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)9.) Economic Recovery and the U.S. Fiscal Outlook: It might be stating the obvious that recovery from such a severe recession is a priority, but what’s more important is what got us all here. With that said, FEI’s most recent CFO survey found there were economic improvements but many executives were hesitant to declare the recession over, or soon to be. (FEI 2010 Top Challenges for Financial Executives)8.) Prepare for the Potential Impact of Key Public Policy Initiatives on Compliance, Risk and Governance Processes: Boards will be stressed to keep up with all the GRC initiatives in light of major public policy changes, such as healthcare, the environment, energy and financial services regulation. New or modified GRC oversight processes will be needed as there will be additional reporting, transparency and compliance obligations. (Audit Committee Institute Ten To-Do’s for Audit Committees in 2010)7.) Financial Regulatory Reform: Of all the issues on this list, this may be the most complex and prolific since it involves reams of federal legislation rife with compromises as both parties gear up for crucial mid-term elections. And now the Sen. Chris Dodd, head of the Senate Banking Committee, is retiring, it adds some uncertainty to the fate of the financial regulatory overhaul, which has already passed in the House. The legislation, if passed by the Senate, would fundamentally change the playing field of the derivatives markets and affect such areas as executive compensation, shareholder proxy voting, capital market regulation and financial products. (FEI 2010 Top Challenges for Financial Executives)6.) Review Compensation in Light of New Disclosure Rules and Shareholder Concerns: For boards and management, executive compensation is an issue that isn’t going away anytime soon. Between Special Pay Master Kenneth Feinberg’s work regarding the seven companies that were under the aegis of the Troubled Asset Relief Program (TARP) and new SEC disclosure rules that will go into effect next month, executive compensation will be the subject of many annual meetings. (Weil Gotshal’s Ten Thoughts for Ordering Governance Relationships in 2010)5.) Understand the Risks Posed by Cost Reductions Made in Response to the Economic Crisis: As companies try to get back to operating their businesses in a somewhat normal manner, there is fear that important oversight functions will be cut as well. As companies cut costs and reduce their workforce, the control environment becomes even more critical. And that is why ACI believes now is not the time to cut back on internal audit’s budget. (Audit Committee Institute Ten To-Do’s for Audit Committees in 2010)4.) Focus on Risk Oversight and Review Risk Management Processes: Similar to the focus on risk management following the accounting scandals of the early 2000s, many corporate governance experts believe risk oversight and risk management are even more critical. Boards are being asked to take a fresh look at their role in risk oversight, specifically in areas such as risks related to board decisions regarding corporate strategy and managing certain risks, i.e. related to executive compensation, corporate governance and delegation to management, that only the board is positioned to manage. (Weil Gotshal’s Ten Thoughts for Ordering Governance Relationships in 2010)3.) Focus on Long-Term Value Creation: Probably the most underlying problem leading to the financial crisis on the shareholder side. As pointed out in The Aspen Institute’s Overcoming Short-Termism paper in September, strong corporate performance over the long-term benefits everyone. It is believed institutional investors should assess their own internal incentive structure and consider whether it unduly emphasizes decisions based on short-term stock price performance. (Weil Gotshal’s Ten Thoughts for Ordering Governance Relationships in 2010)2.) Rethink protest votes in director elections: On the shareholder side, it is believed that since institutional investors and proxy advisors are gaining more power to affect the composition of the board, that they should apply their critical vote on director elections based on a broader view of the board’s performance in governing the company. The belief is that the era of the withhold vote will go away once the shareholders have gained more power to affect board composition. (Weil Gotshal’s Ten Thoughts for Ordering Governance Relationships in 2010)1.) Rethink Engagement with Shareholders: Communication between the board, management and shareholders has been lacking for some time. And as the financial crisis unfolded, that lack of communication and transparency was paramount. It is believed that shareholder engagement efforts should be designed to provide the board and management with candid information about shareholder viewpoints on important topics and to build the foundation for supportive shareholder relations. (Weil Gotshal’s Ten Thoughts for Ordering Governance Relationships in 2010)
Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…