The ongoing global financial crisis has dominated headlines and gripped the attention of all walks of society. Faced with increased uncertainty and breakneck volatility, how should board directors and senior executives approach their management and oversight responsibilities?
J. Michael Cook
NACD Directorship’s Jeffrey M. Cunningham talked to J. Michael Cook about the challenges of corporate leadership in a world of uncertain financial risk. Cook’s perspectives are born of his deep experience as former chairman and CEO of Deloitte, public company director and public servant.
Cook currently chairs the audit committee of Comcast Corp. and the compensation committee of International Flavors & Fragrances. He also chairs the advisory panel to the U.S. Government Accountability Office, an independent, nonpartisan agency that works for Congress and provides guidance to the comptroller general of the United States and other GAO executives. He is a member of the Advisory Council of the Public Company Accounting Oversight Board and a trustee of The Scripps Research Institute. He was a member of the NACD’s Blue Ribbon Commissions on Director Professionalism and Audit Committees, and currently serves in the NACD’s Center for Board Leadership.
After the financial crisis, will risk management ever be the same?
It’s something I have been thinking about for a while. I continue to believe strongly that the right direction is not to push risk down into committees, but rather to have enterprise risk assessed at the full board level.
Does the “new normal” include a different set of risks than before?
It is of considerable concern to me that one of the biggest risks facing American boards of directors is essentially beyond their control. It is created by the irresponsible fiscal policies in Washington. We keep piling on debts without addressing spending issues.
What does this mean for a director? To me it means that, depending on the nature of the institution, there is heightened enterprise risk, especially at financial institutions. While I don’t have firsthand knowledge, it is likely that if you are on the board of any major public financial institution in this country, you would say we have an enterprise risk of great proportion when we look at the U.S. debt situation and the ratings downgrade.
You’re not very impressed by the recent debt-reduction discussions on Capitol Hill.
A sage once told me, if your home is falling down, raising the ceiling is not going to solve the problem. We have too much debt, spend too much money, and we don’t have enough revenue to pay either debts or expenses, so we just add to the pile. And the solution to our problems, according to our political leaders, is to take on more debt. I mean, that is the most ludicrous proposition that I could think of. But I don’t know if we have the capability to sit down and implement an effective, broad-based solution. I don’t think we have the political will.
As board members, we have no choice but to be deeply concerned. Unless you are totally isolated from direct relationships with the government, the financial risk is not something that can be delegated to the audit committee. I’m not even thinking here about the macro risks like the economy and jobs—everybody is in that boat together. Show me anyone in the public company population that doesn’t have to worry about this—I’d like to send them a congratulatory note. There are larger macro issues: What happens if there is another downgrade? What happens to interest rates? What happens to the value of the stock market? What happens to credit availability?
As a result of these macro issues, one of the micro issues that directors need to be thinking about right now is how to deal with any Treasury securities held in company pension funds or on balance sheets.
Is the U.S. debt downgrade merely the revenge of the ratings agencies after their trial by fire during the credit crisis?
I wouldn’t use the term revenge…the pressure is building on the ratings agencies, which have been under a different type of pressure recently for not having seen the future more clearly during the period of the mortgage crisis. Now the world expects them to be more transparent, and they have responded by saying, “We’re really concerned about these U.S. securities.”
Frankly, I don’t blame them. Anyone who follows economic issues can see our economy is not robust, growth rates are declining and job reports are not going to be encouraging for some period of time. And so this is not an economy that enables us to tax our way out of problems or raise costs on business.
Do you remember [former Citibank Chairman and CEO] Walter Wriston’s comment about sovereign risk—that companies go bankrupt but nations don’t? In some respects, the U.S. now has sovereign risk.
We’re at the back of a long line of people that face the immediacy of this. Look throughout Europe now…there are many countries that are sound, but look at the ones that are on the borderline. Look at Greece. Look at Portugal. Look at Spain. Look at Italy. These are not just one little municipality somewhere—these are sizable countries. Look at our own states in the U.S. Whatever the credit rating of the U.S. government, it will have an impact on the credit ratings of individual states. That is just one cost of belonging.
In trying to get a handle on the risks, does the board chair have a different responsibility than the CEO? No, we’re in it together. If you’re a CEO and you’ve got a separate chairman, you should be talking about it together, and you both need to be focused on this. If there is a combined CEO/chair, then he needs to be bringing this issue to the front with both the management team and the board.
What are the most important steps that a board and company leadership should take?
The first order of the day is to understand the specific risks that affect your company. You have to be aware of the macro risks. You’ve got to be aware of the fact that your customers are your lifeblood, and if they are severely harmed by any economic event, it will also hurt you, and you should try to assess the impact that will have on the company, although that is very difficult and will very much depend on the sector you operate in. Retail will be impacted very differently than, say, health care.
The basic question is, What will happen to the business when customer behavior changes due to the increased or perceived increase in economic risk?
Secondly, take a look at what’s on your balance sheet and your pension plan. Where do you have your cash balances? Take a look at your counter-parties and the collateral for your derivatives, the financial instruments that you use in your business. Ask yourself, What would happen if the credit quality of those instruments or investments were to go down, and how would the decline in value affect the company?
J. Michael Cook’s Career Highlights:
- Chairman, CEO Emeritus, Deloitte
- Director, Comcast Corp., International Flavors & Fragrances
- 62nd member of the American Institute of Certified Public Accountants Hall of Fame
- Chairman Emeritus, Catalyst
- Columbia University School of Business Botwinick Prize for Business Ethics, 1998
- Chairman, Comeback America Initiative