Dr Richard Leblanc

What are the requirements to be a director of a major public corporation, where you are required to oversee and approve complex financial statements, compensation packages, business risk appetite, internal controls and regulatory compliance? It will surprise you to know that the requirements are minimal.

To be a company director, you need to be over 18, not insane (or at least found to be insane by a judge), and not bankrupt. That’s it. You can sit on a major board of directors, and not know anything about the company, its industry, or even know how to read a financial statement.

When you see an accountant, a doctor, an engineer or a lawyer, that person has a rigorous code of professional practice with which he or she must comply, ongoing professional development obligations, a common body of knowledge as a barrier to entry, a body of peers that oversees any complaints or misconduct, and must pay an annual fee in order to practice.

There are more than 22 million private and 17,000 publicly traded companies in the US. Each of these companies requires a board of directors. If the average board size is nine directors, that means that there are about 150,000 directors of publicly traded companies alone, and several million directors of private companies.

Perhaps we should require more of directors as fiduciaries. They oversee the management of major corporations that, if or when they fail or engage in inappropriate or illegal conduct, the consequences can be disastrous. There is ample evidence that directors did not (and do not) fully understand the risks and products they were approving of investment banks. At a recent directors conference in Washington, Michael Oxley, co-drafter of the “Sarbanes-Oxley Act,” admitted publicly that even he did not understand what a “synthetic CDO” is.

Director industry associations are not the answer. These bodies are well meaning and professional, but are voluntary and member-accountable and have no sanctioning authority. Codes of conduct are perfunctory at best and the vast majority of directors who attend educational offerings are a slim minority of the total directorships. The people who do not attend are the ones who should.

After Enron and WorldCom, requirements of financial literacy and expertise were introduced within audit committees, which has resulted in their professionalization. Perhaps it is time to implement similar requirements for compensation, governance and risk expertise. This would also help to diversify boards and retire directors whose skills are outdated.

The strengthening of professional requirements for company directorships should be self-evident. As someone who teaches and advises in the field and has an obligation to keep current with emerging developments, given the significant rate of change in the last ten years, I could not imagine how a director of a company could remain current without ongoing requirements rather than passing familiarity or osmosis (I am speaking here of directors who have chosen not to upgrade their education). I often notice a disconnect – to put it mildly – between the resources and expertise that management has and those of directors.

Professional qualifications, a code of professional practice, peer review of misconduct, and disclosure of director expertise are all areas that would strengthen the governance of corporations.

Posted by Richard Leblanc on Oct 7, 2011 at 10:14 am in Member Selection, Competencies and Commitment, Teaching & Education |