Audit Committee Bulletin: July 2013

Enhancing board effectiveness for improved governance

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CFOs uniquely qualified for audit committee role

Growing demand for insights on finance, risk and strategy is making the CFO a popular choice for an audit committee role.

Companies looking to raise the quality of their audit committees are increasingly recruiting CFOs to non-executive roles. Such a move offers clear benefits to both parties, but needs to be managed carefully.

Why the CFO?

Regulation is an important driver, with companies often required to appoint audit committee members with financial expertise.

But their knowledge of accounting standards, investor demands and risk management also make CFOs sought after recruits. They are in an excellent position to question management about the financial rigor applied to business decisions.

CFOs have also come to recognize that a stint as a non-executive director can enhance their career prospects, the research shows. The benefits of a non-executive position include a better understanding of boardroom dynamics, the cross-pollination of ideas and best practice, and exposure to a different corporate culture.

Corporate governance reform in Europe

In recent discussions with audit committee chairs, the acting head of the European Commission unit, Eric Ducoulombier, agreed with senior audit committee leaders that the plan must have a “pro-growth” focus.2

The action plan covers a wide range of governance issues, but in Ducoulombier’s discussion with audit committee leaders, three particularly controversial issues stood out:

  1. Separating the role of board chair and CEO: The question of whether the board chair can also be CEO tends to polarize opinion. But the principle of separating the roles is broadly supported.
  2. Quotas for female board members: National quotas have achieved a great deal, in terms of increasing the number of female board directors. The question is whether this could have been achieved via a comply-or-explain basis, rather than legislation.
  3. Limits on the board mandates: The time needed to be an effective director varies enormously from one company to another depending on the sector and the international footprint. It is difficult to design a single approach to have sufficient board directors devoting quality time to the board.

The comply and explain approach

This approach, rather than “one size fits all” regulations — is considered more effective in furthering improvement and dealing with the heterogeneity of public interest firms from a size, complexity and capability perspectives.

The possible combination of light-touch guidance on some issues and tougher regulation on others suggests European Commission policy-makers are likely to take a pragmatic approach to reform.

What happens now?

The European Commission released an action plan with a series of measures, ranging from best practice guidance to proposals for new legislation. The action plan focuses on three key elements — enhancing transparency, engaging shareholders and improving the framework for cross-border operations for EU companies. These will be introduced in the run-up to 2015, when a new Commission will take office.

Questions for the audit committee

  1. 2 Views expressed in this article are of the participants at the European Audit Committee Leadership Network meeting, June 2012. The network is organized and led by Tapestry Networks with the support of EY as part of its continuing commitment to board effectiveness and good governance.