Risk management methodologies and techniques remain at the forefront in these challenging economic times.
Boards of directors are under increased pressure to identify and manage risks in a timely manner and quickly remediate any issues that may arise.
Active, involved board members possessing diverse skills can greatly assist firms in achieving risk mitigation. While securities laws mandate various director qualifications, including independence for audit committee members, there exists no specific requirement that boards contain directors with varied skill sets.
While this is not a requirement for boards, “a diverse board can allow directors to critically examine management assertions and shepherd the organization through crises that may arise,” says James P. Martin, managing director at Cendrowski Corporate Advisors.
Smart Business spoke with Martin about best practices for boards and their impact on risk mitigation.
What defines a great board member?
In my mind, a great board member is one who becomes genuinely immersed in the company, understanding not only its financials but also its operations and strategy. Many articles have been published encouraging board members to become more active participants in their firms.
However, for whatever reason, this is largely not the case. For instance, a recent study showed that more than 90 percent of directors have not interacted with employees outside executive ranks at firms they govern; more than 70 percent have not visited their firm’s production facilities.
By failing to do so, directors are depriving themselves of important insights into corporate policies, procedures and strategy. These insights might be particularly beneficial for smaller, private firms that really turn to board members for help and guidance. While it is important for all firms to have directors with a diverse array of skill sets, smaller firms especially benefit from diversity of ideas.
This diversity might afford a firm particular insight in the event of a crisis, such as the economic tsunami we’ve experienced over the past two years.
What does it mean to have a diverse board?
Board members must have diverse, but complementary, skill sets to effectively govern a firm and critically question information provided by management. While government and stock exchange regulations have mandated a financial expert on audit committees, boards should also include directors who are experts in operations, legal matters and risk management.
In possessing individuals with such diverse skill sets, boards will be better able to analyze management’s vision and plan for the future, as well as guide the company toward continued value creation for shareholders. Diverse skill sets should also be present on board committees in order to help incite healthy dialogue surrounding critical issues.