Chapter 4 - Governance Structure - In-Depth PDF

# Chapter 4: Governance Structure - In-Depth ## Governance Structure - In-Depth This chapter discusses concepts in governance structure, including the roles and responsibilities of the parties in governance. The role of the auditor in governance, the role of ethics in governance and the role of reg...

# Chapter 4: Governance Structure - In-Depth ## Governance Structure - In-Depth This chapter discusses concepts in governance structure, including the roles and responsibilities of the parties in governance. The role of the auditor in governance, the role of ethics in governance and the role of regulatory bodies in the governance of an organization are included. ### This chapter is a continuation of the **Governance Structure - Overview** chapter. ### Lessons: - Lesson 1: Governance Structure, Compliance, and Ethics - Lesson 2: Governance Structure - In-Depth - Summary Problem ## Elements of Governance Structure - **Fundamental Governance Structure** - Shareholders - Board of Directors - Sub-Committees - Chief Executive Officer/Executive Director - Other Executive Management - Staff - **Other stakeholders** ### Members of Executive Management - **Chief Executive Officer (CEO)** - Responsible for the operations of the entire company - Reports to the board of directors - **Chief Financial Officer (CFO)** - Responsible for reporting financial results, analyzing financial information and preparing and monitoring budgets - Reports to the CEO - **Chief Operations Officer (COO)** - Responsible for overseeing the sales, production, marketing, and human resource functions. - Reports to the CEO - **Chief Information Officer (CIO)** - Responsible for overseeing the technology that is required to run the organization - Reports to the CEO - **Chief Audit Executive (CAE)** - Responsible for the internal audit function - Reports to the audit committee of the board, with an administrative reporting line to another executive, usually the CEO, or CFO ## 4.1 Governance Structure A few key facets of governance are: - Effectively setting the strategic direction of the organization - Ensuring that the organization is fulfilling its responsibilities to the primary stakeholders - Identifying ways to ensure that strategic decisions are made in a timely and effective manner - Implementing the controls required to ensure that the organization acts in an ethical legal and transparent manner in the best interests of its shareholders and other stakeholders - Facilitating orderly communication and cooperation between the organization's owners (such as shareholders in a corporation or members in a not-for-profit organization) and its top-level managers, and between top-level managers and all employees ### 4.1.1 Shareholders Shareholders of private companies buy shares directly from other shareholders or receive shares that are issued by the company as a means of raising capital. Shareholders of public companies buy shares through the capital market or through issuance during an initial public offering (IPO). In order for shareholders to participate in the corporate governance system, their shares must have voting rights attached. The shareholders' rights as they relate to corporate governance are as follows: - Participating and voting at the shareholders' meeting - Nominating and electing directors to the board - Receiving copies of the financial statements - Approving the organization's bylaws and any changes to bylaws - Approving the appointment of the external auditor of the corporation (or waving the requirement for an audit) - Approving major or fundamental changes including: changes that have an impact on the corporation's legal structure; the divestiture of the business; or the acquisition of another business using the company's own shares as consideration when there are significant dilution implications for existing shareholders. The matters of business typically occur at shareholder meetings and only voting shareholders are invited. Shareholder meetings are typically held annually, although special meetings can be called to deal with matters contemplated in the final bullet item of the above list. ### 4.1.2 Board of Directors Because of the decision-making limitations of a large owner base, as noted above, the owners elect or appoint a team of individuals to direct and control the organization's operations on their behalf. That team is the board of directors. The Directors hire the chief executive officer (CEO), who in turn hires the other executive management and staff to run the organization on a day-to-day basis. Normally, the only employee who reports directly to the board is the CEO. Note that in a not-for-profit organization (NPO), the board of directors is often called the board of governors. In addition, an NPO often has an executive director instead of a CEO. In this chapter, "director", "board", and "board of directors" refer to those charged with governance in any organization, and "the CEO" refers to the person who runs the day-to-operations. In accordance with the Canadian Securities Administrator's National Policy 58-201 - Corporate Governance Guidelines, the responsibilities for the board of directors of a publicly traded company are as follows: - Adopting a strategic planning process and, at least annually, approving the strategic plan - Identifying the principal risks with an impact on the organization and oversight of the company's risk management activities - Monitoring the organization's controls and information systems - Developing the company's corporate governance approach - Developing the roles and