Board effectiveness is important to
public, private and nonprofit companies. To be effective, a board, its committees and senior management must
understand today’s requirements and
expectations for increased oversight and
governance. Board members must be able
to evaluate the actions of management, the
organization and its advisers to meet those
requirements. Monitoring should take place
to ensure all required actions are performed on an ongoing basis, and board
members need a high level of assurance
that the information they are given to make
decisions is both accurate and comprehensive. This confidence is cultivated when
strong internal controls are present and
company management operates with
integrity, from the top down.
Smart Business asked Harry Cendrowski,
CPA/ABV, CFE, CVA, CFD, CFFA, managing
member, Cendrowski Corporate Advisors
LLC, about the ways that boards can
increase their effectiveness.
What are some of the characteristics of an
effective board?
A company’s board of directors and its
senior managers set the tone for a company
and its behavior. A highly effective board is
one where the members communicate with
management, independently evaluate the
actions of the organization and devote sufficient time to its duties. Studies indicate that
50 percent or more of the value of an organization comes from qualitative factors, such
as leadership, the ability to execute and the
company’s overall strategy. As such, qualitative factors cannot be overlooked. The
board needs to understand the attitudes and
personality traits of members of the senior
management team and understand how
they approach situations.
What should a board look for in potential directors?
Key factors for members of the audit committee are financial literacy and independence — the member must be able to recognize issues with management’s financial
reports and be independent to allow them
to challenge management when necessary.
To ensure that members are meeting their
obligations, there should be an evaluation of
the directors and committees every 18
months or so. Board members should be
able to work constructively with others and
be willing to not only learn the industry, but
the business as well. They should have
strong communication skills, high ethical
standards and the courage to raise issues,
even if doing so might not be well-received.
To what extent should board members be
trained about the company and its operations?
Members need orientation to understand
the company and how it operates, as well as
the strengths and weaknesses of the company and senior management. This will provide them information they can use when
reviewing a particular area of the company,
such as operations, financial or legal. Board
members today will need some degree of
financial literacy to recognize financial
reporting obligations and expectations.
That’s not to say that board members
should become involved in the day-to-day
operations of the company. There is a very
delicate balance between the board and management, and a board member needs to
know what that fine line is.
How can board members best assess risk?
Over the last few years, there has been an
increased focus on enterprise risk management (ERM), a strategy for proactively
identifying obstacles and improving the
quality and relevance of information presented to the board. ERM helps companies
anticipate risks earlier and determine possible impacts a risk occurrence might have,
both internally and externally. Companies
should keep in mind, however, that to be
truly successful, ERM is a process that
involves all levels of the organization and
that no sophisticated ERM software is a
replacement for human analysis. At the end
of the day, board members and senior management are still accountable.
What can a board do to improve?
Organizations can seek outside counsel to
identify best practices applicable to the
company’s operations and the operation of
the board itself. Boards can authorize an
independent party to perform an operational review, which can identify strengths
and weaknesses, as well as possible areas
for improvement within the organization.
Some operational reviews are merely tune-ups; others involve a complete overhaul of
the internal control system. Generally, it
should evaluate the culture of the organization to highlight issues that are people-related rather than process-related. In addition,
companies that are reliant on one strong
personality need to evaluate the risks
involved with that person. Board members
should interact with management on a regular basis, not only to solidify relationships,
but also to stay apprised of how the company is running.
Perhaps most importantly, board members should maintain a sense of professional skepticism when presented with financial reports or plans. If something seems
unusual, it should be pursued until it is
entirely understood and evaluated.
HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is managing member of Cendrowski Corporate Advisors LLC. Reach him
at (866) 717-1607 or [email protected] or go to the company’s Web site at www.frauddeterrence.com.
