By Vindel Kerr, ContributorIN DAYS gone by, and some might say still today, many persons would engage in 'jockeying' to become a member of a corporate board. Board positions are generally regarded as an honour with much prestige. Today, being a director caries with it some substantial personal and professional risks.
In today's business milieu those individuals who are on corporate boards of directors or who are considering such appointments need to look beyond the prestige of the opportunity and consider that someday they may, in their director's role, become the focus of a shareholders' lawsuit or governmental inquiries. Understanding the potential risk and preparing for them are an important part of assuming and maintaining a director's role. I believe also, that those companies with a propensity to appoint inexperienced and unskilled directors by virtue of nepotism, or just emotionalism or other forms of non-objective decision-making processes will sooner or later come to grips with emerging realities. To put simply, read the newly proposed Companies Act (2001), Jamaica.
THE MAIN DUTY OF A DIRECTOR
The main responsibility of a board of directors is to provide oversight with respect to the management of the company. Boards are charged with assuring that proper management is in place and to monitor the corporation's activities to ensure that these activities are executed in a manner to maximise shareholders wealth (from the shareholders' perspective) or to satisfy the needs and interests of all claimants (stakeholders' perspective) on the firm. Each director in his/her individual capacity has a first duty to the company on whose board they hold such membership. Effective boards are those that provide oversight while allowing the corporation's management the flexibility and freedom to manage the operations.
DIRECTORS THRUST
IN THE LIMELIGHT
In years past, board members remained relatively out of the public's domain. In today's society, that is no longer permissible. Worst, if the company is publicly listed, or is regulated by Basle International Standards. In recent years, Board members have been thrust into the limelight of public scrutiny. Increasing lawsuits from business partners, shareholders, customers and employees against Directors have challenged board members to reconsider their roles and responsibilities. Once sheltered from any liability for the actions of management, directors now find themselves in the position of possibly being held responsible for the actions of their management employees.
Now when a member of management is found to be guilty of a corporate misdeed, sleazy or illegal act, the public and the courts are no longer focusing solely on the manager in question. They are also looking to the board of directors and asking how the board could have let such an incident occur. The traditional belief that directors have no responsibility for the unethical or illegal conduct of the company's employees is no longer valid.
A MAJOR RISK
A major risk facing today's board member is being named in a corporate lawsuit. In the United States alone, the growing incidences of lawsuits filed against corporate directors every year have been steadily increasing. Along with the potential to tarnish the individual's reputation, these lawsuits bring with them the stark reality of multi-million dollar fines and prison terms. And what is both interesting and factual is that while a company may pay a fine for a director, it cannot go to prison for him/her. Once upon a time, directors were protected from being responsible for the actions of the corporate managers. But those times have long gone - worst in this post-Enron period. With the many post-Enron changes in the United States and other countries, what must be guarded against is the possible potential for destruction of a director's personal reputation and career and also the high cost of settlement agreements for the company.
For example, daily newspapers in the United States have carried stories of organisations such as Daiwa Bank ($340 million fine for financial fraud concealment); Archer Daniels Midland ($100 million fine for price fixing); ConAgra ($8.3 million for wire fraud in connection with a scheme to defraud grain purchasers); Laboratory Corporation ($187 million in civil and criminal penalties for Medicare and related government health care billing fraud), and the three executives at the Pyro mine in Kentucky who were sentenced to prison for an explosion in the mine that killed ten workers. These varied but director-blamed activities should serve as reminders that those involved in corporate management and unethical
and illegal behaviours on the part of corporations and their employees are no longer being tolerated by governments and the judicial systems, in the USA, but in very many other jurisdictions across the globe. These corporate misdeeds, more than anytime else, are bound to be punishable once discovered.
ACCEPTING A BOARD APPOINTMENT
If you are asked to sit on a corporate board, among the first questions you should be asking the CEO or Chairman are:
Is your company in a healthy financial status?
Do you and your directors set your own compensation?
Does your organisation have a code of conduct for the board?
Do you have a corporate ethics and compliance programme in place for all directors, management and employees?
What does it consist of?
How is the board informed of issues in these areas?
Do you have a transparent system based on objective criteria for rewarding performance at least, the executive management level?
You should want to make sure these systems were firmly in place and taken seriously by the corporation before accepting the opportunity.
According to statistics, about half of the Fortune 500 companies have given substantial thought to the issue of 'good corporate governance' and have put proper programmes in place. But in Jamaica, the Caribbean, and majority of the developing and emerging economies, most corporations lack systems of effective corporate governance. As a result, their board members are very vulnerable. Vulnerable too because training programmes for Board of Directors are virtually non existent. Companies are strongly encouraged to develop strong and credible corporate governance compliance programmes.
CONCLUSION
This post-Enron era is both exciting and challenging for corporate directors and the companies they serve. Directors and the organisations alike, face almost daily exposure to potential law suits and regulatory investigations (not to mention by the Financial Services Commission or the Bank of Jamaica) which may either carry with them expenses and fines totalling well into the hundreds of millions of dollars (hardly the case in Jamaica but prevalent in the USA), prohibition from professional practice.
A well-designed and implemented corporate governance programme that incorporates board involvement is a wise investment in the future for both the director and the corporation he/she serves. While such systems will never entirely remove the risks involved in board membership, they can go a long way in reducing the potential liability and protecting those individuals whom corporations rely upon as valued human capital resource.
Vindel Kerr is a consultant, writes and trains Company Directors, and a doctoral candidate for business administration at the Manchester Business School, England. Contact: vkerrl@anngel.com.jm
