Weak Governance Boosts Likelihood of Class Action Suits

Over the past year, most securities litigation and SEC investigations have revolved around financial services companies. According to CFO Magazine, now the litigation and enforcement focus is shifting back to nonfinancial firms, specifically in the arenas of earnings guidance, insider trading, and accounting. Yet the largest financial hits are taken by companies that exhibit weaknesses in corporate governance. In other words, gaps in governance not only increase exposure to litigation, but also result in settlements with greater dollar amounts. One significant weak link is when board members and CEOs have worked together for so long that the board is more closely aligned to management than to shareholder interests. Another is when two or more board members serve together on other boards. Finally, companies whose boards include members with questionable qualifications are also exposed to greater risk. To mitigate this risk, C-level executives should conduct governance-risk benchmarking with competitors and industry leaders and present their findings to the board.