Palmer, Russell E.

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eGrove (Univ. of Mississippi)

University of MississippieGroveTouche Ross Publications Deloitte Collection1980Financially oriented director: New role and newresponsibilityRussell E. PalmerFollow this and additional works at: https://egrove.olemiss.edu/dl_trPart of the Accounting Commons, and the Taxation CommonsThis Article is brought to you for free and open access by the Deloitte Collection at eGrove. It has been accepted for inclusion in Touche RossPublications by an authorized administrator of eGrove. For more information, please contact egrove@olemiss.edu.Recommended CitationTempo, Vol. 26, no. 2 (1980), p. 06-08THE FINANCIALLY ORIENTED DIRECTOR New Role and New Responsibility by RUSSELL E. PALMER/Manag ing Partner, Touche Ross & Co, Is the rote of the f inanc ia l ly o r ien ted d i rec tor d i f f e ren t f rom that of o the r corporate directors? To a degree it is. Most d i rectors tend to see themselves as d i rectors first, p lac ing their p r imary occupa t ions , skills, personal interests, and even their board c o m m i t t e e membersh ips in a context of broad responsibi l i ty—a v iew that is both appropr ia te and necessary. A f inanc ia l ly o r ien ted director, l ike any other, needs this breadth o f v is ion because, ul t imately, his j ob is direr ling, no t doing. A d i rector w i t h a f inancia l background shou ld no t assume a broader respon-sibi l i ty for all f inanc ia l prob lems, nor shou ld he nar row his responsib i l i ty to exc lude o the r matters. Lawyers migh t argue that all d i rectors bear the same responsibi l i ty, but whe the r they w o u l d advise all d i rector-c l ients to assume the same role is open to quest ion. W h a t is certain is that the roles of these directors have changed. In his testi-mony before the Senate Judic iary Commit tee 's subcommi t t ee on c i t izens ' and shareholders' rights and remedies in 1977, J. W i l son N e w m a n , a ret ired cha i rman of the board of 6 D u n & Bradstreet and a d i rec tor of Lockheed Aircraf t Corpora t ion , raised an impor tan t po in t about the changing role of directors: "Added responsibi l i t ies are being placed on directors and being demanded now, in terms of legal concept They have been there all the t ime, but n o w they have sur faced" Before Watergate, for example, h o w many directors w o u l d have bothered to ask about corporate codes of conduc t , i l legal po l i t i ca l con t r ibu t ions , or br ibery o f foreign government off ic ials? Or, unt i l recently, h o w many directors w o u l d have asked about w o m e n or m ino r i -ties in their organizat ions? Few, probably. Now, under the law, directors must concern themselves w i t h such quest ions. Adapting to Reality A 1975 Conference Board report suggests ano ther impor tan t area of change. The report , ent i t led "Corporate Di rec torsh ip Practices; Role, Selection and Legal Status of the Board," cites the " increasing legal recogni t ion of the complex i t ies of modern business, and of the diver-gent backgrounds, experience, and responsibi l i t ies a m o n g directors on the board." Moreover , the art ic le argues, there is a t rend toward "more f lexibi l i ty, w i t h the law adapt ing itself to the prob lems at hand." No longer do the same pr inc ip les necessarily "govern the d i rectors of all corpora-t i o n s - w h e t h e r a thousand or a b i l l i on dol lar opera t ion or whe the r a service or a manu fac tu r ing organiza-t ion." Nor does every d i rec tor bear " the same responsibi l i ty, whe the r he be an insider, an of f icer, an outsider, an attorney, an investment banker, an educator, an env i ronmenta l i s t , or whatever. Signif icantly, there are more and more instances of cour ts look-ing to the realit ies of the facts presented," Those " rea l i t ies" are far f rom clear. But one th ing is b e c o m i n g more apparent—special ized know ledge does in f luence the role a d i rector w i l l play wh i le serving on a board. An of f icer-director, for example, can gather more f rom the i n fo rma t ion the board receives about corporate