While legislation—such as the Jumpstart Our Business Startups Act (JOBS Act) and Sarbanes-Oxley (SOX)—has eased some of the burdens small companies face when looking to go public, many of these companies now face the challenge of establishing effective governance structures. Limited resources and smaller staffs can lead to blurred lines between operations and oversight. Additionally, recruiting the right talent can also be difficult since small-cap companies may compete against their larger peers for talent.
Recognizing that small-cap directors have a need for specific corporate governance resources, the National Association of Corporate Directors (NACD) developed the NACD Small-Cap Forums exclusive for small- and micro-cap company directors. The forums—held on April 10 in San Antonio and on July 17 in San Francisco—feature seasoned directors from small-cap companies and subject-matter experts on financing and capital markets and board building.
The keynote speaker is Adam Epstein, founding principal of Third Creek Advisors, lead director of OCZ Technology Group Inc., and author of “The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies.”
Topics to be addressed include strategy and risk, board-shareholder communications, and shareholder activism. To view the full agenda or to register, visit http://bit.ly/1i5NcBu.
While the government remains shutdown, the Securities and Exchange Commission (SEC) remains open, and Chairman Mary Jo White opened the final day of the National Association of Corporate Directors Board Leadership Conference with an overview of what the commission has been focused on and where its attention will be directed in 2014.
As a former director who served on an audit committee, White understands the weight of the responsibilities placed on the shoulders of boards—particularly surrounding disclosure requirements. While the core purpose of disclosure is to provide investors with relevant information they need to make informed voting decisions, over time the list of disclosures has grown and become more specific, causing some to raise flags about disclosure becoming too intricate. “I’m not suggesting investors haven’t benefitted from this information—much, if not all, of it could be relevant and necessary, even though some insist investors don’t take advantage of it,” White said. “I am asking if investors need and are served by the detailed disclosures companies currently provide to the SEC. It can lead to info overload.”
Methods of improving disclosure are perennial topics, and White says there is still more to be done from her perspective. “But before we can move to improvements, we need to know why we have the information we have in disclosure today,” White explained, noting that the JOBS Act requires the SEC to review current disclosure requirements and consider how to modernize and simplify them for emerging growth companies. She said the staff is finalizing these rules and expects to make them public soon.
White also noted that some disclosure requirements may be past their prime. “Some requirements that were appropriate in the past may not reflect how investors use this information today,” she said, using the example of when annual reports were what investors looked to for historical closing prices and now this information is available almost immediately online.
“While much of what some term the ‘disclosure overload’ is a result of regulation, there are other sources,” White said. Due to investor demand, some companies made the decision to disclose more information than required to reduce risk of litigation claims of insufficient disclosure. “We think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing,” White said.
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.