Aug
27
2010

The Conference Board, Davis Polk Release Proxy Analysis

The enhanced disclosures in the 2010 proxy statements of some of the largest U.S. companies, including some financial institutions, reflect the beginning of a new tighter corporate governance regulatory regime that will only grow as the Dodd-Frank Act is enacted.

That is one of the observations made in a four-part series of Director Notes that are based on an analysis of the 2010 proxy statements of the 30 companies in the Dow Jones Industrial Average by The Conference Board Governance Center and Davis Polk & Wardwell LLP.

The four-part series focuses on disclosures in such corporate governance areas as The Role of the Board in Risk Oversight (DN-010), Board Leadership Structure (DN-011), Board Diversity and Director Qualifications (DN-012) and Compensation-Related Risk and Compensation Consultants (DN-013). [Conference Board members can download the reports for free.]

“Passage of the Dodd-Frank Act will further the transformation of U.S. corporate governance from a board-centered to a shareholder-influenced model,” said Matteo Tonello, director of corporate governance research at The Conference Board. “Since additional disclosure requirements are the centerpiece of this new model, it is critical for corporations to benchmark their practices against those of their peers and adhere to the highest emerging standards of transparency. With this series, The Conference Board continues to fulfill its promise to help member companies meet these challenges.” [Read press release.]

Some of the findings from the research include:
•    Risk oversight models vary, but boards tend to directly review strategic risk issues.
•    Non-financial companies typically report having a dedicated Chief Risk Officer.
•    The CEO/chairman combination remains the prevalent leadership structure in the Dow 30.
•    Specific industry expertise is cited as critical in director selection, and all companies say they consider diversity when identifying director nominees.
•    Companies recognize a correlation between top-executive compensation and risk behavior, using an array of measures to mitigate such risk including clawbacks and stock-holding guidelines.
•    A number of non-financial companies retain compensation consultants through their governance, rather than compensation, committees.
•    Compensation consulting fees can be small relative to other disclosed fees paid to the same consultants for, e.g., actuarial or HR services.

“For financial companies, overseeing risk management has long been understood to be a critical board role,” says Louis L. Goldberg, partner at Davis Polk and co-author of three of the reports. “Not surprisingly, in the wake of recent corporate crises, the business community is recognizing that risk oversight is a quintessential function for boards of non-financial companies as well.”

- Gary Larkin

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May
27
2010

Q&A With Ken Daly — Risk and Red Flags

Ken Daly

Ken Daly, President and CEO of NACD

Public company boards have taken a bigger interest in risk governance as they try and get their businesses back to somewhat normal levels following the financial crissis. This focus on risk led the National Association of Corporate Directors (NACD) last fall to issue a Report of the NACD Blue Ribbon Commission – Risk Governance: Balancing Risk and Reward.

That October 2009 report lists 10 principles of effective risk oversight, which the risk and business consultant Protiviti recently provided an analysis of in its Board Perspectives: Risk Oversight that was published this spring. The top three principles are:

  • Understand the company’s key drivers of success.
  • Assess the risk in the company’s strategy.
  • Define the role of the full board and its standing committees with regard to risk oversight. Read the rest of this entry »

- Gary Larkin

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Mar
19
2010

Coalition Targets Boards for Sustainability Risk Message

After years of trying to get boards to pay attention to sustainability, Ceres (Coalition for Environmentally Responsible Economics) finally has an in: risk management. And just how does it plan to sell the notion that sustainability issues are a major risk? Through its investor and corporate networks.

That’s one of the main messages in Ceres latest report, The 21st Century Corporation: The Ceres Roadmap for Sustainability, which was made public on March 11. The report is meant to be an integrated approach for embedding environmental and social issues into all businesses across such areas as governance, stakeholder engagement, disclosure and performance.

“This is about understanding risk – including the risk of not seeing the opportunities your competitors see,” Mindy Lubber, Ceres president, said when announcing the report findings. “We need accelerated performance improvements from companies that reflect the true scientific and economic impacts of unchecked carbon pollution, growing water scarcity and billions of people still living and working in poverty.” Read the rest of this entry »

- Gary Larkin

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Jan
25
2010

Best to Keep Eyes Peeled on SEC Agenda

As President Obama continues to propose more stringent bank regulations in light of the financial crisis – a hefty tax on 50 of the largest banks and a plan to allow regulators to limit the size and scope of those banks’ risk-taking activities (Read press release, Jan. 21) –  it’s hard to imagine those gaining in any traction based on what has happened in the Senate.

