information asymmetry

Posts Tagged ‘information asymmetry’

Know Your Audience: Understanding the Board’s Expectations

April 29th, 2013 | By Steven R. Walker

Know your audience–it’s often the first lesson in Public Speaking 101, but it’s also an important mantra for senior executives looking to improve the quality of their interaction with the board of directors. An issue my team often identifies when working with boards is a disconnect between the information the board needs and what the management team actually presents. We’ve seen this gap occur at companies of all sizes, industries, and levels of sophistication.

How management provides information to the board makes or breaks directors’ oversight role. Providing directors with the information they need to execute their duties is essential to fostering an environment where directors can succeed and be of most value to the company.

Through all my years of serving as general counsel, I have never received formal training on what directors require for their oversight role. Some questions that may arise are: What are their expectations for management? What perspectives do they bring to the table? What keeps them up at night? How much information is enough?

To help executive teams answer these questions, NACD recently introduced Executive Professionalism: Understanding Board Expectations, an innovative program that allows the executive team to step into the boardroom in order better understand the fiduciary and strategic responsibilities that influence the questions directors ask. Led by seasoned directors, this in-boardroom program is specifically designed to help the senior management team better understand the role of the board, deliver the information directors need, and understand how to best engage with their board to meet and exceed expectations on both sides of the table.

In addition to my team’s direct experience with our clients, the issue of gaps in expectations between the board and management is raised by NACD’s members much more frequently. NACD has developed two tools to help companies address this gap:

Bridging Effectiveness Gaps: A Candid Look at Board Practices addresses the gaps in information flow between management and the board.
C-Suite Expectations: Understanding C-Suite Roles Beyond the Core offers guidance for interacting with non-traditional members of the C-suite such as the chief risk officer and the chief corporate responsibility officer.

Tags: board advisory services, board c-suite relations, Boardroom education, Bridging Effectiveness Gaps, c-suite education, C-suite Expectations, director expectations, Executive Professionalism, information asymmetry, know your audience, oversight
Posted in Board Evaluations, Inside NACD | No Comments »

C-Who?

March 21st, 2013 | By Adam Lee

Late last year NACD released a white paper with McGladrey, Bridging Effectiveness Gaps: A Candid Look at Board Practices, which quickly became one of NACD’s most downloaded resources of 2012 and continues to be the most downloaded in 2013. The paper, based on four gatherings of directors and executives, notes that because directorship is a part-time role, the board must inherently rely on management for information. This can lead to a disconnect in communication, as the information the board needs is not necessarily the information management provides.

In an effort to accurately reflect the thinking of those “on the front lines,” boards often hear from voices outside of the typical four-officer lineup (CEO, CFO, COO, and general counsel). Nearly unheard of a decade ago, the chief risk officer (CRO) provides an example of a non-traditional C-suite officer uniquely positioned to fill an information gap. According to 2012-2013 NACD Governance Surveys, in public companies without a CRO, 64 percent of directors state that the level of information they receive on risk management is good or excellent. On the other hand, among the 28 percent of companies with a CRO, this level of satisfaction among directors increases by more than one-third to 87 percent. The difference is even clearer among private companies–48 percent of directors at companies without a CRO report high levels of satisfaction with received risk management information, and this increases by more than half to 76 percent of directors reporting similar high satisfaction levels at companies with a CRO.

These new and influential voices in the boardroom provide directors with the knowledge and experiences of those working day-to-day in various operational fields. Directors can draw on these diverse sources to ensure they have the breadth and depth of information needed for effective oversight. This solution, however, may present another issue; directors, while comfortable interacting with the typical four-officer lineup, may not have the same level of experience with non-traditional C-suite officers. In the same vein, these officers may not be as adept at providing the board with precise and relevant information.

In our latest white paper, C-Suite Expectations: Understanding C-Suite Roles Beyond the Core, NACD addresses this disconnect by presenting directors with tools they can use to interact with non-traditional members of the C-suite. The eight positions highlighted in the report are:

chief audit officer;
chief corporate responsibility officer;
chief ethics officer;
chief human resources officer;
chief information officer;
chief investor relations officer;
chief marketing officer; and
chief risk officer.

The report includes position descriptions for, information the board can expect to receive in reports from, and deeper questions directors can ask of, these C-suite officers. A complimentary copy of this white paper is available to all NACD members, and is available to non-members for $15.

Tags: Bridging Effectiveness Gaps, C-suite, C-suite Expectations, chief risk officer, information asymmetry, McGladrey
Posted in Board Information, Corporate Governance, Risk Management | No Comments »

SEC Leadership and Audit Committee Priorities for 2013

March 14th, 2013 | By Kate Iannelli

In the midst of the general process to determine the next leader of the Securities and Exchange Commission (SEC), current Chairman Elisse Walter[1] spoke to NACD’s Capital Area chapter this week. The conversation covered a wide range of topics, from diversity in the boardroom to the sequester’s impact on the SEC.

A significant portion of the discussion focused on the auditing profession, including activity from the Public Company Accounting Oversight Board (PCAOB). Having served on the SEC’s staff in a variety of roles beginning in 1977, Walter has had a front-row seat to the evolution of auditing and oversight. From her perspective, although audit has improved in the years since Sarbanes-Oxley, the improvements have not been enough to meet the current environment. Walter also highlighted the utility provided by PCAOB’s new Auditing Standard 16: Communications with Audit Committees and the proposed changes to the auditor’s reporting model.

On mandatory audit firm rotation—another significant proposed rule from the PCAOB—Walter was less committed. While there are many pros and cons to the concept, she noted the potential impact was uncertain.

PCAOB member Jay Hanson has commented several times on the concept release. Without a causal link between an audit failure and the audit firm tenure, Hanson remarked that he could “not see how the Board could move forward on mandatory rotation.” Furthermore, “mandatory rotation would be extraordinarily difficult to justify through an economic analysis of its costs and benefits.”

Last year, NACD’s National Audit Committee Chair Advisory Council spearheaded an initiative to propose an alternative solution to mandatory audit firm rotation: the audit committee evaluation of the external auditor. On Wednesday—the advisory council’s first meeting in 2013—delegates reviewed the status of the project. Since NACD CEO Ken Daly’s participation in a PCAOB roundtable last fall—during which he presented the assessment tool—the evaluation form has been downloaded over 1,500 times.

While directors wait for the PCAOB to decide its next steps regarding mandatory audit firm rotation, the advisory council outlined areas it plans to focus on in 2013. These include:

The quality of information presented to the board from management. Delegates suggested dashboards that are board- rather than management-oriented.
Cybersecurity and emerging technologies. Cyberterrorism and new technologies, such as social media, present significant risks to companies—oversight of which is often assigned to the audit committee.
Oversight of big data. Increasingly, investors are using data found in sources other than the annual financial report to analyze and make trading decisions. In some cases, the markets have information about a company’s products and performance before the board.

Produced with KPMG’s Audit Committee Institute and Sidley Austin, NACD’s National Audit Committee Chair Advisory Council will next meet in early June. For a summary of the council’s 2012 meeting, visit our Board Leaders Briefing Center.

[1] The Chairman’s views were her own, not those of the SEC.

Tags: AS 16: Communications with Audit Committees, audit committee, auditing, big data, cybersecurity, dashboards, Elisse Walter, emerging technologies, Evaluation of the External Auditor, financial report, information asymmetry, Jay Hanson, KPMG's Audit Committee Institute, NACD Capital Area, NACD National Audit Committee Chair Advisory Council, PCAOB, Sarbanes-Oxley, SEC, Sidley Austin, social media
Posted in Audit, Legislative & Regulatory | 1 Comment »