act iv-ities than a d i rec to r w h o has not served as a m e m b e r o f corporate management . Similarly, the f inanc ia l ly or iented d i rec tor is expected to apply his exper ience and insight to the board's business. As an examp le , the accoun tan t or i nves tmen t banker is p resumably bet ter at spo t t ing i ncon -sistencies in a draft annua l repor t than an env i ronmen ta l i s t o r c lergyman. In many states, s ta tu tory law re inforces these assumpt ions . The M o d e l Business C o r p o r a t i o n Act , as revised in 1975, au thor i zes a d i rec to r to rely on i n f o r m a t i o n , op i n i ons , reports, o r s ta tements—inc lud ing f inanc ia l s ta tements ar id o the r f i nan -cial data prepared by corpora te employees , ou ts ide experts, o r a board c o m m i t t e e of w h i c h he is not a member. The exception is when he has knowledge which would cause such reliance to be unwarranted A c c o r d i n g to the act , the f i nan -cial ly o r i en ted d i rec to r must be ready to apply his k n o w l e d g e of accoun t i ng , aud i t i ng , o r o t h e r f inan-cial matters shou ld events warrant . He can and shou ld evaluate the c red ib i l i t y of the data fu rn ished h im , " read ing" f inanc ia l s tatements, reports, and even d iscussions at board meet ings to de te rm ine if any th i ng is unusua l or incons is tent Di rectors are no t requ i red to ver i fy al l i n f o r m a t i o n on w h i c h they base the i r dec is ions; the M o d e l Business Co rpo ra t i on Act says that a d i rec to r can rely on the data fu rn ished h im w h e n he does so in g o o d fa i th. In Litwin v. Allen, the c o u r t ru led that a l t hough d i rectors are not l iab le for mistakes of j u d g m e n t w h i l e ac t ing w i t h reasonable ski l l or p rudence , they must no t be negl igent . In the Stirling Ho rn ex case, the SEC p u b l i c l y c r i t i c i zed t w o outs ide d i rectors for fa i l ing to fu l f i l l the i r responsib i l i t ies , even t h o u g h ne i ther had reason to bel ieve that the St i r l ing H o m e x f inan-cial s tatements were false and mis leading. In this case, the c o m m i s -sion also c i ted the in frequency- and pe r func to ry nature o f the board 's meet ings, the absence of an audi t c o m m i t t e e , a n d the d i rectors ' fa i lu re to i n f o r m themselves abou t ant) exercise c o n t r o l over the a c c o u n t i n g pr inc ip les used. The Stirling Homex case shou ld serve as a w a r n i n g to the f inanc ia l ly o r ien ted d i rector , suggest ing strongly that he educa te h imsel f abou t the increasingly c o m p l e x nature of f i nan -cial repor t ing. Mere l y keep ing up w i t h the n e w d e v e l o p m e n t s in this area is a ma jo r under tak ing , as a glance at the many sources of gener-ally accep ted a c c o u n t i n g p r inc ip les w i l l c o n f i r m . They inc lude : • The statements of the Financial A c c o u n t i n g Standards Board • Technical bu l le t ins issued by the FASB staff. • The ASRs and o the r p romu lga -t ions of the SEC, • The s ta tements of pos i t i on issued by the a c c o u n t i n g standards execu-tive c o m m i t t e e of the AICPA. • O t h e r AICPA pub l i ca t i ons , such as aud i t and a c c o u n t i n g guides. The SEC Role As f o rm idab le as this list appears, f inanc ia l repor t i ng encompasses more than general ly accep ted a c c o u n t i n g pr inc ip les. The SEC plays a ma jo r role in shap ing repor t i ng pract ices in the U.S., requ i r ing d isc lo-sure of eve ry th ing f rom the proper-ties o w n e d by an issuer to detai ls about managemen t c o m p e n s a t i o n and perquis i tes. A n d these require-ments change, and somet imes radical ly. O n e especia l ly i m p o r t a n t examp le of SEC in te r ven t i on is its o n g o i n g in te rp re ta t ion of the Foreign Cor rup t Practices Act . The commiss ion ' s ASR 242 has a l ready addressed the a c c o u n t i n g standards requ i rements of the act and the repor t i ng of ques t ionab le payments . The SEC has recent ly c i r cu la ted new proposals, i n c l u d i n g a r equ i r emen t that w i l