The Way I See It… by Michael C. Volker
Good Boards are
needed, not external controls
(Build an effective Board by starting with a Board Charter)
The proverbial buck stops with a company’s board of directors. The board is its conscience and soul. It is the corporate control system.
Yet, how many boards are really working? It concerns me that with the recent corporate debacles that have recently surfaced – look no further than Worldcom, ImClone, Enron, Tyco, Adelphia, and even the auditor, Arthur Andersen – we’ll get new rules and regulations and processes that will greatly increase the costs of doing business. There’s even talk about additional oversight bodies to help keep everyone in line. That’s not necessary if your board is functioning as it should.
Let’s take a look back at what happened in the last decade. The American media (Forbes Magazine, NBC’s Prime Time TV news hour) delighted in exposing the Vancouver Stock Exchange (VSE) as the “scam capital of the world”. The B.C. Government commissioned James Matkin to launch a review that resulted in many new regulations and policies. It backfired. Because it became so costly and time consuming to take a company public, many good prospects stayed away from the junior market and pursued other sources of capital. On the other hand, those that could not attract venture capital as easily had to put up with the extra burden. As a result, there were fewer scams (they all went to the American OTC-BB market) but there were also fewer "quality" companies leaving the VSE with a bunch of mediocre companies.
We shouldn’t forget that many good companies that were perceived as too risky for traditional VCs got their start on the VSE. Names such as QLT Inc. and ALI Technologies come to mind.
A leading accounting firm’s study concluded that 20% of the population is inherently honest all of the time, 20% is inherently dishonest all of the time and the remaining 60% of the population is somewhat unpredictable depending on the circumstances. If this is true, more regulations will not help.
Let’ s face it, company executives and entrepreneurs want to bend the rules. Profitable private companies will want to reduce profits to reduce taxes. Public companies, on the other hand, may strive to show higher profits in order to boost their stock price. It’s like playing the tax game. Whenever there's any latitude in how numbers are reported, they can be stretched a bit. I have never seen a company that has been totally “honest” all of the time.
This is precisely why an active board of directors is so important. It should perform that watchdog role – not an external body. Directors who have an executive day job and also sit on a dozen or more boards cannot possibly be effective.
Most directors do not
know what is expected of them. That’s where a “board charter” comes in. Very
few have this. It was one of the many excellent recommendations made by the Joint
Committee on Corporate Governance (www.jointcomgov.com)
that was established in mid-2000. Its mandate was “to review the current state
of corporate governance in
A charter will tell both the directors and shareholders what the role of the board will be. How active will the board be in the management of the company? What level of commitment is expected from directors? How often will the board meet? Who will set out the agenda for the board? What matters will be brought to the board for deliberation?
By answering these questions, it’ll be easier to recruit new directors. They will clearly know what is expected of them. I would even suggest that prospective directors live with the company for a week or two, i.e. immerse themselves in the affairs of the company before getting involved.
The way I see it, active and accountable boards with a clear purpose is what companies require to keep them out of trouble. Externally imposed supervision will not lead companies to greatness.
Michael Volker is a high technology entrepreneur and