Harvey L. Pitt, the 26th chairman of the Securities and Exchange Commission and founder of Kalorama Partners, was invited to share his perspective on how directors and especially audit committee members can best prepare for and navigate the approaching tidal wave of regulatory change. What follows is an edited transcript of his remarks that focus on how directors can and should respond.
THE GOLDEN RULE IS RISK MANAGEMENT. Unidentified, unquantified and unmitigated risk of all kinds is the enemy. It’s critical to invest the resources necessary to establish sound risk-management techniques. Through these, you’ll be able to weather the remainder of the current crisis and be prepared for the inevitable next crisis to follow.
IF YOU DON’T SPEAK UP, NO ONE WILL HEAR YOU. Right now, during the ongoing legislative debate and ensuing regulatory overhaul, there’s a window for thoughtful discussion and debate that can strongly influence the outcome. Take every opportunity to initiate and advocate your views on what the regulatory landscape should look like at the end of the process. Be reasoned and honest in your advocacy. Develop relationships of trust and respect with regulators and legislators, so your voice will be heard.
TRANSPARENCY IS ESSENTIAL. Nearly everyone looking at the regulatory environment agrees on the need for transparency, although as with so many things, no one has actually defined what that means. This creates both a problem and an opportunity for you, since the age-old approach, ‘Let’s only tell everyone what we’re required to tell them’ no longer works, if it ever did. The toughest part may not be regulators, but those who run the companies on whose boards you serve. There’s a definite need for a re-education process and thoughtful reflection on how best to achieve this critical goal.
IT’S NOT HAPPENING TO THEM, IT’S HAPPENING TO US. When we read in the press or otherwise learn of companies that find themselves in huge difficulty or learn of a regulatory failure to find corporate misconduct, we may succumb to the understandable but pernicious tendency to think either “Thank goodness it’s not happening to me’ or to assume that this has nothing to do with you. But, when any business suffers, all businesses suffer. And, the fact is that if we don’t look upon the foibles of other companies as cautionary tales from which to learn and that must be avoided, others will be looking at you as their cautionary tale.
AVOID THE SARAH PITT SYNDROME. Sarah Pitt was my beloved mother and she was a self-medicating health fanatic. She took hundreds of vitamins and minerals daily and believed that she was better than any physician. As a result, when she developed stomach pains, it took us nearly two years to get her to visit the doctor. After she finally visited the doctor, I called her to get her take on how the visit went and she somberly told me, in very stern tones, ‘You know, Harvey, I was never sick a day in my life until I went to visit that damn doctor.’ Unfortunately, that’s how many CEOs and boards operate. They think that just because nobody tells them they have cancer, they don’t have it, but we know that the real world doesn’t work that way. You can and you must look for potential problems before they come around and bite you in parts of your anatomy in which you’d rather not be bitten.
BEWARE OF THE CEO’s NOMW SYNDROME. The term NOMW stands for Not On My Watch. It’s a dirty little secret in life that no one wants problems to emerge on their watch. What we all secretly hope for is that any problems emerge either after we’ve left the company or before we’ve arrived. Take it from one who knows this all too well. What this translates into is that a board’s desire to detect problems early and solve them before they turn into crises isn’t necessarily shared by the company’s CEO. He or she merely wants to finish his or her tenure with no resulting scandal and let the next CEO clean up any mess that surfaces after the CEO departs. Directors can’t afford to play that game. More importantly, they have to be wary of the possibility that the CEO may actually be playing that game right now.
DIRECTORS SHOULDN’T ACT LIKE PERFECT CHILDREN. As the father of four, I strongly believe the perfect child is one who speaks when spoken to, doesn’t speak out of turn, respects authority, doesn’t drive, and never asks for money. I have four wonderful children, but not a one of them answers that description. Yet, so many directors actually think that’s how they should behave. Outside directors need a lead outside director if the chairman of the board is also the CEO. Every quarter, the outside directors need to convene and generate their own agenda of issues. Again, this should be done working collaboratively with management. And, by all means, directors must remember that the only dumb question is the one that doesn’t get asked.
THERE IS NO SUCH THING AS A SMALL PROBLEM. Small problems have one enormously annoying habit. Left unaddressed, they will coalesce and morph into big problems. That’s particularly true when economic pressures or other external influences act as an irritant. Life is simply a lot easier if problems are identified and addressed early.
BEING SMART IS GOOD, BEING TOO SMART IS DANGEROUS. When seeking to make money or circumvent obstacles, it’s tempting to develop novel, unique, or clever approaches. Making money should be encouraged and circumventing obstacles is great, but only if the proposed plan is thoroughly vetted and understood first.
DON’T BECOME THE VICTIM OF YOUR OWN SUCCESS. Bill Gates had it exactly right when he observed that success is often the worst of teachers. That’s because when we succeed, we’re tempted to believe that our success was because of something we did. But, success can ultimately lull us into a false sense of security. If you hope for the best, but plan for the worst, you’re never likely to be caught off guard, be unprepared, or wind up disappointed.
HEED UNCONVENTIONAL WISDOM. Constructive dissent and contrarian thought ought to be encouraged to counterbalance groupthink mentality that, left unchecked, results in the emperor parading naked while everyone else loses their shirts.
AVOID THE MAE WEST FALLACY. Mae West was a one-of-a-kind actress with a very cheeky outlook on life. One of her pet sayings was that too much of a good thing is just enough. In the boardroom, I’m afraid, we must disagree with Mae. The development of audit committees was a truly inspired idea; over the years, that idea has been honed and massaged to the point where audit committees perform critical functions and provide a measure of protection every corporation requires and deserves. Alas, the very success of audit committees has led many companies to overburden them with additional functions. There’s only so much responsibility any single board committee can undertake and still perform at a high level. I advocate separate committees for risk management and legal compliance, assuming that there are enough directors to serve on each of those committees. This doesn’t mean, however, that these important functions should be performed in a vacuum. Overlapping committee membership should ensure that the audit committee is fully apprised of what is actually going on.
MAINTAIN A SENSE OF HUMOR. Over the last several years, we’ve probably all taken ourselves somewhat too seriously. Adlai Stevenson had it all wrong when, after he lost to Dwight Eisenhower yet again, he somberly intoned, ‘I’m too old to cry, but it hurts too much to laugh.’ If you don’t laugh, the pain is only that much harder to handle.
ADDITIONAL COVERAGE FROM THE AUDIT COMMITTEE ISSUES CONFERENCE: