The accounting snafus of Enron and other corporations have turned up the pressure on corporate audit committees. As a result, one of the biggest challenges corporate officers will face this year is convincing qualified executives to accept directorships and audit-committee nominations, says Bob Williamson, CFO of investment bank vFinance Inc. and a former audit-committee member and CFO of Equinox Systems Inc.
Stakeholders, hell-bent on curbing corporate financial failure, will spend the next year meticulously reevaluating the makeup of audit committees. For instance, several institutional investors now want audit committees to examine off-balance-sheet transactions and special-purpose entities, as well as to decipher those complicated footnotes.
Given such requirements, executives and shareholders may have little choice but to court top-flight financial pros for directorships. In fact, says Samuel Winer, a partner at law firm Foley & Lardner and a former Securities and Exchange Commission attorney, an SEC-appointed blue-ribbon panel recently issued guidelines that recommend audit committee members be financially “literate.” And there’s evidence that the guidelines are being taken seriously. Managers at executive search firm Christian & Timbers already report a dramatic shift in client requests. They say they’ve seen a 50 percent rise over the last few years in requests for board member candidates who possess strong financial backgrounds–or CFO experience.
However, as committee workloads increase, so will potential liability, and attracting talent may become nearly impossible. “Recruiting directors for the audit committee is like calling them on deck for a kamikaze attack,” quips Williamson.
Nevertheless, if the executive committee doesn’t recruit financial top-guns for their boards, at least some institutional investors will. One example is Herbert Denton, founder of investment firm Providence Capital. Denton is big on sponsoring director nominations to prevent boards from being dominated by cronies of the executive committee.
Last year, Providence submitted alternative director slates to two portfolio companies: ICN Pharmaceuticals and Trover Solutions Inc. (formerly Healthcare Recoveries Inc.). All told, Providence has submitted 16 alternative slates over the past five years–and placed 19 of its nominees on 11 boards. Still, Denton concedes that the average institutional investor doesn’t delve too deeply into governance issues. Why? “Because the process is contentious, often litigious,” he says.
Yet, Enron could change that.
The Enron Difference
Remember Gordon Gekko’s “Greed is good” speech in the movie Wall Street? It would have fallen mostly on deaf ears at a recent executive conference sponsored by CFO magazine. More than half of the finance leaders in attendance attributed Enron’s financial failure to greed and a lack of integrity. Yet another 51 percent said that their initial reaction to the quick demise of the Houston-based energy giant was shock and disbelief, says Jonathan Schiff of Monsey, N.Y.-based Schiff Consulting Group. Schiff, who conducted the survey, is also a professor of accounting at Fairleigh-Dickinson University.
Says Schiff, who polled executives attending “Excellence in Finance,” a CFO Executive Program, held in Phoenix in February: “They were surprised at how quickly Enron collapsed compared with, say, Kmart, which took years to unravel.” One result, he notes, is that boards and shareholders will demand better accountability controls for compensation structures that foster accumulation of extreme wealth.
The survey also found that 76 percent of the participants said that the Enron failure would have a “very significant impact” on the accounting profession, while only 13 percent felt that way about their own companies. Noting that it’s much easier to look outward at the accounting profession than inward at their own corporations, Schiff believes that internal reassessments will pick up in the second half of the year.