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Paredes on the Role of Directors

Last week, SEC Commissioner Troy A. Paredes delivered an address before the Transatlantic Corporate Governance Dialogue in Brussels on, among other things, the role of boards of directors in corporate decision making.  Though much of his speech focused on the corporate governance provisions in the Dodd-Frank Act, Paredes did spend some time discussing what makes a board effective.  Setting aside the more obvious factors in assessing board effectiveness, like composition, structure, independence, and individual director skills and qualifications, Paredes asserted that what matters most is how directors act.  The active engagement of directors is key to meaningful deliberations and effective decision-making.

In acting as a body, the promise is that boards will draw on the distinct perspectives, experiences, sensibilities, and expertise that different directors offer. The expectation is that as the group works through a range of ideas and arguments, the decision that is made will be better as a result of the directors’ collective efforts. As decision making improves, so should the company’s competitiveness and its ultimate performance.
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Decision making should improve when directors — whether interacting with each other or with management — engage in open and frank discussions, even if it means being critical. When assessing some course of action, directors should ask probing questions and follow-ups of each other and of management; should challenge key assumptions; should offer competing analyses; and should develop competing options to ensure that alternatives are considered and not cast aside too readily.

In other words, directors should be willing to challenge and dissent. 

. . . directors should be willing to dissent, and disagreement from others should not be discouraged or suppressed. When it leads people to engage rigorously, disagreement helps ensure that the unknown is identified, that potential conflicts are spotted, that information is uncovered, that biases are managed, and that challenges and opportunities are assessed in a more balanced way.

Paredes cautions, however, that this willingness to challenge "should not give way to hostility," as a collegial working relationship with management has great value as well, and augments a board's ability to inquire and oversee. 

Distrust and disharmony can threaten an enterprise; boards need collegiality and cooperation and a well-functioning relationship with management. Dissent will be most constructive, then, when conflicting viewpoints and pointed resistance do not trigger defensiveness, but instead are encouraged as catalyzing better decisions that benefit the corporation and its stakeholders.

It is notable that Commissioner Paredes spoke on what he sees as the board's role, given that Chairman Mary Schapiro and Commissioners Aquilar and Walter  have recently done so as well.  These statements may be seen as a sign that the Commission remains focused on the role of boards, both with respect to, and outside of, the Dodd-Frank legislative requirements. 

Commissioner Paredes' address is available at:  http://www.sec.gov/news/speech/2010/spch102510tap.htm