Rebuilding Trust Through Better Risk Monitoring

A recent op-ed article in the Financial Times by noted author and professor, Frank Portnoy, raises the question about the need to hold corporate managers personally accountable for gross negligence when they do not monitor risks. Mr. Portnoy proposes having senior executives at major banks certify that they are actively monitoring the risks taken in areas such as trading desks that have resulted in recent losses due to rogue trading activities. He summarizes his view in the following way.

Current rules permit directors and officers to avoid personal liability for gross negligence. That is a wise rule for most business decisions: courts are generally not skilled at assessing business judgment. But risk is different. Why should a bank manager who is grossly negligent in supervising risk avoid liability?

Shareholders might never be able to understand the risks of modern banks, and current regulatory approaches will not give them much confidence. But if they knew that senior managers had agreed to be personally liable for gross negligence in monitoring risk, they might trust the banks more. Without trust, it is hard to see how banks can recover.

Mr. Portnoy is correct to promote the notion of greater accountability for monitoring risk. However, attaching personal liability to executives may not necessarily be the best method. It would be very difficult to define what is an adequate level of risk monitoring since it really differs for every institution. That is why the industry is so heavily regulated. However, Mr. Portnoy is certainly on point in the fact that stronger risk monitoring is needed to rebuild trust in banks.


New Breeding Ground for Risk Topics

Board members of public companies are accustomed to passing along any risk related issues to the Audit Committee and/or Risk Committee. However, many of these directors are discovering risk related issues are not necessarily the specific purview of those groups. One committee in particular is becoming a breeding ground for risk topics – the Compensation Committee. With incentive programs entering the spotlight through greater disclosure about their impact on risk taking and heightened investor scrutiny, a new set of board directors need to be concerned with risk management. Here is what a leading expert had to say recently about the change.

Finally, an important means for compensation committees to address the risks that they now face is to ensure that they and the compensation-setting process are fully integrated into the overall risk-oversight activities of the board and the company. The financial crisis and its legislative and regulatory aftermath have focused considerable attention on the relationship between incentives in compensation programs and the risks that arise for companies, and as a result the compensation committee has become a crucial component of the risk-oversight process. The compensation committee’s attention to risks—through a periodic evaluation of the compensation program and how pay elements could create risks—has now become a regular part of the analytical framework.

How is your Compensation Committee addressing risk? Having the ability to articulate the linkage between incentive programs and a company’s risk appetite is critical to proactively addressing investor concerns.  If you or someone else in your company is interested in learning more about bridging this gap, contact us at

NYSE Issues Corporate Governance Principles

The New York Stock Exchange (“NYSE”) recently completed a report detailing the corporate governance principles that member companies should adopt in the wake of the financial crisis of 2008.  In the report, the NYSE’s Commission on Corporate Governance defines the following ten fundamental corporate governance principles and focuses on the interrelationships of what it calls the three cornerstones of the corporation – boards, management and shareholders.

1. The board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation and its shareholders and the board is accountable to shareholders in its effort to achieve this objective.

2. While the board’s responsibility for corporate governance has long been established, the critical role of management in establishing proper corporate governance has not been sufficiently recognized.  The Commission believes that a key aspect of successful governance depends upon successful management of the company, as management has primary responsibility for creating an environment in which a culture of performance with integrity can flourish.

3. Shareholders have the right, a responsibility and a long-term economic interest to vote their shares in a thoughtful manner, in recognition of the fact that voting decision influence director behavior, corporate governance and conduct, and that voting decision are one of the primary means of communicating with companies on issues of concern.

4. Good corporate governance should be integrated with the company’s business strategy and objectives and should not be viewed simply as a compliance obligation separate from the company’s long-term business prospects.

5. Legislation and agency rule-making are important to establish the basic tenets of corporate governance and ensure the efficiency of our markets.  Beyond these fundamental principles, however, the Commission has a preference for market-based solutions whenever possible.

6. Good corporate governance includes transparency for corporations and investors, sound disclosure policies and communication beyond disclosure through dialogue and engagement as necessary and appropriate.