responsibilities for the chairperson, the board, subcommittees of the board, and the CEO - Appointing the CEO and ensuring succession planning - Assessing executive management's performance and compensation - Assessing executive management's tone at the top to ensure that this group creates a culture of integrity - Adopting a written business code of conduct that is applicable to everyone in the organization and monitoring compliance with the code - Adopting a communication policy for the organization Other best practices of board responsibilities include: - Overseeing the execution of the company's strategic plan - Monitoring the company's financial performance - Determining and monitoring a company's resources, products, and services - Assessing the board, its committees and each individual director's performance on a regular basis - Ensuring that board composition consists of a majority of independent directors - Ensuring that the board chair is an independent director - Holding independent directors' meetings regularly (excluding non-independent directors) Board members, or 'directors', must have certain qualities to effectively carry out their responsibilities. The first is that they should understand their responsibilities within a system of corporate governance. It can be helpful if they already have experience in the industry of the organization, but this is not a requirement to serve as a director. The second skill that board members must possess is the willingness to challenge management's decisions. If board members are complacent or are influenced - perhaps because a member of executive management is on their board - they are not carrying out their responsibilities of oversight; therefore allowing for poor decision-making or mismanagement of organizational resources. Board members must also have a duty of care, which means that they will exercise the same care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Board members are also expected to have a duty of loyalty, which means that they put the organization's interests ahead of their own in all situations. There are no specific rules or regulatory requirements regarding the maximum number of board members that an organization should have. In practice, board membership ranges from three to 30 directors. The factors to consider in determining the number of directors are the objectives of the organization. A small private business could benefit from a small number of board members to assist executive management in making better decisions. An NPO could benefit from having a larger number of directors, as having more directors facilitates fundraising initiatives. It is beneficial to have an odd number of board members so that board votes cannot end in a tie. In order for the board to run effectively, the directors should elect a chairperson, who is commonly referred to as the "chair". The chair's role is to provide leadership, and that person's responsibilities include: - Calling meetings of the board and setting the agenda for the meeting - Ensuring that board meetings are efficient - Ensuring that the board is following the bylaws or any other procedural regulations - Meeting regularly with the CEO to adjudicate matters that should be brought to the board for discussion Serving on a board of directors is usually not a full-time position. The role of a director is to prepare for and attend regular board meetings and board committee meetings, as necessary, and to otherwise fulfill the oversight duties as agreed with the organization and as required by law. Directors may be volunteers, or they may receive compensation for their contributions. Some board members will take on additional duties, such as chairing board committees, and if they are compensated for their time, may receive additional compensation for doing so. ### 4.1.3 Subcommittees of the Board of Directors In order to assist the board of directors, board committees are formed to address specific tasks or duties that fall under the board's general purview. Generally, board committees are not legally required unless the organization is a public company. If the organization is a private company or an NPO, committees are formed at the discretion of the board. These committees can be either standing committees appointed to monitor specific ongoing board functions or ad hoc - task-oriented and usually disbanded once the specific task has been completed. The following are some examples of common committees and their mandate (note that the list is neither exhaustive nor required). In smaller organizations, some committees can be combined with others: - Nominating committee: This committee evaluates the board's size and effectiveness. It recommends new members for election and members that should be removed. - Compensation committee: This committee evaluates the performance of the CEO or executive director and makes recommendations to the board regarding the CEO's (and potentially senior management's) compensation. In addition, this committee monitors the organization's share compensation plans. - Risk committee: This committee oversees how risk is managed within the organization, sets the organization's risk framework and risk appetite, and monitors management's risk activities. - Finance committee: This committee oversees the financial and budgeting functions for the organization. Depending on the size and composition of an organization, this committee can be combined with or separated from the audit committee. - Audit committee: This committee makes recommendations to the board with respect to appointing external auditors and