Update on the current board issues: December 2013

December 2013
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BoardroomDirect®<br><span>Update on the current board issues: December 2013</span>

At a glance

Key considerations for board and audit committee members. PwC releases the 2013-2014 edition of this publication that analyzes key issues for directors to consider for both the year-end and upcoming year.

Issue in focus

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Key considerations for board and audit committee members

PwC has released its 2013-2014 edition of Key considerations for board and audit committee members. It is an annual report published by PwC’s Center for Board Governance to address the changing boardroom agenda. It outlines topics that can help enhance the quality of board and management discussions in the coming year.

Following are highlights of the topics covered in the report:

Strategy: Considering megatrends, the customer experience, and supply chains

Five global megatrends are discussed: demographic shifts, changes in economic power, urbanization, climate change and resource scarcity, and technological breakthroughs. These trends may introduce new industries and investment opportunities. Companies are also thinking differently about their customers and building a more customer-centric business strategy.

At the same time, many companies look at their supply chains as strategic engines for efficiency and flexibility. They’re tailoring them to be more transparent, focus more on different markets, and be more closely integrated across business functions.

Director considerations:

  • Continue to challenge the direction and execution of the company’s strategy.
  • Understand megatrends and discuss how they may impact the company.
  • Ask about the supply chain: Does the company have the right partners? Are suppliers integrated across business functions? Is the supply chain agile and flexible enough to withstand the next economic or political disruption or natural disaster?

Emerging technologies and Big Data: Tapping new avenues for revenue and growth

Companies are taking advantage of today’s emerging technologies and using them to drive revenue and growth. Directors have become more engaged in understanding these technologies, with many planning to spend more time on IT strategy in the coming year.

Many companies are using social media and mobile devices to expand customer reach and increase loyalty. The use of new technologies is driving a massive accumulation of data – Big Data – from both internal sources and third parties. Big Data can be analyzed to deliver insight and intelligence to help implement better strategic and operational decisions. But there are risks: reliance on third-party data, the challenge of storing and retaining large volumes of data, questions about who owns the data, and data privacy and information security issues. Another challenge is finding the right talent to effectively analyze the data.

Director considerations:

  • Understand the relevance of emerging technologies to the company and prioritize them.
  • Discuss with management how these technologies can be used to drive growth and how the related risks will be managed.
  • Understand the company’s decisions about Big Data.

Risk oversight: Focusing on cybersecurity and third parties

Today’s changing business environment also means new and evolving risks, including cybersecurity and third-party risk.

Cybercrime is now commonplace, and security incidents have increased 25% this year. Perpetrators have become more sophisticated, even targeting top executives with complex phishing exploits. And current or former employees can also be common culprits, whether intentional or not.

Companies are increasingly outsourcing vital business functions, and supply chain and distribution channels continue to grow and change. This means third-party risk is also growing – including data security risks. Under Federal Sentencing Guidelines, companies can be held accountable for the acts of agents, resellers, distributors, and partners. But less than 30% of US companies carefully monitor their third-party vendors, suppliers, and agents to prevent corruption, fraud, and other compliance risks, according to NAVEX Global’s 2013 Third Party Risk in a Global Environment survey. 

Director considerations:

  • Discuss with management how the company is enhancing its cybersecurity program to safeguard the company’s “crown jewels.”
  • Understand how the company selects, manages, and monitors third parties and whether contractual protections are in place. 

Talent pipeline: Having the right skills and experience for the future, including in the boardroom

Talent is key to achieving strategic goals. And human capital costs represent more than one-quarter of all expenses for the average organization – more than half for some businesses.

Traditionally, the board’s talent focus has often been on the CEO and top management. But the issue goes much deeper: Fifty-five percent of US CEOs say the availability of key skills is a potential threat to growth. Today’s competitive environment is prompting a lot of turnover, even for high performers. That means potential leaders and future executives may not stay to climb the corporate ladder.

