Bob Corey, an 18-year finance veteran who's been CFO at three public companies and currently serves as Director and Audit Committee Chairman at another, has sat through his share of board meetings. This week, he chats with CW about the importance of timely board communication, and provides tips on a variety of topics, from getting independent, unvarnished perspectives from other senior managers, to managing the internal control documentation process.

You've now been involved in board-level discussions at both public, [Forte, Documentum, iManage] and private [Amberpoint, Thor] companies. And you've done so as both a CFO and a director. What factors contribute to making the board-management relationship work especially well?

The central element for a strong and effective board relationship is timely communication.

In my past experience as CFO it was always a rush to get information packages out to the audit committee or board members as board meeting approached. As a board member, it's always frustrating and disappointing when I don't receive an information package before the meeting or receive it the evening before.

This doesn't allow for adequate time to review and evaluate the information being presented.

Where in your experience have you seen the relationship break down?

Lack of timely information can make the board meeting more of an "informational update" as compared to a comprehensive evaluation of strategy and operating results.

As a director, how do you ensure you're getting quality and timely information from management?

Of course, Sarbanes-Oxley requires the board take a much more active role.

Timely information will allow board and committee meetings to be much more effective. New ways of delivering information to board members need to be developed, as well as, a methodology to document and retain meeting agenda's and presentation materials.

At iManage [at which Corey is a director] we have been very successful in making information available on a timely basis by using the company's own product, called the "Board of Directors Virtual WorkSite" [which has] become the "go to" location for board members to receive and review all information related to upcoming board and committee meetings.

And how can you get independent, unvarnished perspectives from other senior managers?

Seeking out input from other senior managers about the business risks and opportunities has always been a best practice.

This is achieved by expanding the attendance at board meetings by a broader constituency of senior managers beyond the CEO and CFO.

Having presentations and dialogues at board meetings with marketing, sales and business development executives brings expanded perspective to the business.

The Conference Board in its June "Corporate Governance Best Practices: A Blueprint for the Post-Enron Era" recommends getting input from other sources. Is that pragmatic, or even likely? What are some good protocol tips for doing so?

All the boards I currently serve on have started a practice of dinners the evening before the board meeting.

These dinners are attended by a host of senior managers and allow an informal forum for board members and management to discuss business risks and opportunities.

Executive sessions of the Board's independent directors are supposed to promote open dialogue and the free exchange of ideas, and should have a feedback mechanism to the CEO for important ideas that may surface. What really happens at those sessions? In your experience, are they useful?

I believe that executive sessions are extremely valuable.

They provide a "free zone" for the directors only where we can openly discuss inputs and proposals from management.

We consider and agree on the real message we believe that management is communicating to the board about business risks and opportunities. Also, we consider and agree on what message the board wants to deliver to senior management on requests and proposals.

Management's assessment of internal controls (SOX 404) is creating more work for everyone. And according to most parties, the Audit Committee should play a critical role in the IC equation. "[Internal controls] Documentation is company-specific, and it's ultimately driven by the Audit Committee," Moss Adams partner Todd Van der Wel told us in June. "The Audit Committee needs to determine how granular they want to get. There's a tremendous amount of documentation here related to financial controls, and you can spend a lot of time documenting pieces that are on the fringes of financial reporting." How do you walk the fine line here, and how have your companies been addressing the issue?

I agree completely with Mr. Van der Wel — the documentation process of financial controls can be consuming.

Also, in today's environment it is critical that the Audit Committee take an active role in leading this compliance process.

As noted above, the documentation of financial controls is company-specific and there should be a ranking of controls by level of importance or significance to each business.

For example, a company with complex revenue recognition requirements would clearly rank controls related to revenue recognition as significant and would therefore document and evaluate these controls on a priority basis.

The prioritization and documentation of financial controls needs to be completed with close interaction with the company's independent auditors. This will ensure that the independent auditors agree with the priority of financial controls and the documentation methodology is sufficient to allow them to test the controls and serve as the basis for their opinion that the financial controls are adequate.

The pressures, above, must be even more intense for the Audit Committee Chairman, which is your role at iManage. What are some of the biggest challenges and stress-points for you there, and how are you and the Committee (and management and the board in general) addressing those challenges?

I think we're moving in the right direction through Sarbanes-Oxley.

An important element is the character, quality and experience of the management team. With a strong management team and active participation by the board we increase the overall control environment within which the company operates and competes in the marketplace.

Common "red flags" for financial reporting include items that have been in the news lately: complex business arrangements, unusual balance sheet changes or accounting policies/adjustments, etc. But what about some of the more human "red flags," like hesitancy or evasiveness from executives, differences in views among management, etc.?

The executive sessions, mentioned above, are a forum for directors to openly discuss subtle human signals that members of management may be trying to communicate.

Separately, our Audit Committee has "private sessions" with both the independent auditors and the CFO each quarter to discuss "tone at the top" and unusual or complex business transactions.

Lastly, with increased participation and improved understanding of the business, directors have become better equipped at identifying "red flags" and taking action in a timely manner. This leads to a strengthening in the overall business environment, allowing both management and the board to increase the transparency in business activities.

 

This column should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

 

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