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TRANS-EUROPEAN DIVISION TREASURER SEMINAR JUNE 11-17, 2012 Boards: The Famous and the Infamous Ann Gibson, PhD, CPA Andrews University 1
T R A N S - E U R O P E A N D I V I S I O N T R E A S U R E R S E M I N A R
J U N E 1 1 - 1 7 , 2 0 1 2
Boards: The Famous and the Infamous
Ann Gibson, PhD, CPA Andrews 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 annually
Financial ties to Richard Scrushy
Many board members were also company officers
Used 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 benefit
Accepted phony land swaps and large loans
Hid 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 Boards 8
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 board
Afraid to ask questions lest they appear naïve
Insider-dominated board
Likely to “rise” to protect management from criticism
Likely to rush difficult issues to a vote
Dominated by the CEO
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Types of Boards
The Contrary and Confused Board:
Unclear about the organization’s mission
Plagued with conflicts of interest
Directors 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 Lay
Well compensated: over $380,000 each in 2001
Financial ties to Ken Lay
Conflicts of interest
Failure 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 friends
Considerable conflicts of interest
Became millionaires by WorldCom stock holdings
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Boards Behaving Badly
Rule No. 1: Don’t bet against Bernie
Rule 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 incorporated
One voting board member who is an employee
Chaired by an external person
CEO/President accountable to the board
Board makes limited hiring decisions
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SDA Governance
The Executive Committee Model:
Entities included in the church network (conferences, unions, divisions)
Unincorporated
Many employee voting members on Committee
Chaired by an internal person
All three officers accountable to the Exec Committee
Committee 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 authority
Total authority matched by total accountability
Total authority can be superseded only by the organization’s owners or by the state
For 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 Organizations 33
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 regularly
Showing independent judgment in voting
Being informed
Reliance 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 experience
Knowledge of the organization’s finance, accounting, and auditing operations
Facility 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 Board
Drucker, 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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