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@example.com or go to the company’s Web site at www.frauddeterrence.com.