Hammer Down the Nail

A recent Securities and Exchange Commission (SEC) rule is yet another regulatory mandate that has been put in place to thwart another financial disaster by encouraging improved corporate risk management practices.

By Joanna Makomaski

Here's the gist of it:

"We are proposing amendments to our rules to enhance the compensation and corporate governance disclosures registrants are required to make about: their overall compensation policies and their impact on risk taking; stock and option awards of executives and directors; director and nominee qualifications and legal proceedings; company leadership structure; the board's role in the risk management process; and potential conflicts of interest of compensation consultants that advise companies." SEC's proposed rule, No. 33-9052.

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Having been in this risk management world for so long now, I should be jubilant and jumping with joy. But I confess my joy was diminished to a whimper. I am not resigned but maybe a wee bit weary. Counting now, we have seen the Sarbanes Oxley Act--reaction to the Enron fiasco, which now seems like a distant memory, the Basel I, II accords, Standard & Poor's new rating requirements for ERM, and coming soon we have the Shareholder Bill of Rights Act of 2009, and rules from the Federal Trade Commission. They all essentially encourage or mandate the same thing--risk management.

This new ruling attempts to answer the question of whether boards should be involved in risk issues. Why are we even asking this question? How exasperating. My bigger question is, "What have boards been actually doing all along?"

It scares me to think that this idea is even under question. Board members are governors. Boards are created to ensure oversight of an organization's operations on behalf of an investor base.Investors are deeply vested in the success of a business. And risk events are the sole sources of not achieving their targets. I would think investors would be interested in that. This is not new, people. So why does it seem that it is being presented like such a new and revolutionary concept?

It pains me that we seem to rely on such "hammer down" approaches to ensure proper governance of publicly traded companies. It seems organizations are happier just to obey laws (compliance) than to take the lead (governance) in the manner in which they operate. Why is that? Maybe managing while flying by the seat of your pants is so much more exciting, and hence, so hard to give up.

I do believe that there must be some other reason for this lethargy in voluntarily instituting solid risk practices. And just maybe the SEC has hit on something critical in this ruling ? compensation.

We all know that compensation practices directly affect the degree and nature of employee risk-taking that could affect the entire company. We hear about it with every rogue trader headline in the news. But Board member and executive officer compensation intrigues me more. What type of activity does their compensation incent? Well, I ask myself a basic question, how are they being paid? Cash? Stock? Both?

Let's examine this. Would you, as a board or C-suite member, be deeply vested in voluntarily looking for dangerous dust bunnies around your company if you knew that disclosing these discoveries may devalue your stock price and hence your compensation? Are we dealing with a serious conflict of interest? Maybe the hammer has found the nail that needs a bit of pounding.

JOANNA MAKOMASKI, the former risk manager for an energy delivery company, is a specialist in innovative enterprise risk management methods and implementation techniques with V3 Advisory Group.

November 1, 2009

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