Good Governance and Delegation

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

The corporate world changed significantly in 2002. Regulatory actions – including several successful lawsuits against sitting directors – have demonstrated that directors need to become more serious about the operations and management of the board. Under the Sarbanes-Oxley Act of 2002, a board of directors has explicit responsibilities for financial oversight, succession planning and other legally binding obligations for good governance practices. Boards of directors typically meet ten to twelve times a year. The meetings are the primary venue within which board members meet their responsibilities. Good corporate governance allows delegation to advisory boards or committees to conduct assessments, and offer advice and recommendations to the board as whole. Several key issues must be taken into consideration as the board considers such delegation.

• Leadership Styles: Board and committee composition is extremely important to the process as well as the outcome of decisions. Not only does expertise and experience play a role in the quality of information coming out of a committee, but also personality and leadership ability. The committee members must be able to work together as well as have relevant expertise and experience to address their committee assignments.
• Resources: Advisory boards must have the resources such as corporate documents, budgets, charters, time, and support to carry out duties. The advisory board should have the authority to request and receive relevant corporate management reports to conduct the necessary assessments and judgments in reaching recommendations for the board. Certain committees such as the Audit Committee and the Succession Committee should have authority to engage outside advisors at the company’s expense to conduct independent analysis at it deems necessary, as well as other authorities as the board deems appropriate.
• Deadlines: Advisory boards work under deadlines meshing with any strategic planning activities the board may be conducting. Issues are framed and judgments formed in a professional and timely manner. This allows the board to receive the recommendations of the advisory board and take action in a manner that allows the company to receive the most benefit.

Boards, particularly the Chairmen, must understand the function of the advisory board. If they are to conduct necessary assessments, reach judgments and make recommendations to the board, the responsibility for the final decisions still rests with the board as a while. Their function does not relieve the board of directors from its responsibilities as the body vested with the authority and obligation to protect the stockholders and to enhance the stockholder’s value in the company. Sarbanes-Oxley puts all the responsibility for complying with the Sarbanes-Oxley Act regulations solely on the board. It does not allow delegation of those responsibilities to any other body. It would be inappropriate for a director to expect the committee to take the blame for a decision of the board as a whole.

Boards may also delegate the assessment function, strategic planning function and other duties to advisory committees. However, should a committee bring an assessment or plan back to the board as a whole, directors have the responsibility to question the plan or assessment. It is up to the board to agree on a strategy or make the final decision. It may be the committee’s work, idea, and recommendation, but the board as a whole has the responsibility for the final vote and the implementation of the plan.

Corporate governance involves shared authority. The governance model used by most corporations today involves committees and advisory boards to assist the board in carrying out the governance responsibilities. The model is designed to allow the most amount of work and oversight to be conducted by a relatively small number of people. Professional governance requires overlapping authority and assessments to achieve the best possible results. Directors must understand that the delegation process allows the delegation of duties to be committees. Advisory boards members have the responsibility to the board to conduct their duties in a professional and thorough manner, but the board as a whole is where the final authority and responsibility rests.

Board delegation is a process that should be undertaken very carefully. Since Sarbanes-Oxley, there are real liabilities for directors who either ignore or are negligent of their responsibilities to the shareholders. Many companies now employ an outside adviser to monitor the delegation process – assuring that the board is acting in the best interests of the shareholders. Board assessments are very useful tools and should be conducted on at least an annual basis. The data generated should be reviewed by the board as a whole and corrective actions taken. Good governed requires delegation – but that delegation should be carefully and thoughtfully done.

© Dr. Earl R. Smith II

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Related Articles:

• Developing Visionary Leadership – Board Contributions
• Corporate Governance and Informal Committees
• Executive Committee Operations
• Corporate Board Dangers
• Board of Directors – Major Legal and Moral Responsibilities

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