Board of Directors – Major Legal and Moral Responsibilities

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Corporate directors have a major legal and moral responsibility to the shareholders of the company – lawyers refer to this as a fiduciary obligation. Most directors also feel an obligation to their customers, suppliers and even employees for honesty and integrity in carrying out their corporate governance responsibilities. Corporate ethics, regulations and compliance all play a factor in the decisions directors have to make at each board of directors meeting.

Every corporate board has a code of ethics guiding conduct during meetings. The CEO typically handles operations and reports on the progress of finance and operational issues related to the board’s strategy. The board typically will request information designed to hold the CEO accountable for any issues a they feel are being either neglected or ineffectively dealt with.

While the CEO is accountable for operational issues and other issues related to the execution of board strategy, the board of directors is accountable by stockholders and by regulations for certain specific corporate functions, such as:

1. Continuity of Leadership: corporate leadership establishes a culture that customers, clients, suppliers, communities and employees trust to act a certain way. Leadership selection and stability plays a major role in adding value to a company.

2. Governance: All individuals agreeing to serve in on the board should subscribe to the terms of charters, by-laws and articles of incorporation that established the corporation and the board. This is also true for the mission of the organization and the corporate governance model selected to fit the needs of that mission. A framework of governance structure should include the number of directors, the officers of the corporation and their responsibilities, and the appropriate terms of service for officers and directors. Selection criteria should be developed for the assessment of the director candidates and for the CEO.

3. Corporate Finance: Budgetary requirements should be determined and the proper corporate structure identified. Funds should be raised to sufficiently capitalize the organization to meet its stated goals.

4. Compliance Management: Committees should be established to advise the board of directors and to ensure corporate compliance with Sarbanes-Oxley regulations, corporate ethics, and other issues. The board may establish sufficient advisory committees, as it deems necessary to oversee compliance with regulations.

5. Corporate Programs, Products and Services: The board should approve all products and services of the corporation and assess the value the product or service brings to the shareholder. Significant programs – those affecting corporate finance or operational capacity or programs likely to impact the company’s ability to comply with Sarbanes-Oxley Regulations – should be approved by the board prior to introduction.

Each board responsibility is built into the governance model with the intent being to provide professional governance for the corporation and offer the best possible strategy for protecting and enhancing shareholder value. Different boards of directors will establish a governance structure of committees to advise the board on issues requiring in-depth assessments, management input and even outside advisers. The goal with the committee work is to bring expertise to bear on certain issues and for the advisory committee to make recommendations to the board of solutions tailored to corporation. Directors, assigned duty to a committee, are expected to participate in the committee hearings and use his personal leadership style and management experience to address the issue in a professional and meaningful way.

Board duty can offer directors meaningful personal growth and leadership development opportunities in exchange for their professional governance expertise. Board duty should not be taken lightly by directors, but directors should offer honest assessments of issues and attend board of directors meetings prepared to participate in discussions and accept committee assignments as a part of their board duty responsibilities.

© Dr. Earl R. Smith II

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Related Articles:

• Risk Governance – Managing Safe Companies

• Nomination Committee Strategies

• Characteristics of a Task Oriented Director

• Inspirational Governance

• Non-Profits – Director and Officer Insurance

• Non-profit Board Compensation Practices

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