Prudent Corporate Governance: A Board’s Dilemma

This article is based on my experience attending over 300 board meetings for financial institutions and other companies I supervised as a federal regulator. It is intended to more clearly define the roles and duties regarding the practical and steady stewardship of a board of directors, including management of the institution’s information workflow and how decisions are made. 

The following questions should be asked (or demanded) by each board member from their organization:

  • Ask for a written meeting agenda
  • Study the agenda
  • Ask for accurate and timely financial information
  • Ask questions and request timely answers
  • Strive for perfect attendance from all directors
  • Dissent where warranted
  • Call for recorded votes
  • Demand accurate and timely minutes for all board and committee meetings
  • Demand independent investigations when needed
  • Sound alarms when warranted.

As everyone knows, managing an organization is challenging. Successful companies employ a continuous process that addresses and acknowledges a constant flow of information.

The primary focus of both the board and corporate management is to identify problems before they seriously constrict and assault the overall condition of their company. A recent case in which I testified as an expert witness illustrates this. The company – which will remain nameless – had been in business for over 35 years, and for most of those years, it operated prudently and was successful financially.

However, in recent years, the company has started experiencing liquidity problems, which have resulted in operational problems, including issues with paying their debts and obligations on time. These issues had a damaging impact on the company’s relationship with its bankers.

The management team and board of directors chalked up little credibility with its bankers, as evidenced by placing a series of forbearance agreements on the company’s operations.

These agreements restricted the company’s operations, including oversight by an independent advisor. Instead of working with the banks to address the swirling financial issues, the company’s management and shareholders resisted efforts to resolve its financial (liquidity) problems.

Rather than working on developing a strategy for the company’s long-term survival, the board and management served as impediments to resolving the issues.

Any constructive efforts made by the management team to resolve the company’s problems were stonewalled by the following issues:

  • The largest shareholder had complete control of the board – three board members were insiders who worked for the company, and three of the four outside directors were family members of the shareholder. 
  • This structure resulted in total control for the primary shareholder, which resulted in a lack of independence on the part of the board. 
  • The lack of adequate financial controls resulted in a forensic audit that revealed the owner had several million dollars of personal expenses that could not be substantiated as legitimate business expenses.
  • The lack of prudent oversight and financial controls resulted in the following:
  • Resignation of all the inside directors.
    • Resignation of the company’s CFO due to potential liability regarding the quality of the company’s financial information.
    • Resignation of the company’s independent auditors based on a question regarding the “going concern” concept.

Conclusion

Effective and prudent stewardship as a director requires the board to have the courage to exercise savvy judgment independent of management. These issues will remain in the spotlight of public accountability, with corporate governance failings and oversight issues leading to litigation. They will often be the subject of a Wall Street Journal page-one article or Bloomberg online analysis.

With the threat of reputational harm, the costs of remedial action(s) required, and possible significant fines, an astute board cannot afford to continue to make questionable decisions.

As new risks emerge, success increasingly relies on the board to see the crises coming, demand and evaluate the information needed to make critical business decisions, and then, armed with that information, have the courage to carry them out. 

Prepared by Terry L. Stroud – 2014

About Terry L. Stroud. 

Terry is one of the co-founders of Opportunity Group and serves as the firm’s chief executive officer. During his 30-year career, Terry has served in the capacity of a banking regulator, a banker, and a financial consultant.

His regulatory background includes senior positions at several US regulatory agencies, including the Office of the Comptroller of Currency (OCC), the Federal Home Loan Bank of Dallas, and the Office of Thrift Supervision (OTS).

He has over sixteen years of international experience as a Senior Resident Advisor in the republics of the former Soviet Union, including Moldova, Ukraine, and Tajikistan. He has served as the Project Manager for banking reform programs in Uzbekistan, Kazakhstan, Georgia, and Azerbaijan.

He has also provided consulting services for financial institutions in Russia, Albania, Montenegro, Egypt, and Belize. Terry has been a Special Administrator for restructuring several trouble banks in multiple countries.

During one of the successful restructurings (of a politically sensitive commercial bank), he was credited with preventing a major banking crisis. He has written and published several articles on dealing with troubled banks in developing economies, and he has been a featured speaker at numerous bank training seminars and conferences sponsored by the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, and the United States Agency for International Development. 

During his US-based work, Terry has significant experience dealing with troubled financial institutions, including restructuring billions of dollars of troubled assets.

Terry Stroud

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