oversees the auditors' work. The appointment of auditors is ultimately approved (or not) by shareholders or members at the organization's annual general meeting. It is critical that the members of this committee, more than any other, are independent from management. The role of the audit committee is also discussed in the Governance Structure - Overview chapter. Further reading on the responsibilities of an audit committee can be found in the Ontario Securities Commission Multilateral Instrument 52-110 (note that in British Columbia, this is referred to as National Instrument 52-110). Subcommittees only review and recommend items for approval to the board. ### 4.1.4 Executive Management In an organization, the positions that are commonly referred to as executive management include, but are not limited to, the following: - Chief Executive Officer (CEO) - Responsible for the operations of the entire company - Reports to the board of directors - Chief Financial Officer (CFO) - Responsible for reporting financial results, analyzing financial information, and preparing and monitoring budgets - Reports to the CEO - Chief Operations Officer (COO) - Responsible for overseeing the sales, production, marketing, and human resource functions - Reports to the CEO - Chief Information Officer (CIO) - Responsible for overseeing the technology that is required to run the organization - Reports to the CEO - Chief Audit Executive (CAE) - Responsible for the internal audit function - Reports to the audit committee of the board, with an administrative reporting line to another executive, usually the CEO or CFO As it relates to corporate governance, executive management is responsible for the following: - Implementing the decisions made by the board of directors - Executing the board-approved strategic plan - Overseeing the enterprise-wide operations - Meeting regularly with the board of directors to allow for appropriate oversight by the board - Providing timely and accurate information to the board to allow for better decision-making - Creating a culture of integrity within the organization to encourage ethical behaviour - Providing an assessment of policies, procedures, and controls to the board - Implementing, understanding, assessing, mitigating, and monitoring the risks that have an impact on the organization and its strategic objectives - Implementing and reviewing the risk management policies and practices with the board to ensure that they remain appropriate and effective in light of changing circumstances and risks It is critical to understand the distinction between the responsibilities of the board and executive management. The board is responsible for direction setting and general oversight of management and the operations. Executive management is accountable for implementing the board's decisions, and is responsible for directing the operations. ### Executive Management Incentives Incentives refer to the motivational mechanisms used to ensure that staff's behaviour is aligned with the interests of the organization. Controls in the form of incentives are used to align the interests of executive management and shareholders. Incentives are also used to align the interests of the board of directors and shareholders. Internal incentives traditionally involve the design and implementation of executive compensation packages that attempt to align the goals of the executives with those of the shareholders as closely as possible. These packages offer pay-for-performance salaries, bonus strategies, executive stock options, or a combination of these. Determining the compensation package for the CEO and approving all executive management compensation plans is a key function of the board. ### 4.1.5 Other Stakeholders Other stakeholders include individuals, groups, and non-human entities with an interest in the organization or who can be affected by the organization's actions. These include customers and suppliers, special interest groups, employees, creditors, governments, and members of the public in communities where the organization operates. Non-human entities that can also be considered as stakeholders include the natural environment and wildlife. These stakeholders can end up being a central consideration in the organization, particularly in the sustainability paradigm (for example, meeting compliance or regulatory standards, meeting customer expectations, engaging customers across value chain activities, or managing networks of suppliers). Non-human stakeholders, while identified as "other" can be the main interest of the organization (for example, the Royal Society for the Protection of Birds is a very large NPO in Europe that has wildlife and nature as its main stakeholders). An important stakeholder in Canada is the community of Indigenous peoples. The term "Indigenous peoples" is a collective name for the original peoples of North America and their descendants, who have unique histories, languages, cultural practices, and spiritual beliefs. Accordingly, Indigenous peoples and the perspective they bring to an issue place this group as a key strategic stakeholder in corporate and government relations. ## 4.2 Auditor Role in Governance Auditors can either be internal or external to an organization. Each has a different objective to fulfill and should be looked at separately. It is not sufficient to refer to them as an "auditor" without specifying whether they are internal or external to the organization. ### 4.2.1 Internal Auditor Internal auditors are responsible for overseeing their company's operational and financial accounting. Their duties include ensuring