Magazine article The CPA Journal

The Role of Boards of Directors in Shaping Organizational Culture

Magazine article The CPA Journal

The Role of Boards of Directors in Shaping Organizational Culture

Article excerpt

The end came for Washington Mutual in September 2008, with the seizure of the savings and loan's (S&L) assets by federal regulators. A forced marriage - with the Federal Reserve holding the shotgun - was hastily arranged, and banking giant JPMorgan Chase absorbed what was left of Washington Mutual.

Known widely as WaMu. the bank had been the largest thrift in the United States. The 119-year-old institution had survived two world wars, a dozen recessions, the Great Depression, and the S&L scandal that had taken down so many of its peers. In the end, there was more man enough blame to go around. The CEO and top management were excoriated for destroying an established business in what should have been a conservative industry, and the company's middle management found itself accused of various irresponsible behaviors. Regulators were criticized for ineffective oversight, and even the S&L's customers were accused of causing the bank's demise through their own fraudulent misrepresentations.

But in this debacle, there remains one group that has been largely overlooked. The board of directors, charged with protecting stockholders, clearly failed in its most important mission. As the WaMu story becomes clearer, the ineffectiveness of the board remains one of the central tragedies in the case. Where was the board? How could a company worth billions, with a century's track record of success, just disappear while the board stood by?

The authors will examine some of the ways in which boards of directors can better fulfill their responsibilities by assessing and attending to the vital area of organizational culture. The demise of Washington Mutual serves as a case study, demonstrating what can result when a board fails to take effective steps to control a culture that has turned toxic.

Tightening Regulations

The Sarbanes-Oxley Act of 2002 (SOX) and subsequent SEC regulations have emphasized the accountability of top management and the board of directors for the ethical behavior of an organization. Since 2003, SEC registrants have been required to disclose whether they have adopted a code of ethics that applies to their CEO, CFO, and controller and, if they have not done so. to explain why they have not.

SOX further mandated the establishment of SEC requirements designed to strengthen the role of the audit committee of the board of directors. The final rule affirms me audit committee's responsibility for providing "independent review and oversight of a company's financial reporting processes, internal controls, and independent auditors" (SEC Release Nos. 33-8 177 A, 3447235A, File No. S7-40-02, March 26, 2003; Release Nos. 33-8220, 34-47654, IC-25885, File No. S7-02-01, April 9, 2003). A key component of effective internal controls is the control environment, including the integrity and ethical values of the organization (Internal Control-Integrated Framework, Committee of Sponsoring Organizations, 1992).

Governance experts agree that boards of directors are responsible for overseeing the ethical values of the organizations they serve. In his 2004 book. Boardroom Excellence: A Commonsense Perspective on Corporate Governance, Paul P. Brountas observed that the fraudulent financial reporting scandals of the past decade were iypically hidden from the board of directors. He claimed, however, that directors were not blameless:

The directors had neglected to establish codes of conduct, ethical guidelines, monitoring programs, and a corporate culture that might have prevented the fraudulent acts or at least have helped if paiperly administered - to establish a tone at the top and a culture throughout the organization that punished those who believed that "anything goes - but don't get caught." (p. 10)

Brountas further stated that SOX and accompanying regulations provide guidance to corporations in "creating a corporate culture encouraging and rewarding integrity and responsibility in the saine way companies have historically rewarded entrepreneurship and wealth creation. …

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