Whether the organization is publicly-traded, a family business or a not-for-profit, boards of directors deal with many universal issues. The central responsibility of a board member is to make sure the organization prospers and fulfills its strategic mission while ensuring nothing puts the organization’s existence in detriment.
“Board members should have a solid understanding of the basic fiduciary responsibilities that need to be fulfilled and how they are going to ensure that they do so at the particular organization they are serving,” says Bob Stillman, CPA, director, assurance and business advisory services at GBQ Partners LLC. “The top priority of board members is to strategically develop a high-level course of action to ensure the preservation, existence and continued success of the entity.”
Smart Business spoke with Stillman about the essentials of board member fiduciary responsibilities and other matters that affect board members and benefit their related organizations.
What are the key fiduciary responsibilities of a board member?
When advising my clients, I routinely refer to the guidance provided by the attorney general of Ohio, who identifies four primary fiduciary duties:
- Duty of care: meaning be active in the organization’s affairs, consistently attend meetings, keep yourself informed to determine if the policies established are appropriate and adhered to, understand how the organization functions, act diligently and in good faith, with knowledge and after adequate deliberations.
- Duty of loyalty: really relates to acting without self-interest and resolving conflicts of interest. This takes varying forms depending on whether the organization is a public corporation, closely-held/family-owned organization or a not-for-profit organization.
- Duty to manage accounts: relates to the financial accountability of the organization and checks to ensure appropriate internal control is established; records, reports and financial accounting are accurate, timely, sufficient, and monitored; appropriate activities are occurring to ensure sufficient funding resources and there is appropriate expenditures and risk management.
- Duty of compliance: relating to following articles of incorporation, by-laws, other operating documents, relevant laws, regulations and filing requirements.
It is imperative that both management of the organization and the board members understand what each of these duties encompass.
How can board members understand more about these duties and take better responsibility for their roles?
The organization should provide a sufficient level of board member training that is tailored for the particular organization. People join boards having past board experience ranging from none to extensive. Providing new board member training offers an opportunity to explain what’s expected of a board member. Management benefits significantly when their board members have a strong understanding of fiduciary responsibilities. The full board should receive a refresher annually about their basic fiduciary responsibilities.
Why is important for board members to understand and take control of their fiduciary responsibilities?
Many people view participating on a board as an opportunity to apply their personal and professional skills for the benefit of an organization and an opportunity to continue to develop their personal and professional network. However, the board’s collective decisions could have serious consequences for the organization that may reflect on individual board members. Clearly understanding the basic fiduciary responsibilities will help them be a more cognisant about that general risk as well as be a more effective board member.
You cannot abdicate your fiduciary responsibilities to another board member. Commonly, the CPA on the board takes the brunt of the details of the duty to manage accounts, but all other board members must have sufficient information to make their own decision.
Beyond fulfilling the basic fiduciary responsibilities, what other areas should a board member focus?
A well-informed and engaged board of directors will ensure an appropriate strategy is developed and implemented to enable the future success of the organization. Doing so inevitably requires the board to assess the leadership within management. This can be an uncomfortable position, however, a board member should expect to deal with this matter routinely. Also, key management personnel risk is becoming more prevalent with our aging society as professionals move toward retirement. The board needs to consider succession planning for key management personnel.
What skill sets should business leaders look for in a good board member?
A strong board needs to be well-balanced with people that possess specialized skills in certain common areas, such as legal, lending, investing, accounting, human resources, business development, insurance, human resources and technology. You also need members who will establish the tone at the top from an internal control standpoint and develop expectations with management about the quality they expect of the organization.
In the end, for any organization, reputation is its biggest asset and difficult to restore if it is damaged. Board members have a high responsibility to preserve, continue to promote and safeguard this. If they stumble, the organization could be open to negative exposure. You want people who are well respected with certain credentials who will continue to preserve and improve the organization’s
Bob Stillman, CPA, is director, assurance and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5304 or email@example.com.
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By now, most business leaders have recognized the opportunities social media offers in the areas of marketing, customer service, recruiting and relationship building. But not as many have weighed the rewards of social media use with the potential risks, including reputational, legal, employment and information security-related risk.
