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The Board’s Right to Know and Red Flags To Avoid When You Don’t

I was called into the Chairman’s office. I received a message on my voicemail from his assistant saying the meeting was urgent. The company was splashed all over the newspapers because of misstep after misstep. People were saying the board was asleep at the switch.

The Chairman shrugged when I met him and simply said, “We missed it.” (Again.) Part of my job was to interview each director and find out why, and produce a report to the full board and regulator. I had a month to do it. The Chair’s office would book any plane flights I needed.

This scenario – my assessing a board – has repeated itself in situations ranging from fraud, stock option backdating, bribery, property destruction and death. When a board “misses it,” it’s rarely because they were not complying with rules or laws. They were. The reason is what goes wrong inside the boardroom – with relationships and people.

Here are some questions that go beyond the rules and more often than not in problematic boards the answers I receive (and see) is “No,” “I think so,” or “I don’t know.” Ask yourself as you read these questions if you can answer, “Yes” to all of them for the board or boards you are on.

Does bad news rise in your organization?

This is a favorite question to ask a director. It’s simple but powerful. If you are not getting the real goods, sooner rather than later, consider this a red flag, as you may be the last to know.

Do your CEO and CFO have integrity?

Another favorite. If the CEO or CFO holds back, funnels information, manages agendas, is defensive, or plays his or her cards too close to the vest, this is a warning sign.

Do you understand the business and add value?

If you asked the management team whether you as a director understood their business and added value strategically, what would their response be? What if you asked shareholders? You would be surprised at the answers I get. Frequently there is a disconnect.

 

Do you know how fraud occurs in your company and industry?

Depending on your local markets and the business you are in, there are tried and true ways to commit fraud that work and are being practiced by your employees and key suppliers. Do you know what they are?

Do you compensate the right behaviors?

You are at the helm as directors. Whatever you compensate, management will do. Ask yourself whether you are rewarding what you intend to reward.

Do you get disconfirming information?

If you get your information only from management, this is a red flag. Use social media, go on unscripted tours, listen in on analyst calls, move a board meeting to a jurisdiction you need to know, and get industry presentations on your competition.

Do you get exposure to key business lines and assurance functions?

Bring these people into the boardroom, with no PowerPoint slides. See how they think on their feet. It is good for succession planning, and is an excellent source of information.

Do you get good advice and stay current?

Don’t let management pre-select advisors. Bring tailored education into the boardroom and stay on top of emerging developments. Get the information you need to do your job.

Do you meet with shareholders – apart from management?

Ten years ago I had to ask CEOs to leave the room when independent directors met separately. Now I am doing so when directors meet with shareholders. Meet with key shareholders regularly. Listen to them. Don’t let lawyers interfere.

I brought the Chairman of the Hershey Company, James Nevels, into my corporate governance class that I taught at Harvard this past summer. We talked about people and relationships, but what Jim also said was how important the Board chair position is to create the climate and environment for the above questions and practices to occur. Jim has a saying he uses to focus his fellow directors – “We need all hands on deck for this one” – for a key decision, and makes sure each director brings their “A” game all the time. He goes around the table and he speaks last.

You need to bring your skills forward as a director. Every director slot matters now more than ever.


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