Present at the Creation: Reflections on the Early Years of the NACD

Lawrence J. Trautman is Assistant Professor of Business Law and Ethics at Western Carolina University and  a past president of the New York and Metropolitan Washington/Baltimore Chapters of the National Association of Corporate Directors. This post is based on a recent paper authored by Mr. Trautman.

Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation. In the United States, the premier corporate director membership organization is the National Association of Corporate Directors (NACD). NACD plays a major role in fostering excellence in corporate governance in the United States and beyond.

The NACD has grown from a mere realization of the importance of corporate governance to become the only major national membership organization created by and for corporate directors. With a membership in excess of 17,000, today’s NACD is a reliable source of essential resources that assist board directors in strengthening board leadership. Now a member of the Global Network of Director Institutions (GNDI.org), NACD has worldwide impact. Even during the early years, NACD was a significant source of quality education and qualified directors to companies striving to achieve excellence in corporate governance.

My interest in corporate governance and involvement with the NACD covers more than thirty-five years. During my career, the job of corporate directorship has proven both fulfilling and intellectually challenging. In 1978, Washington, DC-based NACD was in its infancy; just a few months old. During these early months, I was a 28 year-old entrepreneur, serving as chairman and CEO of a financial services start-up. Not yet having attended law school, I needed to learn about corporate governance and recruit a board of directors capable of governing a national financial services entity, while communicating to the investor community that we were deserving of their support as we contemplated our initial public offering.

NACD’s focus has changed over the years to reflect those issues receiving the most attention in corporate boardrooms at any given time. The Foreign Corrupt Practices Act, signed into law December 19, 1977, was a major development confronting directors as NACD was founded. Next, the SEC’s Advisory Committee on Corporate Disclosure, chaired by A.A. Sommer, held hearings focusing attention on the broad topic of corporate governance and served to highlight the need for increased professionalism by corporate directors. The 1985 decision in Smith v. Van Gorkom held that directors who make an uninformed decision are unprotected by the business judgment rule. Van Gorkom triggered a huge demand for director education.

It’s difficult now to recall how different life was during the pre-Internet age. Most communication was achieved primarily thru print channels and face-to-face educational sessions proved uniquely important, as they remain today. Even during the early years, NACD was a significant source of quality education and qualified directors to companies striving to achieve excellence in corporate governance.

The importance of an independent audit committee cannot be overstated. It now seems difficult to believe that the presence and stature of the formalized board audit committee has evolved so much over a relatively few years. As recently as thirty-something years ago, congruent with NACD’s founding, the board audit committee was in its infancy. [1] By 1980 there was a widespread realization that while accounting and financial statement presentation may constitute the language of business, it is the board’s audit committee that serves as the front-line integrity gatekeeper to the company’s financial statements. [2] Focus on the need for effective audit committees resulted from the National Commission on Fraudulent Financial Reporting of 1987 (the “Treadway Commission”). Accordingly, NACD took up the challenge to educate corporate boards about audit committee dynamics and best practices.

Perhaps NACD’s primary strength is found in its local chapter system. [3] These regional chapters started to organize during the early 1980s. It was the many hours of volunteered effort and strong leadership provided by chapter boards of directors that resulted in those early chapters becoming viable. Directors confronted with corporate governance challenges often face complex and difficult tasks, requiring skilled judgment. Monthly NACD chapter meetings provide a convenient, informal opportunity for directors to develop and strengthen relationships while gaining the perspectives of other directors. Developing and nurturing these peer relationships becomes particularly important during times of crisis.

One of the major benefits provided by NACD involvement is the informal role of mentoring that takes place, both in the boardroom and in the “on-boarding” process of bringing the new director up-to-speed with respect to company governance issues and potential focus points. This mentoring also takes place by NACD members in chapters across the country as more experienced corporate directors share their experiences and insight with younger and often less experienced directors.

The skills represented by directors with years of management and corporate governance experience can provide real economic value to any start-up or early stage enterprise. This is the functional equivalent to governance and relationship leverage provided by institutional venture investors who sit on the boards of their portfolio companies. Many entrepreneurs overlook the value of these added relationships brought by venture capitalists, seasoned directors or advisory board members. None of us live long enough or have broad enough span of career experience and industry contacts that we cannot benefit from the additional insight and relationships brought by others who have excelled in their chosen fields.

Over the years, I have probably been responsible for the recruitment of more than fifty individuals to fill various corporate directorships. As an entrepreneur, giving birth to about a dozen start-ups, I have learned that directors are a major asset, often as important to ultimate success as initial capital. NACD has also proven to be a great source of directors over the years for my involvement with early-stage companies. Experienced senior executive talent, in the form of independent outside board members, can prove to be a profoundly valuable intangible asset of any start-up enterprise. A lifetime of experience teaches that entrepreneurs may enhance the likelihood of ultimate enterprise success by recruiting the assistance of experienced executive talent. Corporate directors provide a useful mechanism in which to tap this asset and leverage many years of experience and personal relationships.

