Boards Of Directors Rely On Counsel, Too

Thursday, November 17, 2011 - 17:55


Members of the board of directors have overall responsibility for the activities of the organization. The board acts on behalf of the shareholders to make policy decisions and provide oversight. By design, a corporate board has great power and also great responsibility. While specific duties of board members vary across organizations, primary duties include fiduciary responsibility, mission and vision, oversight and meeting attendance.  

Board members have a fiduciary responsibility to care for the finances of an organization by acting in good faith and with a reasonable degree of diligence. They are responsible for setting the mission of the organization and assuring that all actions are related to and adhere to that mission. In doing so, board members exercise an oversight function of the actions of corporate officers and directors.

Smooth Sailing For Most

Most board members and executives never encounter financial improprieties as they carry out the specific duties and responsibilities set forth in the corporate bylaws. Therefore, most board members receive training that focuses on providing them with the tools necessary to discharge their obligations in the normal course of business. That means the board can focus its attention on the important issues, such as strategy, competition, business cycles and innovation. While these challenges are difficult enough, many board members have the requisite knowledge and experience to deal with such matters.  

Dealing With A Crisis

Yet board members struggle with what to do once financial improprieties are alleged or discovered. Once an organization enters crisis mode, the steps a board takes to ensure it is discharging its fiduciary responsibility or providing adequate oversight are bound to change. Initially, board members may not understand what their rights and obligations are. It is my experience that the guidance of corporate counsel is both invaluable and necessary during times of crisis.

Communicating The Rights And Obligations Of The Board

Many investigations of financial impropriety are conducted by the audit committee. The audit committee is generally assumed to be free of conflicts of interest, which enables them to put the well-being of the organization ahead of that of any individual.

The audit committee will want to know whether it has the right to hire independent counsel to assist it with the investigation. Corporate counsel can ease the anxiety by helping the audit committee sort through its options. If the audit committee hires independent counsel, corporate counsel can suggest law firms that can provide the needed services. If the audit committee hires the company’s outside general counsel, corporate counsel can help the audit committee work through questions or concerns that members may have about potential conflicts of interest.

As these deliberations proceed, corporate counsel can also help the board, management and outside counsel focus on internal and external communications. For public companies, material events need to be reported within a matter of days. Internally, there is a need to preserve records and files that will be integral to the ensuing investigation. In addition, corporate counsel has the expertise to interpret and communicate the understanding of the facts as they change rapidly in the early days of an investigation.

As the investigation proceeds, the audit committee will need to meet more frequently than what was contemplated in a “business as usual” setting. Corporate counsel can advise members on the frequency of meetings and on how to discharge responsibilities during such times.

I have also found that such events can lead some to reconsider board membership. In a recent case, a CEO implicated in a scheme to defraud the company resigned as chairman of the board but retained his seat as a board member. Initially, the audit committee was convinced that they would be able to carry out the investigation unimpeded. It turned out that the former chairman was still able to exert enough pressure on the process that the audit committee was unable to complete its investigation. Several of the audit committee members resigned in protest. While these facts and circumstances are complicated, corporate counsel may be able to educate others in the organization about their obligations and may be able to provide guidance to directors on how to characterize their resignations.

There may be other unintended consequences that should be anticipated. For example, the company may be subject to a delisting action if the investigation causes the company to miss filing deadlines with the SEC. A delisting can have significant negative effects on a company and its shareholders. Corporate counsel can assist the board with this matter by helping to identify consultants who can usher the company through the process. The presentation before the exchange does make a difference, and the key component of the presentation is a definitive plan of compliance. This plan must include specific timetables that demonstrate the company’s ability to cure the deficiency within the statutorily allowable time frame. Corporate counsel can be instrumental in the development of the plan that assures compliance.


My own experience is that board members and executives have many questions when confronted with adversity. Sometimes, such accomplished individuals are not sure what questions should be asked. Corporate counsel can provide the guidance and advice that can lead to the best outcome.

Steven L. Henning, PhD, CPA is a Partner in the New York City office of Marks Paneth & Shron. He is the Partner-in-Charge of the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP.

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