Corporate Governance after the Financial Crisis
The financial and economic crisis has revealed weaknesses in corporate governance that had barely been apparent in growth markets. In future, boards of directors will be more active and better informed, their mandate will require more time and they will have to question management decisions in a more systematic way.
The Organisation for Economic Co-operation and Development (OECD) has identified weaknesses in the work of boards of directors as one of the causes of the current financial and economic crisis. It has clearly demonstrated that the board of directors plays a key role in either the success or the failure of a company. How can companies benefit more from the board of director's work in future? One thing is obvious: the board of directors must adapt to the changed environment after the crisis. This environment demands changes both in the way the board of directors performs its duties and in the issues it deals with.
The future board of directors will take a closer look at the following issues:
- The financial crisis has increased stakeholders' and public awareness on how companies - not just banks - handle their risks. It is only possible to make sustainable business decisions if the related risks are taken into account adequately. The board of directors is required to monitor the company's risks and the effectiveness of the appropriate countermeasures critically and accurately, and to take these into account in its decisions. The board of directors also owns the task of defining the risk appetite and risk culture of the entire company.
- Due to the crisis, the remuneration and incentive structures for management will also occupy more space on the board of directors' agenda. The board of directors will have to create clear, comprehensible remuneration and incentive structures. This is particularly relevant against the backdrop of the current reform of the Swiss Code of Obligations, according to which the board of directors will have to create a compensation policy and a corresponding annual compensation report.
- In future, the board of directors will be more critical when checking the basis for decisions received from executive or company management. The board should not consider the assumptions and requirements behind these as given. This also includes thinking in (their own) variants and systematically adapting to several development scenarios. This is the only way in which the company can retain its ability to act and respond - even in a turbulent environment.
- Companies have recognised that their reputation can be a key factor in their ability to survive in crisis situations. Investors, banks and other stakeholders expect a sustainable strategy and a future-oriented business concept. In future, the board of directors will want to ensure that its decisions in the conflicting areas of different economic and non-economic interests are sustainable and transparent.
The crisis has not only changed the issues which the board of directors has to deal with more closely. It is also becoming apparent that the way of working in many companies is in the process of changing. All in all, the crisis has shown that the board of directors has to take a very active approach to monitoring executive management or company management. However, their duties are often very complex. Thus, board members who carry out operational functions or board mandates in other companies must particularly invest sufficient time into the individual mandates.
In addition, board members are increasingly asked to take part in continuing education in a systematic way and in line with the requirements of the individual board of directors' mandate. With up-to-date knowledge, the board of directors is in the position to act as an equal sparring partner for executive management or company management.
Finally, boards are now increasingly reconsidering which tasks should be handled by one of their committees and which should be debated by the entire board of directors. The crisis has shown that delegating too many tasks to committees can result in important issues not receiving the attention of the entire board. This can also affect the quality of decisions.
Overall, the crisis has emphasised the importance of the board of directors and increased its significance. It has become clear that the board of directors can be a key success factor, particularly in a dynamic environment. This will require courage, time, scepticism, curiosity, expert knowledge and initiative from boards and their members in future.
The financial and economic crisis has revealed weaknesses in corporate governance that had barely been apparent in growth markets. It has clearly demonstrated that the board of directors plays a key role in either the success or the failure of a company. How can companies benefit more from the board of director's work in future? One thing is certain: the board of directors must adapt to the changed environment after the crisis. This environment demands changes both in the way the board of directors performs its duties and in the issues it deals with.
Contact
Contact
Anne van Heerden
Partner, Head Risk & Compliance, Head Forensic Switzerland
KPMG AG
Badenerstrasse 172
P.O. Box
8026 Zurich
Tel. +41 44 249 20 40 | annevanheerden@kpmg.com