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21 Dec. 2010 | Comments (0)

As company holiday parties wind down and executives prepare for what next year may bring, that can mean only one thing in the corporate governance world: time for Top 10 lists for 2011. Of the four major lists I could cull, only one actually lists 10 items. For the most part, these lists are more a compilation of issues and challenges facing directors and C-level executives in the coming year. In lieu of a Top 10 list this year, I figured I would focus on the top issues that I have seen in lists from four organizations. They are KPMG’s Audit Committee Institute (Ten To-Do’s for Audit Committees in 2011); the law firm of Wachtell, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2011); PWC (2011 Current Developments for Directors); and executive search firm and consultant Heidrick & Struggles (10 Key Challenges for CEOs in 2011). If you want to compare this year’s list to last year’s, look at my blog post from January 8. Here is a breakdown of the issues and challenges for this year’s lists: Executive Compensation
  • “Executive compensation continues to be a major area of regulatory focus and public debate, and the Dodd-Frank Act and related SEC rules include several notable developments that boards and compensation committees will need to take into account. …Boards and compensation committees should review compensation policies with great care, being mindful of pay-for-performance principles while also seeking to avoid policies that will encourage excessive risk-taking. Directors should also bear in mind the heightened sensitivity to pay packages that could be deemed ‘excessive’ given the new post-crisis emphasis on financial restraint.” (Wachtell, Lipton, Rosen & Katz)
  • “While the [executive compensation plan] advisory votes are nonbinding, directors will be under pressure to react to the voting results. If they don’t, they could become targets of a withhold vote campaign in a subsequent board election. … Many directors are concerned that say on pay gives ever-greater influence to proxy advisory firms. … A number of companies are considering more active direct engagement with significant shareholders to counter the greater influence of the proxy advisory firms. … They also should understand shareholders’ perspectives when considering fundamental changes to executive compensation programs.”  (PricewaterhouseCoopers)
Risk Management
  • “Reassess the quality of business controls around the company’s key operational risks – and  consider possible lessons learned from the business crises of the past 18 months. [Ask such questions as] What’s changed in the operating environment? Have we had any failures – or near misses? What are the risks posed by the extended organization – sourcing, outsourcing, sales, and distribution channels? Does the audit committee have a good sense of the company’s risk culture beyond the boardroom and senior management level?” (KPMG’s ACI)
  • “Understand the company’s significant tax risks. Tax authorities in the U.S. and globally are ratcheting-up their enforcement efforts, and are more aggressively sharing information to increase the effectiveness of their tax audits of multinationals.  In September, the IRS announced that it will require companies to report uncertain tax positions on their tax returns – providing important information to the IRS for tax audits. Given this tax risk environment, understand management’s process for determining the company’s tax risk appetite.” (KPMG’s ACI)
  • “This past year, the heightened focus on risk management that was precipitated by the financial crisis was further underscored by the tragic events in the Gulf of Mexico [BP oil rig explosion and spill] and major product recalls by Toyota. … a recent survey by The Conference Board concluded that while most boards have been taking steps to upgrade their risk oversight capabilities, there is significant diversity across companies in their approach to this task. … Compensation committees should be engaged as management develops the compliance framework and should coordinate with risk and audit committee members in fulfilling its function.” (Wachtell, Lipton, Rosen & Katz)
Corporate Governance Compliance and Culture
  • “Making the board an ally. With first Sarbanes-Oxley and then the global financial crisis, corporate boards have stepped in to become more ‘executive,’ instilling themselves further into the role of scrutinizing and interrogating management. The CEO must build a strong relationship with these key stakeholders and bring them on a ‘journey’ against his/her (or their) desired initiatives, operating with transparency. If you treat the board as your enemy, you will get the enemy you deserve!” (Heidrick & Struggles)
  • “Review the company’s whistleblower processes and compliance program. The Dodd-Frank Act’s whistleblower bounty program, together with stepped up enforcement efforts by the SEC and the Department of Justice – particularly in connection with suspected Foreign Corrupt Practices Act (FCPA) violations – point to the need for companies to reassess their compliance efforts. In light of the Dodd-Frank Act’s incentives for whistleblowers to report concerns directly to the SEC, consider whether there is a need to revitalize the company’s existing whistleblower processes so that employees are encouraged ‘to talk to the company first.’” (KPMG’s ACI)
  • “Directors should understand how management is enhancing the company’s FCPA compliance program, and tailoring it to meet the company’s needs; setting a tone at the top that emphasizes the importance of compliance with the law; and ensuring there are robust controls to prevent and detect criminal conduct. Directors should recognize that the SEC will become increasingly active and visible in its enforcement and examination activities, discuss with management how the company may be affected by the new SEC whistleblower program and what actions, if any, management is planning…”(PWC)
  • “It is clear … that proxy access would effectuate a significant ratcheting-up of the already heightened ability of shareholders to exert pressure on boards, particularly when considered in the context of the elimination of broker discretionary voting in director elections and majority voting standards. Companies will need to engage constructively and proactively with shareholders and, in the cases where directors nominated by shareholders are successfully elected, boards will need to work to minimize the potential adverse effects on board stability, collegiality, and effectiveness.” (Wachtell, Lipton, Rosen & Katz)
IT Governance and Social Media
  • “Talk about the audit committee’s role in information technology governance. Understanding the opportunities and risks posed by IT is a critical challenge for companies today – from IT spending and strategic alignment of IT resources to systems implementation and outsourcing, information privacy and security, cloud computing, internal controls, business continuity, and ultimately to information quality and the company’s competitive position. [Ask such question as:] Does the company have a social media networks policy in place? Is there a need for IT expertise on the board?” (KPMG’s ACI)
  • “Operating in a world of social media. Today’s CEO is coming to realize that potentially all of his or her decisions and actions are broadcast in real time on company blogs or on Twitter and Facebook. Instead of being a ‘victim’ of this new exposure, CEOs must embrace and become part of the new media social discourse.” (Heidrick & Struggles)
  • About the Author:Gary Larkin

    Gary Larkin

    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…

    Full Bio | More from Gary Larkin


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