The Buck Stops With the Board: The Full-Time Job Of A Company Director

These days, serving on a public company’s board of directors is practically becoming a full-time job as directors face more government regulation and scrutiny from investors.

And directors could find themselves in trouble for failing to take action. For example:

* In April, a shareholder of Wal-Mart Stores Inc. sued the board of directors of the Bentonville retailer in connection with the allegations revealed by The New York Times that the company’s Mexican division paid million of dollars in bribes so stores could be opened faster than if the company went through normal government channels.

“Wal-Mart’s Board of Directors consciously ignored red flags concerning the existence of widespread corruption at Wal-Mart and consciously ignored the management decision to suppress the investigation into rampant bribery and attempted cover-up at the highest executive level at” Wal-Mart’s subsidiary, Wal-Mart de Mexico, said the lawsuit filed in U.S. District Court in Arkansas. Wal-Mart said in a news release in April that it had been working on compliance with the U.S. Foreign Corrupt Practices Act “and has a rigorous process in place to quickly and aggressively manage issues like this when they arise.”

“We will not tolerate noncompliance with FCPA anywhere or at any level of the company,” the news release said. “We are confident we are conducting a comprehensive investigation and if violations of our policies occurred, we will take appropriate action.”

* In November, three former outside directors of DHB Industries of Pompano Beach, Fla., settled a case with the U.S. Securities & Exchange Commission for being “willfully blind to numerous red flags signaling the accounting fraud, reporting violations, and misappropriation at DHB,” according to a SEC news release.

The directors, Jerome Krantz, Cary Chasin and Gary Nadelman, all of Old Westbury, N.Y., neither admitted nor denied the allegations in their court filings. But Nadelman agreed to pay $966,935, Krantz agreed to pay $496,464, and Chasin agreed to pay $205,723 to settle the case.

List:See our PDF directory of the boards of directors for each Arkansas public company, which includes names, compensation and stock holdings of each director:

New Rules

A wave of new regulations came as a result of passage of the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010. The act contains new rules for how public companies must operate, including more disclosure for company boards.

“With the additional regulation, the job of being a director of a company, particularly a large one, is becoming more difficult,” said David Connolly, a partner in the New York law firm of Shearman & Sterling LLP who advises companies on corporate governance issues. “There are more regulations to pay attention to. The job becomes more complex and requires more time from directors and also more interaction between the directors and executives at the companies.”

Connolly said it was too early to tell, though, if the Dodd-Frank Act had been effective in providing more transparency into company boards, which was its intent, because some rules hadn’t yet gone into effect and some of the deadlines for implementing the rules had been extended.

Still, the board is responsible for the company, said Jay Lorsch, a professor at Harvard Business School who studies corporate boards and teaches a course for board members of publicly traded companies.

“It doesn’t mean, as a practical matter, they can do everything,” he said. “[But] they’re supposed to be in charge of the whole operation.”

Getting Picked

The typical process of being named to a company board goes like this, Lorsch said:

The board nominates potential members and the shareholders then vote on those nominations. A board member might personally know the nominee or at least know of his or her reputation.

But some people find their way onto boards by a more circuitous route. For example, Dennis Foster of Cle Elum, Wash., landed on the board of Windstream Corp. of Little Rock after a series of transactions. Foster was the CEO of 360º Communications Co., which Alltel Corp. of Little Rock bought in 1998. That put him on the board of Alltel, and when Alltel spun off Windstream in 2005, he was placed on its board, where he remains.

“I think being a CEO of a company is good preparation,” Foster said. “You’ve gone through the different chairs and jobs to be a CEO and had a good amount of experience.”

In some cases, being named to a board might be a result of family ties to the company. Deltic Timber Corp. of El Dorado put the Rev. Christoph Keller III on the board in 1996 because his uncle, the late Charles Murphy Jr., helped build Murphy Oil of El Dorado, which was the parent company of Deltic before it was spun off as its own company. He is the director of the Institute for Theological Studies at St. Margaret’s in Little Rock.

Keller said he brought his “advanced training in theology, which is something you don’t see on boards.”

That comes in handy for ethical issues, he said. And having family ties to the company is also a plus, giving him a sense of ownership and stewardship of the company, he said.

Time Commitment

Serving on a company’s board is not intended to be a drop-in part-time job.

“There’s always enormous amounts of material that has to be digested,” said Mary Good, who previously served on the board of directors of Acxiom Corp. of Little Rock and is currently the special adviser for economic development to the chancellor of the University of Arkansas at Little Rock.

She said that board telephone conference calls could eat up an hour and sometimes, when urgent business needed to be discussed, occurred three to four days in one week. Good gave the example of a situation in 2007 when Acxiom board members approved the sale of the company to two private equity firms. That deal later collapsed, however.

Foster, the Windstream board member, said his board meets at least four times a year, but holds telephone conference calls as needed. Being on a board “certainly requires more time, more reading, more research, more communication. … That’s what’s expected of a board member,” Foster said. “It shouldn’t be that they go to a meeting, sit [and] watch, get paid and leave.”

‘Protecting the Shareholders’

“The SEC intends for the board to play a very active role at least in protecting the interests of the shareholders,” said Carla Hayn, a professor at the University of California at Los Angeles’ Anderson School of Management. Hayn also is a co-coordinator of a board of directors’ education course.

But, Hayn said, the board also should be a sounding board for management in terms of strategy, marketing and other issues.

While directors probably won’t treat the board meeting as a congressional hearing and grill the CEO, directors should have a “healthy skepticism” of management, Hayn said.

The CEO should be able to explain why decisions were made, what alternatives were considered and why those were ruled out, she said.

Lorsch, of Harvard Business School, said that if a board member thinks something illegal or unethical has occurred, he should push for an investigation or try to uncover what’s going on.

“The problem for boards is they don’t often have the means to do that,” Lorsch said. “They’re not the FBI or the Securities & Exchange Commission or the Justice Department. They’re just a bunch of board members.”