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By Michael Greene
Nov. 19 — Companies face considerably more complex risk in today's business environment—a fluctuating economy, increased regulatory requirements and industry disrupters, according to Gretchen A. Winter, Executive Director of the Center for Professional Responsibility in Business and Society at the College of Business at the University of Illinois at Urbana-Champaign.
These changes have greatly impacted how boards think about risk, strategy and management according to speakers at a Nov. 18 NYSE Governance Services Webinar: “Meeting Archive: Protecting Your Board: New Risks, D&O, and Cyber Insurance.”
Perceived increases in liability have affected how potential director candidates look at companies, said Jacqueline Waters Urban, a claims and coverage attorney with Aon Risk Solutions, plc.
While there are still plenty of interested candidates, these candidates are now looking at companies more carefully in evaluating what role they are going to take and how they will spend their time, she said. Accordingly, they are not only looking at what protections a company is offering but also considering the types of liability they can face from regulators and potential plaintiffs.
In determining what insurance is needed, boards need to evaluate on a corporate and operational level their company's risk, said Urban. Companies additionally need to look at the risks that are uninsurable and see if there are other mechanisms that can help protect the company.
Some things are not insurable because underwriters cannot value them, such as company reputation, she said.
Robert J. Chersi, the Executive Director of Pace University's Lubin School of Business, noted that Target Corp.'s losses stemming from its 2013 data breach were far greater than what was realized on its financial statement.
“Whenever there is a scandal or fallout, the stock price decline by far outweighs any out-of-pocket costs,” he said. The losses shown on the income statement often pale in comparison to the actual devaluation of the company.
There really is no substitute for good governance practices, said Winter.
While due diligence and having sound policies and procedure are important, Chersi noted that the real challenge for compliance officers is limiting the damage when crises occur. He noted that processes and policies sometimes do break down, but it is how you respond that determines whether things will turn catastrophic.
With regard to how risk management is affecting the ways boards interact with management, Urban said it really depends on theindustry in which the company does business. Certain topics, such as cybersecurity, implicate a lot of companies in a lot of different ways, but what is important is that companies have the operation and service in place to evaluate the companies' needs, she added.
“Things change constantly,” and directors need to make sure that they have the resources to provide them with information they need, she said, adding that sometimes specialists are needed on boards to “speak the language,” depending on the risks.
“Business relevance” is the biggest ongoing strategic risk directors face, according to Chersi. Directors constantly have to make sure their business is an ongoing viable entity, he said.
Most directors are aware that they must always make decisions based upon imperfect data, he said. Being aware of this, boards often used to make decisions without considering many risks because they were unlikely. One of the biggest changes since the 2008 financial crisis is that many boards want all risk identified and prioritized so that they can make better informed decisions.
Chersi noted that recent studies have shown certain aspects of board composition have changed over the last 10 years. For example, he explained that while, on average, board size, board turnover rate and board member age have remained relatively the same, other changes have occurred that could have an impact on governance issues.
Two of the changes that he highlighted were an increase in companies with lead directors taking on powerful roles and in companies with specialist directors on their boards.
He observed that while much has been written and spoken about regarding splitting the roles of CEO and chairman, not much has changed in this area of board composition. According to Chersi, the emerging role of lead director has been the “antidote” for many corporations, instead of splitting the roles of chairman and CEO.
Despite opposition, Institutional Shareholder Services, Inc. Nov. 6 updated its policy for evaluating independent chair proposals “by adding new governance, board leadership, and performance factors to the analytical framework and to look at all of the factors in a holistic manner”.
In an Oct. 29 letter, the Business Roundtable, an association of chief executive officers of leading U.S. companies, expressed its opposition to ISS's new holistic approach to independent chair proposals. The group claims that public company boards, not ISS, are in the best position to make the judgments ISS plans to make and that the changes will “result in a one-size-fits-all voting policy.”
There are a lot companies that have been very successful with this combined role, Chersi said, adding that “there are as many advantages as disadvantages.” There really is “no one size fits all” approach to corporate governance and it really depends on the facts and circumstances of the company, Chersi said.
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