How Directors and Boards Get into Trouble

Title

Directors

Join the Board for variety of reasons like friendship, economic gain, networking, prestige and power. This can lead to a bad situation.

Therefore it is esssential for the Director to know the company and to be certain that they have the time and competency for this role.

Ignorance

Lack of understanding of the responsibilities of being a directorLack of at least a working understanding of the business in which the company operates.Lack of the knowledge of applicable rules/laws to the industry in which the company operates

Lack of Independence

This renders the director ineffective in rendering objective judgments about important issues.Similarly directors are less likely to act independently if they receive substantial financial compensation.

Conflict of Interest

This arises when a director has the potential to profit from a decision at the expense of the shareholders.

Failure to care

Busy directors may not be able to have latest knowledge about the business in general and the company in particular. This affects informed decision making.

Stock Trading Violations

Insider Trading problem could arise as Directors are privy to inside information.Ignorance of law offers the Director no protection.

Collective Board Problems

Poor Business PerformanceThis invites the wrath of the shareholdersBoard decisions could affect performance

Lack of leadership in the Board

Many mistakes are a result of ineffective Board

leadership

Inadequate involvement in management

Board decisions to the management should

be followed with effective oversight but

without micromanagement.

Entrenchment

A high percentage of board members remain on the board for too long.

Personal conflict

Internal politics hampers the smooth functioning of the Board.