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Winter 2013


The First Task of the Board for the New Year: Reassess Its Structure and Composition

By Robert S. Hawekotte, Esq.

Heading into the new year requires an important look back.  As the new year begins, it is important that all members of the board of directors step back, and take a critical look and assess their composition, committees, and past performance to determine whether the board is prepared for the challenges and risks associated with its organization’s strategic plans for the new year.  For any organization to be successful, it must remain committed to improvement. To improve, an organization must look at its past experiences and current practices, and make appropriate changes where necessary. This includes considering possible changes in the board’s composition and committees. The board, along with the officers of the organization selected by the board, constitutes the “team” that will lead your organization during the next year. To get the most out of this team, your organization should consider the following items that relate to the board’s structure, composition and industry trends that your board may need to address in 2012.

Board Structure and Composition Matters  All organizations need to review their committees’ authorizations annually, to ensure that such committees have the requisite authority necessary to complete the duties which the board has delegated to the committee, and also to ensure that such committees do not have authority greater than what the full board desires to grant to the committee. Committee authority is often the most ignored issue for many organizations. The authorization granted to any committee should be discussed by the directors who are on the committee, as well as with the remaining directors who will rely on the actions of the committee during the new year.  Obviously, the authorization needs to be in writing, and is generally referred to as its charter.

A committee’s charter not only protects the other members of the board from liability, it also acts to shift liability to the members of the committee to whom the authority has been delegated. For directors, generally the law allows them to rely upon the reports and recommendations of a committee of directors of which they are not members. However, a director may rely upon a committee only for matters within the committee’s designated authority; the committee has a legal duty of care to carry out that authority as an ordinarily prudent person in a like position would do under similar circumstances. The committee also has a legal duty of loyalty to carry out that authority when it is only in, and not opposed to, the best interests of the organization. Thus, it is imperative that the authority of a specific committee is properly and clearly set forth in its charter.

Audit Your Corporate Governance Practices  Most emerging organizations, either by choice in anticipation of going public some day, or by regulations applicable to their respective industry, have their financial statements audited on an annual basis. However, very few conduct an audit, either formal or informal, of its corporate governance practices. An annual audit of governance practices goes a long way in creating a productive board.

Boards must strive for excellence in their corporate governance and not just adhere to the minimum standards prescribed by law. This requires a goal of continuous improvement. Similar to evaluating the organization’s chief executive officer and subordinate management for the organization’s performance, the board must evaluate itself to constantly improve its decision making. An evaluation will allow the board to:

  • Check the organization’s progress against its mission and goals.

  • Provides a meaningful measure of accountability of the team.

  • Allows for a check of the strengths and weaknesses of the team.

  • Reviews the accomplishments, and yes failures, of the team during the prior year.

  • Establishes a means by which the goals for the new year can be measured.

A board’s effectiveness depends on the competency and commitment of its individual members, their understanding of the role of a fiduciary and their ability to work together as a team.  This includes an understanding of the fiduciary role and the basic duties that directors must fulfill in performing their responsibilities of care, loyalty, honesty and good faith. Being a member of a board is prestigious.  However, it also involves the assumption of many duties. Organizations are measured by their least common denominator.  Therefore, it is important that all members of its board are knowledgeable, not only with respect to the policies and governance rules of the organization, but are also educated on the general duties of directors. Such education sessions can be reserved for one or two day board retreats, or as part of a board’s regularly scheduled meetings. Either way, it is important that all boards know what it means to be member of a board, and how to fulfill their duties as board members.

Conclusion  Commitment to continuous improvement requires continuous work. Committing to accomplishing the above will lead to improvement of not only your board, but also your entire team. In turn, such commitment to improvement of your team, will add to the growth and performance of your organization.

No One Ever Gets Credit for Anticipating and Preventing Problems

By: Richard E. Blasco, Esq.

As Benjamin Franklin once said, "an ounce of prevention is worth a pound of cure." However, no one ever seems to get credit for anticipating and preventing a problem from ever happening.  When a problem doesn’t happen, there is no triggering event, such as the filing of a claim or the commencement of litigation, which brings management’s attention to the particular problem.  However, once a specific problem is identified, and it is brought to management’s attention, it is the problem solver, usually a member of the management team, paired up with an attorney who is a litigator, who receives the credit for expending the resources necessary to obtain a resolution of the problem.  Whether the resolution is favorable or unfavorable to a company, a substantial investment of resources is usually required, whether it is in the form of the time and effort expended by management, or the fees and costs paid to outside counsel to obtain a final resolution of the problem.  However, the resources that can be expended in obtaining a resolution of the problem, whether favorable or unfavorable, can be in the hundreds of thousands of dollars, usually far in excess of the cost of the “ounce of prevention” necessary to head off the problem from ever occurring in the first place.

Management’s Duties  The issue management is confronted with, is a balancing test.  How much time, money and other resources should be invested by your company to prevent the specific “problem” from ever occurring?   As we all know, ever business faces potential problems on a daily basis.  It is management’s duty to try to reduce the volume and extent of the effect of these daily problems on the company. 

A common strategy that is used by many companies is to avoid investing in risk management, hope for the best, and then wait to address problems as they arise in the normal course of business.  Hopefully, none of the problems that arise will be of such magnitude as to threaten the very existence of the company.

Another strategy is to make a serious commitment to the disciplines and methods associated with risk management, before the potential problem ever arises.  It is important to note that the term that we are using is risk "management." By modifying term risk with the term “management”, this phrase expresses the recognition that some risk is always inevitable.  However, the duty of management is to manage such risk.

The Basics  Whether it is a simple problem, dispute, or legal action has been commenced, planning ahead by having the appropriate agreements, rules, policies and guidelines in place ahead of time, can prevent potential problems from happening in the first place, thereby saving a company the time, money and emotional stress that are invested in resolving the particular problem.  There are specific basic preventative steps that a company can take reduce the number of problems that occur.  These basic steps are:

  • Including the right clause in an internal or external contract.

  • Documentation of a companies rules, regulations and policies.

  • Contemporaneous documentation of the facts surrounding an event that could give rise to potential liability.

  • Knowledge of how to document the right facts surrounding an event that could give rise to potential liability.

Get professional legal help   While legal advice is costly it is worth it in terms of preventing disputes and bad publicity. When the rules governing relationships are reduced to writing before potential problems arise, and, everyone is aware of the rules when their respective contractual relationship begins, there are fewer disputes.  This includes disputes with employees, customers, vendors, and other third parties who may have a potential problem with a company. A lawyer can advise management of the company’s rights and responsibilities, as well as anticipate common problems which other clients have experienced.  They can also help with the writing of effective business rules, regulations, policies, contracts and other agreements. That is why it is always important to hire attorneys who have the most experience. 

Having this kind of support early can stop your company from entering into relationships and transactions that it later regrets.

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