Conference Panelists Review Risk Management

J. Michael Cook, a corporate director, spoke about the board's processes for overseeing risk at the Practising Law Institute's recent Audit Committee Workshop. Since the financial crisis, a lot of time is spent on meetings. New demands on audit committees may make it more difficult to find people willing to serve if the pressures continue, he said.

In discussions of enterprise risk, Cook said financial reporting is rarely mentioned, but the risk of misleading financial reports is huge. The credit crunch has raised financial reporting risks including critical accounting estimates and judgments, he said. There are new items to consider in the current environment. Revenue recognition is a critical accounting issue. Companies should consider the credit condition of their customers. Inventory valuations may change because there is more of it or there is a greater potential for obsolescence, he said.

There should be a heightened level of attention on how long an entity plans to hold investments and its ability to hold them to maturity. The way things have always been done may no longer hold, Cook said. Banks that have always been willing to roll over debt may no longer be willing to do so. Management should also stress test the company's loan covenants. Cook said the tone at the top is critical in this environment.

Cook believes the credit crunch should be on the agenda of every audit committee meeting for the foreseeable future. This is not a year-end issue, he warned. Cook also said for those still issuing earnings guidelines, the pressure is greater. The credit crisis provided an opportunity to stop issuing the guidance, in his view.

Cook was asked when it is appropriate to consider changing one's auditor. He suggested that audit committees challenge the quality of service they are getting. He is not an advocate of periodic changes for the sake of change, but said companies should get what they expect. They many change components of the audit team without changing the entire team, he added.

Michael McAlevey, vice president and chief corporate, securities and finance counsel at General Electric Company, spoke about financial services reform and its potential impact on companies' business models. There may be changes in taxes as the government looks for ways to pay for its initiatives, such as the elimination of certain deductions. Incentives and compensation may be affected. McAlevey said that people and staffing may also change with pressure to control costs. Those changes can affect a company's ability to comply with new regulations.

Corporate management is probably held in the lowest esteem possible already, McAlevey said. He urged management to avoid getting caught in a Wall Street Journal article based on corporate aircraft and similar issues relating to perks. Whether corporate aircraft is a benefit or not, McAlevey cautioned management to be attuned to the current environment. He believes that responsible companies have reacted to recent events with better risk identification and mitigation. He does not believe that additional laws are needed, but believes that political expedience will lead to new laws anyway.

When asked how best to allocate responsibilities between risk and audit committees, Cook said he does not buy the notion that the audit committee is responsible for overseeing risk. There is nothing more devastating to a public company than to lose its reputation in the financial markets, he said. The full board has the responsibility for overseeing risk, he said, but can delegate elements to various committees.

Cook mentioned a recent conference at which three board members of a well-known company were present. He asked them to list the company's top risks and was surprised by the diversity of their responses which made it clear that the issue had never been addressed. Cook said every board member should know what their company's greatest risks are and all should be able to name the same top risks.

The legislation would mandate that each company must provide appropriate funding, as determined by the compensation committee, to enable the committee to engage and adequately compensate compensation consultants, outside counsel and any other advisers employed by the compensation committee. Further, the legislation would direct the SEC to establish standards for ensuring the independence of compensation consultants and outside counsel used by the compensation committee.

Senator Charles Schumer (D-MA) has sponsored a bill requiring say on pay as part of a broad shareholder rights reform package. The Shareholder Bill of Rights Act, S. 1074, would require public companies to hold an annual advisory vote on executive compensation policies and would require shareholder approval of executive golden parachutes.