TRANS-EUROPEAN DIVISION TREASURER SEMINAR

JUNE 11-17, 2012 

Boards: The Famous and the

Infamous

Ann Gibson, PhD, CPAAndrews University

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The Board of Directors

The Board of Directors is at the top of the organization’s governing structure.

In non-profit institutions, the board owns an organization….for the sake of the mission which that organization is to perform…. (Board members) own the organization because they care.

David Hubbard

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Boards Behaving Badly

The Board of HealthSouth:

Well compensated; received 25,000 shares annuallyFinancial ties to Richard ScrushyMany board members were also company officersUsed loans to “enhance equity ownership”

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Boards Behaving Badly

“We (directors) really don’t know a lot about what has been occurring at the company.”

HealthSouth Board Member

“We relied on the explanations of management so we were deceived as to the fraud.”

HealthSouth Audit Committee Chair

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Boards Behaving Badly

“The conduct of the HealthSouth board amounted to ‘gross negligence.’”

Corporate Governance Expert

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Boards Behaving Badly

The Board of the Baptist Foundation of Arizona (BFA):

Engaged in related party transactions to their own benefitAccepted phony land swaps and large loansHid information through the use of 60 shell corporations

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Boards Behaving Badly

Members of the BFA board, especially the pastors and laypersons, interpreted the complex corporate shells as sophistication

And the increasing income numbers on the financial statements, even in a down real estate market, as persuasive positive evidence

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Types of Boards8

The Passive Board

The Contrary and Confused Board

The Strong-minded Board

The Super, Mission-driven Board

Types of Boards

The Passive Board:A sleeping boardAfraid to ask questions lest they appear naïveInsider-dominated boardLikely to “rise” to protect management from criticismLikely to rush difficult issues to a voteDominated by the CEO

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Types of Boards

The Contrary and Confused Board:

Unclear about the organization’s missionPlagued with conflicts of interestDirectors see personal benefit to serving on the board; may use board position to enrich themselves

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Boards Behaving Badly

The Board of Enron:

Hand-picked by Ken LayWell compensated: over $380,000 each in 2001Financial ties to Ken LayConflicts of interestFailure to monitor and follow-through on decisions

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Boards Behaving Badly

SDA Boards can have conflicts of interest:

Inside-directors come with their own agenda

Inter-connected relationships between church boards

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Types of Boards

The Strong-minded Board:

Led by members who have their own interpretation of what is good for the organization or its community

Led by members who wish to move the organization in ways that benefit themselves and/or the charismatic leader rather than the organization

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Types of Boards

Strong-minded boards often exist where professional training and judgment are critical to understanding the mission of the organization

Such boards require either the education of board members or the selection of members who already understand the mission of the organization

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Boards Behaving Badly

The Board of Citigroup:

“I had no familiarity at all with CDOs (collateralized debt obligations).”

“…I am not senior management. I have this side role.”

Robert Rubin, Chairman

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Boards Behaving Badly

The Board of WorldCom:

A passive board“Bernie’s Board” - Composed of Bernie’s friendsConsiderable conflicts of interestBecame millionaires by WorldCom stock holdings

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Boards Behaving Badly

Rule No. 1: Don’t bet against BernieRule No. 2: See Rule No. 1

Not an active or curious board. Was not aware of major debt transactions with Bernie Ebbers

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Ethics Scenario

It’s April, 2002

You are a member of WorldCom’s Board of Directors

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Ethics Scenario

It’s July, 2002: WSJ headlines read:

“WorldCom Plans Bankruptcy Filing. Board Approves Move; Operations to Continue During Reorganization”

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Types of Boards

The Super, Mission-driven Board:

Understands the mission of the organization

Seeks to remain true to that mission as it provides guidance to the organization

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Non-Profit Organizations

Do not have owners in the traditional sense

May be responsible to many stakeholders

May be dependent on many stakeholders

May have clientele different than those who fund or govern the organization

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Non-Profit Organizations

Role of the Board particularly crucial in non-profit organizations because the board is entrusted with the mission and the corporate integrity

Requires that the Board focus on the mission of the organization and embrace “systems thinking” rather than remaining “representational” for a specific constituency

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SDA Governance

Two Governance Structures:

The Governing Board

The Executive Committee

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SDA Governance

The Governing Board Model:

Stand-alone entities (e.g., institutions)Separately incorporatedOne voting board member who is an employeeChaired by an external personCEO/President accountable to the boardBoard makes limited hiring decisions

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SDA Governance

The Executive Committee Model:

Entities included in the church network (conferences, unions, divisions)UnincorporatedMany employee voting members on CommitteeChaired by an internal personAll three officers accountable to the Exec CommitteeCommittee makes many hiring decisions

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Non-Profit Organizations

“To be effective, a non-profit needs a strong board, but a board that does the board’s work. The board not only helps think through the institution’s mission, it is the guardian of that mission and makes sure the organization lives up to its basic mission….

Over the door to the non-profit’s boardroom there should be an inscription in big letters that says:

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Non-Profit Organizations

MEMBERSHIP ON THIS BOARD IS NOT POWER;

IT IS RESPONSIBILITY.”

Peter Drucker

Managing the Non-Profit Organization

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Non-Profit Organizations

The governing board has power:

Has ultimate corporate authorityTotal authority matched by total accountabilityTotal authority can be superseded only by the organization’s owners or by the stateFor corporate boards, the owners are the shareholders; for the SDA church, the owner is the constituency or “membership”

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Non-Profit Organizations

The governing board has the responsibility:

To determine the organization’s mission and purpose and to focus on the mission.