7. While independence and objectivity are necessary attributes of board members, companies must also strike the right balance between the appointment of independent and non-independent directors to ensure that there is an appropriate range and mix of expertise, diversity and knowledge on the board.

8. The Commission recognizes the influence that proxy advisory firms have on the market, and believes that such firms should be held to appropriate standards of transparency and accountability.  The Commission commends the SEC for its issuance of the Concept Release on the U.S. Proxy System, which includes inviting comment on how such firms should be regulated.

9. The SEC should work with the NYSE and other exchanges to ease the burden of proxy voting and communication while encouraging greater participation by individual investors in the proxy voting process.

10. The SEC and/or the NYSE should consider a wide range of views to determine the impact of major corporate governance reforms on corporate performance over the last decade.  The SEC and/or the NYSE should periodically assess the impact of major corporate governance reforms on the promotion of sustainable, long-term corporate growth and sustained profitability.

This report is a wonderful guiding resource for board directors and management who are looking to strengthen corporate governance in a meaningful and practical way. It also provides some great recommendations for government regulators who are looking to implement new rules.  If adopted fully, these principles will go a long way to returning the U.S. and its capital markets to a position of prominence.

Clues to Board Ineffectiveness

The Harvard Business Review published a provocative article last week about the shortcomings of board directors in today’s post financial crisis environment. The article was written by Roger Martin, dean of the Rotman School of Management at the University of Toronto. Mr. Martin is a frequent writer and expert in the field of Design Thinking. According to Mr. Martin, the following are six indicators of a bad board member.

1) They complain about how hard Sarbanes-Oxley has made it to be a director. Guess what? It has also become hard to be an investor. And hard to be a public company auditor and a capital markets regulator. It’s hard all over. If your directors complain that they don’t have time on the board to talk about strategy and succession and other important management issues because the formal SOX procedures have crowded that out, you have mice not men (or women) on the board. Every person in every organization has the personal choice to be a value-added contributor or turn into a useless bureaucrat. Directors have that choice; nobody is putting a gun to their heads. If they complain, they are likely to be useless to you.

2) They complain about how the fees for being a director aren’t high enough to compensate for the onerous work involved. You don’t want a director on the board because they think it is great money. If they complain about the money, it is because they are obsessed about making money by being on boards and want it to be a lucrative gig. If they think it is great money, they won’t do anything to rock the boat and risk losing that gig.

3) They are paid in the top tertile of peer boards. Boards set their own compensation. If board members set their compensation significantly above the median of peer boards, they want to make the board a lucrative gig and that is a bad thing, per the point above.

4) They express excessive pride over being on the board. This is likely to mean that they are enamored with the prestige of being on the board. If that prestige is important to their sense of self then they won’t do anything to rock the boat and risk losing the prestige associated with being on the board.

5) They express enthusiasm for the enjoyable social atmosphere on the board. This means they will be incline to avoid doing anything to rock the boat because that will reduce the enjoyment of the atmosphere on the board.

6) They express enthusiasm for the personal growth opportunities the board provides them. That is lovely for them, not for you.

As we continue to emerge from the rubble of the Great Recession, more companies will need to reflect on the effectiveness of their boards and, more importantly, their individual board members.

Boards Take the Lead on Risk Management

The Conference Board published a report this month about best practices in public company risk oversight. The report compiled interview insights from  20 members of U.S. public company boards, representing a variety of business sectors (including manufacturing, high tech, real estate, food services, retail, telecommunications, air travel, energy, health care, and banking) and ranging in size from $150 million to over $30 billion in revenues. The report ultimately demonstrates the need and desire of corporate boards to take the lead in improving risk oversight. The following ten insights are noted in the report with actual board member quotes in italics.

