Corporate Governance Considerations in the PostSarbanes Era

1
Corporate Governance Considerations in the
Post-Sarbanes Era
ASSURANCE AND ADVISORYBUSINESS SERVICES

• AGA/EEI CAO ConferenceSeattle, WAJune 27-29,
  2005

Jeff Holloman, Ernst Young LLP Global Business
Risk Services Energy/Utilities Industry Leader
2
Corporate Governance The New Reality

• Impact of Significant Corporate Governance
  Failures
• Under Sarbanes-Oxley, management challenged to
  comply or else
• Most still trying to get it right
• Significant Impact on Careers 60 of CFOs
  making weakness disclosures are changing jobs
  either right before or within three months of
  disclosure.
• Much greater emphasis on Audit Committee oversight

3
So Why Is This Important to Me?
The New Yorker - October 21, 2002
The New Reality - Significant Penalties

• False certification subjects person to a fine
  and/or prison
• Knowing violation 1 million / 10 years
• Willful violation 5 million / 20 years

4
Corporate Governance Current State

• Significant Corporate Governance Improvements
  Adopted by Most Companies
• Elimination of Director and Management Conflicts
  of Interest
• Improved Reporting and Transparency
• Stronger Oversight of Internal and External
  Auditors
• Enhanced Oversight of Controls Over Financial
  Reporting and Disclosure

5
Principles For Implementing A More Complete
Governance Program Future State

• Challenging Strategy But Not Formulating It
• Assessing and Evaluating Business Operations
  Critical to Financial Performance But Not Running
  The Business
• Effective Processes For Evaluating CEO and
  Related Compensation
• Ensuring Adequacy of Controls Over Critical Risks
  in Key Business Processes
• Many of Which May be Outside of Sarbanes
  Reporting Process

6
Areas of Improvement

• Strengthening Board Independence and
  Effectiveness By Appointing Lead Director and
  Separating Roles of Chairman and CEO
• Boards Need to Take Control of Executive
  Compensation to Protect The Shareholder
• Establishing Risk Governance Mechanisms to
  Enhance Companys Control Over The Full Array of
  Business Risks

7
Double Indemnity

• Does AC Member or Chair Have Increased Legal Risk
• Emerging Communications Director Found Jointly
  Liable
• Because Of His Expertise He Should Have Known
  Transaction Was Unfair to Minority Stockholders
• What Steps to Take
• Limit Number of Audit Committee Served On
• Ensure DO Policies Offer Good and Broad Coverage
• Charter and Bylaws Should Have Exculpatory
  Provisions
• Formal Indemnification Agreement With Company

8
How to Tell if Audit Committee is Doing its Job

• By How Much it Focuses on the Five Cs
• Complexity Understand Complexity and Related
  Risk
• Creativity Too Much Creativity in Structure of
  Business Transactions
• Controls Importance of Internal Controls
• Coziness How Close is Relationship Board
  Members, CEO, Sr. Mgmt, Audit Firm, Audit Partner
  Friendship with CFO
• Choices Understand Everyday Choices By CEO, CFO
  About Policies, Estimates, Judgments

9
Assessing Audit Committee Effectiveness

• Who Should Be Surveyed?
• Audit Committees or Broader?
• 360 Degree Board Members, Key Mgmt, Auditors
• Assess Individual Members?
• What Questions Should Be Asked?
• Responsibilities Outlined in AC Charter
• Items Outlined in Detailed Meeting Planner
• How Will Effectiveness Be Measured?
• Rating Scale (1-5) Useful
• How Often Should Survey Be Done?
• Annually Provides Timely Feedback and Focus

10
Audit Committee Tips for Managing Shared
Responsibility with the Board

• Articulate what topics and their implications
  will be covered and when they will be reported on
• Schedule committee meetings before full board
  meetings and provide real time summaries
• Add Committee Agenda and Supporting Documents to
  Board Book
• Add Approval of Audit Committee Minutes to Next
  Board Meeting and Use to Dig Deeper on Any Issues
• Involve Audit Committee Chair In On Going
  Education of Full Board
• Systematically Rotate Directors Across Committees
  to Broaden Knowledge and Experience

11
Ongoing Strategy What elements are being
employed to address the broader context of risk
in corporate governance?
12
ASSURANCE AND ADVISORYBUSINESS SERVICES