the appropriateness of record keeping and to monitor and improve the internal control system. Internal auditors can also perform fraud audits to identify and quantify fraud, then provide controls to ensure that the fraud has stopped and will not reoccur. Organizations are not required to have an internal auditor or internal audit department. An advantage of having an internal audit department is that it is a part of the internal control system, which helps to prevent fraud in an organization and increases effectiveness. This provides stakeholders with an increased amount of confidence. Internal auditors are not involved in performing the day-to-day operations of a company. Rather, the internal auditing department is often led by an executive who reports directly to the audit committee. This reporting structure promotes independence, as internal auditors do not find their jobs in jeopardy if they uncover management wrongdoing, fraud, or material errors. ### 4.2.2 External Auditor An external auditor is a CPA from outside the organization and works or consults for a public accounting firm. In accordance with specific laws and regulations, external auditors can perform audits of financial or non-financial statement information. An external audit can contribute to the governance of an organization by providing independent analysis that is separate from management of the financial statements or other information that is under audit. The request for an audit lends comfort to shareholders and to those charged with governance that the information relied upon is reasonable. ## 4.3 Boards of Directors - Challenges and Solutions While having a board of directors has historically been viewed as an effective solution to the principal-agent problem presented by the separation of ownership and control, the approach is not perfect. As corporate structures and shareholding become increasingly complex, the selection of appropriate directors has become more challenging. ### 4.3.1 Board Selection The nominating committee is responsible for recommending potential board candidates for the shareholders, members, or other owners to elect or appoint. In choosing a slate of directors to recommend, the committee tries to ensure that a broad range of perspectives and skill sets are included so that all stakeholder needs can be adequately considered. For corporate boards, some shareholders, such as majority shareholders, are heavily involved in board selection, while others are not. In some situations, significant shareholders or creditors can even have the ability to appoint one or more directors at their sole discretion. These nominee directors are expected to represent the entity appointing them, while at the same time, they are still legally obligated to act in the best interest of the organization. These situations, in which certain shareholders have significant influence over the directors, can lead to governance challenges if the directors are biased and do not adequately consider other shareholder and stakeholder needs when making decisions. Placing limits on the length of time directors can serve and staggering terms for members are considered healthy approaches for board succession. An example of staggering terms with a board of 12 members would be to retire four members while bringing on four new members. In the past, directors were usually re-elected if they wished to continue in the director's role. In today's environment, boards are more concerned with the need to refresh board membership and to recruit members with the required training and experience to round out the organization's inventory of board member skills. The infusion of new board members helps to avoid complacency and to promote new ideas. On the other hand, board member continuity is also valuable due to the knowledge gained, built-up trust, and the leadership contributions of seasoned directors who can provide a measure of stability and guidance. Boards also have a role in the organization's commitment to diversity. Board selection processes should adhere to practices regarding the consideration and promotion of diversity. As indicated above, the board can specify term limits to provide new directorship opportunities. The organization could then look outside its traditional networks when searching for new director candidates to ensure the best possible talent in diverse categories. A balance of board continuity and renewal is important, even if difficult to achieve. Publicly disclosing the board mandate (or charter), the matrix of board member attributes, and board recruitment practices is considered best practice for a company, as it demonstrates how the board provides a basis for good corporate governance. ## 4.4 Government Oversight and Regulation In addition to the internal monitoring discussed above, organizations are subject to external monitoring in the form of oversight and regulation imposed by various levels of government. The Canada Revenue Agency (CRA) and the provincial securities commissions and exchanges establish and enforce corporate reporting requirements for the purposes of taxation and public disclosure. Government oversight and regulation applies to both the not-for-profit and corporate sectors. NPOs are not designed to generate profits and do not have an ownership structure of shares and shareholders. As such, the regulations and reporting requirements differ for NPOs, but they are no less important for the governance of these organizations. The CRA has very specific reporting requirements for registered charities and NPOs and is vigilant in monitoring the activities of