Month: July 2020

Categories
Board Effectiveness

Board Committee Prep is a Team Sport

At most companies, each board committee has a “staff officer” who works with the corporate secretary to coordinate committee work. The staff officer’s expertise matches the committee’s role – the controller or internal auditor for the audit committee, someone in HR for the compensation or human capital management committee. Typically, the governance committee falls to the corporate secretary.  

These staff officers are key to committee effectiveness and are key teammates for corporate secretaries. Working together, they can ensure that agenda are well-crafted and committee time is well-spent. They also work together to see that committee briefing materials are well-prepared. They acquaint preparers with any “norms” the company has set for board briefing materials (e.g., decks not prose memos, not more than 12 pages, text must be at least 14pt font, each page must have a clear purpose stated at the top).  They help colleagues understand the committee’s role and that preparing materials for the committee is different from preparing materials for management.  

Staff officers and corporate secretaries can also leverage their experience to coach colleagues who are attending a committee meeting for the first time or will need to deal with a particularly contentious agenda topic. Some committees are looking for a “presentation” but more are looking for fulsome discussion. Preparing colleagues for committee discussion will make the employees more confident going into the discussion and committee meetings more effective. Helping those employees can also enhance those employees’ careers.

Categories
Governance News

How DOJ Compliance Update Impacts Boards

DOJ Compliance Update: What does it mean for Boards?
The Way Forward | Foresight BoardOps can help you navigate complex corporate governance issues.

DOJ Compliance Update: What does it mean for Boards?

In June 2020, the US Department of Justice (“DOJ”) issued updated corporate compliance guidance1.

What Stays the Same? DOJ continues to urge companies to:

  1. Adopt a risk-based compliance program, based on results of a rigorous assessment of the company’s risks,
  2. Embed preventative and detective controls tailored to those particular risks, and
  3. Be data driven in monitoring the effectiveness of those controls.

What Changes? The update suggests that the DOJ will be looking more closely at whether a company’s compliance program:

  1. Is adequately resourced,
  2. Has formalized processes to evaluate its effectiveness on an ongoing basis,
  3. Incorporates the use of data analytics, and
  4. Addresses relevant cross-border implications.

Why is This Update Important? More than ever, company reputation impacts shareholder value. A well-run compliance program is important to company reputation. It can give investors, employees (current and prospective), suppliers, customers, and communities a real sense of the company and its commitment to integrity. Compliance is also a key element in risk management.

What Does This Mean for Your Board’s Oversight of Risk and Compliance programs?  To get a better understanding of what the DOJ update means for your company and board, here are several questions that your directors might want to ask the company’s Chief Compliance Officer (“CCO”) when the CCO next reports to your board or board committee. If a CCO report is not on an upcoming agenda, it would be good to add it!

Are We Resourcing Our Program Appropriately? In the past, the DOJ’s asked whether your compliance program was “being implemented effectively.” Going forward, the DOJ is likely to also ask whether your program is “adequately resourced and empowered to function effectively.” As COVID is prompting companies to cut budgets where they can, it would be good to talk with your CCO about whether the company is providing appropriate budget and authority to run the compliance program. It might not be a “yes/no” question and it is a good one to ask regularly as your company’s business evolves.

Data is a resource too. Asking your CCO about IT support being provided to the compliance function is important because the DOJ is looking for companies to provide compliance personnel with the data they need for “timely and effective monitoring and/or testing of policies, controls, and transactions.”

How Are We Using Ongoing, Data-Driven Processes to Ensure Our Program’s Effectiveness? The DOJ is still looking at whether your compliance program is effective but it also wants to see that your company has formalized processes to evaluate your program, those processes are generating useful data, and your company is updating its program based on those evaluations and data. No more will you receive credit for updates made “in light of lessons learned.” It would be good to talk with your CCO about how your company would demonstrate that:

  1. Review of your compliance program is “based upon continuous access to operational data and information across functions,” and
  2. Your program includes a formalized tracking process to track your company’s and compliance developments in your industry.

