Directors Source News - July 2009

• 20 Questions Directors Should Ask
  about Responding to Allegations of
  Corporate Wrongdoing
• 20 Questions Directors of Not-for-
  profit Organizations Should Ask about
  Risk
• Privacy and Director and Officer Liability

• IFRS Update

• Post Your Directorship Opportunity
  Here
  

• 2009 Intergovernmental Forum on Risk Management: Rethinking Risk and Rising
  to New Challenges

• The Board Book: An Insider’s Guide for Directors and Trustees

• The Directors & Boards Survey: CEO
  and Executive Compensation 2009
• Canadian Coalition for Good Governance: Report on Clawback Provisions — U.S. and Canadian Issuers
• Corporate Board Governance and Director Compensation in Canada

Most companies face issues relating to corporate wrongdoing at one time or another. Board response to such an allegation can determine the company's ability to recover. A thoughtful process, overseen by the board as appropriate, can not only resolve the problem but preserve and promote the company's relationships with regulators, stakeholder confidence, and reputation.

20 Questions Directors Should Ask about Responding to Allegations of Corporate Wrongdoing provides questions a director should ask about the company's response to allegations of corporate wrongdoing. The issue that gives rise to each question is explained in detail and is accompanied by a description of recommended practices. In addition, the document relates a number of public examples of corporations which have faced allegations of corporate wrongdoing, and dealt with them with varying degrees of success.

Summarized answers to two questions are included below.

1. What are the board’s responsibilities regarding whistleblowing?

Whistleblowing is an important part of the process of detecting corporate wrongdoing. While whistleblowing has existed as an informal mechanism for many years, it has become quite formalized in the post-Enron period, at least as it relates to financial reporting. Securities laws require issuers to establish a whistleblowing program — overseen by the audit committee — relating to financial reporting and accounting matters.

There are two basic components to any whistleblowing procedure: receiving complaints and dealing with the complaints received.

a) Receiving Complaints

Securities laws in both Canada and the United States require a mechanism for employees (and others) to register complaints or concerns related to accounting and financial reporting confidentially and anonymously, and many corporations extend this approach to cover complaints on any issue.

There are a number of ways to effect confidential and anonymous reporting. Telephone hotlines, often run by outside suppliers, are widely used. Online reporting is another option — the employee (or other person) fills out and submits a questionnaire on a website or simply e-mails a complaint. A third option is anonymous letters (mailed or deposited in an on-site drop box or to an outside provider). For these processes to be effective, there must be some way for the company to contact the complainant (for additional information, for example), while preserving both the complainant’s confidentiality and his or her anonymity, until such point as the complainant has agreed to step forward in a more transparent way.

b) Handling Complaints

The second component involves reviewing, investigating and responding to the complaint. In developing this aspect of the procedure, decisions must be made about:

• who will receive the complaints
• how complaints will be prioritized for investigation (e.g. based on likely dollar value or on patterns or trends)
• how complaints will be investigated
• who will have access to the complaints
• how and when complaints will be reported
• how the results of the investigation of any complaint will be handled
• how employees and others will be educated about the procedures
  

In some cases the appropriate procedure to follow will be based on the nature of the complaint, but much of the process can be anticipated and documented in a corporate policy.

2. What should the board do when corporate wrongdoing is discovered or alleged?

There are situations in which a higher level of board involvement is desirable — even required. Where the situation is franchise-threatening, the board must be closely involved (although it need not necessarily lead the investigation). Certainly where senior management is implicated, the investigation should be led by the board. Where regulators may be interested in the events at issue, it may also be important that the investigation bear the imprimatur of the board.

External advisors such as legal counsel or forensic accountants may also advise as to whether a board-led investigation is necessary. In determining the appropriate course of action, the board should consider not only the nature of the allegations, but any special circumstances that expose the corporation to extraordinary risk or criticism.

Many corporate crises arise from the circumvention of internal controls. Most breaches occur and are dealt with below the radar.

Risk is a reality for every not-for-profit organization. There are many things that can go wrong, from minor, day-to-day incidents to major crises. These may adversely affect the delivery of programs and services, damage the organization’s reputation or, at worst, threaten its capacity to survive. These “risks” can generally be reduced or avoided by good risk management — one of the key responsibilities of a board of directors.

