Directors Responsibilities – Ten Commandments

Prepared by Terry L. Stroud – June 2014

Over the past 35 years, I have had the unique opportunity to review and analyze a wide variety of businesses during my U.S. based work and my international assignments. As a former federal regulator for the commercial banking and thrift industries (including a ten year period from the mid 1980’s and to the mid 1990’s) I witnessed over 500 commercial banks and savings and loans fail. During this period I detected a pattern in which there were two primary reasons for these failures. These include the lack of adequate capital and poor management practices and governance structures. These same issues were encountered in my international assignments; however, most of the major participants in the financial markets of developing countries were not willing to implement governance reforms especially those involving transparency of ownership and the duty to disclose detailed, accurate, and timely financial information.

Poor corporate governance practices was also supported by a study performed by the U.S. General Accounting Office which stated that a major contributing factor in 90% of the commercial bank failures was a passive and/or negligent board of directors. Similarly, the directors in a majority of the 300 plus failed thrifts failed to act in a prudent manner regarding the affairs of the institution they were ultimately responsible for.

Effective service requires a director to exercise judgment independent of the company’s management team. A prudent board does this by asking the following questions:

1. Thou shall ask for a written meeting agenda
2. Thou shall study the agenda
3. Thou shall ask for accurate and timely financial information
4. Thou shall ask questions and demand timely answers
5. Thou shall strive for perfect attendance from all directors
6. Thou shall dissent where warranted
7. Thou shall call for recorded votes
8. Thou shall demand accurate and timely minutes for all meetings
9. Thou shall demand independent investigations when needed
10. Thou shall blow whistles when warranted.

Conclusion: Effective service as a director requires a board of directors to have the courage to exercise judgment independent of management.