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Speaking at the NACD’s recent National Compensation Advisory Council, Robin Ferracone, executive chair of Farient Advisors, an executive compensation and performance consulting firm, said that while the challenge of evaluating and setting CEO and executive compensation is becoming more of a lightning rod, companies that can pass the “red-face test” will have a relatively easy time with the new disclosure and say-on-pay rules. Those that cannot may be treated harshly.

Those attending the meeting highlighted several issues that need to be addressed, both in the fundamentals of setting pay and in the way those pay decisions are communicated to shareholders and to the wider community. Perhaps the most important questions to emerge from the discussion were: Why are some CEOs pilloried for their compensation while others—even those who may make more— are held up as heroes? There is little, if any, consequence for underperformance—in fact, CEO pay never seems to go down. How should directors really measure performance, and how can compensation structures and policies be best communicated to shareholders, the media and the general public? Until these issues are addressed, there can be no meaningful discussion of the role of the compensation committee.

Some participants questioned the premise that the compensation system is “broken,” and even the need to have the conversation. Why is such a dialogue important, they asked?

Ken Daly, NACD president and CEO, answered succinctly: “If we don’t do something about this, then Congress will do it for us. If directors only do what is mandated [in terms of curtailing CEO pay], then we are going to get stronger regulation. Up to this point Congress has generally been happy changing behavior by increasing disclosure, but their patience has run out and they are starting to take a far more aggressive approach. If we don’t get ahead of issues and concerns around compensation— real or perceived—then we will lose control of the discussion.” In short, regulatory overtone is filling the gap in board leadership.

Several hours of sometimes-heated conversation resulted in a handful of steps and resolutions that boards should take in order to take control of the issue and become leaders of compensation strategy.

1. The board must be the leader of the compensation process. While in theory it is the job of the compensation committee (and ultimately the entire board), in reality, many boards feel that the CEO dominates the conversation while the board is reduced to a reactionary role.

The board needs to regain primacy on compensation philosophy, metrics and planning. The compensation committee must set the tone and own the process. This may require the compensation committee to adopt a different tone or approach than other committees that provide oversight and work collaboratively with management. The compensation committee should be less collegial, and realize that this is one of the few areas in which it has total responsibility. They shouldn’t act like dictators but, as one chairman pointed out, “You should remember that the CEO is really just an employee. This will assist greatly in setting the tone for compensation conversations.”

2. Tie pay to performance and define the metrics. Ferracone cautioned that assessing pay and performance is tricky. Perhaps the most common mistake made is looking at the grant value of long-term incentives rather than the value of long-term incentives after performance has happened. To achieve the Holy Grail of pay—i.e., tying it to long-term performance— use forward-looking metrics rather than backward-looking responses to past performance. The board should conduct a robust discussion of how pay aligns with strategy. This should be a formal agenda item. Nonfinancial metrics should also be considered because they can have a tangible impact on both short- and long-term value. Broaden the scope of what is considered value creation and sustainable growth. Consider the impact the company has on the wider community. Some companies are including metrics such as workplace safety, reliability of service and customer satisfaction.

Stephen Brown, director of corporate governance at TIAA-CREF, suggested linking any increase in CEO pay to pay within all levels of the organization. “You could match the CEO compensation story with employees, shareholders and others,” he said. “If CEO pay goes up 20 percent but general employee pay only goes up 2 percent, you are likely to have a problem.” In other words, it can be very difficult to justify this type of increase, not just to the media but also to the workforce.

The board must also create a structure that outlines negative consequences for poor or nonperformance. Variability in executive pay is acceptable. The compensation committee should not be constrained by legacy metrics. It is easy to get trapped in a steady stream of upwardly ratcheting pay—CEO pay never really seems to go down. Noted Arthur Martinez, director at AIG, PepsiCo, IAC/Interactive, Liz Claiborne and International Flavors & Fragrances, there is a “lack of true variability in pay at top levels. It is very hard to have the conversation that we can’t tell them their bonus will be 75 percent lower than last year. CEOs don’t always take that well. It’s the responsibility of those of us on committees to have that discussion and to introduce a real sense of variability.”

