The basic legal responsibility of a board member is to exercise reasonable business judgment and do what is in the best interests of the company and its shareholders.
What makes a good board member?
When participating in decision making, board members should consider the interests of other parties, including the company’s creditors, customers and employees.
Board members should stay informed. Board membership obligates members to be diligent in their pursuit of an appropriate amount of understanding of the issues before they pass judgment on any request by management. In other words, they must do their due diligence.
Reviewing the corporation’s bylaws, rules and regulations for inconsistencies or inaccuracies is important.
Also important is attending all board meetings, committee meetings and specialized committee meetings, especially the audit committee meetings. Board members should insist that materials and board minutes of the previous meeting are sent to them weeks before the scheduled meeting. It follows that board members should carefully review the materials. The preparatory work is a great time to formulate questions, ask for clarifications and perhaps scope out other potential agenda items.
The Sarbanes-Oxley Act created a new liability environment for board members, especially for those individuals on the audit committee. Audit committee members are now directly responsible for hiring and firing the auditor, reviewing financial disclosures and resolving disagreements in accounting issues between management and the auditor. At least one committee member must be a “financial expert.”
The audit committee has the authority to engage independent counsel and other advisers, and those engagements are funded by the corporation. The expense will be borne by the company itself. Thus, there is no excuse for being uninformed.
Board members now have the ability to seek assistance in understanding complex financial and accounting issues. This ability makes them better able to conduct their due diligence.
The overall objective of the Sarbanes-Oxley Act is to improve corporate governance. Therefore, the mission of board members is to encourage a tone within the organization that fosters a better financial disclosure and reporting environment.
Speaking of tone, board members should be careful to monitor the “tone at the top” within the existing corporate culture. Is management engaged in behavior driven by meeting its quarterly numbers at any cost, or is there a genuine concern for doing the right thing?
One way of gauging the tone is through the whistle-blower requirement of Sarbanes-Oxley. The act requires that an audit committee establish procedures for handling whistle-blowing complaints, including treatment of complaints.
Board members should review the complaints and their outcomes and how management addressed the issues that arose as a result of complaints. Unsatisfactory corporate responses to complaints, punitive measures imposed by the corporation on whistle-blowers themselves or other negative behavior patterns are sure signs that management is not trying to improve corporate governance within the organization.
Audit committee members must make sure that proper internal controls are established and that committee members are informed of all critical accounting choices adopted by the corporation.
Board members should insist on reviewing all documentation that supports the risk assessment review of all of the tough choices between auditor and management.
One final note: Board members should inquire about the firm’s indemnity policy and its D&O (directors and officers) insurance coverage. No insurance is a bad sign.