“Social networking is here to stay, and board members cannot simply ignore it,” says Jim Stempak, a principal at Crowe Horwath LLP. “For directors to perform their governance role effectively, they need to understand both the risks and the opportunities social media offers their organizations — and see that both are managed effectively.”
Smart Business spoke to Stempak about how to incorporate social media use into the governance framework to best protect and promote your business.
What are some of the risks businesses face when engaging in social media platforms?
The damage from a disgruntled current or former employee’s comments on Facebook, customer complaints on Twitter, or criticism of management on LinkedIn can be substantial and long-lasting.
An organization that uses social media for customer support (a channel in which they allow customers to post comments requesting assistance) opens itself up to new marketing and business opportunities, but needs to monitor these channels closely and timely. Customers can post criticism or derogatory comments about the business and its services and share negative comments with one another.
Businesses must also keep an eye on the social media activity of employees. Their voices can be as prominent as those of official company representatives. If employees post offensive or confusing content, customers might consider taking their business elsewhere.
What other ways can an employee’s use of social media harm operations?
While the acceptance of social media in the workplace can encourage talented candidates to seek out organizations that embrace this type of access, employees still need to understand that certain practices are exposing them and the company to risk. The explosion of social media in everyday life has generated public disclosure of a great amount of personal data. Malicious users can take advantage of information employees share and use it for social engineering attacks.
In addition, the human resources function needs to be made aware of the restrictions surrounding the use of social media channels to research and recruit new talent. Misuse of information found on social media sites to make hiring decisions could result in a claim of discrimination. Even though potential candidates post personal information on a public site, an expectation of privacy still exists in the hiring process regarding certain protected statuses, including disabilities, age, religion, etc.
Finally, employees must take extra care to understand the implication of the information they share with customers through these channels. While employee communication with the public and customers provides the means to build relationships and good will, if that communication includes confidential or sensitive information, a company could end up with a damaged reputation or even a violation of privacy laws and regulations.
How can leaders take advantage of the rewards and minimize the risks?
Having a robust corporate governance framework helps to clarify the role board members should play relative to social media, as well as address the complexity, interrelationships and variables that an organization must manage in order to strengthen governance over this area.
- Board of directors and committees. In addition to being responsible for effective corporate governance, the board establishes the direction and values of an organization, oversees performance and protects shareholder interests. As part of overseeing performance, board members should understand the opportunities, as well as the risks, of social media use by the constituents of the organization.
- Legal and regulatory. Labor practices are changing as a result of social media use in the workplace, and board members need to keep up with those changes to avoid exposure.
- Business practices and ethics. The board needs to confirm that the social media policy the organization adopts is based on best practices and is enforced consistently. So that no stakeholders in the organization are neglected, a social media policy is best determined by a multidisciplinary team of senior representatives from human resources, legal, IT, marketing, public relations, risk management, compliance and other relevant functions. The resulting written policy needs to address the appropriate use of social media by employees at all levels and in all functions.
- Disclosure and transparency. Shareholders need to be made aware of the risks associated with social networking and how the organization is managing them. Some public companies are now including social media as a risk factor in their annual reports.
- Enterprise risk management. Before developing and implementing its social media policy, an organization should undertake an initial risk assessment that takes into account not only the likelihood of and potential damage from incidents resulting from social media use, but also the cost of opportunities lost as a result of social media not being used. Once the policy is in place, social media risk mitigation should be integrated into the organization’s everyday risk management processes.
- Monitoring. After an organization implements its policy, it needs to monitor employee compliance. This requires periodic social media risk assessments, Internet and site monitoring, and control testing, all of which will show if internal controls need to be enhanced.
- Communication. Communication holds together the various components of the governance framework and keeps the process improving over time. The board should ensure that the social media policy is communicated appropriately and relevant business practices and codes of conduct are addressed.
Jim Stempak is a principal in and leader of the Risk Consulting practice for the Crowe Horwath LLP Dallas office. Reach him at (214) 777-5203 or firstname.lastname@example.org.
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