Are We Making It Easy for Employees to be Compliant? The DOJ also wants companies to make compliance easy for employees. Consider talking with your CCO about whether your company’s policies and procedures are readily available and searchable so employees can find pertinent provisions. And it would be good to ask how your CCO tracks the most accessed policies and what that tells the CCO.

Is Our Training Effective? The DOJ will ask, so consider asking your CCO:

  1. How is our company evaluating our training’s effectiveness?
  2. How do our employees get answers to questions or issues prompted by our training?

Do Our Acquisition Plans Include a Post-Acquisition Compliance Audit?  

In What Ways are We Multi-National? Few companies are purely domestic. Supply chains, IT/data and sales can easily take a “domestic” company outside the US. It’s not easy to structure a multi-national compliance program given variations in laws and circumstances in each of the countries where a company does business. Talk with the CCO about the how the company’s compliance program takes into account the multi-national aspects of your business and what rationale your company uses in support of compliance decisions made in a multi-national context, including how those decisions “maintain the integrity and effectiveness” of your compliance program.

Conclusion

Hopefully, these suggestions can form the basis for an ongoing, dynamic interchange between the board (or the audit or risk committee) and your CCO. And that interchange can help the CCO and company in efforts to improve compliance and mitigate risk in line with DOJ guidance.

_____________________

1 U.S. Dep’t of Justice, Criminal Division, “Evaluation of Corporate Compliance Programs” (June 1, 2020), https://www.justice.gov/criminal-fraud/page/file/937501/download.

Categories
BoardOps

Board Agility in Times of Crisis

The SEC’s Corp Fin Staff is looking for disclosure that enables investors to understand how management and boards are analyzing current and expected impacts of COVID-19 on company operations and financial condition, including liquidity and capital resources. For this reason, in planning your company’s upcoming board and committee meetings, you may want to:

1) Incorporate COVID elements into briefing materials for standing agenda topics and/or

2) Add additional agenda topics in order to appropriately address unprecedented circumstances created by COVID.

Here are a few thoughts about how boards can do that effectively and how Foresight® can provide board agility in times of crisis:

COVID’s Impact on Company Finances: SEC guidance suggests that, as basis for disclosure, your board would address:

  • Short- and long-term funding and liquidity risks
  • Burn rate and ability to withstand sharp declines in sales or supply chain disruptions.

Perhaps your Finance team could prepare updated liquidity analyses taking into account such variables as COVID “high water” unemployment levels where your company does business and your company’s personnel actions (pay cuts or increases, furloughs, layoffs, and recall actions and plans). That can support board discussion of:

  • Use of lines of credit and government support programs, access to capital markets
  • Scenario planning for expected, faster, and slower recovery
  • Cost savings (or increases) from COVID-related changes to your business  
  • Material changes to your company’s cost of capital.

Several Foresight Agenda Topics lend themselves to board discussion of COVID-related financial information:

  • Report of the Chief Financial Officer: The CFO could report on COVID-related impacts on the balance sheet, cash flow, financings, progress on strategic transactions, investor response to recent company announcements, etc. The CFO might also review COVID’s Supply Chain impacts, e.g., weaknesses, uncertainties, and workarounds.
  • Report on financial reporting issues. Your audit committee will likely expect to hear how you are applying Staff guidance to company filings.
  • Approve capital strategy and annual capital plan. Your board will likely look more closely at dividend policy, debt structure, working capital, capital needs/uses for the year (including accelerating or postponing specific capital projects).
  • Approve debt. Your board may need to authorize the issuance of specific debt instruments or delegate authority to issue debt.
  • Report on major financial risks:  It is timely to review COVID’s impact on major financial risks, disclosure, and controls created to mitigate those risks.