l have far-reaching ef fects on all pub l i c l y he ld businesses. The c o m -miss ion wants managemen t to represent that its systems of in terna l a c c o u n t i n g and c o n t r o l p rov ide reasonable assurances that the b road ob jec t ives stated in the act are ach ieved " w i t h o u t mater ia l i t y of amoun ts . " Obv ious ly , the f inanc ia l l y o r ien ted d i rec to r shou ld m o n i t o r the commiss ion ' s act iv i t ies in this area w i t h care. He shou ld d o more , however. Because of his special know ledge , he can "educa te " his fe l l ow d i rectors abou t the imp l i ca -t ions of t he SEC's d e e p e n i n g invo lve -ment . The f inanc ia l l y o r i en ted d i rec to r shou ld be fami l ia r w i t h p r inc ip les , requ i rements , and the relevant act iv i -ties of regu la tory agencies w h i c h af fect the company . The k n o w l e d g e requi red w i l l vary, d e p e n d i n g on the dep th of the company ' s i nvo l vemen t w i t h the agency. W h i l e an acqua in tance w i t h the legal c l ima te is ex t remely impo r t an t for all d i rec tors , it is par t i cu la r l y so for the f inanc ia l l y o r i en ted d i rector . Legal requ i rements are imposed by the cour ts , the M o d e l o r State Business Co rpo ra t i on Act , and by app l i cab le federal law and regula-t ions. Obv ious ly , each d i rec to r shou ld keep up w i t h the t rends in case taw and statutes and make some a t tempt to recogn ize w h e r e these are l ikely to lead. I n f o r m a t i o n on legal d e v e l o p m e n t s can be f o u n d in a n u m b e r of pub l i ca t i ons , in the admin is t ra t i ve ac t ions b r o u g h t by the SEC, and in speeches g iven by the SEC commiss ione rs and staff, as we l l as by law professors and others. A i d i n g the d i rec to r in his quest for i n f o r m a t i o n abou t his legal responsi -bi l i t ies are such pub l i ca t i ons as "The Corpora te Director 's G u i d e b o o k , " prepared in 197b by an Amer i can Bar 7 New Role and New Responsibility Assoc ia t ion s u b c o m m i t t e e , and the excel lent C o n f e r e n c e Board research reports. The Con fe rence Board, the Nat iona l Assoc ia t ion of Corpora te Di rectors, a n d a n u m b e r of repu tab le academic i ns t i t u t i ons h o l d educa-t iona l seminars for d i rectors. Finally, each year, b o t h spec ia l ized and general pub l i ca t i ons address the legal needs of d i rec tors . Even t h o u g h these pub l i ca t i ons and seminars d o no t usual ly deal w i t h matters conce rn ing the f inanc ia l l y o r i en ted d i rec to r specif ical ly, they d isseminate m u c h va luable i n f o r m a t i o n . Using the Advantage At first g lance, hav ing a f inanc ia l backg round may appear to p lace excessive burdens o n a consc ien -t ious director , w h i l e increasing his exposure to l iabi l i ty . In reality, a f inanc ia l o r i en ta t i on can be tu rned to advantage, for it enables a d i rec to r to c o n t r i b u t e more to the c o m p a n y in his capac i ty as a d i rec to r w h i l e he also protects h imse l f legally. If I mysel f were serv ing as a d i rec to r of a co rpo ra t i on , I w o u l d ask to be a p p o i n t e d to the audi t c o m m i t t e e . M e m b e r s h i p on that c o m m i t t e e w o u l d a l l ow me to make the most of the t ime spent in fu l f i l l i ng the p o r t i o n of my d i rec tor -ship o b l i g a t i o n a l loca ted to f inanc ia l matters. No t o n l y c o u l d I use my exper ience as an accoun tan t , b u t 1 w o u l d also have greater access to f inanc ia l i n f o r m a t i o n . W i t h b o t h the i n f o r m a t i o n and the t ime to cons ider it, 1 c o u l d s ign i f icant ly reduce the l i ke l i hood that I w o u l d miss some-th ing i m p o r t a n t - t h e some th ing I m igh t be expec ted to d iscover because of m y f inanc ia l backg round . O n e of the most d i f f i cu l t chal lenges for d i rec tors may be c o p i n g w i t h the manner in w h i c h in f luen t ia l cr i t ics and g roups have in terpre ted the i r ro le—everyone w h o seriously considers this sub jec t r e c o m m e