  1. Assign the responsibility of risk oversight to the full board and the burden of risk oversight to the right committee(s). (“We are all collectively responsible for risk,” said a board member, while another added: “Audit committees tend to have a checklist approach to risk oversight, which is dangerous; not enough prioritization, not enough of a business angle.”)
  2. Consider the full breadth of material risks that can impact the company. (“We benchmark against a range of companies to make sure we think.“)
  3. Push for a deep understanding of the key risks. (“We spend a lot of time reviewing the numbers and understanding risk processes: where the key numbers come from, how they get into the reports.”)
  4. Secure the right expertise on the board. (“Transformation of our risk approach was driven by two board members with risk experience elsewhere.”)
  5. Nurture a healthy tension borne by diversity. (“The biggest change we made in risk management over the last few years is focusing on having the most diverse board possible.”)
  6. Engage the broad management team. (“The board needs to interact with management in an open manner, not just hear what has been rehearsed three times.”)
  7. Embed risk discussions in all board processes. (“Every initiative presented to the board concludes with a simple page with three to four bullets on the key risks.”)
  8. Avoid the “bureaucratic trap”—more substance, less process. (“When you ask an executive to go in depth on a specific risk and you get a blank stare, you know risk management has become too bureaucratic.”)
  9. Make risk management actionable, not just an exercise. (“Follow-up is critical—managers come back to the board and are asked ‘tell me what you have done’—it is more than just a plan.”)
  10. Take ownership of improving risk management in the organization. (“To make risk management a success at our company the board had to get involved—we never gave up.”)

This represents the new shift by boards to become more risk focused.  How does your company stack up against these best practices?  What other insights should be included on the list?  How do you engage senior management to embrace practices such as these?  If you are interested in joining the discussion, email us at

New SEC Rules Serve as a Warning to Boards

Large U.S. corporations were recently placed on notice by the Securities & Exchange Commission (“SEC”) that shareholders will have a larger voice in determining board members going forward.  Just last week, the SEC adopted new proxy access rules that could have a significant impact on companies who anger their shareholders by not managing their risks well.  Crain’s New York had a very interesting report on the potential impact of the changes on companies like Goldman Sachs.  Here’s their view.

Goldman Sachs is target No. 1 for activist investors looking to shake up corporate boards now that the Securities and Exchange Commission has made it easier for shareholders to nominate directors.  Corporate governance activists are looking to replace Goldman directors at the firm’s annual meeting next spring unless the board strips Chief Executive Lloyd Blankfein of his position as chairman.

The SEC determined that investors can nominate their own directors if they own as little as 3% of a company’s stock and can combine their holdings with other shareholders to reach the threshold. It’s a sea change for board elections, where candidates in most cases are selected by management only. While investors are limited to nominating 25% of directors in any year, the power they’ve been granted by the government is considered so worrisome that the U.S. Chamber of Commerce is threatening to sue.

Boards and senior management need to ensure that they are working well together to anticipate risk events like the one Goldman Sachs experienced to protect their shareholders and their positions.  The best way to achieve this goal is to have a strong enterprise risk management program in place.  To learn more about how Wheelhouse Advisors can help your company implement a strong ERM program, visit

More Change is on the Way

More change regarding how U.S. public companies disclose details about their risk management programs is on the way. The Wall Street Journal recently reported that the Securities and Exchange Commission is re-evaluating disclosure requirements on the heels of financial regulatory reform. Here is what they had to say.

The Securities and Exchange Commission will act quickly to revise corporate risk disclosure requirements and also consider more sweeping recommendations on executive compensation disclosures and easy-to-read corporate filings, SEC Chairman Mary Schapiro said Friday. The SEC also is looking at trading activities such as hedging, shorting, arbitrage and certain types of market orders, to ensure that all investors have access to a highly complex and technologically sophisticated trading market, Ms. Schapiro said in the text of prepared remarks.

SEC staffers now are re-evaluating all corporate filing forms and disclosure requirements, asking whether the information that is being sought is “still relevant,” Ms. Schapiro said. “After this review, I expect the staff will present individual recommendations that we can act on quickly, such as revising the risk disclosure requirements,” Ms. Schapiro said in the text of her speech to the Society of Corporate Secretaries and Governance Professionals.

Companies should be prepared to provide more substantive information regarding their risk programs. Wheelhouse Advisors can help your company with a complimentary risk program diagnostic review. For more information, email us at