Duty of Care: Board of Directors OPS Risk...

The Board Rooms across America are in full tilt mode working hard on risk oversight. The Chairman of the Board (COB), is wrestling with divergent personalities and competing agendas as the organization races towards its next phase of growth.

Operational Risks are being presented from all facets of the business and the Board of Directors has a fiduciary responsibility to address them, without creating new risk in the process. Leadership is in short supply and collaboration among the entire board is dwindling. In terms of Operational Risk Management (ORM), what risk is the most dangerous to the enterprise at this point in time?

The risk that the Chairman of Board has lost their ability to forge trust and a favorable relationship with the Directors themselves becomes a significant threat. The trust and the relationship that a Chairman has with the Board of Directors is paramount. When this is no longer present, and the "Independent Directors" realize they can no longer trust the performance of the Chairman, significant risk factors begin to quickly evolve that puts the entire organization into a vulnerable state.

Once the Independent Directors see and hear or feel that the Chairman has lost credibility and respect from the Board, then it is time to act. The jeopardy of the organization is at stake and each day or week that goes by without action to change leadership, will increase the long term risk to the brand, confidence in the entire leadership and finally the people charged with making the organization compliant with all legal and ethical policies. A failure in people is an Operational Risk that far too often becomes overlooked or just plain ignored, due to the power base that may exist by the Chairman's role.

The Board of Directors are charged with the duties that involve the governance, regulatory, compliance, legal and ethical components of the organization. When any one of these starts to fail, then the faith in the entire leadership of the organization becomes a question mark. How many times do we hear the story that brought down the leaders with the words "Failure to Act"? Today and in the future, “serving on a Board of Directors means living in a fishbowl” according to Chief Justice Myron Steele of the Supreme Court of Delaware:

Once a difficult situation arises with the potential for litigation and its accompanying damage to the company’s reputation, the media will descend on the company, and directors must show 1) that they had a plan in place to deal with such situations in accordance with their oversight or compliance duties, 2) that the plan was reasonable and adequate, and 3) that the plan was followed. It is worth noting here some of the recent trends in corporation litigation. Two major categories of corporate litigation that a director might face include the traditional class actions based on breach of fiduciary duty, and derivative actions which are filed on behalf of the corporation due to wrong doing on the part of the board, either for its actions that resulted in a loss or its failure to act which also resulted in a loss through missed opportunity.

One of the major trends going on these days is to keep the Chairman separate from the CEO or President of the organization. The benefits are great especially if you have a CEO who will allow their ego to accept the other person as an ally and not competition:

In the public company arena, more and more companies are separating the Chairman of the Board position from the CEO. It turns out that this trend has benefits for earlier stage companies too. We believe that all CEOs – regardless of their experience – benefit from having a lead director on the board. In general, it has been our experience that boards (and the board meetings) work better when there is a Chairman in charge other then the CEO.

This strategy in overall Board Governance is a sound one. As a result of the "The Duty of Care" by the Board of Directors, at some stage it may require that the Chairman recommend to the Board that a CEO resign or be fired from running the day to day operations of the organization.

The Board of Directors and their behavior within the Board Room and in the functions outside in public are at stake. The governance of the Board of Directors begins with the Chairman but ends with each individual on the Board itself. If the Independent Board Director remains silent on any legal duty of the Board, they are putting all in jeopardy of a failure of the Duty of Care:

In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant must be able to show a duty of care imposed by law which the defendant has breached. In turn, breaching a duty may subject an individual to liability. The duty of care may be imposed by operation of law between individuals with no current direct relationship (familial or contractual or otherwise), but eventually become related in some manner, as defined by common law (meaning case law).

It is the Chairman of Board who has the responsibility to keep the Independent Directors informed and aware of any persons behavior or actions that could put the entire board at risk. And even more importantly, it is the duty of each Independent Director to insure that they are constantly monitoring for any possible failure of the Duty of Care to their organization and their fellow Board Directors.