Sarbanes-Oxley: The Practical Implications

Everyone has heard of the (over?)reaction to the huge reporting frauds the markets have experienced in recent years, namely the Sarbanes-Auxely bill. The Big Four accounting firms have written volumes on the technical implications of the bill, and those have been shared in many a boardroom. The same accounting firms have also been shuffling accounts, as banks are separating internal and external audit functions, tax and consulting. But in addition to rising accounting fees, what else has been accomplished?

The Sarbanes-Auxley bill has awakened board members to their fiduciary responsibility in a very positive manner. Bank board members, like other institutions’ boards, realize that the expectations from the board have grown both in volume and in significance. The reaction has been mixed. In general, board meetings are certainly longer, as are committee meetings, with special emphasis on the audit committee. The audit committee now meets in separate executive sessions with the external auditor, internal auditor, executive management, on its own, and sometimes with the compliance officer as well.

Another side effect of the Bill is the change in charters. Board committees have been reviewing their charters to ensure compliance with both the letter and the spirit of the new law, which has added complexity to the reports staff has to present to the committees and time to the meetings.

The final interpretation of the new law isn’t out yet. In the meantime, many are struggling with the true meaning behind the new requirements. Here are some perspectives:

1. Sarbanes-Auxley can cause confusion between board oversight and executive management. I do not believe this was the intent of the law, and caution against such confusion. The purpose of boards is to provide elements such as oversight, a final level of controls, and strategic guidance to executive management. Board, however, should not manage or second guess management. Their job is to advise, candidly assess situations and provide input. They listen to management’s recommendations and either accept or reject them. They do not interfere with the implementation of strategic direction as set by the board and executive management, except when execution falls short of expectations or is not along the lines agreed upon. Ultimately, the board’s final responsibility is to support executive management; when management does not measure up, the board needs to advise, caution and prod. If need be, the board can even remove management. But the board should NOT manage.

   This distinction is getting harder and harder to execute, especially at the audit committee level. I do think it is important that board members remember that the new law has not changed their fundumental duties regarding the management structure of corporations; it just clarified the detailed responsibilities of board members.

2. The days when board members were a rubber stamp should be over by now. The role of the board is to add value to shareholders and management alike, by sharing their experience and insights. When disagreements occur, board members should present their views candidly as they support management toward making the decisions they feel are in the best interest of the shareholders. This means that they need to have a reasonable understanding of the content before them, and ask whatever questions are necessary in order to fully understand what management is doing and asking for. It may be different from what has been happening in the past in some institutions, but it’s where board members can truly bring value.

3. The acid test for the value a board member brings, today as well as yesterday, has been: are the shareholders and management benefiting from my involvement in the organization? The benefits can vary, ranging from great advice to business development, from management support to constructive criticism. The job of the board member, especially under the new law, is to protect the interests of the shareholders by helping management do their job as well as possible within the risk appetite range of the organization. The board needs to play a key role in aligning even further the interests of the shareholders with those of the leadership of the company.

Sarbanes-Auxley has elevated the importance of board members (and their liability…) to a new level. Board members need to assess their contribution dispassionately and ask themselves: Do I get in the way of effectively managing this company? Do I contribute to the company through better questions, more business development, candid opinions and business judgment? And, the ultimate question: Am I helping both management and the shareholders succeed?