In Surfside Ruins, Stark Reminders of Board Duties

By Stuart R. Levine

The tragic collapse of a 13-story condominium in the Surfside neighborhood of Miami that claimed the lives of at least 98 people underscores the need for board members to be both reflective and proactive. Bearing witness to tragedy is part of the human experience yet memory dissipates quickly unless, of course, you endure the unforgettable loss of a loved one, are a first responder, or are now among those anxiously living in a multistory building in south Florida.

In the grand scheme of such unthinkable catastrophe the work of a governing board is hardly top of mind, but for those directors serving on nonprofit or condo association boards, the events of June 24 must have been jarring. As a corporate director viewing the circumstances from the outside, I and many of my peers asked ourselves while scanning media coverage for mention of the board, “What if I were on that board?”

Such tragedies rivet our attention. They should also prompt reflection on our responsibilities as board members. Each of us who have the privilege of serving on boards should commit to having frank discussions about risk in light of what we learn from the experiences of others. What may seem unimaginable must be examined as if we were indeed in that board’s shoes: what are our responsibilities, what could we have done differently, and how could we have protected ourselves from risk?

RESPONSIBILITY AND WHAT-IFS

Reflecting on the Surfside tragedy and applying that to governance more generally on each of our own boards, let’s be thoughtful about the responsibilities we owe to the stakeholders we serve. The board should regularly and constructively engage in intelligent and forthright conversations on what-if scenarios, confronting the most egregious physical, intellectual, and human failures possible.

There are many reasons that businesspeople decide to serve on boards. There is social and community recognition, linkage to the organization’s mission, association with other accomplished individuals, intellectual stimulation, and money. The responsibility of serving on a board today, however, is filled with significantly greater personal and professional risk than in the past. The Surfside tragedy is a grim reminder of those risks—and the likely and severe consequences of inadequate risk oversight for board members and their families. The scope of the Surfside tragedy raises immediate questions about what could have been done to prevent it. Legal proceedings have predictably already begun and it will take time for investigators and the courts to sort out the culpability of the parties.

Our next job as members of the director community is to try to distill lessons from what happened and why.

RECOMMENDED ACTION STEPS

Clear-eyed assessments of the risks associated with board service are critical. Being able to exercise independent judgement when your opinions and reasoning are recorded in board meeting minutes is particularly essential. But before even joining a board, make sure you understand and can commit the time required to participate in conversations in board meetings, and learn whether the board’s culture is one that reflects common sense and your values.

In addition, there are several constructive steps to undertake before agreeing to be a candidate for board election. Meet with management and review the annual management letter that affirms financial performance that has been certified by an independent auditing firm. Inquire if the board has retained independent advisory firms on issues ranging from financial performance to cybersecurity to technology to legal and regulatory matters, as well as people and cultural issues. Ask whether their findings are provided to the board in a transparent way.

Anticipating governance issues begins with an understanding of structures and expectations. A good practice is to establish a protocol for the circulation of board minutes within 72 hours of a meeting. This provides an opportunity for directors to comment while the conversations are still fresh in their minds. This is also the time to ensure that material conversations were recorded and accurately reflect expressions of independent judgement. The directors of the Surfside condominium association have already been subjected to litigation. The board minutes will provide insights into their conversations regarding the issues that ultimately caused the building to collapse.

Unfortunately, taking and distributing meeting minutes on some boards is viewed as a check-the-box exercise. For example, one financial institution provides the board minutes on a monthly basis when they send out a new board agenda. They are included in that entity’s consent calendar, which discourages comments and assumes that the minutes are accurate and do not require review.

To view the production and affirmation of minutes as a pro forma exercise is a significant mistake that could expose directors to poor or inadequate decision-making and unnecessary liability.

INDEMNIFICATION VS. INSURANCE

It’s also important to review the difference between indemnification and directors and officers (D&O) insurance. If you are being recruited to serve on a board, don’t accept indemnification as enough to protect you when things go wrong. D&O policies provide critical opportunities for the providers to pay and support legal defenses for board members. Directors must have a clear understanding of their policies, its exclusions, and whether there is adequate coverage. In an artificial intelligence-driven world, accurate data becomes incredibly important in D&O policy negotiations. Insurance carriers who underwrite these important policies for your organization now have access to predictive and prescriptive analytics. When you renew your policies, do not be afraid to ask how the basis for the premiums being charged are determined, which may provide you with new insights into risks associated with your industry or company. This data can provide both economic and structural perspectives, so consider adding the information to your enterprise risk management heat map or dashboard.

DUTIES AND ACTIVE OVERSIGHT

A landmark case in 1996 clarified the board’s duties in relation to its oversight activities. The shareholders of Caremark International claimed that the failure of the board to put adequate internal control systems in place allowed employees to commit criminal offenses. The Caremark decision established, in essence, that the board had an obligation to assure itself in good faith that the corporation had a system of internal reporting and compliance controls to monitor for illegal activities. Boards must ensure that reasonable information is reported to them and there is active board oversight. They also need to be responsible for prioritizing risks and documenting their focus on them, as previously noted.

Additionally, the roles of the full board and standing committees as well as the information flow between the two need to be established. “The focus of the board’s agenda sharpens when a matter affecting public health and safety is raised in the boardroom,” says Joe Tarantino, president and CEO of Protiviti, “requiring directors to exercise oversight and monitor the matter to its conclusion through a reasonable information and reporting system. This includes establishing protocols by which the board is to be advised by management as to the progress of the organization’s response on a timely basis.”

Risk oversight modeling needs to become a regular board agenda item. While we don’t have information as to what the Surfside board did or did not do, and may never have that insight, it’s a good reminder for all directors that mission-critical risk matters need to be shared and communicated regularly from mangement to the board and discussed in a robust fashion. This also underscores the importance of creating a culture of trust between the board and management. Emerging problems that are not dealt with in an open and timely way heighten risk.

The reaffirmation of a culture of trust begins with an independent assessment and review of the board’s functionality and effectiveness. Are the board committees populated with independent directors who are current in their knowledge and prepared? There should be a review of the standards for service on every board. This must include discussions on succession planning, committee charters, board assessments, and the development of criteria for board members with regard to their duty of care and duty of loyalty.

Lastly, it’s critical to annually assess whether board members are appropriately focused on the mission and purpose of the organization and stakeholders are being served. These issues should not become self-righteous conversations. Let’s learn from the Surfside tragedy, and in our duties as board directors immediately review questions raised by the disaster. We can honor the victims by becoming better board members who understand our responsibilities and act decisively—that is what is needed now.

 

Stuart R. Levine is chair and CEO of Stuart Levine & Associates. This Viewpoint was originally published for www.NACDonline.org