“The last several decades have proven that, more than ever, we are all interconnected and interdependent,” said NACD Chair Karen Horn. “We will rise—or fall—together, based on that trust.”
NACD Board Chair Karen Horn
Horn’s opening speech at the recent 2016 NACD Global Board Leaders’ Summit revealed a compelling case for strong, conscientious corporate governance in light of recent political, economic, and social turbulence.
Horn’s governance experience is extensive and includes serving as a director at Simon Property Group, vice chair of the U.S. Russia Foundation, and vice chair of the National Bureau of Economic Research. She also previously served as chair of the audit committee at Norfolk Southern Corp., lead director and chair of the compensation committee at Eli Lilly & Co., and a director of T. Rowe Price Mutual Funds.
Horn began by thanking outgoing NACD chair Reatha Clark King for “her leadership and her positive influence on our organization’s growth,” and praised the audience for their own strength of leadership in the boardroom. She then turned to the guiding concept behind this Summit’s programming—convergence.
“Convergence is an important theme at a time when our world appears to be tearing itself apart,” Horn said. She pointed out that hostility seems to be the prevailing sentiment of our time and that frustrations with the current domestic and geopolitical environments are the impetuses for growing division. “I feel we must focus on a wider, longer view—a more broadly encompassing perspective that leads us back toward convergence,” she said.
Horn—who previously served as president of the Federal Reserve Bank of Cleveland and as an economist for the board of governors of the Federal Reserve—made several recommendations meant to address the evolving relationship between society and capitalism, using conscientious governance. (For more information on the roles of capitalism and corporations, view the NACD blog post “Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards.”)
Addressing Income Inequality
Directors can take a role in addressing social issues like income inequality, Karen said, adding that income inequality is an example of a challenge that “affects not only our immediate stakeholders, but everyone downstream who will be affected in the long term as well as the short term.”
Horn agrees that free trade is an excellent driver of economic value across the board, but that the path to growth can unintentionally leave some individuals behind. She suggested public, private, and government entities alike should develop programs that lift up those who are taken advantage of or otherwise harmed on the path to greater economic progress. “Looking at an issue like this from the perspective of those who will not benefit, or may even be hurt by it, is the first step toward finding compromises and solutions that will minimize negative fallout,” Horn said about the corporation’s role in growth as a greater good.
One such program that directors could collaborate with policy makers, social leaders, and other stakeholders on is how to address the controversial debate over minimum wage increases. “Everyone has an opinion, and it is clearly a divisive issue,” Horn conceded to the audience. “If we are to find a solution that works, again, we must become familiar with the divergent perspectives.”
The Imperative to Lead
Capitalism is being impacted by “globalism, social and demographic shifts, new technology, increased transparency and resource scarcity,” According to Horn. In the face of these paradigm shifts, directors have the opportunity to converge with stakeholders to build a better path forward for all, and have a unique opportunity to rebuild the public’s trust in the role of corporations.
“People are searching for leaders they can trust, leaders who are smart, confident and strong—who are understanding and compassionate,” Horn said. “This is a role sometimes filled by government, but trust in government is at an all-time low, so the leadership gap needs to be filled. I believe we are some of the leaders who can and should fill that gap.”
Horn’s address closed with a charge to directors that will resound through her term as chair of NACD and beyond.
“Corporate America has an immense amount of talent, and we need to step up before we are stepped over,” she entreated. “There is no question that we have the ability to take this leadership challenge, but only if we act responsibly, transparently, honestly and with careful regard for different perspectives. If we can do that, we can move our culture back toward civil discourse—toward convergence.”
On June 19, NACD and partners KPMG’s Audit Committee Institute (ACI) and Sidley Austin LLP co-hosted the most recent meeting of the Audit Committee Chair Advisory Council, bringing together audit committee chairs from major U.S. corporations, key regulators and standard setters from the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standards Board (FASB), and other audit experts for an open dialogue on the key issues and challenges impacting the audit committee agenda.
As detailed in the summary of proceedings, the forum provided timely insights into a number of issues that are top of mind for audit committees. Key insights from the dialogue include:
As the PCAOB continues to focus on enhancing auditor independence, skepticism, and objectivity, audit committees are wrestling with how to make the best use of PCAOB inspection reports, with some questioning the timeliness and relevance of the reports and the use of the term “audit failure.”
Audit committees continue to discuss the potential value of more robust reporting from the audit committee and external auditors to provide greater insight into their work. Most delegates agreed that the auditor’s statement is the right area of focus.
Companies should be preparing for the impact of FASB’s “big four” convergence projects—revenue recognition, leases, financial instruments, and insurance contracts—with a particular focus on the lead time IT departments will need to implement systems changes.
Under new leadership, the SEC is refocusing on corporate accounting fraud and the quality of financial disclosures, while moving ahead with its already heavy rule-making agenda resulting from Dodd-Frank mandates and the JOBS Act.
The allocation of risk oversight duties among the audit committee, full board, and other board committees is receiving increased attention, as the risk environment becomes more complex and audit committees reassess their risk oversight responsibilities.
In their oversight role, directors serve in a part-time capacity, while management is full time, resulting in executives having a much deeper knowledge of the operational aspects and risks of the company. To overcome this inherent imbalance, directors should apply a “healthy” level of skepticism to the information and assumptions management provides.
The audit committee’s effectiveness hinges not only on having the right mix of skills and backgrounds, but also having a robust onboarding process and commitment to continuing director education.
For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.
In just twenty minutes, Financial Accounting Standards Board (FASB) Chairman Leslie F. Seidman provided conference attendees with an overview of today’s key accounting issues. Although she tried to frame it as a briefing one would give in an elevator, she observed it would need to be “a very large elevator, in a very tall building.” Seidman chose two topics to highlight, providing sufficient information so attendees would be able to inquire their management teams further.
Seidman first addressed FASB’s project on convergence and the adoption of IFRS standards. Although FASB has been committed to adopting global accounting standards since the 1990s, the project has somewhat stalled in the last several years as a result of the financial crisis. Not only have key components seen significant delays, in July the Securities and Exchange Commission (SEC) issued a report on the project which did not include a decision or recommendations for future work.
Although Seidman believes the financial crisis has highlighted the need for consistent reporting globally, the fallout has shifted attention away from the convergence project. Additionally, the economic recession has made the cost-benefit analysis of switching standards an even larger issue. Because the vast majority of companies in the U.S. are domestically focused in both their operations and where they raise capital, the benefits of consistent standards must outweigh the potentially significant costs. Furthermore, if globally accepted standards are implemented, they will not necessarily be applied consistently, which can result in reporting that is still not comparable.
Despite the project’s roadblocks, the FASB will continue to work with the IASB. Directors can expect either reports or exposure drafts to be issued in the first quarter of 2013 on revenue recognition, leasing and certain areas of financial measurement. An exposure draft on the impairment element of financial instruments is expected to be released in the fourth quarter of 2012.
Seidman also discussed the issue of disclosure reports. Specifically, a call for companies to use disclosures to highlight only material information. Reports should also be structured to highlight the most important information in footnotes. She noted two companies, Sprint and Hartford, who voluntarily cut the length of disclosures without FASB assistance. At these companies, senior management committed to an examination of footnotes to remove immaterial, irrelevant information.