Posted on 15 Sep 2011
According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, the financial crisis appears to have driven home the need for boards to manage risk more effectively. When asked what topics they would like to spend more time on, a majority (55%) of board members at public companies cite risk management, more than any other area. Moreover, an even greater percentage (61%) believe their liability risk as a director has increased during the past few years. These concerns may be well-founded as more than one-half (53%) of the directors indicate their companies do not have a Chief Risk Officer (CRO), or a person with similar responsibilities, and two-thirds (67%) say their boards do not have a risk committee.
"In recent years, the responsibilities of corporate boards have grown considerably and much of their time has been dedicated to responding to new regulatory requirements. Risk management has certainly played a role in those activities, but only from a compliance standpoint. What we are seeing in this study is a willingness of boards to take a more proactive role in risk management and it seems to be related to the risk they face as directors," says Wendy Hambleton, Partner in the Corporate Governance Practice of BDO USA.
When asked their main concern, if any, with the SEC's new whistleblower bounties, more than three-quarters (78%) of the board members focus on the negative impact of increased false allegations. Forty percent cite the damage false allegations can have to a business's reputation and another 38 percent cite the cost, in both dollars and time, of responding to false allegations. A much smaller proportion (15%) identify the potential negative impact to internal whistle-blower programs they've previously put in place.
Despite a great deal of criticism when they were announced, two-thirds (66%) of board members do not feel the whistle-blower bounties, recently enacted by the SEC, undermine the internal anti-fraud and compliance programs mandated by previous legislation. However, a similar amount (68%) of directors are in favor of legislation that would require whistle-blowers to report complaints internally in order to collect any reward from the SEC.
"The new Dodd Frank Whistleblower rules, which became effective last month, present several challenges to our corporate clients," said Glenn Pomerantz, Partner at BDO Consulting. "Whistleblower hotlines have been a strong tool for fighting fraud and a weakening of this mechanism would be unwelcome news for directors. It’s refreshing to see that directors do not anticipate bounties undermining anti-fraud compliance programs. The feelings among compliance professionals have certainly been mixed on this issue. It is certainly understandable why directors support a mandate for whistleblowers to use internal programs prior to alerting the SEC."
These are just a few of the findings of The 2011 BDO Board Survey which examines the opinions of more than 100 corporate directors of public company boards regarding financial reporting and corporate governance issues. The survey was conducted in August of 2011.
Other major findings from the 2011 BDO Board Survey:
* Reporting on Risk. Of the 47 percent of businesses that have Chief Risk Officers in place, most report directly to either the CEO (42%) or CFO (38%). By comparison, it is relatively rare to have them report to the Board (9%), General Counsel (4%) or Chief Operating Officer (4%).
* Risk Committees. Although only one-third (33%) of the boards have a risk committee, those with committees are overwhelmingly (90%) confident that they have qualified risk experts as members.
* Board Assistance. When asked which member of management is most helpful to board members in assessing and managing risk at the company, 44 percent cite the CEO, compared to one-third (33%) for the CFO. Other executive titles mentioned, include Chief Risk Officer (6%), General Counsel (4%) and Chief Operating Officer (3%).
* Accounting Overload Overdone. Almost three-quarters (73%) of board members report there have been too many changes to accounting standards and financial reporting requirements in recent years. Despite the pace of these changes, the vast majority (89%) of directors are comfortable with their ability to stay current on changes to accounting and financial reporting. Only a small minority (11%) indicate they are uncomfortable with their ability to keep pace with the changes.
* Auditor/Board Relationship. More than three-quarters (81%) of directors indicate the audit committee and external auditor meet on at least a quarterly basis, with one-third (34%) reporting they meet with the auditor even more frequently. Yet, 10 percent of directors say the meetings take place twice a year and another 8 percent say only once a year. However, among directors who serve on audit committees, almost all (96%) indicate they meet with the external auditors at least once per quarter. Virtually all (94%) board members report their audit committees conduct private meetings with the external auditors in order to get the auditors assessment of management.
* Time Management. When asked what topics they would like to spend more time on, a majority of board members cite risk management (55%) and succession planning (54%). The directors also identified areas where they do not need to spend any additional time. For example, a majority of the board members do not want to spend more time on executive compensation (71%), evaluations of key executives (64%) and compliance/regulatory issues (64%). Boards were evenly split (50/50) regarding the need to spend more time on studying industry competitors.
* Transparency. The overwhelming majority (84%) of corporate boards of middle market businesses describe themselves as "very satisfied" with the level of transparency management has with them. Another 11 percent are somewhat satisfied and only five percent describe themselves as dissatisfied with management's transparency. This is especially true on accounting issues. Ninety-seven percent believe that management provides them with enough information on positions they are taking on key accounting issues. The board members are equally (97%) satisfied that their external auditor is providing them with their independent view on management's positions on these accounting issues.
* Most Valued Attribute. When asked to identify the most important attribute for a board member, among the commonly cited qualities are "experience at a variety of businesses" (39%) and "industry expertise" (25%). Financial literacy (16%), ability to collaborate (10%), and communication skills (9%) are other popular attributes cited. Financial literacy was more likely to be viewed as an important attribute by members of the audit (23%) and compensation (22%) committees.
* Most Needed Attribute. When the directors were asked what capability was most lacking on their current board, more than a quarter identify the need for more industry expertise (28%) and one-fifth want directors with "a variety of business experience" (20%). Financial literacy (16%), communication skills (12%) and the ability to collaborate (9%) are also cited, but less often. Fifteen percent perceive their boards lack no important capabilities.
* Board Evaluations. When it comes to evaluating other members of their board, two-thirds (67%) of the directors report they have a formal evaluation process in place for this task. Surprisingly, one-third (33%) of the directors indicate they do not have a formal evaluation process. When considering their fiduciary responsibilities, almost all (95%) directors indicate they are comfortable with the qualifications of their fellow board members, with close to three-quarters (73%) saying they are "very comfortable."
These findings are from The 2011 BDO Board Survey, a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, on behalf of BDO USA. Executive interviewers spoke directly to 101 board members for public companies with revenues ranging from $250 million to $750 million.