COVID’s Impact on Sales: To the extent relevant, briefing materials and board discussion could cover:

  • Lost, improved, or significant shifts in Sales and anticipated recovery
  • New/modified customer payment terms – including financing that the company provides
  • Revenue cycle days and accounts payable days

These Foresight Agenda Topics lend themselves to discussion of COVID-related Sales information:

  • Report of the CEO – Business Update: This is an opportune time to share significant COVID-related developments, including any regarding Sales.
  • Report of the Chief Financial Officer: The CFO’s Report complement’s the CEO’s Report with updates on operating results, including Sales.
  • Report on Operating Segments: It is useful for each operating segment to annually discuss the segment with the full board – this year’s reports would include COVID’s impact on Sales.

COVID’s Impact on Risk: Board discussion could address:

  • Update of your Enterprise Risk Management (“ERM”) program to identify new COVID-related risks or uncertainties including material operational risks and uncertainties
  • Cybersecurity Risk associated with increased numbers of employees “Working from Home” (WFH)
  • Reputational risk from company COVID-related actions/inaction and, although not mentioned in SEC guidance, risk from company actions/inaction in response to recent protests

These Foresight Agenda Topics lend themselves to discussion of COVID-related Risk information:

  • Review enterprise risk management program: Annually, the board reviews the annual ERM risk assessment. COVID’s impact on your business may warrant an update to your ERM and report to your board.
  • Review strategically significant environmental, social and governance (ESG) risks: Your company and investors may use environmental, social and governance (ESG) criteria assess risks from your products and business operations and practices. As it relates to COVID:  
    • Social: Company relationships with its employees, suppliers, customers, and the communities in which it operates, and the company’s health and safety policies
    • Governance: Risk-based incentives.

COVID’s Impact on Information Technology: Board discussion can cover:

  • WFH: Does your company need to invest in new equipment to address your company’s technical capabilities? How has WFH impacted productivity?
  • Results of/lessons learned from new COVID-prompted tech initiatives

These Foresight Agenda Topics lend themselves to discussion of COVID-related Risk information:

  • Review company’s information technology capabilities: This year’s review could include assessment of capabilities versus post-COVID-needs.
  • Review role of technology in the company’s business and industry: It is useful to review the role of technology in post-COVID strategy, including key aspects of tech-reliant processes and products.

COVID’s Impact on Human Capital Management (HCM): Board discussion can cover:

  • Employee health and wellness, including retrofitting facilities (especially manufacturing facilities), procedures to ensure health and safety, and sick leave policies
  • Plans for facilities use – short- and long-term – including WFH
  • Return to work planning: accommodation and limits, and security measures addressing protests/looting

These Foresight Agenda Topics lend themselves to discussion of COVID-related HCM.

  • Review HCM programs including succession planning (below C-suite) During the HCM committee’s review of human capital management programs (e.g., recruitment, retention, evaluation, compensation, succession planning), it is good to consider the programs’ alignment with company values, culture, strategic direction, and compensation philosophy.
  • Review diversity and inclusion: The HCM committee receives reports on the status of the workforce regarding diversity (gender and ethnicity), equity and inclusion efforts – and that reporting should include consideration of recent protests.

COVID’s “Silver Linings”: Some companies are finding business opportunities in COVID. (E.g., Remote meeting services have never had greater demand, but even they must significantly invest more in security provisions.) Board consideration of new opportunities is warranted. 

  • New innovations in processes or product/service
  • New customer needs or perceptions
  • Distribution improvements:  e.g., moving to the cloud, increased on-line activity,
  • Regulatory changes (albeit some only temporary) and regulatory advice to specific industries (e.g., COVID-related relaxation in pharma, banking, insurance)

Conclusion

COVID has changed how many many things are done – including how boards carry out their responsibilities. Foresight provides boards agility in times of crisis, including tools for effective agenda planning and support for high-quality board discussions, decisions, and disclosure.

To learn more about Foresight®, click here: https://foresight.board-ops.com/

© 2020 Corporate Governance Partners, Inc., Chicago, IL 60601