GRC Journal - (Page 11) Governance, Risk & Compliance FROM BEHIND THE CURTAIN TO CENTER STAGE Effective boards have emerged from behind the scenes to play an active role in governing their organizations. Such “decision-ready” boards have a fundamental understanding of the organization, its strategy, competition, and markets, so that when issues arise and decisions need to be made, they are ready and able to act quickly. They understand what’s important to the organization, know who is responsible for those matters, and have the metrics needed to evaluate ongoing performance and progress. Their primary purpose is twofold: 1) to confirm regulatory compliance and good corporate governance, a role spurred by Sarbanes-Oxley (SOX) that has helped engender (and at times restore) trust among stakeholders; and 2) to use their business and industry knowledge and oversight powers to contribute to organizational performance and create value for stakeholders. Because of the prominence of SOX legislation, many boards have been consumed with compliance matters and the need to restore investor confidence. Their efforts have indeed begun to pay off in improved levels of trust, tighter controls, and better overall corporate governance. Now, with compliance matters generally in hand, many directors are eager to shift their focus to performance, using their knowledge and experience strategically to positively impact their organizations – the role that likely led them to join the board in the first place. Along with building trust and overseeing performance, several other attributes characterize well-run boards – boards that are focused on the right things, at the right time, and with the right people. THE CHAIRMAN, CEO, AND THE BOARD The principle of separating the role of board leader and CEO is now well accepted. Boards that do not have a nonexecutive chairman use a concept called the lead director to achieve the same purpose of having an objective point of view to counterbalance the weight of influence. The CEO and leadership team are responsible for strategy creation and implementation, risk assessment and mitigation, regulatory compliance, and day-to-day execution. The board can serve as a knowledgeable mentor and coach to the CEO, actively overseeing the company, its leadership team, strategy, risks, and performance metrics. Just how the board and CEO interact, how their spheres of influence overlap, and who takes charge of what is a give-and-take process, is hammered out through negotiation and renegotiation between the board and CEO. Effective boards also play a pivotal role in recruiting, retaining, or even removing a CEO, as well as evaluating the CEO’s and other key executives’ performance. Today, many boards are assessing executive performance in a much more robust way than was common in the past, often seeking perspectives from multiple parties inside and outside the organization. The compensation committee takes the lead to analyze, organize, and make recommendations for how senior executives and the board itself will be compensated. Planning for succession of the CEO and other senior officers is another board activity critical to the organization’s longevity and continuity. This is the natural role of a lead director or a governance and nominating committee. GOVERNANCE AND EVALUATION Effective boards monitor their own performance, structure, and processes that allow them to work efficiently. This self-evaluation is actually a requirement for New York Stock Exchange-listed companies and strongly suggested for NASDAQ companies. In fact, the assessment trend has extended broadly to not-forprofit organizations and universities; everywhere, public trust is honored by the search to improve effectiveness. Directors are able to hold one another accountable for adding value to the board, and “silent contributors” are no longer tolerated. Directors are expected to be knowledgeable about the company’s affairs and actively seek information they need to make educated decisions. Further, increasingly embedded in the charter of board committees is the right to seek outside counsel on such topics as compensation, governance, audit, nominations, etc. as needed. In their quest to be decision-ready, many boards are also diving into previously unexplored waters. Effective boards are recognizing the critical and often strategic role they play in organizational performance and in achieving good governance; they themselves can’t do their jobs without the right information at the right time. A number of leading companies have established technology committees on their boards to close the knowledge gap. With so much data to absorb and with high expectations for their performance, boards must be able to organize their work to keep focused on the most important issues. Considering that preparation and meeting time for an average Fortune 1000 board is generally 225 hours or so, being well-organized can also help to lessen the commitment burden on board members and makes the time they do commit more productive. To help a board streamline processes and operate efficiently, it’s important to think in terms of a framework of Governance, Risk, and Compliance (GRC). GRC can help boards look for commonality in the activities, processes, and information to avoid redundancy and eliminate “silos.” The concept of GRC can help align the board’s focus with the company’s processes and priorities for increased efficiency. To take it one step further, the alignment of GRC can also enhance a company’s performance. RISK MONITORING Critical to a board’s role in overseeing performance is to understand the risks involved in executing the enterprise’s strategy. Environmental risks, competitive risks, customer risks, technology risks, talent management risks, financial risks, political risks, and more all can come into play, and the board must understand how these risks can influence the achievement of goals. Effective directors know which questions to ask, at the right time, and to the right people to better understand and mitigate risks and to avoid surprises. TONE AT THE TOP Boards must take a lead in setting the tone for ethical behavior and responsible stewardship in the companies they oversee. Emerging practices call for boards to directly raise the question of ethics and to monitor performance not only with dollars and cents in mind, but also along ethical lines. It goes without saying that board members themselves must be seen as upholding the highest standards of integrity and ethical behavior. IN IT FOR THE LONG HAUL Having the right board in place is an enormous asset to a CEO. It can provide a pool of experienced, savvy professionals who understand the organization’s strategy and objectives and what needs to happen to bring those to fruition. As boards improve and as the interaction between senior management and Q1 2007 | www.btquarterly.com BTQ Business Trends Quarterly 45 http://www.btquarterly.com
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