1. Regain control of the audit committee agenda. As signs of recovery emerge, take the opportunity to develop more focused (yet flexible) agendas, with an eye on the company’s key financial reporting risks. Insist on quality pre-meeting materials, spend less time on low-value or checklist activities, and engage in more discussions rather than listening to presentations. Don’t let compliance activities crowd out substantive discussion.

2. Understand the risks posed by cost reductions made in response to the economic crisis. Every board and audit committee should be asking whether the company’s delivery model has been changed permanently, and whether a “cost-reduced” business model can be sustained. Now is not the time to cut back on internal audit’s budget. (See #6.)

3. Focus closely on all financial communications. Earnings releases and scripts for analyst calls often pose more issues than the 10-Qs because they contain important business information—which often does not come from the financial reporting system, is not audited, and is not subject to internal controls. Reconsider the types of earnings guidance the company issues. Engage early on in reviewing 2010 proxy disclosures, particularly new disclosures regarding risk, compensation, and corporate governance. Understand the company’s policy on the use of Twitter and other social media to reach investors and customers.

4. Continue to monitor fair value issues, impairments, and management’s assumptions underlying critical accounting estimates. These issues, together with pension funding shortfalls and going-concern challenges, will continue to be a major area of focus for audit committees. Take time, too, for deep dives into specific financial reporting developments.

5. Rethink the audit committee’s role in risk oversight—with an eye to narrowing the scope. The tremendous focus on risk today—and the SEC’s new rules requiring disclosures about the board’s role in risk oversight—is an opportunity for the board to reassess the role of the audit committee (and the full board and the other standing committees) in overseeing risk. Does the audit committee have the expertise and time to deal with strategic, operational, and other risks? Is the expertise of other board members being leveraged?

6. Make sure internal audit is properly focused and fully utilized. Help refine internal audit’s role—and focus internal      audit’s activities on key areas of risk, as well as providing added assurance regarding the adequacy of risk-management processes. Internal audit is most effective when it is   focused on critical risks to the business—not just compliance and financial risks.

7. Prepare for the potential impact of key public policy initiatives on compliance, risk, and governance processes. Major public policy changes—e.g., healthcare, the environment, energy, and financial services regulation—are likely to impose additional reporting, transparency, and compliance obligations, requiring new or modified compliance, risk, and governance oversight processes. The adoption of the American Recovery and Reinvestment Act of  2009, coupled with new federal programs and the availability of stimulus funds, has created complex mandates, and companies have had to adjust their compliance programs.

8. The economic crisis continues to put pressure on compliance and anti-fraud programs. Be vigilant. The economic downturn has placed tremendous pressure on management to achieve operating results; at the same time, cost cuts and workforce       reductions may have exacerbated these pressures. How has the company treated its employees? How do they think they’ve been treated? A full review of the company’s anti-fraud and compliance programs, including its Foreign Corrupt Practices Act compliance program, may be in order.

9. Help link change and risk—and monitor critical alignments. Change creates risk. During times of dramatic change, the risk of misalignment—of the company’s strategy, goals, risk, controls, compliance, incentives, and people—goes up exponentially. The audit committee is in a unique position to help reduce the risk of misalignment.

10. Take a fresh look at the audit committee’s composition and leadership. The audit committee’s effectiveness and accountability hinges on meaningful self-   assessments—of the audit committee as a group as well as individual members. Take a hard look at the committee’s composition, independence, and leadership. Is there a need for a “fresh set of eyes?”

Mary Pat McCarthy is executive director, KPMG’s Audit Committee Institute (ACI), and U.S. vice chair, KPMG LLP.

–Former Fed Chief
Paul A. Volcker
speaking at a U.K. conference

CEOs should be good at many things, but there is really only one thing they must be good at—that is thinking through complex problems and designing equally powerful solutions. It is time they applied their great minds to finding some obvious solutions to the perception of compensation. It would materially help regain lost ground and public confidence.

Don’t Like the Cards? Shuffle the Shareholder Deck
We get the shareholders we deserve. How much time do CEOs spend during ordinary times finding a better class of longer-term shareholders? Goldman Sachs’ Lloyd Blankfein understands the importance of building the right shareholders better than most, so he made sure in the crisis period that Buffett was on the roster. Other CEOs should be regularly visiting with and canvassing smart shareholders about holding their stock for longer periods with lock ups and benefits. In the theater business they call it papering the house, having a few friends in the right seats. It can bring on a round of applause just when the company needs it most.

