The issues frequently start with who is sitting in the boardroom. This month’s meltdown of several financial giants exposed a serious flaw in corporate governance, writes Joann Lublin and Cari Tuna in today’s Wall Street Journal.
Many U.S. boards don’t cope well with a crisis and some directors are now striving to anticipate, and avert, trouble.
Part of the problem is ill-prepared board directors who fail to ask the right questions or adequately scrutinize management, governance specialists told the WSJ.
In the wake of the financial turmoil, more boards will ask themselves, “Are we well prepared for the unforeseen crisis?” said Jerry W. Levin, former chairman of retailer Sharper Image Corp. and a director on four public company boards.
“For an extremely complex financial institution like Lehman, that set of directors probably wasn’t the best group to populate its board–or help prevent its collapse,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware business school.
Assessing corporate risk is a particular weakness. In 2006 and 2007, when Lehman was amassing mortgage-backed securities and questionable real-estate loans, the risk committee of its board met twice each year, the WSJ’s review of regulatory filings show.
A person close to the board says risk was discussed at four committee meetings and 25 board meetings in 2008.Now, the WSJ reports, more boards may take a bigger role in risk management.
During a Sept. 9 roundtable held by the National Association of Corporate Directors, 24 chairmen of audit committees agreed “the whole board needed to be engaged” in monitoring risk, an association official says.
What’s a corporate director to do? Be prepared:
* Pick directors with temperament, skills and experience to spot warning signs
* Engage in regular scenario planning
* Choose independent law firm as future crisis adviser
* Create an effective risk-management committee
* Appoint a nonexecutive chairman
* Develop and practice an emergency communications system
* Prepare for special committee to explore crisis’s cause and remedies
Source: WSJ reporting