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Ropes & Gray recently convened a group of current and prospective members of Boards of Directors to address their role in identifying and properly addressing accounting issues before they have an adverse impact on the company’s revenue and reputation.

The roundtable discussion, moderated by Jane Goldstein, co-Head of Ropes & Gray’s Mergers & Acquisitions practice, included forensic accounting and auditing, operational and regulatory experts: Simon Platt, Chairman of StoneTurn; Carrie Teffner, Executive Vice President and Chief Financial Officer of Crocs, Inc.; and R. Daniel O’Connor, who co-leads the Securities & Futures Enforcement practice at Ropes & Gray.

The panel discussed the following key takeaways:

Conduct Proper Due Diligence: While it may feel awkward to probe too deeply before accepting an invitation to join a company’s board, it is totally appropriate and prudent to ask questions and conduct the proper personal due diligence before committing to the role. “I had a client who joined a board believing certain red flags could be addressed once in the role, and ended up regretting the position immediately,” said Simon. So, before committing several years of your professional life, “try peeling back the layers by asking questions in a way that gets you the answers and signals you need about the company’s culture, transparency and the dynamics in the board room before joining,” added Carrie.

Trust Your Instincts and Challenge the Answers: Red flags are often spotted by instinct as opposed to deep technical analysis. If the numbers don’t look right, or if there is a relationship that is not consistent with your understanding of the company or the industry, ask questions until you have answers that make sense. When reviewing material—especially as a new board member—trust your instincts and challenge the executive group to explain any possible issues or discrepancies and provide more details.

This applies even when reviewing numbers from quarter-to-quarter. The CEO and CFO will be answering analysts’ questions regarding performance and any noticeable financial or operational differences from previous quarters. It is better to identify these things and get to the explanation from the inside rather than deal with the matters in hindsight. According to Dan, you will later be asked, ‘What did you do to follow up?’ You want to be prepared to address those situations when / if they occur.”

Whether you are a financial expert or not, whatever is heard in a board meeting should be clear; if it isn’t, keep asking questions until it is.

Get to Know Key Gatekeepers: One aspect of a board of directors’ role is to evaluate and oversee management. The auditors and outside counsel have important insights into the company, its culture, operations, key risk areas and management. Get a number of views on the most important aspects of the company’s industry, businesses, reporting processes and transactions, for example.

As a general practice, the Audit Committee should have an executive session with the auditors at every quarterly / year-end meeting. Such a meeting provides the opportunity for more candid feedback and views; it is also good practice if there is ever a question around missed signals. There should also be communication in advance of the meeting—with both financial management and the auditors—to make sure the agenda is going to raise and appropriately address key issues arising.

Focus on Culture: Asking the questions and getting to know key people within a number of layers of the organization aren’t merely good practices, but should also open one’s eyes to the culture of the company. Understanding nuances of the company’s culture—i.e., How aggressive is the sales culture? How reasonable is the budgeting process? Are there sufficient resources, so that the controls can be operating and monitored sufficiently?—is critical not only before committing to the board position, but also on an ongoing basis. An M&A deal can be particularly risky—it is the board’s responsibility to oversee due diligence on the ethical and cultural aspects of the target, not just the financial details. Doing so can help uncover hidden legacy issues that may arise later.

“It is especially important to speak to employees below the executive level when acquiring a small company,” said Carrie. “Too often there is the assumption that the deal will be quick because the company is smaller and there’s less risk, so the purchasers are only speaking to company leaders, but you have to do just as much due diligence regardless of company size.”

Be Prepared, Present and Prudent: Taking on a board seat isn’t a boost to your resume; it’s a fiduciary obligation with significant responsibilities. Prepare for and show up for meetings, ask questions, ensure proper documentation, and use your best instincts, knowledge and judgment when choosing how to respond or act. Increasingly, regulators have been sweeping across industry sectors with probes into more than one company and questioning various industry-wide practices. As a board member, it’s as important to be aware of these developments as it is to be at the company and to report anything questionable—internally or externally.

Meet Simon

Simon Platt

Simon Platt

Simon Platt co-founded StoneTurn in 2004 and is Co-Chair of the firm. He previously served as the firm’s Managing Partner until 2016, when he was appointed Chair and in 2022, […]