Adjusting to new policy demands on corporate boards

Our point of view
In response to the financial crisis, policymakers around the world are actively considering corporate governance reforms to improve the effectiveness of boards of directors. Ernst & Young believes that effective boards are vital to well-governed and successful companies and strong capital markets. For this reason, boards should make the changes necessary to strengthen their governance and effectiveness, including implementing new and pending requirements.

Context
The financial crisis has highlighted the need to strengthen corporate governance, particularly but not exclusively, within the financial sector. Across much of the world, governments  both legislatures and regulators  are adopting measures designed to enhance corporate governance, including the management of risk. One area of focus has been on how management and boards of public companies could and should work better in the interests of shareholders, the capital markets and other stakeholders.

In the wake of the crisis, policymakers are questioning whether boards carried out their duties responsibly, including whether they were sufficiently aware of the risks involved in their companies’ businesses and whether they responded appropriately. While the crisis has elevated long-standing policy debates specific to some countries (e.g., proxy access and say-on-pay in the United States), other proposals are more widespread (e.g., the need to focus more on remuneration and incentives relative to long-term objectives and risks).

Another key area of focus for policy reforms is on enhancing the effectiveness of the board as a mechanism for representing shareholder interests, overseeing management and mitigating risk. Policymakers are looking carefully at the role and composition of boards, and what needs to change. Proposals range from the creation of risk management committees  the focus of which would be more forward-looking and strategic compared to audit committees  to the improved flow and use of information, and the appointment of directors who are better equipped to oversee the management of a company’s risks. Again, while many of the new proposals will focus on the financial services sector where policymaker concerns have been the greatest, signs suggest the focus may not remain there.

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