Board Duties — Handle With Care II

Big Red Car here.  Wow, we had a very nice rain last night replete with lightning, thunder and wind.  Ahhh, it was the best.  We desperately need water to fill the area lakes.  The lakes have been down a bit since 2011 but they are building back with the recent rains.  In the last month, water levels are up almost four feet.

So today we finish up our discussion on the nature of Board duties.  We began the discussion here <<<link, so check that prior post before launching into this one.

Process and organization

Let’s dig into the practical realities of what a Board member actually does.

1.  The first thing a Board does is to constitute itself and sort out its own organization with appropriate leadership and committees to undertake some of the work of the Board.  There are no hard and fast rules — there may be in the Articles of Incorporation or By Laws, so read them first — as to organization but you will likely want to have a Chairman, a Vice Chairman and Audit, Compensation, Nominating, Independent Directors and other committees.

2.  You will need an agreed upon process to include meeting schedules (including committees), meeting agendae, records of discussions, meeting minutes and resolutions evidencing important discussions.  Commit this to writing including a Board etiquette discussion.

3.  The management will create a Board Book prior to each meeting and distribute it in enough time for the Board members to review it and to raise questions.  In an ideal world, these questions reach the management in sufficient time to be answered before the Board meeting.

Today, this should be done in a digital format with the Board Book being held in a safe place such as a DropBox file or other digital portal.  I am amazed at how lax Boards are in streamlining their information flow.  There is also a benefit of being able to access records of action — meeting minutes, corporate resolutions and other documents which will provide a record of Board deliberations.  This is a very important consideration and someone is going to have to break a sweat to make it happen.

A quick word to management, it is your duty to keep the Board informed about everything but it is not necessary to discuss every such topic at every Board meeting.  A good practice is to have a comprehensive Board Book which includes every topic but to only discuss the appropriate topics at the Board meeting.  In this way, the Board Book serves two purposes:  provides a discussion outline or agenda for the Board meeting while simultaneously keeping the Board informed as to other important topics which may not be discussed.  Remember, CEOs, these guys are your employers so make damn sure not to give them a reason to change that arrangement because you failed to keep them informed.

4.  The Board has to hire a President, Chief Executive Officer and a Chief Financial Officer (corporate officers all and likely required by the Articles of Incorporation and By Laws) at a minimum.  This decision is likely the most momentous decision that will be made by a Board from time to time.  They are hiring the jockey and barn manager for the shareholders’ horse.

5.  In the course of hiring the corporate officers, the Board is also required to retain their services by means of some appropriate document such as an Employment Agreement.  Startups and small companies are notoriously lax on this matter.  As we discussed here <<< link, the CEO has some very specific arrangements which must be spelled out as it pertains to his duties.

 This discussion could go on for a long time but this is enough to move to the next topic.


The Board is the shareholders’ eyes and ears to oversee management running their company.  The Board has an enormous oversight responsibility.  This discussion could go on all day but here are some highlights.  If you want to add more, please do so.

This responsibility can be subdivided into the following general applications:

1.  The oversight of planning.  Planning takes the form of developing specific documents which enunciate the Vision, Mission, Strategy, Tactics, Objectives, Values and Culture of the company.  Some are more important than others.

In days gone by, we might have discussed Strategy as the company’s strategic plan; and, Tactics as the company’s annual plan including a budget.  This discussion is couched more in the vernacular of the startup and the modern small company.

Part of the tactical plan is a projection of financial requirements including cash flow, cash requirements, banking relationships and funding of acquisitions.  The financial plan is an element of any competent tactical plan — Annual Plan.

Do not overlook controls as part of any plan.  A competent financial plan, as an example, will include specific operating controls as it relates to such mundane matters of purchasing, competitive bidding, check approval thresholds and financial commitment levels.

A savvy Board Chairman would identify certain of these plans as requiring specific Board approval and ensure they are used as benchmarks for the company’s performance versus plan.

