To the Board of Directors: Matters Arising

We’ll agree that strengthening the board is good for all stakeholders, including shareholders. It is for that reason that the following ought to be considered to shore up corporate governance, which should never be out of style when value creation is the only reason for the entity’s existence:

1)   The Chief Financial Officer (CFO) as a Board Member – In Europe and elsewhere, the CFO is a board member. Together with the Chief Executive Officer (CEO), they form the executive directorate. The CFO role works well, when they collaborate with the CEO to deliver the organization’s value creation mandate. Being a member of the board allows the CFO to have more insight into the board’s strategy as intended by the overall board. This in turn, allows the CFO to be a better adviser to the CEO, the board, and all affiliated bodies. The CFO’s board membership also allows for continuity of the executive team’s input and sense of direction, in the event of the CEO’s incapacity. This issue has come up before for North America’s boards to consider. As Jamie Dimon’s recent hospitalization led to succession planning discussions in and out of JP Morgan, now more than ever, boards may have to seriously consider this issue. One more thing –as boards consider the issue, they should see the CFO’s signature (along with the CEO's) on the Attestation to the Securities & Exchange Commission (as part of Sarbanes Oxley) that the CEO and CFO are on the hook for the efficient and ethical well-being of the enterprise. It is time to close the gap by making de facto what is already de jure in the eyes of governance rules in North America.

2)   Audit Quality -- A lot has been written about audit quality or lack thereof. As it has been pointed out from several quarters, audits improve with auditor independence. Efforts have been made in that regard with the creation of the Public Company Accounting Oversight Board in the US and the work of the Financial Reporting Council in the UK. So far with mixed results, these bodies continue to seek ways to improve audit quality. To be meaningful, auditors need to be properly compensated and their ranks can be filled with competent auditors. Perhaps, the Big Four and all auditors need to consider using seasoned executives in what would be considered junior work as that is the area where discrepancies exist and can be easily overlooked by the untrained eye. Audit committees should ask for competent auditors and make sure that the auditors are properly compensated.  

3)   Diversity & Inclusion -- While this might be the most difficult work for the board, it is necessary that the board work on ensuring that a diversified workforce is in place. Logically, everybody understands that a diversified workforce has the potential for improved returns or outcomes. However, since the issue of lack of diversity and inclusion in an enterprise is not a logical one, board members can use their emotional intelligence to engage management to address the issue; assuming the board itself is meaningfully diversified.