a step in the right direction toward creating a high-performing board of directors.

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