Plans are likely to require quarterly updates and the Board should insist on such timely updates.  Planning is a very important consideration, as the Big Red Car says:  “Plan your work and work your plan.”  [STFU, Big Red Car, this is not all about you.]

2.  The oversight of execution.  No sooner than planning is complete than the Board must oversee the actual execution of the plan versus its milestones.  This one of the most important duties of a Board — calling balls and strikes v the plan.  This should be a part of every Board meeting.

This is not just a financial consideration, it is also an operational consideration.  If management says it is going to hire 35 people in the quarter, then someone has to oversee whether this was done or not and why.

3.  The oversight of growth.  In companies that are growing rapidly — organically scaling up or making acquisitions — the Board must ensure that the process of growth is under control at all times.  Growth must be undertaken at a certain pace and when it exceeds or falters in the face of that planned pace, the Board should know the reasons why.

Growth is often the best and worst thing about a company’s performance.  It can be fatal when not properly planned or controlled.

4.  The oversight of disclosure.  The Board has a requirement to ensure that their bosses — the shareholders — know what is going on with their company.  This is particularly true if the company is either public or there are a number of shareholders who are not directly involved with the company on a day to day basis.

This oversight requirement also is pertinent to the issue of insider trading — the acquisition or disposition of shares by persons who possess material non-public information.  Many Board members — including members of management or inside Directors — are substantial shareholders and must be extremely careful to ensure that buying and selling decisions are not based on information that is not widely disclosed.

A note also on the character of disclosure — it must be broad and complete.  You cannot whisper your results in the mens room and expect to meet your duty to ensure fair disclosure nor to discharge your oversight requirements.

If you are buying or selling your company’s stock be damn sure you are not trading on material non-public information unless you look particulary good in a prison jumpsuit.

A savvy Board member will delve into the company’s communication plan and ensure that they engage with all shareholders in supplying information even when there may not be much to report.  The shareholders own the company.

5.  The oversight of conflict resolution.  When a conflict arises, the Board acts to resolve it.  This is a primary and obvious duty and the Board must be constantly vigilant to ensure that they probe for, identify and resolve conflicts.

Some conflicts are obvious and can be handled with simple policy pronouncements and oversight of the policy.  Interestingly enough, insider trading is one such issue.  A company should have an insider trading policy which may preclude insiders from trading in the company’s stock in some window prior to the announcement of periodic results.

In a planned acquisition or disposition of company assets, the Board should take a very detailed view of things to similarly probe for, identify and resolve conflicts.  Sometimes the resolution may be to deny the action completely as the conflicts cannot be fairly resolved.

Disclosure is one of the best ways to ensure that conflicts are appropriately dealt with and the Board should disclose its deliberations and actions to resolve conflicts.  An example might be the disclosure that it undertook to obtain an independent third party fairness opinion at the behest of the independent Directors in an acquisition or disposition which might have had a real or potential conflict of interest.

A parting shot on this subject is the necessity to be curious and inquire into the status of any litigation to which the company is a party.  There should be a list of all litigation which is a part of every Board Book.  And why not?

6.  The oversight of documentation, legal requirements and reporting.  The Board must document its information flow from the company as well as its deliberations and decisions.  Boards are allowed to get things wrong but they must be able to demonstrate that their deliberations and decisions were made with due care and diligence.

The company operates in a legal framework which must be updated from time to time.  It is a good practice to quiz management and the company’s attorney as to the state of legal and regulatory filings.  This is a perfect application for a well crafted checklist.

The Board has a duty to oversee the reporting requirements of the company.  This is the older sister of disclosure.  Not only must the Board oversee disclosure requirements but also make periodic reports to the owners — the shareholders.

Two other requirements which fall into this broad heading are the timely filing of income taxes and the compliance with banking covenants.  The Board should make it a specific action to inquire continuously into these matters.

