How board compliance need not be so painful
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How board compliance need not be so painful

How board compliance need not be so painful

The costs associated with compliance are definitely much lower than that of the risks that might emerge in the absence of it

Most enterprise board members in the GCC are worried about regulatory compliance than focusing on driving the strategic success of the organisations they serve. This is partly because the various certification agencies insisting on testing the knowledge of regulatory duties of a board member. They all conveniently forget that good governance needs many other skills as well.

Yes, bankruptcies have been rocking the region for some time now. With recent ones like the B R Shetty scam, regulators are bringing in stringent regulations to stop scams by board members.

The costs associated with compliance are definitely much lower than that of the risks that might emerge in the absence of it. Insurers too will insist on compliance to reduce their risks. Therefore, there is no way this can be less important than other duties of a board director. What is crucial is about managing this better so the director has least hassles in delivering the fiduciary duties well.

When it comes to public company corporate governance, few things draw quite as many groans as the annual directors and officers (D&O) questionnaire. Long, detailed legal boilerplate, intrusive and tiresome; the questionnaire is a chore for law firms, a pain for company staff who prepare and process it, and an irritating time sink for the board members.

Yet the D&O questionnaire is a requirement in most world corporate disclosure systems, and crucial for liability coverage. However, it can be much more than a grim necessity. With a few shifts in approach, structure and usage, D&O questionnaires can be a strong governance tool.

First, who says the questionnaires have to be so damned long? Thirty, 40, 50 pages and up is not uncommon, with most questions demanding long, detailed answers. It is unrealistic to expect someone with a normal life – much less a day job – to devote the amount of time needed. This has been the observation by many board directors when asked about it. They all wished that the corporate secretary could pre-fill in items that the company knows internally, like board compensation, legal name, address, and so on (and likely with more accuracy – how many directors remember company equity grants off the tops of their heads)? This may not cut the page count, but it eases the quantum of work a director has to hack through. Further, you can often trim some bulk by not using the full, legal boilerplate wording for questions. “Plain English” is a best practice goal.

However, we do not recommend just picking up the director’s previous year answers for most items, such as outside stock ownership, potential conflicts, employment, etc. Also, don’t accept a quick “No changes” response from directors. It becomes far too easy for the director to forget about minor shifts in ownership, trusts, equity holdings, job descriptions, and so on. Most of these may indeed just be minutiae, but if a legal disclosure includes information that’s sloppy or incomplete, you can be left out to dry.

A big complaint on D&O questionnaire is the vagueness and subjectivity of some items. Busy, distracted board members then take the path of least resistance, which can lead to omissions. The questions about potential conflicts and interlocks get into judgment calls that directors prefer to skip – sometimes to everyone’s later regret. There have been incidents that can land everyone in soup such as where a board member of company X was active in setting severance for the CEO of company Y after X acquired it. They had no legal links, but an aggrieved shareholder uncovered that both were board members of a prestige golf club, which triggered a mini-scandal. Assume that, if a degree-of-separation connection can be dug up on the Internet today, you should note it first in your D&O questionnaire.

For these and other subjective questions, try “giving some examples as thought starters in the form. Questions about a director’s other board commitments are limited to public companies. But prod the directors with examples of other board engagements to learn the full story. A director may serve on two other public company boards and not seem over-boarded. However, if (s)he serves on major non-profit boards, or the boards of a bunch of startups, that’s a lot of added time. Give examples so directors will say, “Oh, yeah, I hadn’t considered that.”

Most boards using online board portals today are migrating away from paper D&O questionnaires to electronic versions. This brings real benefits. E-surveys are easier to send, do not get lost, and are less intimidating than a wad of paperwork. They can be pre-populated with boilerplate items, and structured so that the director can’t skip an item. Online questionnaires make it easier for the corporate secretary or chair to uncover trends and issues in governance by filtering the results (eg: Are more board members cashing out on stock options than before? Are there buried family/business connections?).

Ralph Ward is a global board advisor, coach and publisher. Dr M Muneer is co-founder of the non-profit Medici Institute and a stakeholder in the Silicon Valley-based deep-tech enterprise Rezonent Corp.

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