Mind the Knowledge Gap
May 10, 2010 Leave a comment
Former SEC Chairman Arthur Levitt delivered some very interesting remarks in a recent speech at the Annual Audit Committee Conference sponsored by the National Association of Corporate Directors (“NACD”). Mr. Levitt challenged companies to improve the knowledge base of its board members to allow for more fulsome discussions on risk. He also provided some recommendations for better governmental oversight and regulatory reform. Here are a few of his thoughts.
Let’s talk about steps that need to be taken by corporate boards on their own. In general, I favor elements that improve transparency and accountability. Basic improvements, like giving investors access to the proxy, would push boards to be more proactive, and more sensitive to investor concerns.
But being more accountable is a lot easier when you have the right expertise. Right now, independent board members often don’t have the base of knowledge they need. When someone working every day inside a corporation is presenting information and analysis to the board, there will always be a gap between what they know and what the board knows. This gap is inevitable, but it need not be permanent. That is why I would strongly favor that boards of directors include individuals with financial market experience, and especially expertise in understanding, pricing, and managing risk. With even one member regularly raising challenging questions and issues, boards would be able to press management to think far more creatively about issues such as counter-party risk, operational risk, and so on.
Mr. Levitt is right in his view that the knowledge gap must be bridged to ensure board members are truly effective in their roles. It will take renewed efforts on both sides – management and board – to accomplish this feat. However, not only will they benefit, their shareholders will as well.