Board Games

Scared your board may be up to no good? Take a hard look at who's serving on it.
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This story appears in the February 2003 issue of Entrepreneur. Subscribe »

Can you tell how likely your board is to commit fraud just by looking at it? Not really, but an analysis by a Canadian researcher found that the boards of businesses prosecuted for financial fraud share some characteristics. Comparing 113 convicted companies with 113 with a clean record, Paul Dunn, assistant professor of accounting at Ontario's Brock University, noticed corrupt companies were more likely to have large, all-male boards serving short tenures.

These qualities may contribute to a board culture where power is concentrated in the hands of a few directors, usually members of senior management. In the case of short tenures, Dunn says, "it could be that senior management doesn't let directors stay long enough to control decision-making."

Considering the other findings, Dunn is most surprised by the impact of gender. "One explanation is that firms that would never commit fraud are more likely to promote women to the board," he adds. "Or it may mean women are more ethical than men."

Dunn's data suggests the obvious route to financial forthrightness is a smaller, diverse board whose members can make a lengthy commitment. Roger M. Kenny, co-author with Ram Charan of e-Board Strategies and managing partner of Boardroom Consultants in New York City, says building effective boards also means choosing directors based on practical needs. The best directors, Kenny says, have proven skills in operations, marketing, research and development and can coach rather than control. A director with an expansive network of business contacts doesn't hurt either. "Just as long," says Kenny, "as they're not getting any kickbacks."

Edition: July 2017

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