Some Interesting Observations As PwC Surveys the Board

Norman Marks, CRMA, CPA, is a vice president for SAP and has been a chief audit executive and chief risk officer at major global corporations for more than 20 years.

 

PwC has completed and published their 2012 Annual Corporate Directors Survey. Their overall comment is that “progress [has been] made, but challenges persist.”

I am not sure that they got this right, as my observations as I look at the data are sometimes different from theirs. In a number of cases, I wish the questions had been different or additional questions asked to get to the heart of the matter.

In any event, the report is worth reading and you should draw your own conclusions.

Here are my comments and observations as I work through the report.

  • The first observation PwC makes is that directors are reporting that they are dedicating more hours to their board duties. This is progress? I am not persuaded that spending more time indicates progress; if anything it may indicate opportunities to improve efficiency and the continuation of unsolved issues requiring board attention.
  • PwC references attention to fraud frequently. While I understand the focus of this accounting firm on fraud, I am disappointed that it should be considered sufficiently pervasive and extensive to merit much attention from the board in these times of economic and regulatory uncertainty.
  • While PwC correctly points out that “sixty-four percent of directors responded that their compensation practices changed in response to their ‘say-on-pay vote”, they don’t point out that the majority of those ‘changes’ were in the information they provided (their disclosures) in the proxy statement (41%, or two-thirds of those who reported change) or in discussions with proxy advisory firms (a further 23%). It’s not that they changed their practices as much as they tried to explain what those practices are. In fact, half or less made real changes in response to votes. 29% made compensation more “performance-based”, 21% reduced “certain controversial benefits”, and 2.5% reduced overall compensation. (The data provided in the report does not let us see how many took more than one of these actions.)
  • Unfortunately, PwC has combined their comments on risk management with the subordinate activity of crisis management. Their comment that directors are spending less time than before on the latter is a good sign, although PwC appears to disagree.
  • While PwC correctly points out the disturbing fact that “nearly one-third of directors believe somebody on their board should be replaced”, and they also report that only 13% of boards provided “counsel to one or more board members”, they did not put the two together to identify an even more troubling failure to act on poor director performance.
  • That “more than half say they are not  adequately engaged with new business models that are enabled by IT” points to issues not only with oversight of IT and technology-related risks, but with oversight of organizational strategy as a whole. Why? Because technology is or should be at the heart of most strategy decisions today.
  • I don’t understand (or maybe I do) PwC’s interest in whether boards are discussing proposals for mandatory external auditor rotation. I would be worried if that consumed much of the directors’ limited time!
  • Although not highlighted in the report, it is somewhat reassuring that management recommendations are only identified as the source for new directors by 55%. 91% are recommended by other board members.
  • I agree with PwC that the increased level of satisfaction with CEO succession planning is a positive development. 80% now express a level of satisfaction.
  • The divergence of those who believe the board should (two-thirds) talk to institutional investors and those who believe they should not (one-third) is interesting.
  • Although not highlighted by PwC, I find it disappointing that institutional investors were only rated as ‘influential’ by 54% of the respondents, and public perception rated an influential vote from just 22%. I guess reputation risk is not as important to directors as I would hope.
  • It’s also interesting that the CEO was only rated as influential by 79%. Maybe those 21% should get a new chief executive!
  • I am pleasantly surprised that 97% are at least moderately comfortable with their understanding of the organization’s risk appetite. But I have to wonder whether they really understand and appreciate what that term should mean in terms of how risk is managed within and across the company.
  • It is equally surprising that the PwC survey finds 93% are satisfied with their company’s “key performance indicators regarding risk management objectives” when so many don’t have formal risk management programs, and other surveys report that 70% or more of directors are not satisfied with the information they receive on risk. I wonder if there is a problem with the question and whether it takes on the issue of whether directors are satisfied with how management is addressing risk.
  • On the other hand, 59% want to spend more time on risk management discussions.
  • As usual, directors want more time dedicated to strategy. It is unfortunate that this is reported every year, indicating that insufficient progress is being made.
  • One VERY positive sign was that 88% say they have integrated discussions of risk and strategy. That is at odds with my personal experience, talking to executives and boards. If true, this is excellent news.
  • I find it curious that only 56% believe IT is either ‘very important’ or ‘critical’ to their firm. Why is it not much higher? 7% say it is a commodity, and 33% say it is ‘somewhat important’. Are these firms taking full advantage of the potential of technology? I wonder. 36% say that taking competitive advantage from technology requires improvement.
  • The PwC observation that the audit committee oversees IT at 56% of companies does not seem justified when the question asked is who has responsibility of IT-related risks.
  • The Appendix has some interesting data, including that 60% of directors now receive their board packages on tablets.
  • It is also interesting that 34% of the directors have served for 10 years or more, while the newer corporate governance codes (Malaysia and Singapore) say that after 9 years directors have essentially lost their independence from management.

I am interested in your views and comments on the report and its conclusions.

Posted on Sep 24, 2012 by Norman Marks

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