Many Boards become fixated on the minimum requirements — particularly companies with exchange or SEC reporting requirements.  This is a bad practice.  They should think instead of their owners and their inclination to buy, sell or hold their shares.

Reporting requirements as a topic should also include the development of specific reporting parameters — known performance indicators — internally.  The Boss loves to see graphs of key ratios and performance indicators over a protracted period of time to be able to spot the trend.  The trend can be your friend when it is positive.  It can be the canary in the mine shaft when it is not.  But the Board has to have a dashboard to see the trend.

7.  The oversight of performance appraisal.  One of the duties often overlooked by Boards is the necessity to timely and forthrightly appraise the performance of the President, CEO and, perhaps, the Chief Financial Officer.  Even well run Boards seem to gravitate toward seeing compensation actions as a substitute for a detailed performance review of those management folks they have appointed to actually run the company.

This should be a formal process and should entail Board discussion and the presentation of a document detailing the Board’s assessment of performance.  When not done correctly, it is often the source of mutual dissatisfaction and tension.  It is an easy thing to do but it takes time and commitment to do well.

8.  The oversight of things that go bump in the night.  Much of the oversight duty of Board members is well documented and logical.  Some requires specific policies and procedures that may simply be good practices or legal requirements.  A few of these things are work place policies such as sexual harassment or whistleblower complaints or the necessity to report fraud to higher authorities.

These matters are far fetched and unlikely until they happen and then the company’s policies or controls and the Board’s oversight of them will become huge legal issues.  Forewarned is forearmed?


It is worthy to note that in the course of discharging one’s Board duties, a Board member is required to be curious.  They are required to have a professional skepticism as to what the management is telling them.  This may take the form of requiring specific reports or asking probing questions or seeking outside expert opinion.  It requires engagement.

When the issue before them may include a bit of conflict or potential conflict then a Board member’s “spider sense” should be kicking in and the Board should be extraordinarily careful to ensure they are getting the whole story.

A Board member cannot turn a “blind eye” toward their duty to be curious.  She cannot simply rely upon what management says as the explanation for everything.  This is why Boards are well served by having a broad expertise represented among their ranks.  Have a financial issue — Sarbanes Oxley requires the designation of a “financial expert” to both serve the greater Board but also to be a member of the Audit Committee.


It is important to note that Board members are entitled to certain safeguards and protections in the course of the discharge of their momentous duties.

1.  The prudent man rule.  As a general proposition, a Board member cannot be held liable for their decisions as long as they were prudent in making them.  This is why many of the issues we have discussed — not being hasty in making decisions, smoking out conflicts, undertaking a regular and deliberative meeting process — are so important as they demonstrate prudence.

Conversely when a Board member fails to undertake decisions in a deliberative and diligent manner, they can be held personally liable for their decisions.

This discussion could consume one but know it is really very simple — conduct your affairs and make your decisions in a prudent manner and document them to prove this and you will not be held personally accountable.

The law does not require you to be correct, just prudent.

2.  Indemnification.  The Board can and should enjoy a formal indemnification as to their actions when they are taken in conformance with their agreed upon process.  The company will indemnify the Board for any and all costs incurred in defending their decisions.

3.  Directors & Officers insurance.  Boards should have the benefit and protection afforded by an insurance policy for the liabilities incurred by their service.  This D & O policy should be in an amount that is commensurate with the size of the company and the nature of the attendant risks.  In 33 years as a CEO, The Boss never had a claim made against a D & O policy but he would never have contemplated foregoing one.

The issue of safeguards is a worthy topic of a chat with the company’s lawyers and recitation in the engagement arrangement whereby a Board member accepts his position as a Board member.

This discussion today of Board member duties is not a comprehensive discussion, is not legal advice but is a pragmatic overview from the perspective of an experienced member of management and a seasoned Director.  It will provide a frame of reference from which to seek legal advice should the situation require that.

But, hey, what the Hell do really know anyway?  I’m just a Big Red Car.