20 Questions Directors of Not-for-profit Organizations Should Ask about Risk was written to help members of not-for-profit boards of directors understand their responsibility for the oversight of risk. The document explains what “risk” and “risk management” mean, describes how risks can be identified and managed, and provides guidance for boards on how to carry out their oversight responsibilities.

Summarized answers to two questions are included below.

1. What are the major risks and uncertainties facing the organization?

The board’s responsibility for the oversight of risk includes making sure that the organization has procedures for identifying, assessing and managing risks and uncertainties. This applies to all the risks that an organization faces. There are usually just too many risks for the board to follow individually, so, in most cases, the board will confine its oversight role to satisfying itself that risk management procedures exist and are followed. The processes for identifying and managing risks are discussed in questions 9 through 15.

Some risks, however, could severely affect the organization’s ability to achieve its objectives and continue operations. It is important that the board and staff know and understand what these major or “key” risks are, and what is being done to manage them.

Major risks can be important considerations for the board when reviewing strategic and operational plans, capital projects and new programs. It is advisable to consider a range of scenarios — what might happen if, for example: key components of operating costs increase by 10%, 50% or 100%, an expected grant is reduced or cancelled, a fund-raising event only achieves 50% or 75% of its goal, or the computer system goes down at a critical time.

2. How can the board be sure that the information it gets on risk from management is accurate and reliable?

Boards generally have a close relationship with the Executive Director who attends board and some committee meetings to provide most of the information and answer most of the questions. The result can be that the board receives information that supports the Executive Director’s viewpoint and, at worst, could be slanted or misleading. To get a broader perspective on the organization and its risks, the board should arrange to meet and hear from a number of sources in addition to the Executive Director.

This can be a sensitive area. Boards should be alert to the risks when the Executive Director is the only source of information to the board and be concerned when an Executive Director unreasonably restricts board access to senior staff. Effective Executive Directors usually look for opportunities to develop senior staff by encouraging them to make presentations and answer questions at board meetings, and to talk freely to board members at other times.

Regardless of the source, board members should demonstrate healthy skepticism and ask themselves if the information they get is consistent and rings true. In larger organizations, the board may periodically request a formal review and report on the effectiveness of the risk management process from an objective and independent source outside of senior management (e.g. internal audit, external auditor, consultant, etc.).

As part of their statutory and common law duties, directors and officers must provide oversight and guidance in the management of their organization’s business. Ensuring compliance with relevant laws, including privacy legislation, would certainly be a large part of those obligations.

The difficulty directors and officers face is that their organizations may be subject to overlapping privacy statutes, especially if they collect and transmit customer information across provincial and/or international borders. There is also heightened risk if the organization uses third parties in the collection, storage and transmission of that information.

• use of IFRS by a domestic issuer for periods beginning prior to January 1, 2011,
• requirements for interim financial statements in the year of IFRS adoption, and
• reference to IFRS and Canadian GAAP.

• refer only to IFRS in the notes to the financial statements and in the auditor’s report, or
• refer to both IFRS and Canadian GAAP in the notes to the financial statements and in the auditor’s report.

To implement these two options, the CSA proposes to distinguish between the basis of preparation and disclosure requirements. We propose the following requirements for domestic issuers for annual and interim financial statements relating to financial years beginning on or after January 1, 2011:

• issuers must prepare their annual and interim financial statements in accordance with Canadian GAAP for publicly accountable enterprises,
• issuers must make an explicit and unreserved statement of compliance with IFRS in the notes to their annual financial statements, and disclose compliance with International Accounting Standard 34 Interim Financial Reporting in their interim financial statements, and
• auditor's reports accompanying an issuer's financial statements must refer to IFRS and be in the form specified by Canadian generally accepted auditing standards for financial statements prepared in accordance with a fair presentation framework.

Link to full document

2009 Intergovernmental Forum on Risk Management: Rethinking Risk and Rising to New Challenges

Date: September 16-17, 2009
Location: Ottawa, Ontario

Conference Overview:

Are your risk management processes fit to guide your organization in today’s increasingly complex environment?

Senior public sector executives now recognize the value of integrated risk management in maintaining trust, delivering services, avoiding errors, and being prepared when things go wrong. They also understand risk management’s role in improving processes, integrating measurement, and ensuring consistent application of best practices across the enterprise.

Many risk managers are now dealing with the greatest public spending increases they’ve ever experienced. Find out from leading risk experts how to maintain risk management effectiveness during change and turmoil, how to use risk management in strategic development and decision-making, and how to embed risk awareness and understanding into your organization’s culture.