The ICGN, whose members have more than $18 trillion in assets under management, has sent a letter to the SEC that supports a rulemaking petition filed by 10 law and business school professors.

This article originally appeared on the Institutional Shareholder Services blog.

“The ICGN recognises that corporate political activity can be positive. However when corporate resources are deployed to seek political influence there is also potential for abuse. In the extreme this can lead to serious breaches of business ethics, particularly when influence is sought through corrupt practices or in ways that are not consistent with promoting the long-term interests of the company and its investors,” the London-based group wrote in its Aug. 10 letter.

U.S. companies are not required to disclose their political contributions in their proxy materials, but some large companies, such as Merck, Hewlett-Packard, Aetna, and Microsoft, have voluntarily provided greater disclosure in response to shareholder demands, which include a multiyear shareholder proposal campaign coordinated by the Center for Political Accountability.

In related news, Starbucks CEO Howard Schultz has enlisted more than 100 current and former chief executives in his campaign to stop making personal contributions to lawmakers until they address the U.S. government’s mounting debt. Among the executives who have supported this effort are those at AOL, J. Crew, JC Penney, and Whole Foods Market, according to CNN Money. While this effort is attracting media attention, it appears unlikely that Schultz’s campaign will discourage investors from filing shareholder proposals that seek more disclosure of corporate political spending.

Meanwhile, ISS’ Governance Exchange plans to hold a Sept. 27 webcast, “Show Me the Money: The Debate Over Corporate Political Spending Disclosures.” The webinar’s panelists will discuss proposed legislation and preview the shareholder resolutions expected during the 2012 proxy season. The panelists will include: Matthew Lepore, vice president and chief counsel for corporate governance at Pfizer; David Katz, a partner with the law firm of Wachtell, Lipton, Rosen & Katz; Bruce Freed, president of the Center for Political Accountability; and Adam Kanzer, managing director and general counsel at Domini Social Investments. The panel will be open only to Governance Exchange members. For more details, click here.

Ted Allen is governance counsel and director of publications at ISS.

William B. Chandler III

The process of choosing Chandler’s successor got underway in May when the Delaware Judicial Nominating Commission, chaired by Andre G. Bouchard, managing partner at Bouchard Margules & Friedlander, issued a public notice soliciting candidates. The court is required by the state constitution to be bipartisan, and all candidates must be Delaware residents. Following interviews, the JNC would refer any finalists to Gov. Jack Markell, who would then recommend one candidate to the state Senate for approval.

The 60-year-old Chandler, the subject of a cover story in NACD Directorship (December 2010/January 2011), notified the Delaware governor in April he planned to resign to seek opportunities in the private sector. His last day on the court was expected to be June 17.

Franklin, Hockaday to Co-Chair BRC on Lead Directors
A group of more than 20 corporate directors and governance thought leaders convened this spring to initiate the 2011 Report of the NACD Blue Ribbon Commission on the Lead Director. Hosted by the NACD, the commissioners will leverage their years of experience to develop recommendations that will define and clarify the role of the lead director in the boardroom. The commission is co-chaired by Barbara Hackman Franklin, former U.S. Secretary of Commerce, and currently a director for Aetna and the Dow Chemical Company and chairman of the board for NACD; and Irvine Hockaday, director for Ford Motor Company, Estée Lauder and Crown Media Holdings. Holly Gregory, corporate partner at Weil, Gotshal & Manges, will serve as governance counsel to the commission.

“As boards rise in accountability and visibility, the role of the lead director has become increasingly important. Lead directors play a critical role in ensuring independence of thought and oversight, and help build consensus in the decision-making process,” said Ken Daly, president and CEO of NACD. “The diversity and depth of experience represented on this year’s commission provide a unique opportunity to study leading practices for the lead director position.”

The new commissioners will meet once more in June as they continue to collaborate on their recommendations. The report is scheduled for release at the NACD Annual Board Leadership Conference on October 2-4 in Washington, D.C.