While a global systemic breakdown has been declared the culprit by most leading economists, including Federal Reserve Chairman Ben Bernanke, popular opinion and the media have focused on the failure of risk-management processes at our leading banking institutions, and the cascade effect that had on all companies. Thus, the scrutiny and criticism towards management and board directors has been more pointed than in previous declines. While directors are moving swiftly to restore confidence in their institutions’ corporate governance, there is an equally urgent need to set the record straight with regard to how most boards performed versus the few in the spotlight, as well as the significant contributions now being made towards recovery.

To embark on such a mission, directors need to know what people are thinking and saying, and why. To obtain these important insights, Directorship and Deloitte collaborated to study the matter in detail, and in conjunction with Korn/Ferry International, set out to determine how the broader community—defined as “Main Street”—views the boardroom. In the course of our research, the opinions of teachers, laborers, policy makers, doctors, students, academics, and community leaders were sought (see Methodology, opposite). To gauge and compare those data with inside-the-boardroom views, we also asked the opinion of the C-suite, which includes board directors, chairmen, CEOs, and members of management.

The objective of “What Society Thinks? (about boards and business)” was principally to establish a baseline that, reviewed over time, would record changes in perceptions and point to where education and reform are needed, in terms of public opinion. Independent directors, says Henry Ristuccia, Deloitte & Touche LLP partner and U.S. leader of Governance & Risk Management, need to step back and determine the motivating factors for this perception and to the extent that there is genuine longer-term reputational risk. “The reason we contributed to this study is because we sensed a shift in perception, but wanted to be able to point to the exact causes. How dramatic has the change been? That will be answered by the research and subsequent studies every six months. What matters most are the lessons we can learn. It’s the same old issue that, if you don’t address the problem, then the regulators and legislators will do it for you.”

While many studies have focused on the more obvious question of “what the boardroom thinks,” there was a growing sense on the part of Directorship’s editors that a new measurement could be used to inform boards of directors what others think about them. As the data was analyzed, it was clear the results were instructional and constructive for its implications to directors and the C-suite at large. “There are always lessons to be drawn from challenging times, and today is no exception,” says Ray Lewis, managing partner, Deloitte LLP’s Center for Corporate Governance. “There are areas that proactive boards will focus on improving, whether they are about processes, sensitivities, or simply risk vs. reward metrics. In reviewing the data, we cannot predict whether societal attitudes will change quickly upon recovery or whether this is a longer-term shift. But providing directors and CEOs with a deeper understanding of the environment in which we are working is an important step.”

The institutions and organizations that share a commitment to good corporate governance are well aware of a shift in the public’s perception about boards and business, and have already taken action to address the issue proactively. In the fall of 2008, for example, the National Association of Corporate Directors (co-publisher of NACD Directorship) released Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies to show that boards are “leading the way” in restoring public and investor confidence in American boardrooms and C-suites. The initiative has led to a series of white papers, peer-to-peer meetings and, most recently, a Blue Ribbon Commission on Risk Governance.

Directors should also be willing to engage in a role that helps shape public opinion, says Steve Mader, vice chairman and managing director, of Korn/Ferry, if for no other reason than it is good for business. “We spend all our time on shipwrecks. Few would dispute that based on results, a small number of boards did not perform for their shareholders and their companies,” Mader says. “But my point is everyone, and especially directors, should join in the fight to shape public opinion rather than allowing it to be shaped for them. In the capital markets, value goes up and down by trillions of dollars driven by simple sentiment. That’s a trillion-dollar capital-formation challenge every morning.”

Seeking Answers
The specific objective of “What Society Thinks?” was to distinguish the views of   select groups on a variety of board-specific topics now the subject of intense debate, study, media attention, and regulation: for example, public opinion on issues ranging from accountability and transparency to environmental and social responsibility. Also examined was how well society understands the board’s role in dealing with issues such as corporate governance, compensation, labor, ethics, risk management, and the environment. How does society perceive the board’s role vs. the CEO? And how do the board and management see themselves in these contexts? These are the questions that the research set out to explore. “The intensity of negative publicity around American business, particularly in the automotive and financial-services sectors, has created a ripple effect at the corporate-governance level,” says Nels Olson, managing director of Korn/Ferry’s Eastern region and senior client partner in the CEO and Board Services practice. “On an annual basis, Korn/Ferry advises hundreds of boards on their composition and the selection of new directors. At the end of the day, consumers are the shareholders and we need to understand their perceptions, so we can properly guide our clients.”

