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Boards: The Famous and the Infamous

Boards: The Famous and the Infamous. Trans-European Division Treasurer Seminar June 11-17, 2012. Ann Gibson, PhD, CPA Andrews University. The Board of Directors. The Board of Directors is at the top of the organization’s governing structure.

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Boards: The Famous and the Infamous

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  1. Boards: The Famous and the Infamous Trans-European Division Treasurer Seminar June 11-17, 2012 Ann Gibson, PhD, CPA Andrews University

  2. The Board of Directors The Board of Directors is at the top of the organization’s governing structure. In non-profit institutions, the board owns an organization….for the sake of the mission which that organization is to perform…. (Board members) own the organization because they care. David Hubbard

  3. Boards Behaving Badly The Board of HealthSouth: • Well compensated; received 25,000 shares annually • Financial ties to Richard Scrushy • Many board members were also company officers • Used loans to “enhance equity ownership”

  4. Boards Behaving Badly “We (directors) really don’t know a lot about what has been occurring at the company.” HealthSouth Board Member “We relied on the explanations of management so we were deceived as to the fraud.” HealthSouth Audit Committee Chair

  5. Boards Behaving Badly “The conduct of the HealthSouth board amounted to ‘gross negligence.’” Corporate Governance Expert

  6. Boards Behaving Badly The Board of the Baptist Foundation of Arizona (BFA): • Engaged in related party transactions to their own benefit • Accepted phony land swaps and large loans • Hid information through the use of 60 shell corporations

  7. Boards Behaving Badly Members of the BFA board, especially the pastors and laypersons, interpreted the complex corporate shells as sophistication And the increasing income numbers on the financial statements, even in a down real estate market, as persuasive positive evidence

  8. Types of Boards • The Passive Board • The Contrary and Confused Board • The Strong-minded Board • The Super, Mission-driven Board

  9. Types of Boards The Passive Board: • A sleeping board • Afraid to ask questions lest they appear naïve • Insider-dominated board • Likely to “rise” to protect management from criticism • Likely to rush difficult issues to a vote • Dominated by the CEO

  10. Types of Boards The Contrary and Confused Board: • Unclear about the organization’s mission • Plagued with conflicts of interest • Directors see personal benefit to serving on the board; may use board position to enrich themselves

  11. Boards Behaving Badly The Board of Enron: • Hand-picked by Ken Lay • Well compensated: over $380,000 each in 2001 • Financial ties to Ken Lay • Conflicts of interest • Failure to monitor and follow-through on decisions

  12. Boards Behaving Badly SDA Boards can have conflicts of interest: • Inside-directors come with their own agenda • Inter-connected relationships between church boards

  13. Types of Boards The Strong-minded Board: • Led by members who have their own interpretation of what is good for the organization or its community • Led by members who wish to move the organization in ways that benefit themselves and/or the charismatic leader rather than the organization

  14. Types of Boards • Strong-minded boards often exist where professional training and judgment are critical to understanding the mission of the organization • Such boards require either the education of board members or the selection of members who already understand the mission of the organization

  15. Boards Behaving Badly The Board of Citigroup: “I had no familiarity at all with CDOs (collateralized debt obligations).” “…I am not senior management. I have this side role.” Robert Rubin, Chairman

  16. Boards Behaving Badly The Board of WorldCom: • A passive board • “Bernie’s Board” - Composed of Bernie’s friends • Considerable conflicts of interest • Became millionaires by WorldCom stock holdings

  17. Boards Behaving Badly • Rule No. 1: Don’t bet against Bernie • Rule No. 2: See Rule No. 1 • Not an active or curious board. Was not aware of major debt transactions with Bernie Ebbers

  18. Ethics Scenario It’s April, 2002 You are a member of WorldCom’s Board of Directors

  19. Ethics Scenario It’s July, 2002: WSJ headlines read: “WorldCom Plans Bankruptcy Filing. Board Approves Move; Operations to Continue During Reorganization”

  20. Types of Boards The Super, Mission-driven Board: • Understands the mission of the organization • Seeks to remain true to that mission as it provides guidance to the organization

  21. Non-Profit Organizations • Do not have owners in the traditional sense • May be responsible to many stakeholders • May be dependent on many stakeholders • May have clientele different than those who fund or govern the organization

  22. Non-Profit Organizations • Role of the Board particularly crucial in non-profit organizations because the board is entrusted with the mission and the corporate integrity • Requires that the Board focus on the mission of the organization and embrace “systems thinking” rather than remaining “representational” for a specific constituency

  23. SDA Governance Two Governance Structures: • The Governing Board • The Executive Committee

  24. SDA Governance The Governing Board Model: • Stand-alone entities (e.g., institutions) • Separately incorporated • One voting board member who is an employee • Chaired by an external person • CEO/President accountable to the board • Board makes limited hiring decisions