Delaware VC Cuts Plaintiff Lawyer Fee
What did shareholder plaintiffs lawyers achieve in their litigation over an abandoned tender offer for shares of Sauer-Danfoss? Not much, according to a recent decision by Delaware Vice Chancellor J. Travis Laster. In fact, Laster found that the plaintiffs lawyers did so little of value that he slashed their fee request by 95 percent and awarded them just $75,000 of the $790,000 they asked for, according to Morris James’ Delaware Business Litigation Report. Wrote Laster: “Plaintiffs never engaged in meaningful litigation activity.”

Heidrick Study Finds Number of Directorships in Decline
New director appointments decreased 22 percent from 2009 to 2010, according to the new Heidrick & Struggles Board Monitor Fortune 500 quarterly trend report, with 279 new directors at the studied companies in 2010, down from 356 in 2009. In addition, only one-third of these appointees had non-CEO or –CFO backgrounds, reflecting the growing post-Dodd-Frank disclosure requirements. “The ongoing economic uncertainty is causing companies to lean towards those with top-job experience when they do make an appointment,” said Bonnie Gwin, the leadership advisory firm’s vice chairman and head of the North American Board Practice. Average director age remained at 57, and female placements increased slightly from 17.9 percent to 19.3 percent.

Outside CEOs Cost More, Perform Worse
CEOs promoted from within are more cost-effective and outperform their external counterparts, according to a study conducted by The Kelley School of Business at Indiana University in conjunction with A.T. Kearney, that examined 36 companies that had promoted internally between 1988 and 2007. It compared their performance with other S&P 500 companies that had chosen external candidates. The study found that none of the external CEOs’ companies performed better than the 36 identified companies, and the external CEOs commanded salaries that were 65 percent higher than those of CEOs recruited from within.

Transocean Execs Donate Safety Bonuses to Victims’ Families
After sparking public ire by rewarding executives with safety bonuses, five Transocean senior executives will donate $250,000 collectively to a fund for the families of victims of last year’s Deepwater Horizon explosion in the Gulf of Mexico. Transocean had given safety bonuses because the company had reached two-thirds of its safety target, despite the deaths of 11 workers in the explosion and the subsequent massive oil spill. Overall, the five executives received about $900,000 in incentive bonuses; 25 percent of the bonus equation is determined by safety performance. Transocean reported that 2010 was its “best year in safety performance.”

Judge Orders Borders Bonus Plan Changes
Bankrupt bookseller Borders Group was ordered by U.S. Bankruptcy Judge Martin Glenn to revise its executive bonus plan after the lawyer representing unsecured creditors, Bruce Buechler, notified the judge that the plan rewarded executives for staying with the company though its bankruptcy. The plan had proposed giving the top five executives $4.9 million if unsecured creditors were paid at least $95 million, and a $1.8 million bonus if creditors received $73 million. Glenn instructed the retailer to include a provision that would apply if less than $73 million were returned to creditors.

Basel Establishes Criteria for Globally Essential Banks
The Basel Committee on Banking has established criteria designating banks that must maintain extra capital reserves because they are essential to global financial stability. The international regulatory committee did not compile a list of firms that these rules would affect. Banks will be evaluated based on “size, interconnectedness, substitutability, global activity and complexity,” said the committee’s secretary general, Stefan Walter, who noted that the Basel committee would monitor hedge funds, money market mutual funds and other securitization structures to help prevent another financial crisis.

Class Actions Lose, Arbitrators Win in Supreme Court Ruling
In a ruling expected to provide businesses with significant protections against class-action lawsuits, the Supreme Court ruled that state laws couldn’t override contract clauses that require customers to present complaints to private arbitrators individually. The case in question, AT&T Mobility v. Concepcion, fought over a $30.22 sales tax charge on phones that AT&T had advertised as “free.” The ruling makes arbitration clauses more attractive to companies in consumer contracts, and is expected to apply to employers in employee contracts under the Federal Arbitration Act of 2001.