The election of Scott Brown to the late Sen. Ted Kennedy’s seat gives the Republicans the power to filibuster since the Democrats will have only 59 votes, one vote short of what they need. With that said, many on the Hill believe it will be difficult, if not impossible, to approve such legislation as the financial reform package. And when you consider the proponent of the companion Senate bill, Sen. Chris Dodd, is now a lame duck, prospects for passage wane.

The uncertainty of any Obama proposal that needs Congressional approval leaves the SEC as the major corporate regulatory rule-maker for at least this year. So that is why I think it is prudent for directors and corporate management to keep an eye on the body’s rule-making and regulatory decisions over the next six-to-nine months.

Here are the most important SEC proposed and final rules I think many of you should be concerned with in 2010: Read the rest of this entry »

- Gary Larkin

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Jan
12
2010

FDIC Takes Page Out of G-20, Executive Compensation Task Force Playbooks

The FDIC’s decision Tuesday on a new insurance premium model for banks falls in line with what many are saying about executive compensation: It makes sense to tie executive compensation to risk alignment.

Specifically, the decision reflects some of the tenets of the G-20 and The Conference Board Task Force on Executive Compensation executive compensation principles.

The FDIC, led by Chairman Bair, voted 3-2 Tuesday during a contentious meeting  to require those banks that don’t align their compensation system with risk management to pay a higher insurance premium to the regulator. (Read Wall Street Journal blogger Damian Paletta’s coverage of that meeting.) “The FDIC is exploring whether the design of employee compensation programs should be considered as a factor in the risk-based pricing system,” according to a FDIC staff memo. The memo refers to Section 7 of the Federal Deposit Insurance Act, which requires the FDIC to establish a “risk-based” assessment system for depository institutions. (Read FDIC proposal, Incorporating Employee Compensation Criteria Into The Risk Assessment System.)

“The FDIC seeks to provide incentives for institutions to adopt compensation programs that align employees’ interests with those of the firm’s stakeholders, including the FDIC, and that reward employees for internalizing the focus on risk management,” the memo states.

As I said, not all five FDIC commissioners are on board with this measure, which is being pitched more as a way to replenish the bank insurance fund than a way to limit banker’s compensation. The vote itself calls for a 30-day comment period before the FDIC takes any action. Read the rest of this entry »

- Gary Larkin

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Jan
08
2010

Top 10 Issues Facing Directors in 2010

As part of my required reading during the first full week of the New Year, I can’t help but notice how many Top 10 board issue lists there are. And when I think about how critical 2010 is to the future of U.S. businesses and the recovery from the current recession, I realize how important it is to pore over those lists and determine whose advice is the most appropriate.

That is exactly what I will attempt to do with this post. Consider this the best of the Top 10 corporate governance lists for 2010. While it is by no means exhaustive, it is pretty thorough. I focused on annual memos from Weil Gotshal (Ten Thoughts for Ordering Governance Relationships in 2010), Financial Executives International (CEO Marie N. Hollein’s Top Challenges for 2010) and KPMG’s Audit Committee Institute (Ten To-Do’s for Audit Committees in 2010).

Another good source of advice, which I already featured in a recent post on good corporate governance, is the annual client memo from Wachtell, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2010) by partners Steven A. Rosenblum and Marty Lipton and associate Karessa L. Cain. Among many issues facing boards in 2010, Wachtell, Lipton believes succession planning is key as shareholder pressure builds. The memo reads: “CEOs and senior management have been under tremendous pressure from shareholders, employees, customers and other constituencies to manage difficult market conditions, and not surprisingly, continuity of executive leadership throughout the economic crisis has increasingly been the exception rather than the norm.”

Here are the best of the Top 10 lists for 2010 (OK, the FEI list only listed nine items, but you get the idea) in order of importance:

10.) Global Convergence of U.S. GAAP and IFRS: While it is true the United States is the last of the industrialized countries to embrace IFRS, that doesn’t mean boards shouldn’t be concerned about mandatory adoption in the near future. The SEC, whose IFRS roadmap hit a roadblock in 2009 in the midst of the financial crisis, seems ready to move ahead with setting a definitive date for adoption possibly by 2014. (FEI 2010 Top Challenges for Financial Executives) Read the rest of this entry »

- Gary Larkin

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Nov
23
2009

Worth Reading … Risk Management

Companies, big and small, are seeking out risk management guidance in the aftermath of the financial crisis as many worry about how to handle such a problem in the future.