Johnson and Johnson and the Tylenol crisis (1982)

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Not-for-Profit Organizations

To lead change; focus on long-range vision and strategies and critical relationships

To ensure legal and ethical integrity and maintain accountability. To act as a conscience, a keeper of human and moral values

To provide proper financial oversight

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Not-for-Profit Organizations

To provide a window to the outside world for management

To help the organization be understood by its constituencies

To support the CEO and assess his/her performance and assure management competence

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Not-for-Profit Organizations

To recruit and orient new board members and assess board performance

To request good governance information and ask the crucial questions

To use technology to communicate effectively with other board members and with constituents

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Not-for-Profit Organizations33

Crucial questions to ask:

Are appropriate financial reports prepared and presented to the finance committee in a timely manner? What are the financial results for the year?

What are the observations or analyses that the finance committee has considered?

Not-for-Profit Organizations

Are there any tax or legal considerations of which we should be aware?

Are we meeting our budget? If not, why not? Are the variances great enough to warrant action on the part of management or the board?

Do we have strong internal controls? Do the controls assure the accuracy of the financial statements?

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Not-for-Profit Organizations

Are the organization’s investments managed in accordance with board-approved investment policies? How have our investments fared?

Have there been any unexpected events, or do we anticipate external changes, of which the board should be aware?

Are we operating efficiently?

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Not-for-Profit Organizations

Are our programs valid? Are the revenue sources secure? Are we adapting to the changes in our environment? Are there opportunities that are going unexplored?

Are there any reasons we should be worried?

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Ethics Scenarios

The Purchase

The Best Investment

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Individual Board Members

Legal Duties of Individual Board Members:

The Duty of Obedience

The Duty of Loyalty

The Duty of Due Care

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Individual Board Members

The Duty of Obedience means that board members must insure that:

The organization is “obedient” to its purpose and role as defined by its charter

The organization is “obedient” to the laws of the country in which it operates

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Individual Board Members

The organization is “obedient” in fulfilling all commitments, both current and previous ones

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Individual Board Members

The Duty of Loyalty means that board members must:

Act in good faith for the benefit of the organization

Maintain confidentiality of privileged information

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Individual Board Members

Serve with undivided allegiance when making decisions

Refuse to use their position on the board for personal advantage

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Individual Board Members

The Duty of Due Care means that the board members must:

Be diligent in managing the affairs of the organization

Be prudent in managing the affairs of the organization

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Individual Board Members

“Due Care” speaks to an expected level of competence

Perfection is not demanded, but understanding the basics of the mission of the organization, the critical factors to make it successful, and the possible pitfalls is expected

Additional expertise may demanded of board members if they carry specific roles

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Individual Board Members

Specifics of “due care” may include:

Attending meetings regularlyShowing independent judgment in votingBeing informedReliance on or seeking information from trusted sources

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Ethics Scenarios

The “Broke” Organization

The Christian Board

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Audit Committees

The Audit Committee is composed of “outside” members of the board

These members should have:Board business experienceKnowledge of the organization’s finance, accounting, and auditing operationsFacility in obtaining information by inquiry

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Audit Committees

Primary responsibilities:

Oversee the organization’s internal accounting controls

Review the audit plan and the audited financial statements with the independent auditors

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Board Assessment

Questions for the personal board member:

To what extent are the goals of the board clear to you?

To what extent is your role on the board clear to you?

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Board Assessment

Questions for the Board as a group:

How would you rate the board’s problem-solving abilities?To what extent is conflict on the board managed productively?How effective are the board’s decision-making processes?

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Board Assessment

Questions for the Board regarding the quality of communication:

What is the communication…..Among board members?From leadership to the members?From leadership to the committees?From the members to leadership?Between the board and the staff?

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Chairing the Board

An effective chair person should:

Both set and stick to the board agenda.

Be able to move beyond the details.

Build unique relationships with each board member and use them to shape consensus.

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Boards

Questions?

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References

Alstadter, Eric. (1998) “Keys to keep your board on track.” Nonprofit World. 16 (6) p 14-15.BoardSource (2007) The Nonprofit Board Answer Book. 2nd ed. San Francisco, CA: John Wiley Carter, Bob (2001) “Where are the leaders?” Fund Raising Management. 32(5) p 42-48.Cooper, Lowell (2011) “Effective boards and committees.” Presentation to Pacific Press Publishing

Association BoardDrucker, Peter (1990) Managing the Non-Profit Organization. NY: Harper/Collins.Fager, Chuck (1999) “Baptist Foundation faces investment fraud charges.” Christianity Today.

43(12) p 18-20.Jennings, Marianne. (2012) Business Ethics. 7th ed. Cincinnati, Ohio: South/Western/Cengage

Learning.Jennings, Marianne. (2006) The Seven Signs of Ethical Collapse. NY: St. Martins Press.Lang, Andrew (1994) “Staying financially sound: Knowing which questions to ask can help you

ensure your association’s financial viability.” Association Management 46(1) Masaoka, Jan. (2002) “A board’s financial duties.” Association Management 54(1) p 102-105.Orlikoff, James. (1998) “7 practices of super boards.” Association Management 50(1) p 52-58.Partridge, William (2000) “Getting the board to measure up.” Association Management 52(1) p

59-63.

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