Geronzi Resigns, Faces Ruling
Cesare Geronzi resigned as chairman of Italian insurer Assicurazioni Generali after the board threatened a vote of no confidence. He was awarded a payoff of 16.6 million euros ($24.3 million) upon leaving Europe’s No.3 insurer, according to Reuters. The controversial Italian financier has in succession chaired three of the country’s most important financial institutions: Capitalia; Mediobanca, which is Generali’s top shareholder; and Generali itself. Separately, a Rome court is due to rule on whether Geronzi contributed to the 2003 bankruptcy of Italian food group Cirio. Prosecutors are seeking an eight-year sentence for Geronzi, who has denied any wrongdoing.

Wall Street Banker Pay Falling
An unnamed Wall Street paymaster told The Wall Street Journal recently that the median banker pretax salary is currently $1.6 million, down from $2.2 million before the financial crisis hit. The pre-crisis pay was approximately 60 percent cash payments, with bankers taking home about $700,000 a year after taxes. Now, however, more bankers receive deferred compensation rewards, which brings their median aftertax take-home pay to about $380,000.

Director Shortage
Despite median director compensation increasing from $45,000 in 2001 to $119,500 in 2010, Canadian companies are having increasing difficulty finding directors to fill their boards. Spencer Stuart found “a definite increase in the number of first-timers joining boards,” said Andrew MacDougall, president of Spencer Stuart Canada. Over the past three years, almost 25 percent of all directors appointed were joining their first board. One-third of the newly appointed directors in 2010 were from the United States—the highest proportion since Spencer Stuart began tracking Canadian directorship trends. In addition, female board members increased to 20 percent in 2010, from 13 percent in 2009.

Top Paid CEOs in 2010
1. Philippe P. Dauman – Viacom
2. Lawrence J. Ellison – Oracle
3. Leslie Moonves – CBS
4. Martin E. Franklin – Jarden
5. Michael White – DirecTV
6. John F. Lundgren – Stanley Black & Decker
7. Richard C. Adkerson – Freeport-McMoRan Copper & Gold
8. Robert A. Iger – Disney
9. Donald J. Stebbins – Visteon
10. Jeffrey L. Bewkes – Time Warner
11. Alan Mulally – Ford Motor
12. Brian L. Roberts – Comcast
13. John H. Hammergren – McKesson
14. Samuel J. Palmisano – IBM
15. David M. Cote – Honeywell
16. Laurence D. Fink – BlackRock
17. James Dimon – JPMorgan Chase
18. David N. Farr – Emerson Electric
19. Thomas M. Ryan – CVS Caremark
20. Rex W. Tillerson – ExxonMobil
Source: The Wall Street Journal Survey of CEO Compensation

Corporate Reputations
Best:
1. Google
2. Johnson & Johnson
3. 3M Company
4. Berkshire Hathaway
5. Apple
6. Intel Corporation
7. Kraft Foods
8. Amazon.com
9. General Mills
10. The Walt Disney Company

Worst:
11. AIG
12. BP
13. Goldman Sachs
14. Citigroup
15. Chrysler
16. Bank of America
17. General Motors
18. ExxonMobil
19. JPMorgan Chase
20. Delta Airlines
Source: 2011 Harris Interactive

Effective oversight of financial reporting— even in times of growth and relative calm—is no simple matter for an audit committee. Add in a global financial crisis, economic recession and uncertainty, sweeping regulatory reforms and unprecedented expectations by investors and regulators for transparency and accountability, and you have one of the most demanding, challenging—and vital—roles in Corporate America.

It’s not a stretch to say that the financial and economic crisis and ensuing volatility and uncertainty in the United States and global markets have put audit committees, and the financial-reporting systems they oversee, through a gauntlet. To be sure, some were well prepared— likely buoyed by systems and processes put into place following the Sarbanes- Oxley Act of 2002. Others were less prepared— and the crises exposed critical gaps in their financial-reporting systems, oversight processes or both.

