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PwC reports changes are brewing in the boardroom. Are they enough?

The latest study by PwC, Annual corporate director survey 2011 findings: Boards respond to stakeholder concerns includes some interesting observations. I am concerned – are you?

Norman Marks
Norman Marks
This is how the authors start their report:

During the last two years, corporate directors have had to accommodate significant corporate governance changes, starting with the Securities and Exchange Commission’s rules expanding governance disclosures in the 2010 proxy season and including the enactment of the Dodd-Frank Act in July 2010. The new advisory votes on executive compensation and whistleblower rules, among others, are clearly influencing the director’s oversight role. The financial crisis also led to some concern by many regarding the efficacy of the role of boards in meeting their oversight responsibilities. With the evolving corporate governance climate, corporate directors face increased scrutiny from shareholders, regulators, politicians, the media, and other stakeholders.

PwC reports that directors are working diligently to meet the increased expectations. Areas they are addressing include:
- improvements to proxy compensation disclosures
- more dialogue with stakeholders
- risk management, including IT security and the risks inherent in the adoption of emerging technologies, including cloud computing.
- bribery and corruption
- strategy and succession planning
- diversity on the board

Some excerpts from the detail of the report:
- “72% of directors indicate that their boards would reconsider executive compensation—even when these votes pass — if there are indications of significant shareholder dissatisfaction”.
Comment: why is this only 72%?
- “To prepare for the “say on pay” vote and to embrace investor concerns about executive compensation, two-thirds of directors made changes to their approach from prior years. Forty-five percent changed the Compensation Discussion and Analysis (CD&A) to be more “plain English,” and 31% provided an executive summary in the CD&A.”
- “When rating the importance of the factors being considered by the compensation committee for the purpose of improving CEO pay practices, directors rank accurate and appropriate peer group evaluation as the most important factor, with 42% stating it is very important.”
Comments: (a) including ‘clawbacks’ was only moderately important; (b) the risk of public perception that the compensation may be excessive was not discussed.
- “Many directors increased communications with stakeholders during the last year in response to the desire of various corporate constituencies for more dialogue with board members. The largest increase is seen in communications with employees (36%), while 31% report an increase in communications with major shareholders. Just over one-quarter (26%) report an increase in communications with analysts”.
- “Today, only 19% of directors rate their board as very effective at monitoring a risk management plan that mitigates corporate exposure. To improve that performance, 57% report they would like to increase their focus on risk. The trend toward a desire for more effective risk management oversight is not new. In 2009, 66% of board members were interested in spending more time on this area. In 2010, this percentage decreased but was still at 57%. Not surprisingly, in 2011, 36% of directors indicate that risk management is already an area of major focus and therefore did not feel a need to dedicate more time to it.”
Comment: this is pretty pathetic. 81% admit to being less than effective and this was recognized as a problem in prior years, yet 43% appear complacent in addressing it.
- “Directors are particularly concerned about their ability to effectively oversee information technology risks. Nearly half of directors (46%) believe the board’s ability to oversee strategic use of IT is less than effective, and 38% want to spend more time on IT.”
- “A majority (52%) say it is difficult to find IT expertise to add to their boards.”
Comment: how hard have they been looking?
- “Forty-one percent of directors express an increased concern about fraud, which is in line with the growing frequency of investigations related to the Foreign Corrupt Practices Act. As a consequence, there is a particular concern about bribery and corruption (11%), which exceeds the concern about financial reporting fraud (6%).”
- “Succession planning is at the top of the list for increased consideration by directors, closely followed by strategic planning. Risk management remains near the top of the list, followed by meeting managers from key parts of the company.”
- “Nearly half of directors (42%) indicate their boards have started using tablets or smart phones in the last 12 months to receive their board materials, while an additional 38% wish that their board would use them.”

The report has an interesting Appendix with other curious findings – each of which give me cause to question whether the directors know what they are doing:
- Poor employee morale was only considered a very important red flag, stimulating greater board involvement, by 35%.
- The red flag of poor customer satisfaction was only considered very important by 38%.
- Boards rated themselves very effective in standing up and challenging management in only 61% of responses.
- The ability to review CEO performance garnered a 38% score.
- The ability to oversee risk management got 19%.
- 44% said that US boards are having trouble controlling CEO compensation.
- Only 37% said that the evaluation of individual directors’ performance was effective.

I am interested in your views.
Do you agree with me that these studies indicate many boards have problems with their performance?
Do you think they are taking the correct actions to improve performance?

Link :

Norman Marks, CPA, is vice president, governance, risk, and compliance for SAP's BusinessObjects division, and has been a chief audit executive of major global corporations for more than 15 years. He is the contributing editor to Internal Auditor’s “Governance Perspectives” column.

Vendredi 21 Octobre 2011