Concerns About Risks Confronting Boards
REPUTATIONAL RISK IS TOP CONCERN OF BOARDS AS MEASURED BY 2011 EISNERAMPER SURVEY
Potential Cost of Damage to Companies with Compromised Reputations Due to Product or Service Quality, Management Decisions or Information Breaches Keep Board Members Up At Night.
Report: Concerns About Risks Confronting Boards Shows Regulatory Risk, CEO Succession and IT Risk also of Significant Concern.
EisnerAmper today issued its second annual Board of Directors Survey, Concerns About Risks Confronting Boards, designed to gain insight into the risks that are top of mind in today’s boardrooms. More than 140 board members, sourced from both NACD Directorship and EisnerAmper databases, were surveyed with respondents drawn from public and private companies. Thirty-one percent identified themselves as serving on audit committees.
Other than financial risk, respondents were asked to identify risks of most concern, and 69 percent identified reputational risk as their primary concern. Regulatory & compliance risk, which topped last year’s survey, was a close second at 61 percent; followed by CEO Succession Planning at 55 percent and IT Risk at 51 percent.
To review the 2011 Concerns About Risks Confronting Boards Report click here. Commenting on the Survey’s results, Steven Kreit, a partner in EisnerAmper’s Services to Public Companies practice, said that “Protecting a company’s and a board member’s individual reputation has taken on heightened awareness.” Kreit noted that, “Reputation, together with the closely related concerns about IT, privacy, data security, and product or service failure are now a focus of many boards.” The Report’s underlying conclusion is that directors and their companies are subject to the same dangers everyone faces in a digital world where information spreads virally at enormous speed; and where the impact of reputational damage is magnified and the ramifications to a company are great.
Regulatory and compliance risk is still very much a concern of boards. When asked what areas of regulatory compliance are of most concern directors cited financial reform (58 percent), accounting standards (49 percent) followed by Sarbanes-Oxley, healthcare reform, environmental, tax and energy regulation. Jim Mack, partner and leader of EisnerAmper’s consulting services practice, commented on these findings saying, “Reviews and process checks at the board level are now critical, while new rules springing from Dodd-Frank add an as yet unknown dimension of concern.” An example of this level of uncertainty is the apparent disconnect when director were asked about IFRS. Fourteen percent said they were unaware of where their companies stood with regard to implementation, yet almost 50 percent cited accounting standards their primary regulatory concern.
Results from the Report seem to reflect the more positive economic conditions of the marketplace. When asked to name the top topics for discussion in the board room, 41 percent said growth, up from 16 percent just a year ago. Similarly, M&A was a top topic for 18 percent in 2011, up from 10 percent in 2010.
Directors were asked to what degree they felt their CEOs have a strong understanding of selected topics. Perhaps reassuringly, 87 percent said their CEOs were up to speed on broad-based risk assessments; yet only 21 percent felt their CEOs understood how to implement IFRS.
Directors thought their CEOs needed more education on broad-based risk assessment, updates on regulatory compliance change and aligning business goals to IT. While for their CFOs the top three were IFRS implementation, changes to tax from new regulations and creating financial models for strategic direction.
Summarizing the Report’s overall findings, Michael Breit and Pete Bible, partners and co-chairs of EisnerAmper’s Services to Public Companies practice provided four conclusions. “As we listen to what the directors are telling us in the Survey several themes emerge:
- Protect against risk: constant board surveillance of management’s review and testing of operations can help companies avoid or mitigate reputational damages.
- The need to understand regulatory and compliance changes is a board requirement. Thousands of rules from recent legislation have yet to be written or fully implemented; accounting standards will change, and the road maps are not yet finalized. Keeping current is a full time task, yet board member’s time commitments are already severely taxed.
- CEO succession planning offers risk and opportunities. Understanding the state of a business in a global economy is required of a CEO, and is a skill directors look for when planning for the future.
- The Board itself will change. Mergers and acquisitions are bringing change to many boards. New and unknown requirements regarding “say-on-pay” and proxy rules may influence member’s decision to stay on boards or reduce the number of boards on which they serve.”