A Reader’s Thoughtful Comment

We appreciate the thoughts, issues, or questions raised by the readers of the Corporate Governance Corner. The subject of this column is a response to a thoughtful, real-world situation raised by one of our readers.

The column editors received the following correspondence from a CPA Journal reader:

The reader recognizes a situation which can occur often and may be problematic when it does. It is a real issue that can take different forms within an organization. And it is not a new issue: for The CPA Journal it goes as far back as a March 2002 article, “From-‘Tone-at-the-Top’-to-‘Checks-and-Balances,’” authored by members of our board of advisors (https://tinyurl.com/d8fnafcx). The article explained the shift from a strong CEO setting the presumably appropriate tone at top to a focus on improved checks and balances among the fundamental elements of an organization. The distance in time from that article to the current one testifies to the persistence of the challenges and the slow pace of change in the boardroom.

As the reader points out, this issue of a CEO maintaining a tight leash occurs often. This is where a board must exercise the appropriate governance and oversight to ensure the required checks and balances are in place. It must be addressed in whatever manner is required, including executive sessions with the board, as well as other steps that focus on the CFO’s loyalty to the organization and not solely the CEO.

Exhibit 1, from the authors’ book (Corporate Governance: Understanding the Board-Management Relationship, published by the ABA) identifies the responsibilities for the proper governance, oversight, and management of an organization (https://tinyurl.com/8dhadpvx). Owners create the actual governance attitude at an entity; the form of ownership can vary; note the contrast that exists amongst structures dominated by investment funds (such as Warren Buffett in Berkshire Hathaway), private equity investors (who often have a distinct agenda), mutual funds (which are typically not strongly engaged in actual management), and technology companies (which are often dominated by the individual founders that started up the company). The owners in these varying structures appoint a board to oversight and a team to manage.

Checks and balances are not just important with respect to the CEO/CFO relationship, they are also essential elements of governance throughout the organization. Effective checks and balances entail the dynamic definition of the roles and responsibilities of every participant. The following are several examples of how checks and balances were used to improve the risk and the operational control environment:

• The development and maintenance of position descriptions, incorporating roles and responsibilities, are important considerations in developing delegations and checks and balances.
• The board utilizes checks and balances in connection with its responsibilities for governance, oversight, and management. These processes are commonly facilitated through the reporting to the board of operational and financial information, as well as reporting of ethics and other compliance matters. The definition of what information is to be reported to the board is an important consideration for the development and effective use of checks and balances.
• A large corporate entity known to the authors implemented operational business authorities after the recognition of several operating issues. These authorities began with the company’s bylaws, with specific authorities delegated by the board down to and through the applicable management levels. One example of these authorities was related to product development. The officer responsible for the design and implementation of new products was required to obtain concurrence from the officers responsible for finance, risk management, marketing, manufacturing, distribution, and strategic planning. This process helped ensure there was an active involvement of the impacted relationships throughout the product development process, and it minimized operating issues and risks.

The above examples are not absolute solutions to the issue raised by the reader above, but they should nonetheless be considered when addressing the issue raised. As noted above, the authors also recognize that there are no practices or standards that can be broadly applied to all organizations, as each organization operates differently. Concurrently, procedures must be in place to update checks and balances over time as organizational structures, areas of risks, and business environments change.