these entities. For example, the CRA can look at NPOs to see if their activities, such as renting space out to others in a building they own, are profit oriented. If the CRA determines an NPO is operating more for profit, the organization's tax-exempt status could change, and the organization could have to start paying corporate taxes. Regardless of the type of organization, it is the responsibility of the board of directors to ensure compliance with all applicable legal requirements. Penalties for not doing so can be severe. For example, directors can be found personally liable if their organization does not withhold and remit adequate payroll taxes. ### 4.4.1 Sarbanes-Oxley Act One of the most influential pieces of legislation in recent decades is the 2002 Public Company Accounting Reform and Investor Protection Act, otherwise known as the Sarbanes-Oxley Act (SOX). This act was brought into U.S. law in response to a number of high-profile accounting scandals. SOX applies to companies that trade publicly on U.S. stock exchanges. The following are the major aspects of this act: | Part | Description | |---|---| | Public Company Accounting Oversight Board | Improves the accuracy and quality of audit reporting by providing oversight of the auditing of publicly traded corporations. | | Auditor Independence | A public company cannot retain the same public accounting firm for both audit and consulting assignments. | | Corporate Responsibility | The audit committee must be independent of management and is responsible for recommending and overseeing the auditors. Corporations are required to change audit firms after a certain period of time. Corporations are restricted from hiring an audit firm if any of their senior executives were employed there during the preceding year. | | Enhanced Financial Disclosures | The CEO and CFO must certify the accuracy of the financial statements and must fulfill their responsibilities to provide internal controls. Requires additional financial and reporting disclosures. | | U.S. Securities and Exchange Commission Resources and Authority (SEC) | Increases the US. SEC's authority and access to resources in order to execute its mandate to oversee and regulate the securities industry. | Signed into law in 2002, SOX has transformed public accounting and continues to be relevant today and will be into the future. SOX has also helped to create a cultural shift that has served to improve the professionalism of accounting and audit practices. While SOX does have its downsides - most notably the substantial financial burden of compliance - the positive aspects of this legislation far outweigh the negative. ### 4.4.2 Canadian Securities Administrators (CSA) National Instruments The Sarbanes-Oxley Act applies only to entities that trade on U.S. stock exchanges, but many of the main provisions have been adopted in Canada. In Canada, the provincial and territorial securities commissions are responsible for securities regulations and their enforcement. The CSA works at the national level to coordinate provincial and territorial harmonization and facilitate a number of regulations, called national instruments and national policies. The national instruments also provide rules and regulations that are related to governance. Some of the main governance recommendations and requirements for publicly traded Canadian entities (such as public companies, income trusts and limited liability partnerships that list securities on the markets) are summarized below: | CSA Document | Recommendations | |---|---| | National Policy 58-201: Corporate Governance Guidelines | - The board should be composed of a majority of independent (that is, having no direct or indirect material relationship with the company) directors. - The board chair should be an independent director (if not, the board should appoint a lead independent director to avoid independence issues). - The independent directors should meet regularly without the non-independent directors to ensure that the non-independent directors do not have undue influence over the board discussions and decisions. -The board should adopt a written mandate that sets out its responsibilities and a written code of conduct and ethics. - Board members should be properly trained and regularly assessed (individually and collectively). | | National Instrument 58-101: Disclosure of Corporate Governance Practices| - The board must compare its organization's frameworks against the recommended practices contained in the National Policy 58-101. - CSAs use a "comply or explain" structure in which harmonized provincial regulation requires disclosure of governance practices. Companies failing to comply or explain are in violation of securities regulation with respect to governance disclosure. - Most jurisdictions have adopted an amendment to this national instrument that requires additional disclosure regarding gender diversity policies and director term limits or other mechanisms of board renewal. | | National Instrument 52-110: Audit Committees | -- The board must implement an audit committee comprising at least three independent and financially literate directors. Financial literacy is the ability to understand financial statements at the level of complexity that would reasonably be expected for the company. - The audit committee responsibilities include the following: - Recommending to the board the external auditor and the external auditor's compensation - Overseeing the external auditor's work - Resolving differences in opinion between the auditor and management - Pre-approving all non-audit services (such as tax