My paper discusses the growth of the New York and Baltimore/Washington, DC NACD chapters during these early days, especially at the local level. NACD’s primary strength is found in its local chapter system; these are the “grass roots” that make governance a viable field. Now over 36 years old, the NACD plays a major role in fostering excellence in corporate governance. Today’s NACD is a reliable source of essential resources that assist board directors in strengthening board leadership.

The full paper is available for download here.

Endnotes:

[1] Lawrence J. Trautman & James H. Hammond, Role of the Audit Committee: Update and Implementation, National Assn. of Corporate Directors, Monograph No. 13 (1980).
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[2] See April Klein, Audit Committee, Board of Director Characteristics, and Earnings Management, NYU, Law and Economics Research Paper No. 06-42 (2006), available at http://ssrn.com/abstract=246674; Biao Xie, Wallace N. Davidson & Peter DaDalt, Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee (2001), available at http://ssrn.com/abstract=304195; Yan Zhang, Jian Zhou & Nan Zhou, Audit Committee Quality, Auditor Independence, and Internal Control Weaknesses (2006), available at http://ssrn.com/abstract=925732; Andrew J. Felo, Srinivasan Krishnamurthy & Steven A. Solieri, Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis (2003), available at http://ssrn.com/abstract=401240; Georges Dionne & Thouraya Triki, Risk Management and Corporate Governance: The Importance of Independence and Financial Knowledge for the Board and the Audit Committee, HEC Montreal Working Paper No. 05-03 (2005), available at http://ssrn.com/abstract=730743; Lawrence J. Abbott, Susan Parker & Gary F. Peters, Audit Committee Characteristics and Financial Misstatement: A Study of the Efficacy of Certain Blue Ribbon Committee Recommendations (2002), available at http://ssrn.com/abstract=319125; Jeffrey R. Cohen, Ganesh Krishnamoorthy, & Arnold Wright, The Corporate Governance Mosaic and Financial Reporting Quality, J. Acct. Literature, 87 (2004), available at http://ssrn.com/abstract=1086743; Luo He, Réal Labelle, Charles Piot & Daniel B. Thornton, Board Monitoring, Audit Committee Effectiveness, and Financial Reporting Quality: Review and Synthesis of Empirical Evidence, 1 J. Forensic & Investigative Acct. (2009), available at http://ssrn.com/abstract=1159453; Dan S. Dhaliwal, Vic Naiker & Farshid Navissi, Audit Committee Financial Expertise, Corporate Governance and Accruals Quality: An Empirical Analysis (2006), available at http://ssrn.com/abstract=906690 ; Lawrence A. Cunningham, The Appeal and Limits of Internal Controls to Fight Fraud, Terrorism, Other Ills, 29 J. Corp. L. 267 (2004), available at http://ssrn.com/abstract=444600 ; Anderson, supra note 58; David F. Larcker & Scott A. Richardson, Corporate Governance, Fees for Non-audit Services and Accrual Choices (April 2003), available at http://ssrn.com/abstract=394441; Kirsten L. Anderson, Stuart Gillan & Daniel N. Deli, Boards of Directors, Audit Committees, and the Information Content of Earnings, Weinberg Center for Corporate Governance Working Paper No. 2003-04 (2003), available at http://ssrn.com/abstract=444241; Gopal V. Krishnan, & Gnanakumar Visvanathan, Does the SOX Definition of an Accounting Expert Matter? the Association between Audit Committee Directors’ Accounting Expertise and Accounting Conservatism, (2007), available at http://ssrn.com/abstract=866884; Matthew J. Magilke, Brian W. Mayhew & Joel Pike, Are Independent Audit-Committee Members Objective? Experimental Evidence, 84 Acct. Rev. (2009), available at http://ssrn.com/abstract=1097714; Dain C. Donelson, John M. McInnis & Richard Mergenthaler, The Effect of Board Independence and Non-Audit Services on Financial Reporting Fraud (2012), available at http://ssrn.com/abstract=2138348; Francois Brochet & Suraj Srinivasan, Accountability of Independent Directors – Evidence From Firms Subject to Securities Litigation (2013), available at http://ssrn.com/abstract=2285776.
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[3] National Association of Corporate Directors, NACD Chapters- Enhancing Corporate Governance in Your Region, available at http://www.nacdonline.org/Connections/NACDchapters.cfm?ItemNumber=702&navItemNumber=579. (last viewed July 21, 2014).
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