|
I. Introduction
On November 4, 2003, the Securities and Exchange Commission (“SEC”) approved new corporate governance standards for public companies listed on the New York Stock Exchange (“NYSE”) and NASDAQ1. The new listing standards
for both exchanges are very similar in content and scope. Their focus is to
empower boards of directors of public companies to play a greater role in
corporate governance. Over the long term, these standards may prove to be
more significant than the Sarbanes / Oxley legislation, passed last summer.
These proposed new rules will generally take effect with a company's first
annual meeting occurring after January 15, 2004, but not later than
October 31, 2004. Among other things, the new standards:
- Require a majority of board directors to be independent
- Require independent or non-management directors to meet regularly in executive session without management directors
- Significantly strengthen the role of independent directors in compensation and nominating decisions
- Provide heightened standards of independence for audit committees and specify core audit committee duties and responsibilities
- Provide for the establishment of procedures for audit committee receipt, retention and treatment of complaints from employees on accounting, internal control or auditing matters and a mechanism for confidential submission of employees of such information
- Require adoption and public disclosure of a code of business conduct for directors and employees
The new standards could have a dramatic effect on how companies are governed in the future. The new standards require the board and its audit, compensation and nominating committees to be more independent, more informed, and more actively engaged in the affairs of the company. In some companies, the new standards could represent a dramatic power shift from management to the Board, which is charged first and foremost with looking after the interests of the shareholders. The impact will hopefully be greater management accountability to shareholders.
II. Audit Committee Oversight of Risk Analysis and Risk Management
The NYSE standards specify in detail certain duties of the audit committee.
These duties include, at a minimum, the following:
- Review independent auditors' quality control procedures and independence
- Discuss quarterly and annual financial statements with management and the auditor
- Discuss earnings press releases as well as financial information released to analysts
- Discuss policies with respect to risk assessment and risk management
- Meet separately and periodically with management, internal auditors, and external auditors
- Review with the independent auditor any audit problems or difficulties and management's response
- Set clear policies for employees or former employees of independent auditors
- Report regularly to the board of directors
The fourth specified duty relates to oversight of risk assessment and risk management. The text of the specific provision is as follows:
iv. Discuss policies with respect to risk assessment and risk management -
Commentary: While it is the job of the CEO and senior management to assess and manage the company's exposure to risk, the audit committee must discuss guidelines and policies to govern the process by which this is handled. The audit committee should discuss the company's major financial risk exposures and steps management has taken to monitor and control such exposures. The audit committee is not required to be the sole body responsible for risk assessment and management, but, as stated above, the committee must discuss guidelines and policies to govern the process by which risk assessment and management is undertaken. Many companies, particularly financial companies, manage and assess their risk through mechanisms other than the audit committee. The processes these companies have in place should be reviewed in a general manner by the audit committee, but they need not be replaced by the audit committee.
III. Conclusion
By specifically requiring audit committees to review their company's risk assessment and risk management policies, the NYSE & NASDAQ regulations highlight the importance of the corporate risk management function and the need for companies to assess their risks and employ appropriate risk management and transfer techniques. Assessing risk and risk management is a responsibility properly assigned to the board as it is part and parcel of its overall responsibility to protect the interests of its shareholders. The new formal codification of the audit committee's responsibilities for risk management can be expected to raise the profile of the risk management function in many companies.
In light of these and other new requirements, such as the Sarbanes Oxley Act, management needs to dedicate the resources necessary to ensure that it has a solid understanding of the company's risks and a sound strategy to mitigate, transfer, or retain them.
If you have any questions or would like additional information, please contact us.
1NASD+NYSE Rulemaking: Rel. 34-48745 (re: Relating to Corporate Governance),
Securities and Exchange Commission (Release No. 34-48745; File Nos. SR-NYSE-2002-33, SR-NASD-2002-77)
|