compliance work) for which the external auditor is engaged to ensure that independence rules are followed as applicable, and any related risks are mitigated - Reviewing the organization's financial statements and other financial disclosures before they are made available to the public. | | National Instrument 51-102: Continuous Disclosure Obligations | Public companies that are "reporting issuers" must regularly provide the public with certain prescribed disclosure about their activities and financial status. This obligation is referred to as "continuous disclosure obligations." This will include the preparation and filing of the following: - Financial statements (both interim and year-end) - Management's discussion and analysis (MD&A) - Annual information forms - Material change reports - Information circulars, proxies, and proxy solicitation and certain other continuous disclosure-related matters | These regulations guide public companies of all sizes that are trading on Canadian exchanges, including the largest public Canadian companies such as CN Rail, BCE, and the major national banks. Certain organizations such as smaller venture companies or investment funds can be exempt from certain requirements. ## 4.5 Ethics and Good Governance ### 4.5.1 Professional Codes of Conduct CPA Canada's Code of Professional Conduct requires professional accountants, students, and candidates, whether internal or external, to effectively manage situations involving ethical dilemmas. A strong sense of independence and autonomy are characteristics of the accounting profession along with the requirement to put the integrity of one's profession first, over and above the interest of one's employer, when faced with an ethical conflict. Accountants recognize their duties as twofold: a duty to the public interest and a duty to the profession. This is manifested by making the public interest the first priority, followed by the duty to refrain from any activity that brings the profession into ill repute. As such, when there is a conflict of interest between duty to the profession and to the interests of an employer or client, or between duty to the profession and to the personal interests of the individual accountant, the professional duty to protect the public interest clearly takes precedence. ### 4.5.2 Corporate (or Organizational) Codes of Conduct A corporate code of ethics is a statement establishing the organization's ethical values and principles. Codes are designed to govern behaviours to ensure alignment with the corporate values and principles. Companies sometimes favour strict codes of conduct to reduce the necessity for judgment and the stress of ambiguity in ethical decision-making. More principles-based codes work well in judgment-heavy environments (for example, when company operations dramatically affect local communities, traditional territorial rights, or social mandates in the not-for-profit sector). Although slightly different, the terms code of conduct and code of ethics are used interchangeably in practice. Adherence to a code of ethics can help an organization avoid a number of undesirable effects in the marketplace. If consumers perceive a corporation to have a poor ethical reputation, they can simply refuse the products and services offered by that corporation. The market is quite often much more effective in influencing ethical behaviours than any regulatory body. Consider the case of Centerplate, a company that provides food services to entertainment and sports venues in the United States, Canada, and the United Kingdom. Centerplate's CEO was caught kicking a young dog on a hotel elevator video. The video went viral, resulting in an online petition with more than 150,000 signatures demanding that the CEO be fired and a public outcry that urged event-goers to boycott food venues catered by the company. The board imposed requirements for the CEO to attend anger management training, to donate $100,000 to establish a new foundation, and to donate 1,000 hours of his time to animal welfare groups. But the public was not appeased, and the company ultimately fired the CEO, recognizing that a significant portion of an organization's reputation depends on the CEO's reputation. ### 4.5.3 The Role of Corporate Codes of Conduct and Ethical Values in Corporate Governance Establishing and maintaining corporate codes of conduct and ethics provides occasion for a company to reason through, articulate, and formalize its governing values and objectives. The process of developing a code of ethics is often just as important as the final result. Engaging in the process can reveal internally accepted practices that the organization would not wish to publicly acknowledge and that, upon reflection, would best be discontinued or changed in order to influence and develop the organizational culture in ways that are more productive, responsible, and transparent. Formulating a code of ethics should also initiate a monitoring and reform process. The established code can be used to measure the organization's success in mitigating emerging ethical problems and challenges. The code should be updated periodically to incorporate mitigation advice for emerging issues and to keep the code current and relevant. As an essential element of corporate governance, the process of establishing and maintaining a code of ethics must be viewed as both the initial step in the renewal of an organization and the object of continuous review. ### 4.5.4 Corporate Governance and Harmful Conflicts of Interest A member of a board of directors could serve on another board or work for a corporation with