  25. SDA Governance The Executive Committee Model: • Entities included in the church network (conferences, unions, divisions) • Unincorporated • Many employee voting members on Committee • Chaired by an internal person • All three officers accountable to the Exec Committee • Committee makes many hiring decisions

  26. Non-Profit Organizations “To be effective, a non-profit needs a strong board, but a board that does the board’s work. The board not only helps think through the institution’s mission, it is the guardian of that mission and makes sure the organization lives up to its basic mission…. Over the door to the non-profit’s boardroom there should be an inscription in big letters that says:

  27. Non-Profit Organizations MEMBERSHIP ON THIS BOARD IS NOT POWER; IT IS RESPONSIBILITY.” Peter Drucker Managing the Non-Profit Organization

  28. Non-Profit Organizations The governing board has power: • Has ultimate corporate authority • Total authority matched by total accountability • Total authority can be superseded only by the organization’s owners or by the state • For corporate boards, the owners are the shareholders; for the SDA church, the owner is the constituency or “membership”

  29. Non-Profit Organizations The governing board has the responsibility: • To determine the organization’s mission and purpose and to focus on the mission. Johnson and Johnson and the Tylenol crisis (1982)

  30. Not-for-Profit Organizations • To lead change; focus on long-range vision and strategies and critical relationships • To ensure legal and ethical integrity and maintain accountability. To act as a conscience, a keeper of human and moral values • To provide proper financial oversight

  31. Not-for-Profit Organizations • To provide a window to the outside world for management • To help the organization be understood by its constituencies • To support the CEO and assess his/her performance and assure management competence

  32. Not-for-Profit Organizations • To recruit and orient new board members and assess board performance • To request good governance information and ask the crucial questions • To use technology to communicate effectively with other board members and with constituents

  33. Not-for-Profit Organizations Crucial questions to ask: • Are appropriate financial reports prepared and presented to the finance committee in a timely manner? What are the financial results for the year? • What are the observations or analyses that the finance committee has considered?

  34. Not-for-Profit Organizations • Are there any tax or legal considerations of which we should be aware? • Are we meeting our budget? If not, why not? Are the variances great enough to warrant action on the part of management or the board? • Do we have strong internal controls? Do the controls assure the accuracy of the financial statements?

  35. Not-for-Profit Organizations • Are the organization’s investments managed in accordance with board-approved investment policies? How have our investments fared? • Have there been any unexpected events, or do we anticipate external changes, of which the board should be aware? • Are we operating efficiently?

  36. Not-for-Profit Organizations • Are our programs valid? Are the revenue sources secure? Are we adapting to the changes in our environment? Are there opportunities that are going unexplored? • Are there any reasons we should be worried?

  37. Ethics Scenarios The Purchase The Best Investment

  38. Individual Board Members Legal Duties of Individual Board Members: • The Duty of Obedience • The Duty of Loyalty • The Duty of Due Care

  39. Individual Board Members The Duty of Obedience means that board members must insure that: • The organization is “obedient” to its purpose and role as defined by its charter • The organization is “obedient” to the laws of the country in which it operates

  40. Individual Board Members • The organization is “obedient” in fulfilling all commitments, both current and previous ones

  41. Individual Board Members The Duty of Loyalty means that board members must: • Act in good faith for the benefit of the organization • Maintain confidentiality of privileged information

  42. Individual Board Members • Serve with undivided allegiance when making decisions • Refuse to use their position on the board for personal advantage

  43. Individual Board Members The Duty of Due Care means that the board members must: • Be diligent in managing the affairs of the organization • Be prudent in managing the affairs of the organization

  44. Individual Board Members “Due Care” speaks to an expected level of competence Perfection is not demanded, but understanding the basics of the mission of the organization, the critical factors to make it successful, and the possible pitfalls is expected Additional expertise may demanded of board members if they carry specific roles

  45. Individual Board Members Specifics of “due care” may include: • Attending meetings regularly • Showing independent judgment in voting • Being informed • Reliance on or seeking information from trusted sources

  46. Ethics Scenarios The “Broke” Organization The Christian Board

  47. Audit Committees The Audit Committee is composed of “outside” members of the board These members should have: • Board business experience • Knowledge of the organization’s finance, accounting, and auditing operations • Facility in obtaining information by inquiry

  48. Audit Committees Primary responsibilities: • Oversee the organization’s internal accounting controls • Review the audit plan and the audited financial statements with the independent auditors

  49. Board Assessment Questions for the personal board member: To what extent are the goals of the board clear to you? To what extent is your role on the board clear to you?

  50. Board Assessment Questions for the Board as a group: • How would you rate the board’s problem-solving abilities? • To what extent is conflict on the board managed productively? • How effective are the board’s decision-making processes?

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