Key challenges threatening companies’ reputations are expected to crowd agendas of corporate boards, including their audit committees, this year, according to research by the EY Center for Board Matters and Deloitte.
“With the rapid rise of transformational technologies, digital risks, and human capital challenges, boards need to effectively manage reputational risk on a global scale,” Ruby Sharma, a principal with EY and the EY Center for Board Matters, said in a statement.
“As a result, board members’ time commitment might increase in 2015,” Sharma said.
Reputational risk is driven by a host of business risks. At the top of the list are fraud, bribery, and corruption; cyber-breaches; product and service risks related to safety, health, and the environment; and risks related to actions taken by suppliers and vendors.
Eighty-seven per cent of about 300 executives polled worldwide by Deloitte in 2013 said reputation risk is a key challenge because it can quickly escalate into a major strategic crisis if not properly managed. The responsibility to prevent these crises resides with corporate boards and the executive suite.
To help corporate boards manage their agendas and properly address key risks, the EY Center for Board Matters and Deloitte prioritised what corporate directors should try to tackle:
Board composition and turnover. Succession planning can help ensure that directors on the board represent a balance of institutional knowledge and fresh perspectives. That may help boards defend against activist investors looking to exploit perceived weaknesses in board composition, the EY Center for Board Matters suggested.
Pressure from shareholders could come through proposals or letters to the board and through proxy voting decisions.
About 50 institutional investors interviewed by the EY Center for Board Matters said board composition and renewal is one of their key priorities going into the 2015 proxy season. Most of those investors believed companies should do a better job explaining in proxy statements why the right corporate directors are serving on the board.
Improving disclosures. Investors and regulators are increasingly focused on clear, concise, and thorough disclosures that use graphs, charts, and tables to show how boards are carrying out their oversight responsibilities, including strategy, risk, management, CEO succession, audit, and compensation, according to the EY Center for Board Matters.
It is particularly important for boards’ audit committees to better explain what they do, according to Deloitte, because the audit committee plays a significant role in monitoring management activities that shareholders are most concerned about, such as information technology, regulatory matters, risk oversight, globalisation, and tax issues.
Regulatory co-operation. Regulatory scrutiny is increasing worldwide, and neither Deloitte nor the EY Center for Board Matters expected any abatement. Indeed, EY suggested that a recent agreement between the US Securities and Exchange Commission and the Chinese units of the Big Four accounting firms to settle a dispute over audits of US-listed Chinese companies is a precursor of more co-operation to come between regulators in developed and emerging economies.
The shifting regulatory environment is empowering the board’s audit committee, whose input is increasingly being sought by regulators, according to Deloitte. Consequently, shareholders are expecting to learn more about the audit committee’s responsibilities.
Human capital. Many emerging countries are experiencing explosive population growth and major demographic shifts, which is putting pressure on critical resources, changing goals and aspirations at a personal and social level. It is also leading to new talent needs.
Recruiting, retaining, and developing finance talent is a key concern of finance executives around the world, according to Deloitte. Ninety-two per cent of finance executives polled in a global survey in 2013 said talent management was an important issue, but 40% of respondents were not optimistic about their ability to meet talent demands in the future.
To evaluate global finance needs, companies should consider culture, personality, work ethic, and regulatory requirements, according to Deloitte. Structural considerations related to shared-service approaches and outsourcing further complicate issues of pipeline, continuity, and quality control. And the constantly expanding roles of key executives, including the CFO, add further complexity to talent development and succession planning.
Deloitte suggests that members of boards’ audit committees assist in making sure plans to build a strong global finance talent team stay on track.
IT management. Technology is increasingly a high priority for many companies. Cyber-security, social media, cloud strategies, and analytics are no longer fringe investments and are regularly discussed in board and audit committee meetings across industries, according to Deloitte.
To keep up with rapid developments in technology and provide effective oversight and controls, boards and audit committees need up-to-date information at the appropriate level of detail, to meet with IT leaders periodically, and to understand who in the company has primary responsibility for technology issues.
Cyber-threats are a particular technology concern, for which board members are increasingly held accountable. To deal with cyber-security issues, companies need a clear plan of action and a chain of command. Corporate boards must set the tone for enhancing cyber-security and determine oversight responsibility, according to the EY Center for Board Matters.
Related CGMA Magazine content:
“What to Ask When Evaluating Your Risk-Assessment Process”: Executives and boards of directors can benefit from a periodic assessment of risks on the horizon to position their organisations for a proactive response. Consider asking these questions as you evaluate your company’s risk-assessment processes.
“What’s the Risk? Survey Shows Increased Focus on Reputation”: Businesses were placing an increased focus on reputational risk, according to a 2013 CGMA survey, as a result of market demands for transparency, reputational failures at leading companies, and the rise of social media.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.