Corporate directors say new regulations aren’t worth the costs

A majority of corporate directors are sceptical about the benefits of new regulations, and more than one-third admit that their own boards have underperforming members, according to a new survey.

Many government entities and regulators responded to the recent financial crisis with new regulatory and enforcement initiatives.

Most US corporate directors participating in PwC US’s 2013 Annual Corporate Directors Survey say these regulatory initiatives are not working. Nearly two-thirds (64%) of 934 public company directors surveyed said recent regulatory and enforcement initiatives have not increased investor protections.

In addition:

• 77% of directors said recent regulatory and enforcement initiatives have not increased public trust in the corporate sector.
• 73% of directors said new regulation and enforcement have at least somewhat added costs to companies that exceed the benefits.

Shortcomings also exist on boards, directors acknowledged. More than one-third (35%) said someone on their board should be replaced, an increase from 31% in 2012.

Candid responses

Directors who are new to boards were more likely to perceive deficiencies in their fellow board members’ performance. More than half of directors who have served for less than a year believe a fellow board member should be replaced, but less than one-fourth of those who have served more than ten years would like a board member replaced.

Diminished performance due to aging (19%), lack of expertise (16%) and being unprepared for meetings (15%) were the most common reasons cited for a belief that a fellow board member should be replaced. Reluctance amongst board leadership to address the issue was the most commonly cited impediment to replacing an underperforming director.

Although those responses demonstrate serious concerns about board governance, PwC Center for Board Governance Leader Mary Ann Cloyd, CPA, said she was encouraged by the candidness of the responses and the desire amongst directors to improve performance of the boards.

Directors also are not driven by money or ego in their duties, the survey showed. More than half (54%) said their primary motivation for sitting on a public company board was intellectual stimulation; 22% cited staying occupied and engaged; and 17% said they wanted to give back to the marketplace and communities.

Just 4% were motivated to serve by financial compensation, and 3% were serving to enhance their personal reputation.

“There are probably some out there who have the perception that this is driven by someone who just wants to get paid, and that’s not what’s driving the behaviour,” Cloyd said. “Being on a board, it’s a real job, and it’s a tough job.”

Keeping up with technology

One of the difficult things about the job is keeping up with technology. Almost one-third (32%) of directors said they do not have sufficient understanding of IT to support the company’s strategy and IT risk mitigation. And 35% of boards are using outside consultants to advise them on IT strategy and risk this year, up from 27% in 2012.

The percentage of directors who believe annual training should be required for board members also rose, to 59% from 52% a year ago. And half of directors said they participated in separate board training last year totaling eight hours or more.

In addition, the survey showed that:

• Strategic planning is the activity directors would most like boards to spend more time considering in the upcoming year.
• Three-fourths of directors took additional actions to reduce fraud risks in the past 12 months. Six of ten said their boards held discussions about “tone at the top”, up from 46% in last year’s survey.
• Nearly one-quarter (23%) of directors are dissatisfied with the information they receive on competitor initiatives and strategy.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.