It was in this context that The Conference Board Governance Center last week released the first in a series of online publications on risk management called Director Notes, which is available exclusively to Governance Center members. The first article, The Role of the Board in Risk Oversight: Adapting to Regulatory Developments and Emerging Practices, concludes that directors are generally aware of their fiduciary duties and know that an organization needs a comprehensive and holistic approach to risk, but there is still limited guidance available on the nature and extent of their oversight function. (To download the report directly, click here.)

“Outside of the financial sector, risk management as a coherent enterprise-wide initiative is a relatively recent topic of discussion among business leaders,” says Mark S. Bergman, co-head of the capital markets and securities group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and author of the report.

Here’s a look at some other recent research on risk management that I have been reading:

  • Effective Enterprise Risk Oversight – The Role of the Board of Directors,  Committee of Sponsoring Organizations of the Treadway Commission (COSO), Aug. 24, 2009. http://www.coso.org/documents/COSOBoardsERM4pager-FINALRELEASEVERSION82409.pdf. Key findings: This publication followed COSO’s Enterprise Risk Management Integrated Framework in 2004. It is a short addendum on the fundamentals of the board role within the framework. It takes into account the how the financial crisis has led to an increased focus on the effectiveness of board risk oversight practices.
  • Is Risk Management Part of Performance Management? Gary Cokins, product marketing manager of SAS, BigFatFinance Blog, Nov. 16, 2009. bigfatfinanceblog.com/2009/11/16/is-risk-management-part-of-performance-management/#more-690. Key findings: Risk management is not about minimizing an organization’s risk exposure. Quite to the contrary, it is all about exploiting risk for maximum competitive advantage.
  • Putting Risk in the Comfort Zone: Nine Principles for Building the Risk Intelligent Enterprise, Deloitte, 2008. www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_risk%20consulting_Putting%20risk%20in%20the%20comfort%20zone103108.pdf. Key findings: Part of a series of publications on the fundamental principles of risk intelligence, such as the definition of risk,  a common risk framework, the delegation of key roles and responsibilities and that the board has appropriate visibility into the company’s risk management practices.
  • The Board’s Role In Risk Management – Lessons Learned From The Financial Crisis, Bill Baxley, Anne Cox and Bettina Tobben, King & Spalding LLP, Metropolitan Corporate Counsel, September 2009. community.rims.org/RIMS/RIMS/Community/Resources/ViewDocument/Default.aspx?DocumentKey=558f535e-ee0f-4e90-b122-e5b2f2c19e25. Key findings: This article examines the changing role of the board in light of the recent financial crisis and draws, among other things, upon the insights from the Lead Director Network. It looks at how boards have responded to assist their companies and management and how the financial crisis likely will change the thinking of directors going forward.
  • Risk Management at Crunch Time: Are Chief Risk Officers Compliance Champions or Business Partners? Anette Mikes, Harvard Business School, May 30, 2008. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1138615. Key findings: Risk management departments in financial institutions have been undergoing major transformations. New regulatory requirements have raised the bar on compliance and expanded the remit of risk management significantly. The compliance imperative requires banks to implement a firm-wide risk management framework complete with analytical models for the measurement and control of quantifiable risks. In addition, recent corporate governance guidelines advocate the ‘business partner’ role of risk management.
  • Reputation Risk: A Corporate Governance Perspective, Matteo Tonello, The Conference Board Governance Center, December 2007. www.conference-board.org/publications/describe.cfm?id=1390. (free for members, fee required for non-members) Key findings: Some key recommendations contained in this report are that boards of directors should: reach a common understanding of the concept of corporate reputation and tie its discussion to a comprehensive analysis of the firm’s stakeholder base,  become familiar with management’s rationale for prioritizing stakeholder relations and be persuaded that the selected relations are instrumental to achieving the firm’s long-term objectives.
  • Emerging Governance Practices in Enterprise Risk Management, Matteo Tonello, The Conference Board Governance Center, February 2007. www.conference-board.org/publications/describe.cfm?id=1271. (free for members, fee required for non-members) Key findings: This study presents the results of inquiries conducted by The Conference Board Research Working Group on Enterprise Risk Management.  It examines how ERM departs from the fragmented and compartmentalized risk management solutions already in place at many organizations.

