What recommendations do you have for those serving on audit committees?
The audit committee is one of the most — if not the most — important committees on the board. Its importance is paramount to the proper oversight of the company. However, the existence of an audit committee is not a sufficient condition for proper governance.
Enron, HealthSouth, Tyco and Adelphia Communications each had audit committees. Although audit committees today must include a financial expert and independent directors, I believe they also should include individuals with skills in areas other than accounting. For instance, a director with risk management expertise might be able to assist an audit committee in recognizing the warning signs of risks that lie ahead.
These risks can then be brought to and evaluated by the board as a whole.
What factors might influence a board’s ability to act on and evaluate information presented by management and internal committees?
Size is certainly one factor that affects board-level decision-making processes. When a board is too large, it sometimes becomes a case of too many cooks spoiling the broth. The larger the board, the more difficult it is for members to participate actively and engage in constructive discussions.
Many large companies have boards with 10 to 15 directors, while smaller, growth-oriented firms may have five or fewer members. There is, however, great variance in the size of boards that isn’t necessarily commensurate with the size of the underlying company. General Electric, for instance, has 16 directors. Apple Computer, a firm whose market capitalization is larger than GE’s, has only six directors, including CEO Steve Jobs.
While a large board allows directors to more concretely divide responsibilities, a large board can stifle meaningful dialogue. Smaller boards promote accountability and also help directors make swifter decisions in crises.
However, if a company has a small board, these individuals must hold a diverse array of skills in order to effectively shepherd the company. Small boards might also be more greatly influenced by persuasive CEOs seeking to impress their personal vision upon the company.
James P. Martin, CMA, CIA, CFE, CFD, CFFA, is a managing director of Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or [email protected].