Investors’ and regulators’ expectations of audit committees have always been high; but the demands and challenges facing audit committees have perhaps never been greater: complex accounting rules and regulations, innovative financial instruments, the global nature of businesses, product innovation, pressures on companies to meet expectations and stay competitive— there is little that doesn’t impact a company’s financials. And, as one seasoned audit committee chair often reminds us: If it’s complicated and requires a lot of time and detailed focus, it usually lands on the audit committee’s plate.

This paper is not intended to be a comprehensive manual or treatise on the duties and responsibilities of the audit committee (which is readily available from numerous sources today). Rather, drawing on the experiences and insights of our Blue Ribbon Commission members, as well as the thoughtful work and writings of others in the business, audit and governance arenas, including the NACD National Audit Committee Chair Forum, it is intended to offer practical perspectives, suggestions and leading practices on what makes an audit committee effective.

No single approach will work best for every audit committee, but we believe the perspectives and leading practices outlined in this report (including ten guiding principles) will help audit committees and boards—as well as auditors, managers and others—drive the financial-reporting process to provide investors, regulators and the market with a clear and accurate picture of the company’s performance, risks and prospects.

Setting the Agenda: Making the Most of Audit Committee Meetings
Ensuring that the audit committee’s agenda appropriately addresses the issues that require the audit committee’s attention and keeps the committee focused on its primary oversight responsibilities can be a major challenge.

Given the scope of the audit committee’s responsibilities, we recommend that at the beginning of each year, the committee create a formal responsibilities checklist and calendar for the coming year, including a tentative calendar for each audit committee meeting throughout the year. The responsibilities checklist and calendar should be based on the audit committee’s charter. [A model audit-committee charter, with tentative agendas for the year, is included in the Commission’s full report.]

The tentative agenda for each audit committee meeting throughout the year is typically crowded with key oversight topics—such as the company’s financial reports and disclosures, the control environment, risks, audit processes, whistleblower complaints and legal and regulatory compliance—as well as numerous mandatory compliance activities.

In preparation for each audit committee meeting, the challenge for the audit committee chair is to prepare a focused (yet flexible) agenda, which devotes sufficient time to the company’s key financial-reporting risks, as well as other items that require the audit committee’s attention. Audit committees must be proactive in setting their agendas—with input from management and internal and external auditors—and must not simply react to an agenda proposed by management.

To accomplish this, audit committee chairs employ a number of leading practices in developing the agenda for each audit committee meeting, including the following:

• In preparing the agenda, the chair will allocate sufficient agenda time to address what’s important, and then address the required items (not vice versa).

• The initial draft of the agenda will often be prepared by someone in management who serves as the audit committee’s primary support, such as the CFO, controller, CAE, corporate secretary, etc.

• The audit committee chair will take responsibility for finalizing the agenda and, distributing a draft agenda, if there is sufficient time, to members of the audit committee for their input.

It’s important to discuss the agenda with the CFO, the audit engagement partner, the CAE, the general counsel—and perhaps others—to obtain their suggestions on key issues and topics for the agenda, including the time allotted to each item and who should participate in the discussion of each topic. In sequencing the agenda, the most important items should be covered first; however, avoid having the same items at the end of the agenda, as it may be perceived as a lack of interest on the committee’s part.

Of course, audit committee members should be encouraged to suggest agenda and follow-up items for future committee meetings.

In order to devote more meeting time to important issues and risks, some audit committee chairs separately identify agenda items that are appropriate for a “consent agenda”—i.e., items that are routine and do not require discussion—so that the committee can approve the items without discussion, assuming all committee members agree.

Some audit committee chairs also set aside time at each meeting (or at least periodically) for the audit committee to take a “deep dive” into an important accounting judgment or estimate, or a significant accounting development that is affecting the company. Some also make it a point to have operating management discuss selected agenda items, such as key areas of risk.

In finalizing the agenda, the audit committee chair should ensure that the agenda devotes sufficient time to the company’s key financial-reporting risks. At the same time, the chair should ensure that the audit committee does not take on too much beyond its core responsibilities. If mission creep occurs, the chair may need to discuss with the chairman of the board or the chair of the nominating/governance committee the possibility of shifting certain oversight responsibilities to another committee or to a new committee.