The Directorship/Deloitte survey was organized into five broad categories: board duties and compensation, board responsibilities, opinion of board directors and CEOs, the economic crisis, and director and CEO compensation. In all, 39 questions were asked, including:

• How would you assess the credibility of board directors and CEOs today and how effective have they been during the economic crisis?

• Did CEOs and directors adhere to good corporate governance standards?

• How many hours do directors work and how much should they work?

• Is what directors and CEOs get paid fair?

• Should CEO compensation be capped and tied to company performance?

• How familiar are different constituencies with the responsibilities of a public-company board director?

• Should the role of the chairman and CEO be separated?

• What motivates CEO performance?

• Was criticism in the media of board directors during the economic crisis fair?

• Was criticism in the media of CEOs fair?

• Who was most responsible for the economic crisis?
  ]]> http://www.directorship.com/main-street-meets-c-suite/feed/ 1 http://www.directorship.com/bernanke-defends/ http://www.directorship.com/bernanke-defends/#comments Fri, 04 Dec 2009 21:08:50 +0000 News Editor http://www.directorship.com/bernanke-defends-record-for-second-term/ Federal Reserve Chairman Ben Bernanke, making his case for a second term, defended his record on Thursday before a skeptical Senate that criticized the central bank for failing to prevent the financial crisis, according to Reuters.
  
  ]]> http://www.directorship.com/bernanke-defends/feed/ 0 http://www.directorship.com/main-street-banks-morici/ http://www.directorship.com/main-street-banks-morici/#comments Wed, 02 Sep 2009 14:42:48 +0000 Peter Morici http://www.directorship.com/?p=9227 Like a boxer staggering to its feet, the U.S. economy is recovering.

  Since May, real consumer spending has been gradually rising. Technology spending is looking up, as computers age and Asian growth pulls demand for sophisticated components. New home construction is showing new life.

  These will permit 2 percent GDP growth in the second half of 2009, but a second credit squeeze could knock down the economy again.

  Regional banks are in a sorry state, laboring under failing commercial loans. Through August 2008, the FDIC closed or merged 83 banks into stronger institutions and 400 more banks are on the critical list.

  Many forgot how to be bankers. With one eye on quarterly profits and the other on the Country Club BBQ, many loaned to retailers and commercial real estate ventures with dubious business prospects.

  Even a casual trip through suburbia from 2005 to 2007 revealed too many stores selling the same stuff, and bankers were best positioned to know consumers were overextended.

  Main Street scions of finance tried to diversify risk by selling loans to Wall Street, which packaged those loans into Commercial Mortgage Backed Securities (CMBS) and then sold the securities back to the banks. This round tripped debt is collapsing, destroying bank balance sheets.

  The Obama Administration’s financial sector rehabilitation plan originally proposed public-private partnerships to purchase and work out residential and commercial debt.

  Instead, the FDIC, with limited resources, is merging insolvent banks into somewhat stronger banks by agreeing to absorb huge losses.

  Retailers, commercial property leases and CMBS failed later in the recession than the housing market, and the full impact on regional bank lending and credit markets is just coming into focus.

  Moderate-sized businesses—those supposed to build President Obama’s green economy—can’t get credit. Wall Street bankers are not much interested in collateralizing business debt through regional banks—New York has had enough of the lending acumen of Main Street bankers.

  Finally, big firms are paying smaller suppliers slower but demanding payments from them sooner, imposing a cash flow squeeze on the moderate-sized business whose bankers are turning them away.

  Cash flow, credit and collapse could be the bywords of 2010 as smaller businesses and banks continue to fail and the recession takes a second dip.

  The FDIC insurance fund stood at $10.4 billion in June and total losses are likely to double that. Either surviving banks will pay much larger insurance fees—making credit even tighter—or the Treasury will lend the FDIC money against fees that may be collected in better times.

  The Obama Administration and Fed have done just about everything possible to keep doors open at the nation’s largest banks, lending money so cheaply that even an economics professor could make one profitable.

  It’s high time for systemic relief for smaller banks—a Bad Bank to work out their loans and a wholesale revamping of how community bankers run their cottage investment houses.

  Endlessly, pundits and analysts pronounce that small businesses are the innovators and job creators and critical to recovery.

  They can’t do that job without meaningful rehabilitation of regional banks.
  Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

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