The boardroom is also beginning
to feel like a fire station, where directors wait tensely to react to the next alarm. Where boards traditionally had a member with a strong financial or accounting background serve on an audit committee, or a lawyer keeping tabs on legal issues, more problems are cutting across these lines and putting greater responsibility on all of the directors.
This can prove impossible in companies offering specialized products or services. Martin D. Payson, who was on the board of Warner Communications for almost 20 years and was vice chairman of the board of Time Warner, also served on the board of AVX, an electronics company in Myrtle Beach, S.C. “Once I was asked to consider
the problems with ceramic capacitors,” Payson recalls. “I could not understand the product. I’m a lawyer and trained to spot issues, but I did not understand the product at first. Fortunately, others on the board did.”
A survey in 2002 by McKinsey & Co. and the newsletter Directorship found that 36 percent of participating directors felt they did not fully understand the major risks their businesses faced. An additional 24 percent said their processes for overseeing risk management were ineffective. Nineteen percent said their boards had no processes.
What is Enough?
Calculating calamities comes at a price. “Assuming you are dealing with products that are not potentially lethal, it could still cost you a bloody fortune to protect yourself,” says Robin L. Farkas of Jackson Hole, Wyo., a veteran venture capitalist and director. Farkas was once chairman of the now-defunct Alexander’s department store chain in New York. (One of its most serious problems was shoplifting; after hiring a security force, it made 16,000 arrests a year.) These days Farkas spends several hours before every board meeting studying a briefing book provided by management.
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