Making the Most of Meetings
The frequency of audit committee meetings will vary from company to company, with most committees holding four to six “in person” meetings each year, as well as teleconferences as required. Typically, the audit committee will meet, often by phone, prior to the filing of the company’s 10-Qs and 10-K to discuss the reports.

The productivity and effectiveness of audit committee meetings hinges in large measure on the diligent preparation and participation of each member, as well as on the dynamics between committee members and other participants in the meeting. The audit committee chair is responsible for ensuring the efficient use of meeting time and that each agenda item receives appropriate attention. Again, audit committee chairs employ a number of practices to accomplish this, including:

• Working with appropriate management to ensure the quality of premeeting materials—for example, ensuring that the pre-meeting materials are at a level of detail appropriate for committee members (and not simply materials prepared for management and now passed along to the audit committee).
• Asking that copies of all “presentations” and other materials to be covered during the committee meeting be distributed with other pre-meeting materials well in advance of the meeting. To allow sufficient time for discussion, the chair often instructs management to assume that all audit committee members (and others, as appropriate) have read all presentations and other pre-meeting materials, and to limit their “presentation” to an overview of the most significant issues of interest and relevance to the committee.
• Setting aside time at the beginning of each committee meeting for members to have one last look at the agenda (including the amount of time allocated to each item on the agenda) after members have had an opportunity to review the premeeting materials.
• Concluding—and sometimes beginning— each audit committee meeting with an executive session so that members of the committee have an opportunity to discuss important matters privately.

We note that some audit committees routinely have informal “between meeting updates” on issues and developments, typically by email or conference calls. These updates—in which committee members participate on a “voluntary” or time permitting basis—help streamline committee meetings, as members are more current on the issues.

Executive Sessions
Candor and unvarnished viewpoints are tremendously important to the audit committee in its oversight role, which is why executive sessions are now standard fare for audit committees. As stated in the NYSE corporate governance rules, executive sessions serve as a “check on management” by promoting open discussion among the audit committee members without members of management present, and by providing an opportunity for the audit committee to have private conversations with members of management, and with the CAE and external auditors.

We offer the following suggestions for making the most of audit-committee executive sessions:

• The NYSE corporate governance rules require the audit committee to hold periodic, private sessions with management, external auditors and the CAE, and a portion of the executive session should be devoted to these sessions. Many audit committees have private one-on-one sessions at each audit committee meeting with the CFO, the CAE and the audit engagement partner. They also have periodic (once or twice a year), private one-on-one sessions with others, such as the CEO, general counsel and compliance and risk officers. Some audit committees make it a point also to have periodic private sessions with managers below the CFO level, to assess whether information the committee receives is open and transparent, and not “overly controlled” by senior management.
• When meeting one-on-one with management and external and internal auditors, audit committee members generally pose questions to elicit any concerns about management or auditor competency, resources or candor, as well as general concerns about the financial-reporting and control environment or specific accounting and control issues. At times, the audit committee chair may provide managers and auditors with a question in advance, so they have an opportunity to consider the issue more fully before the session (this should not be a “gotcha” exercise). Of course, audit committee members need to be prepared to ask follow-up questions, “test the answers” and take action to address any issues or concerns.
• Avoid negative inferences about the calling of executive sessions by holding them, as a matter of routine, at all audit committee meetings. These sessions might last several minutes or much longer; the key is to ensure discussions are not rushed or inhibited by artificial time constraints —and committee members should plan their schedules accordingly.
• An “audit committee members only” portion of the executive session provides an opportunity to privately discuss the performance of the financial- management team, including the adequacy of communications from the team, as well as compensation, succession planning, any issues or concerns that may have surfaced during the audit committee meeting and the audit committee’s own effectiveness and efficiency. It also provides an opportunity for audit committee members to deliberate and reach a consensus on difficult issues.
• It’s generally left to the audit committee chair to communicate with management or auditors regarding any issues or concerns that were identified during the executive session that may require their attention and follow-through. In addition, the chair should report to the lead director or board, as appropriate.