n d s some i m p r o v e m e n t s in the system. In impo r t an t instances, the cour ts are p rov id i ng in terpreta-t ions The Killearn case o f fers a good example. The consent j u d g m e n t resul t ing f rom the SEC's en fo rcemen t ac t ion against K i l learn Propert ies, Inc., mandates an audi t c o m m i t t e e c o m p o s e d of three ou ts ide d i rectors. It also prescribes ten speci f ic dut ies, such as rev iew ing the engagement of i ndependen t accoun tan ts , the company ' s p rocedures for in ternal aud i t i ng and its a c c o u n t i n g and f inanc ia l con t ro ls , and all i n f o r m a t i o n abou t the f inanc ia l c o n d i t i o n of the c o m p a n y and its subsidiar ies w h i c h w i l l be d issemina ted by the c o m p a n y to the pub l i c . No responsib le d i rec to r can afford to ignore the imputa t ions of this ru l ing. The Board's Duties In sat isfy ing these demands , wha t shou ld the f inanc ia l l y o r ien ted d i rec to r do? I can best app roach this ques t ion by shar ing some though ts abou t wha t I w o u l d do if I were a d i rec to r today. M y t h i n k i n g is based on a s imple premise: i nd i v idua l board members must have a clear idea o f the board's dut ies. First, the board shou ld spend a few minu tes at cer ta in meet ings to cons ider fo rma l l y the scope of b o t h its act iv i t ies and those of its var ious commi t tees . Then, the f inanc ia l l y o r ien ted d i rec to r shou ld try to in f lu -ence the aud i t c o m m i t t e e to cons ider whe the r it s h o u l d under take each of the ten act iv i t ies l isted in the Ki l learn cour t order. A f inanc ia l ly o r i en ted d i rec to r also shou ld d e v e l o p some cr i ter ia to gu ide the audi t c o m m i t t e e . For example , I w o u l d no t insist that the aud i t c o m m i t t e e au tomat i ca l l y rev iew and approve al l pub l i c releases con ta i n i ng f inanc ia l i n f o r m a t i o n i f : 1} The outs ide aud i to rs p e r f o r m e d quar ter ly reviews of i n te r im i n f o r m a t i o n . 2) The results w e r e reasonably in l ine w i t h budgets or plans. 3) Past audi ts had no t revealed that s ign i f icant errors escaped t imely de tec t i on by the company ' s system of Internal con t ro ls and rev iew of f inanc ia l management . A u d i t c o m m i t t e e i n v o l v e m e n t w i l l b e c o m e essential if the i ndependen t CPAs d iscover a p rob lem or if the results represent a s ign i f icant depar tu re f r o m p lan. A d i rec to r shou ld o p p o s e over-load ing the board 's agenda. If the board canno t deal w i t h no rma l business in its meet ings, it shou ld cons ider f o r m i n g add i t i ona l s tand ing c o m m i t t e e s or specia l c o m m i t t e e s to deal w i t h i m p o r t a n t matters in suf f i -c ient deta i l The board can de f ine its role, in part , by i den t i f y i ng matters that requi re i n -dep th a t ten t i on . Boards have b u i l t - i n mechan isms for fu l f i l l i ng the i r respons ib i l i t ies and p ro tec t i ng their members . If co rp -orate o f f i c ia ls and emp loyees are not f u n c t i o n i n g as they s h o u l d - t h u s weaken ing the re l iance that may be p laced on (hern—the boa rd has a clear duty. Reasonable Expectations W h i l e these suggest ions are cer ta in ly far f r o m exhaust ive, they do po in t to some matters that the f inanc ia l l y o r ien ted d i rec to r m igh t keep in m i n d . Richard Whate ly , a 19th cen tu ry A r c h b i s h o p of D u b l i n , o n c e observed that " I t is fo l ly to expect men to d o al l that they may reasonably be expected to do. " Tai lor ing Arch-b ishop Whate ly ' s remarks to ou r o w n t ime, w e can u n f o r t u n a t e l y an t i c ipa te that someone w i l l a lways expect a board to d o more t han it may reasonably be expected to do. In the face of these demands , al l we can d o is try. 8 

Financially oriented director: New role and new responsibility

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Financially oriented director: New role and new responsibility

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