Managing Risk Panel
The following are cryptic notes and a few photos taken at the 2013 Millstein Forum held June 24 & 25 at Columbia Law School. Be sure to check out the Forum’s photo gallery with links to other materials as well.
Moderator: Peggy Foran, Chief Governance Officer, VP and Corporate Secretary at Prudential Financial, substituted for Holly J. Gregory, Partner, Weil, Gotshal & Manges LLP. Panelists included:
- Donna Dabney, Director, Conference Board Governance Center; Fmr. VP, Secretary & Corporate Governance Counsel, Alcoa Inc.
- James R. Doty, Chairman, Public Company Accounting Oversight Board (PCAOB)
- Steven A. Rosenblum, Partner, Wachtell Lipton Rosen & Katz
- Ben W. Heineman Jr., Senior Fellow, Harvard Law School Program on Corporate Governance; Former SVP, General Counsel and Secretary, General Electric Company
Many companies face sustainability risks. Alcoa has a public issues committee to help deal with such risks. Dabney introduced the topic by briefly describing a project she was involved with involving reputational risk analysis for building a mine in the Amazon. Committee has some white space.. time available to take deep dive into project. Triple bottom line, ESG, CSR discussed.
Ben W. Heineman Jr.
Resources for integrated reporting with financial and non-financial aspects include: SASB – Sustainability Accounting Standards Board, International Reporting Council, Ceres – Global Reporting Initiative (GRI).
Of course, one question is, “Does anyone read them?” Advocates insist corporate governance is “not just pure financial; its the way we think.” Put link in 10K to your GRI statement. That might get a few more reading and link from proxy because that’s what most shareowners read.
Best practice would be to have the company audit include its sustainability report, as well as the financials. Most audit committee reports are bare-bones; including sustainability might yield a better read. Shareowners will read it if it is interesting.
Donna Dabney
There’s an information gap between the audit committee and management. Principle task of the committee is not establish the audit fee but to ensure it is scoped correctly, what the report means, how it compares to others, and quality control issues. If they find significant deficiency, there’s a hole in management’s representations. What does the firm generally do about control? Audit firms are not so good at finding fraud. Scoping should include better tests for fraud. Make sure they have standards and are improving their game. There is a very strong wind blowing on being transparent on process – how the audit is engaged.
Legal framework – Caremark (sustained and systemic failure). Board has oversight role to ensure management is considering risk management. Many boards check up on that at least once a year. Of course, any decision needs to evaluate downside, degree of risk and risk/reward ratio.
Integrity, ethical risks, taking positions in public policy on risks near to them. Landscape includes terrorism and climate change… making assessments about the future and evaluating systems processes. Boards have to decide what are the top 10-15 risks and opportunities that must be discussed again in future. Management should discuss the options, systems and processes. Might be helpful to pick 7 risk issues and use red team / blue team debate to argue and be prepared.
Audit committee has important role but has to come back to the full board. Mechanics. Audits are backward looking. Risk management/oversight has to be forward looking. How do you get bad information? Fred Lipman’s Whistleblowers: Incentives, Disincentives, and Protection Strategies recommended. Have a vigorous whistle-blower administered by 3rd party and make sure they get a reward. Easiest way for an auditor to get fired is find fraud.
CFA Institute. Social norms have become leading indicators of where law is going. Started with pension funds. Risk related to strategy, managing certain risks that only boards can manage.
Supplementary materials:
- Aguilar, Melissa. Risk Matters: Why and How Corporate Boards Should Become Involved. The Conference Board. March 2013. Click here to sign in and view.
- Gregory, Holly J. The Board’s Role in Risk Management. Weil, Gotshal & Manges. Jan. 2010. Click here to view.
- Heineman, Ben W., Jr. Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders. Committee for Economic Development. Jan. 2010. Click here to view.
- Tonello, Matteo. Risk in the Boardroom. The Conference Board. May 2013. Click here to sign in and view.
- Rosenblum, Steven A. Effective Board Oversight of Risk Management in the United States. Chapter from Executive Risks: A Boardroom Guide 2012/13. Click here to view.
See also: Caremark: Good Intentions, Unintended Consequences; An Economic Rationale for Judicial Decisionmaking in Corporate Law; Systemic Harms and Shareholder Value; Conceptions of Corporate Purpose in Post-Crisis Financial Firms; Reconsidering Board Oversight Duties After the Financial Crisis; NIST SP 800-37, Guide for Applying the Risk Management…; and classic The Risk Management of Everything, as well as the flip-side: Seven lessons on sustainability from Star Trek.
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