Public sector risk experts will explain how you can:

• adapt your approach to risk in response to dramatic change
• apply risk management to the decision-making process
• maximize the value of integrated risk management (IRM) in your organization
• build a culture that understands and applies risk management discipline effectively
• transform risk from a concept to an essential discipline
• communicate risk effectively to internal and external stakeholders
• measure the effectiveness of your risk management program
• optimize strategic planning and budgeting with IRM
• improve project management with risk management

The Board Book: An Insider’s Guide for Directors and Trustees

In The Board Book the author brings his experience, together with the recollections and insights of numerous colleagues, to bear on the most pressing questions facing boards of directors and trustees today. His topics include issues such as the relationship between CEOs and board members, perks, executive compensation, and CEO transitions. In addition, he offers advice on how to run a board effectively, including the uses of committees and executive sessions, the handling of leaks, and the recruitment of new board members.

Click here for more information

Results of this survey reveal that corporate directors, executives and shareholders believe that excessive executive compensation is a significant issue. Most respondents, however, do not feel as though more government intervention is the answer. Instead, most view “self-help,” particularly in the areas of assessing the effect of the compensation system on risk-taking behaviour, improving performance measurement, and strengthening the link between performance and pay as the right path forward.

The degree of change that the survey’s respondents are advocating with respect to executive compensation has begun to translate into changes to programs and practices, but so far, these actions have not matched the level of rhetoric on the subject. Seventy-two percent of the organizations responding are not completely satisfied with the advice they are receiving from compensation consultants, which may account for some of the gap between intentions and actions.

Notwithstanding their agreement that executive compensation is a legitimate business issue, approximately three-quarters (76%) of respondents indicate that the CEO pay levels in their organizations are “about right.” In particular, large organizations feel as though they would need to pay about the same to recruit a new CEO, while small/mid-sized organizations feel that they would be just as likely to have to pay more. Larger organizations showed more restraint than smaller organizations in 2008, perhaps driven by their larger total CEO pay levels. Larger organizations were more likely than smaller organizations to pay less in 2008 than 2007, and were more likely to withhold bonuses.

A "clawback" provision allows a company to recoup performance-based executive compensation in cases where financial information upon which the performance payments were made needs to be restated. The use of such provisions have rapidly gained acceptance in the United States over the past year and it is expected that similar provisions will begin to work their way into Canadian issuers. The report examines the rise in the number of clawback provisions being adopted as well as the structure and wording of these policies.

Key findings:

• There is significant variability among disgorgement policies of issuers. In looking at the U.S. data, there are two main types of policies — a fraud based policy whereby only the executive responsible for the restatement of the financials is required to repay the performance-based compensation and a performance-based policy which requires all executives, regardless of their involvement in the misconduct, to repay the compensation.
• There is also variability on what is to be repaid. Some policies limit the repayment to termination payments, others to equity based payments while others still require repayment of all performance-based compensation.
• Canada is far behind in terms of issuers reporting their disgorgement policy with only 3 issuers having such a policy communicated in their 2007 proxy circular.

Conducted in partnership with Patrick O’Callaghan and Associates, the latest edition of this annual report on the state of Canadian corporate governance provides the opportunity to observe key trends and identify emerging issues that are likely to become increasingly important for Canadian directors over the next several years.

Key findings:

• When the first survey in this series was published fifteen years ago, fewer than half of the companies surveyed (48%) separated the roles of chair and CEO. This proportion has been increasing steadily to the point where this year, 81% of the companies surveyed separate these roles.
• Among the 287 Canadian firms included in the survey, only 9 have a stand-alone risk committee, while an additional 21 explicitly include the word “risk” in the name of another of their committees. Of the 30 companies with either a stand-alone risk committee or with risk included in the name of another committee, two-thirds have assets in excess of $5 billion and one-third are in the financial sector.
• When the first annual report in this series examining governance in Canadian public companies was published 15 years ago, the average size of the board of directors among surveyed companies was 11. Over the past several years, this number has stabilized around 9 in Canada and 8 in the United States, although in both countries larger companies tend to have larger boards: the average for large cap companies in the U.S. is 11 while in Canada it is 12.
• This year, 92% of the companies we surveyed reported that they held meetings of only the independent directors. This is a significant jump from 79% of companies reporting this practice the previous year.

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© 2009 CICA