The way to effectively hold a company accountable for their actions is through transparency. On December 16, 2009, the U.S. Securities and Exchange Commission (SEC) approved new rules requiring public companies to increase their transparency around proxy disclosure, specifically:
• Board risk oversight practice and philosophy
• Executive compensation practices and policies
• Board leadership structure
• Board diversity
• Director qualifications and their “value add”
SEC Commentary on the rule states “Disclosure of the board’s oversight of the risk management process should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.”
The relationship between the board and management has become of greater importance and will need to continue to strengthen.
Management is responsible for identifying, monitoring, managing, and communicating the risks to the board. As management it is important to use the time with the board and the committees to help them understand the real objective and risk exposure is in relation to the risk culture of the company. The board continually needs to access management’s understanding of risks, attitude towards risk, and their performance. Furthermore, the board must ensure that only well informed decisions are made.
Management manages risk and the board oversees management, therefore the continuous communication between the two, including the committees, is vital for success. The new proxy disclosure rules itself and any additional changes in corporate governance are going to push for continued improvement in this relationship.
