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Jeff Tetrick
Chief Financial Officer
Colorado, Pinnacol Assurance
Only Rip Van Winkle could have missed the corporate governance
headlines of the last several years. The media inferences have been
widespread and broad brush.
One has to wonder: When has the lack of integrity of a few driven
the outcomes and reactions of so many?
The answer goes back to the famous Dutch Tulip Mania of 1612, the
Roaring ‘20s, the market collapse of 1929 with the subsequent
creation of the SEC, or look at the Savings and Loan crisis of the
‘80s. And the list goes on.
This is not a new phenomenon. Several taking advantage of many
is an ageless condition. In the end, one must acknowledge that the
capital markets are not as efficient and all-knowing as everyone
thought.
Why? The answer may lie in the market itself: We are all looking
for an edge. The advantage of a few basis points creates an advantage
whether we are buying or selling into an expectant market.
Like the creation of the SEC in 1933, 2002 brings us the Sarbanes-Oxley
Act. Effective Aug. 14, 2002, a new bureaucracy was created, and
everyone scrambled to learn what a “financial expert”
was and where to find one or two for board membership.
Once the law was in place and we took pause to assess what had
happened, we acknowledged that Enron had several “financial
experts” on their infamous board! From a regulatory standpoint,
this new law was rushed “onto the books” overnight, on
top of several hundred existing laws relating to the same issues.
It was rushed through with little public debate, and thus there
is little committee testimony and discussion for guidance.
The Sarbanes-Oxley Act of 2002 has two broad categories: accounting
oversight and corporate governance. Within these categories is regulatory
guidance on CEO/CFO accountability, audit committees, external auditor
independence, corporate governance and, finally, enhanced financial
disclosure requirements along with increased SEC review.
Where does one go for guidance on Sarbanes-Oxley and its impact
on your organization?
The last time I searched on Yahoo for Sarbanes-Oxley Act of 2002,
it came back with more than 33,000 items. Obviously, the search
criteria needs to be narrowed.
One could read the Act and determine it doesn’t apply in your
situation. And that could be true since the Act has very defined
application criteria. But then think about the consequences as a
CFO or CEO of telling your board you won’t certify the financial
statements because the Act doesn’t apply. Seems to be career
limiting.
Best practices
A different tactic may be to look at the Act and extract best practices
from it. Work with your internal and external auditors. Discuss
topics like independence of the audit committee; i.e., review the
audit committee charter to ensure it is up to date. Does the committee
function as it says it does? Does it function in a “best practices”
manner? Does it have the expertise available to properly discharge
its duties?
The point is that each of us has access to willing experts who
can help resolve these questions and the many others that will come
up. Keep in mind it’s not just the audit committee of the board.
This can also apply to the board itself and any other formal or
informal committees—the compensation committee, the investment
committee, and so on. Seek the guidance of the experts around you.
Whether that’s auditors or attorneys, seek their counsel.
Another source of help is within each of our organizations—our
own employees.
Define responsibilities within the company so employees know their
individual roles. Define responsible behavior for employees. Have
you thought about a code of conduct? When was the last time a review
of internal controls—checks and balances—within your processes
was performed? When faced with violations of conflict of interest
or company ethics policies, do you take timely disciplinary action?
Have you looked at a process of focused internal audit procedures?
Maybe a process of benefit disbursements to employee addresses?
Does your company create expectations for compliance with ethical
and governance guidelines within the performance review and compensation
process? Establishing personal accountability within the performance
review system will tend to enlist your entire employee base in helping
raise the bar as to ethical practices within your marketplace. The
laws passed by Congress, enforced by the SEC, endorsed by the board
can only work if embraced by each individual within your company.
One additional series of questions to consider relates to documentation.
Do you have minutes of critical meetings? Are your ethical and conflict
of interest policies and practices documented? Are they clear enough
that all your employees understand? Are they communicated to business
partners? Has your training process around these topics been documented?
Have you recorded who has participated? Have you reviewed the material
for timeliness?
As you can see, the general question is: Have you documented what
you’ve done?
“The Company: A Short History of a Revolutionary Idea”
by John Micklethwait and Adrian Wooldridge points out that “corporations
are the worst form of economic organization, except for all others.”
It quotes an 18th century English lord who complained, “Corporations
have neither bodies to be punished nor souls to be condemned; they
therefore do as they like.”
With this in mind, it’s up to us as individual leaders to
be the bodies and souls of our organizations. We must set the standard
so others look at us now and years later and comment, “Well
done faithful steward.”
Jeff Tetrick can be reached at (303) 361-4861 or
jeff.tetrick@pinnacol.com.
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