The primary role and responsibility of boards of directors is management oversight. Recent lawsuits against public company directors for oversight failures should prompt boards to consider whether their current governance structures are optimal for maximizing oversight effectiveness. It is common, but potentially problematic, for the audit committee to be tasked with all compliance oversight. This scenario can create an opportunity for a plaintiff to claim that the audit committee had insufficient resources to provide effective oversight of the compliance function. This claim may be even stronger when it relates to critical company-specific and industry-specific risks, particularly in heavily regulated industry sectors. Boards of directors should thoughtfully review their board committee structures to determine if there is sufficient management oversight of mission-critical company and industry risks and, where appropriate, consider reallocating responsibilities among various board committees, with corresponding updates to committee charters.
Avoid Overburdening the Audit Committee
Audit committees tend to have more and longer meetings than other board committees. While financial oversight is at the core of the audit committee’s mandate, it is frequently the case that audit committees are tasked with significant compliance oversight in addition to their traditional responsibilities, despite the fact that financial oversight alone is a critically important and time-consuming job. Unfortunately, given the importance and burden of financial oversight, the directors on the audit committee may have inadequate bandwidth to fully consider and address non-financial compliance issues. This could mean that potentially significant risks receive only summary review, and management presentations may lack sufficient depth for directors to adequately assess and mitigate potential risks and compliance failures.