CEO succession planning is always top of the board’s priority list. And director succession planning should get attention, too. Thirty-five percent of directors said that someone on their board should be replaced. The top three reasons: diminished performance because of aging, lack of expertise, and lack of preparation for meetings.

Director considerations

  • Actively engage in the talent discussion and understand where potential talent gaps exist, considering the company’s overall strategic objectives and related risks.
  • Discuss trends in company retention rates, particularly for high performers.
  • Hold discussions about board and CEO succession, and consider the need to be involved in succession planning beyond the CEO.

Corporate ethics: Gauging the compliance atmosphere

Fraud is a big concern for companies in today’s complex, high-stakes, and high-pressure world. Many corporate boards continue to enhance their oversight of fraud risk. Sixty percent of directors held board discussions about tone at the top in the last 12 months, up from 46% a year earlier, according to PwC’s 2013 Annual Corporate Directors Survey (ACDS).

Tone at the top is not a new idea, but it remains paramount to a company’s success. Company culture can be gauged through employee surveys, upward feedback of top management, discussion at exit interviews, feedback from internal and external auditors, and whistleblower tips.

The SEC and the Department of Justice continue to work together to pursue violators of the Foreign Corrupt Practices Act. Many other countries have, or are developing, their own anti-corruption laws. And recently, there has been a lot of media attention on insider trading allegations. While insider trading allegations historically have been made against individuals, the focus has now shifted to investigating hedge funds, expert networks, 10b5-1 plans – and even directors.

Director considerations

  • Ensure management is fostering an atmosphere that makes compliance and ethics part of the everyday dialogue, encourages employees to speak up, and trains management on how to respond to allegations. And be sure to include third  party risks in the conversation, as appropriate,  about compliance issues.
  • Discuss with management the effectiveness of the company’s ethics and compliance programs and policies, including internal controls, compliance testing, and resource allocation.

The financials: Keying in on complex accounting, and keeping up with regulators and standard setters

Overseeing the integrity of the company’s financial statements is a challenge with today’s complex financial reporting. The accounting for many transactions is rarely black and white and requires significant judgments and assumptions. 

Companies must stay focused on ensuring the accuracy and completeness of financial information and disclosures. They will also want to be mindful of what’s top-of-mind for regulators. This includes:

  • impairment charges relating to certain investments, long-lived assets, goodwill and other intangibles
  • fair value measurements, including  the use of specialists
  • revenue recognition
  • segment reporting
  • loss contingencies disclosures, specifically what management knew and when
  • non-GAAP disclosures

Director considerations

  • Continue to have discussions with management and the company’s auditors about key accounting areas – those that are new, complex, unusual, higher risk, or require significant estimates or judgments – and the transparency and adequacy of related disclosures.
  • Discuss with management whether all material information is provided in the financial statements to give readers a clear picture of the company, including unusual transactions entered into and risks the company faces.

Stakeholder communications: Deciding when to engage and whether to expand the audit committee report

In recent years, various stakeholders have been pushing for direct communications with boards. More than 60% of directors say their boards have communicated with institutional investors, and nearly 30% say there’s been an increase in the past year, according to the 2013 ACDS. On the other hand, 33% of directors say the board doesn’t and shouldn’t speak with institutional investors, the survey also found.

In November 2013, the Center for Audit Quality, in collaboration with five other organizations, released a paper that calls for audit committees to consider whether enhancements can be made to their audit committee reports. [See BoardroomDirect Special Edition (Audit committee disclosure).] Some companies are enhancing disclosures of audit committee duties, audit committee composition, appointment of the audit firm, and selection of the lead audit partner, among others. The suggested disclosures are voluntary; the paper does not propose any requirements.

Director considerations

  • Think about whether the board’s approach to shareholder and stakeholder communications is appropriate or needs revision.
  • Consider whether enhancements should be made to communications with shareholders, particularly through the audit committee report.