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Aug 07, 2014

State Law Encourages an Expertise Board for Corporate Compliance
 

This is the first in our three-post series on the use of expertise boards for corporate compliance. In this post, we discuss state corporation law’s encouragement for use of an expertise board and the benefits of having one. The second post will discuss the categories of expertise to consider and the third post will discuss how to address any gaps in desired expertise.


State corporation law encourages use of an expertise board rather than a constituency board for corporate compliance.

An “expertise” board is composed of persons each having particular competencies (i.e., knowledge, skills, experience and expertise) necessary for the board to have as a whole to achieve its future objectives. This is in contrast to a “constituency” board, which is composed of persons who represent the view of a particular constituency (such as the U.S. Congress or a state legislature).

The state law duty of care encourages use of an expertise board by holding each director to the standard of acting as an ordinarily prudent person in regards to the background, skills or expertise of that director. In other words, under the duty of care, a director is to act with the care that an ordinarily prudent person in a like position would use under similar circumstance. Accordingly, a lawyer, accountant or other professional is not held to the standards of his or her profession when serving on a board, but only to that of an ordinarily prudent person. Likewise, a principal with a health care firm, investment firm, banking firm or other business is not held to the standard of someone familiar with that type of business, but only to that of an ordinarily prudent person.

On the other hand, the state law duty of loyalty requires a constituency board to act in, or not opposed to, the best interest of the organization as a whole and not necessarily in the best interest of any particular constituency. For a stock corporation, a director is required to take into account the interest of stockholders, but generally only stockholders as a whole and not any particular class of stockholders. For a membership corporation, a director is required to take into account the interest of members as a whole.  And for a charitable organization without members, a director is required to take into account the persons who, as a whole, are served by the mission of organization.

In addition, most state laws require any matter in which a director has a personal or economic interest to be disclosed by the director to the other directors and, to the extent possible, be approved by directors not having such a personal or economic interest.

Accordingly, the major benefit of an expertise board is a focus on the best interests of the organization as a whole because its members are selected on the basis of their collective competencies to act in those best interests. Expertise boards also do not face the problems a constituency board encounters with members that view their duties as representing the best interest of the separate constituency that each member represents, not the whole. This often results in:

  • Partisanship similar to Congress and state legislatures;
  • Decisions watered to the least common denominator; or
  • Favoring particular constituencies rather than the organization as a whole.

The first step in having an expertise board is to adopt an agreed-upon strategic direction for the organization. The "agreement" is typically more in the form of the board's confirmation or ratification of direction recommended by management than a strategy initiated by the board. Only after the board and management commit themselves and the organization to a future strategic direction can they determine the particular expertise and other competencies necessary to achieve that direction.

The next steps generally include:

  1. Inventory the knowledge, skills, experience, expertise and other competencies present among the current members of the board and management. This will be the subject of our second post in this series.
  2. Project the knowledge, skills, experience, expertise and other competencies that are believed beneficial for achieving the agreed future strategic direction. A board and management often need help in identifying the categories of competencies that should be considered.
  3. Compare the current collective competencies with the desired future collective competencies and identify the gaps. This is simply deducting current competencies projected to remain among the board and management from those believed beneficial in the future.
  4. Determine how best to address any gaps. This will be the subject of our third post in this series.


The next post in this series will discuss categories of expertise to consider for an expertise board.


 
Posted by J. Beavers  in  Governance Best Practices  

 

 

 

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