Get to Know Finance, Internal Audit Teams
Audit committee meetings provide an opportunity for audit committee members to get to know (and understand the potential of) members of the internal audit team and the entire finance team—whether the treasurer, tax director, chief accounting officer, controller, et al.—as well as managers a level or two below these C-level executives. At the same time, however, it is important to recognize that it is difficult to give the audit committee exposure to these key individuals without having committee meetings become unnecessarily large.

To this end, the audit committee chair should work with financial management to develop a systematic approach to providing key members of the finance and internal audit teams with appropriate, periodic exposure to the audit committee, while at the same time ensuring that there is a clear purpose for their presence at the committee meeting.

Reports to the Board, Meeting Minutes
The NYSE corporate governance rules require the audit committee to report regularly to the board of directors, and the commentary states that: “The audit committee should review with the full board any issues that arise with respect to the quality and integrity of the company’s financial statements, the company’s compliance with legal or regulatory requirements, the performance and independence of the company’s independent auditors and the performance of the internal audit function.”

For many boards, the audit committee’s report to the full board is the primary method of informing the board of the audit committee’s activities and ensuring proper coordination of the audit committee’s activities with other committees of the board.

Typically, the audit committee chair has 15 to 20 minutes on the board agenda to present the committee’s report, including time for director discussion and questions. The challenge is to update directors on the audit committee’s work, including significant issues and recommendations, and enable directors to focus on key items, engage in discussion and ask questions—in short, to keep all board members informed about the committee’s work.

While minutes of committee meetings are critical to document the processes the committee followed in carrying out its oversight responsibilities, there is an ongoing debate as to how much detail should be included in the minutes. It is critical that audit committees obtain the advice of counsel regarding the content and level of detail that is appropriate. Minutes of audit committee meetings should be distributed to the full board on a timely basis.

Ten principles to help guide audit committees—and the management and audit professionals supporting them—in their oversight of the financial-reporting process:

1. Be proactive in focusing the agenda on what’s important—financial-reporting risk— and make the most of audit committee meetings.
2. Insist on transparency, both external and internal—among the audit committee, management and internal and external auditors.
3. Focus closely on external financial communications—beyond the 10-K and 10-Q.
4. Question the continuing validity of key assumptions that underlie critical accounting judgments and estimates and be up-to-speed on key financial-reporting issues and developments affecting the company.
5. Assess the audit committee’s role in the oversight of risk management—with an eye to clarifying the scope.
6. Set and manage clear expectations for external and internal auditors.
7. Make sure the chief financial officer (CFO) and the entire finance organization, as well as internal audit, have what they need to succeed, and be sensitive to the strains on these organizations.
8. Assess the tone at the top and throughout the organization, including the effectiveness of compliance and anti-fraud programs.
9. Help link change and risk management— and monitor critical alignments (controls, risks, etc.)
10. Take a hard look at the audit committee’s effectiveness—including its composition and leadership—and find ways to continuously improve.

Commission Members (directorships in italics)

Co-Chairs
Dennis R. Beresford* – University of Georgia; Fannie Mae; Kimberly Clark; Legg Mason, Inc.

Michele Hooper* – The Directors Council; AstraZeneca; PPG Industries; UnitedHealth Group; Warner Music Group

Commissioners
James T. Brady – Ballantrae International, Ltd.; Constellation Energy; McCormick & Co.; T. Rowe Price Group

Richard Chambers – Institute of Internal Auditors

J. Michael Cook – Comcast; International Flavors & Fragrances

Cynthia Fornelli – Center for Audit Quality

The Honorable Barbara Franklin* – Barbara Franklin Enterprises; Aetna; American Funds; Dow Chemical

Patrick Lee – KPMG Audit Committee Institute

James P. Liddy – KPMG LLP

Kenneth Daly – NACD

Peter Gleason – NACD

(*NACD Board Member)

Copies of the complete 2010 Report of the Blue Ribbon Commission on the Audit Committee may be purchased at NACDonline.org. NACD members receive a substantial discount.