conflicting interests in a given situation or transaction. In most cases, mechanisms are in place to deal with these conflicts of interest when they arise. From a governance perspective, it is important for conflicts of interest to be recognized and declared and for any undue influences presented by these conflicts to be removed from the decision-making process. ## Lesson 2: Governance Structure - In-Depth - Summary Problem ### Technical Competencies - 2.1.1 Evaluates the entity's governance structure (policies, processes, codes) - 2.1.2 Evaluates the specific role of the audit committee in governance - 2.1.3 Evaluates mechanisms used for compliance purposes ### Learning Outcome - Examine an organization's governance structure and recommend good governance practices. ## Summary Problem Amir Lavigne is the newly appointed CEO for the Lowlands Park Community Association (Lowlands), an NPO. After two months on the job, Lowlands' board chairperson (chair) resigned and Amir was appointed as the new chair. Previous to taking his role at Lowlands, Amir was the COO at High Stream Corp. (High) for 20 years. High engaged Black and Smith, Chartered Professional Accountants, to perform High's annual audits. Britney Black, a partner at Black and Smith, sent the following email: > Amir, a long-time client and friend, has sent me his notes that he made after his second Lowlands board of directors meeting. This was Amir's first meeting as chair. Here are Amir's notes: > > - Lowlands' board of directors currently has 10 directors, including me. Each director represents a neighbourhood within the Lowlands Park Community District. Whenever a director moves or leaves their appointment, they are replaced with a new member from the same neighbourhood. > - Before she left, the former board chair mentioned that whenever there is a special project board meeting, whether it is a fundraiser or meeting to discuss bylaw infractions, the entire board is required to meet. Often, some board members sit in silence and do not participate, particularly if they are not going to participate in the fundraiser or their neighborhood is unaffected by the violations of the bylaws. Overall, our board is great, with each member contributing in their own way, but these large meetings can be a drain. > - I recently saw the agenda for next month's meeting. Included is an item to discuss the compensation for senior executives. In accepting the role as Lowlands' CEO, I was taking a 20% pay cut and am looking forward to raising this matter at next month's meeting. > >> Please respond to Amir and advise him of the strengths and weaknesses of Lowlands' current governance structure. > > Regards, >> B. Black ### Required Prepare a memo for Amir addressing Lowlands' strengths and weaknesses. For each strength, clearly explain why it is a strength. For each weakness, clearly state why it is a weakness. ### Solution **TO:** Amir Lavigne **FROM:** CPA candidate, Black and Smith, Chartered Professional Accountants **RE:** Lowlands governance structure Please see below for my discussion of Lowlands' governance structure: **Strengths:** - Lowlands currently has 10 directors. Considering the objectives of Lowlands to manage the community association where each of the 10 directors represents a different neighbourhood, this is an appropriate number and mix of directors. A reasonable number of directors is anywhere between three and 30, and this is well within that standard. This parameter ensures enough people to make a decision, but not too many that nothing gets done. - Board members must have certain qualities to carry out their responsibilities, including experience in the industry of the organization. With Lowlands, each director is required to live in a neighborhood serviced by Lowlands and is replaced by a member of that same neighborhood whenever there is a vacancy. This way, each of the neighborhoods is represented in community decisions. If the residents have an issue, they have a direct line to the person representing their particular neighborhood. **Weaknesses:** - Currently, all board members are required to attend every meeting. At some meetings, such as fundraisers, not all board members participate. This could have a negative impact on the morale of the other directors and result in Lowlands not moving toward the successful execution of its strategic objectives. - **Recommendation:** Create subcommittees for different community initiatives. For example, consider creating a fundraising committee and a bylaws committee. By creating sub-groups for your board of directors, you ensure that everyone who attends these meetings is vested in that initiative and helps to execute Lowlands' strategic objectives for that initiative. - You are currently the CEO and chair. It is a director's role to effectively carry out the board's responsibilities, which includes overseeing management. If you are management, that could pose a conflict of interest as it would be difficult for you to remain impartial when discussing matters at board meetings that pertain to matters specific to your role as the CEO, such as compensation. Your role as chair could influence other directors to not act in the best interest of the board and Lowlands' stakeholders for fear of repercussions by you in your role as the chair. - **Recommendation:** I recommend that you look to find a replacement for yourself on the board, or at least the board chair. In the meantime, recuse yourself from all decisions with which you could have an actual or perceived conflict of interest to ensure that the board is representing its members appropriately.