- Gary Larkin

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Sep
28
2009

Note to Directors: Risk Management Not Optional

It may have taken a financial crisis the likes of which we have not seen since the Great Depression and the election of a liberal president to get the federal government to see what corporate governance experts for years have seen. Risk really does matter.

Sure, some companies – especially those in financial services – have had a chief risk officer or the equivalent for years and COSO (Committee of Sponsoring Organizations of the Treadway Commission) issued an integrated framework for enterprise risk management back in 2004. (And those actions came after monumental accounting fraud perpetrated at Enron and WorldCom.) The difference now is that risk management is no longer an issue that just concerns CROs, CFOs and the internal audit team. It has reached the CEO’s office and the boardroom.

Aon, the Chicago-based insurance brokerage and management consultant, in its April Global Risk Management Survey found that while most organizations increased their overall risk preparedness since 2007, less than half of the respondents are tracking and managing all components of their total cost of insurable risk. And less than two-thirds of respondents had formally reviewed or have a plan in place to review three of the top 10 risks of 2009: economic slowdown (1), regulatory/legislative changes (2), and damage to reputation (6).

When the SEC and the U.S. Treasury Department (see Sept. 24 speech by Deputy Treasury Secretary Neal S. Wolin) are focusing on risk management for public companies, then you know it is no longer a secondary task, but rather a primary one for all boards and management. If auditors and audit committees felt burdened with conducting risk-based integrated audits of internal control over financial reporting, wait to see what the new administration has in store for the coming year.

For starters, the SEC under new Chairman Mary L. Schapiro has created the Division of Risk, Strategy and Financial Innovation, combining the Office of Economic Analysis, Office of Risk Assessment and other functions. It marks the first time one division, which will be headed by University of Texas School of Law Professor Henry T. C. Hu, will oversee risk and economic analysis, strategic research and financial innovation. Hu’s statement in the Sept. 16 release announcing his appointment is quite telling: “I look forward to working with the Commission and to using an interdisciplinary approach that is informed by law and modern finance and economics, as well as developments in real world products and practices on Wall Street and Main Street.”

In other words, it won’t be business as usual at the SEC as fewer political appointees and more academic and hands-on people join the regulator. It also means that all the work of organizations like COSO, the Institute of Internal Auditors (IIA), the National Association of Corporate Directors (NACD) and The Conference Board, will become more relevant. It is the research and thought leadership produced by such organizations that both regulators, lawmakers and executives will need to address current and future risk management issues.

Earlier this month, COSO issued Effective Enterprise Risk Oversight: The Role of the Board of Directors, a four-page paper that reiterates how crucial risk management is for today’s companies. “In the aftermath of the financial crisis, executives and their boards realize that ad hoc risk management is no longer tolerable and the current processes may be inadequate in today’s rapidly evolving business world,” the paper says.

The IIA has recently published 2010-2: Using the Risk Management Process in Internal Audit Planning (membership required), which is a practice advisory for internal auditors, and in May its Tone at the Top monthly e-newsletter focused on global risk. In addition, the NACD’s President and CEO Ken Daly told a KPMG Audit Committee Insights Webcast Sept. 21 that his organization is working on a Blue Ribbon Commission on Risk that is due out shortly.

Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition)

Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition)

The Conference Board Governance Center just last week released Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition), which includes a separate chapter on risk oversight. “Corporate boards should give thoughtful consideration to the benefits of implementing a comprehensive risk management infrastructure and enhancing the organization’s ability to respond effectively to risk events and capture new strategic opportunities,” according to the handbook, which was authored by Matteo Tonello, associate director of corporate governance at The Conference Board. The Board is also working, in collaboration with its Directors’ Institute, on a special Risk Oversight Handbook for board members.  The new Handbook will be a compilation of emerging practices in this area, expanding on the findings of the 2006 Working Group on Risk Oversight and will be released in the summer of 2010. (See Emerging Governance Practices in Enterprise Risk Management for those Working Group findings and recommendations.) Until then, The Conference Board will release a series of short-papers on the subject, for which it will avail itself of the contribution of leading legal and financial experts.

- Gary Larkin

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