Worth Reading … Financial Crisis

At this point, a lot has been written about the causes of the financial crisis of 2007-2009. From the toxic mortgage-backed securities market to the lax regulation of derivatives to the creation of financial institutions that were too big to fail, many experts have written about their take on this historic collapse.

But what’s more important now for those boards and companies trying to move forward is real advice about what to do next … as in the next two to five years. Those analyses from such service providers as KPMG’s Audit Committee Institute, Deloitte , PWC and Ernst & Young as well as the Committee for Economic Development and the American Institute of Certified Public Accountants (AICPA) are providing that much needed advice. It is up to the boards and the company counsel to pore over these and integrate any appropriate actions in their strategic plans.

In its Director Notes series on the 2010 Proxy Season, The Conference Board Governance Center has tackled the challenges posed by the financial crisis. The January installment by John Wilcox, chair of Sodali Ltd., titled From Compliance Governance to Strategic Governance, [Membership required] focuses on how corporate boards will come under pressure to explain how they integrate governance with performance and long-term strategic business goals. “In addition to steering their companies through difficult times, business leaders must work to restore public trust in private enterprise…,” Wilcox wrote.

The financial crisis is also addressed in The Conference Board Governance Center’s The Role of the Board in Turbulent Times: Leading the

Public Company to Full Recovery [Click on cover image on right.]

Wilcox surmises the 2010 proxy season will focus on the following corporate governance issues:

• Integration of governance decisions with business strategy and performance goals
• Board oversight of risk management and internal controls
• Corporate culture, ethics, internal equity, and leadership style set by the CEO and board
• The board’s strategic competence in executive pay, CEO succession planning, and board self-assessment
• Quality of disclosure and communication between the board and shareholders.

The following are recent reports, papers, and articles on the financial crisis that I think are worth reading:

• Fall 2009 Audit Committee Roundtable Report: Few Directors Expect a Return to ‘Business as Usual,’ KPMG Audit Committee Institute, January 2010. www.kpmg.com/aci/docs/roundtable/Fall-2009-ACI-Roundtable-Report.pdf. Summary: This summary of the audit firm’s audit committee roundtables finds that expectations for effective risk management have many boards (and audit committees) rethinking their risk oversight practices. And a raft of public policy and regulatory reform initiatives – from new proxy disclosures to healthcare, energy, environment, and financial services reforms – pose new compliance and governance challenges. A survey of participants found that 66 percent believed that business would not return to usual in the next four years. It raises such questions for boards as: Have we cut too much? Do we have the flexibility to respond to changing customer and market demands? Have internal controls or financial reporting been affected?

• The Financial Crisis One Year Later: Proceedings of a Panel Discussion on Lessons of the Financial Crisis and Implications for Regulatory Reform, Prof. Bruce Aronson, Creighton University School of Law, Creighton Law Review, March 1. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1561844. Summary: A panel of experts composed of prominent corporate and banking law scholars, local financial industry executives, and a bank regulator convened at a recent symposium held at the Creighton University School of Law and engaged in a moderated discussion on applying lessons from the first year of the financial crisis to basic considerations underlying financial regulatory reform. There was some agreement between the “pro-regulation” academics and the “pro-market” business executives. The panel discussion covered six broad topics: (1) causes of the financial crisis, (2) government bailouts and market support, (3) historical analogies and lessons,(4) foreign banks and globalization, (5) systemic risk and its regulation, and (6) consumer issues and executive compensation.

• Banking Reform Proposals: Why They Miss the Mark, Knowledge@Wharton, Feb. 17. http://knowledge.wharton.upenn.edu/article.cfm?articleid=2434. Summary: Big banks have been widely blamed for creating the global financial crisis, and last month the Obama administration proposed several reforms aimed at restricting their activities. Among them is the so-called Volcker Rule — named after former Fed chairman Paul Volcker — which prohibits banks from trading for themselves. But will these proposals lead to a healthier banking system and help prevent future crises? Several Wharton professors say that while the proposals have some good aspects, overall they miss the big picture.
• Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders, Ben W. Heineman Jr., CED Trustee and chair of the CED Subcommittee on Corporate Governance, Policy Brief, Policy and Impact Committee of the Committee for Economic Development, Jan.25, www.ced.org/images/library/reports/corporate_governance/cgPolicyBrief0110.pdf. Summary: In a period of economic turmoil and public policy fer­ment, this Policy Brief seeks to identify the six essential and seamless tasks which boards of directors and senior executives together must discharge to create long-term value through strong economic performance, sound risk management and high integrity. To help restore deserved trust in corporate governance and account­ability, it seeks to provide an actionable framework on the fundamentals for private-sector leadership. This Policy Brief is released when necessary, spirited and extensive regulatory debates are taking place on the safety and soundness of the financial system and on governance issues applicable to all publicly held companies.
• After the Financial Crisis: Fixing the Market and Regulatory Failures, Eliot Spitzer, former New York governor, Blog Post, The Harvard Law School Forum on Corporate Governance and Financial Regulation, March 3. http://blogs.law.harvard.edu/corpgov/2010/03/03/after-the-financial-crisis-fixing-the-market-and-regulatory-failures/. Summary: Among seven points Spitzer lists in this post are “too big to fail” is too big not to fail, risk is real and the only way to reform corporate governance is to get the shareowners involved. He also writes that the failures of corporate governance account for much of our economic troubles over the past 30 years. Getting out of the current mess will require addressing these underlying failures. Fiduciary duty embodies all of corporate governance. If the decision-makers don’t understand this notion — to whom they owe it and how to act to enforce it — nothing will work.  Boards have to become more active, and that means they will have to be chosen in a fundamentally different way. CEOs, frankly, need to have their wings clipped because the internecine relationship between CEOs and boards has led us down a dangerous path.  Perhaps shareholders should be given additional voting power if they own a stock longer. That solution has its own troubles. But we need to find a way to give shareholders the power and incentive to get involved.

- Gary Larkin