June 30, 2003

The Fear All of Sums

Visibility, transparency, and complying with onerous new regulations such Sarbanes-Oxley are burning issues on the minds of CFOs, CIOs, and other corporate executives. In a roundtable discussion, we hear a variety of perspectives on addressing the challenges

by David Stodder

Continued from Page 1

Guard: Bob, let's hear from the regulator's perspective. How is regulation a "driver" for good business?

Walley: That's actually a great question: Good regulation is good business. Some bad apples upset the apple cart. I think what we've seen in the last year or so are the challenges of achieving good corporate behavior. The pendulum has now swung away from too little regulation toward a heavy regulatory environment. Regulators are trying to put in place key monitors and enforcement bodies to ensure that the boards and the public companies are actually practicing the way they should be practicing.

The stock exchanges are responsible for the enforcement of the new legislation; and they are out there trying to educate the industry and help public companies prepare. What happens when a company steps out of bounds? I guess the ultimate penalty would be that the company is delisted. Clearly, from a financial, economic, and public reputation perspective, the regulations cannot be ignored.

Companies are putting a lot of effort into Section 404 reviews, and are trying to build tools around the monitoring and assessment processes to determine where they stand from an internal audit standpoint. We are seeing some tools that can help manage disclosure and support whistleblowers or complaints filed by independent managers. However, there remains the large issue of creating information transparency for the board of directors, who will now need financial data access.

Guard: Phil, how are you seeing the needs evolve for enterprise financial intelligence?

Strand: A recent CFO Magazine survey reported that over the last five years, 91 percent of CFOs said their jobs are now more difficult; 62 percent said that they are working longer hours; and 54 percent said that success in their position is now more difficult because they're looked upon as the corporate police. Before, it was "run the numbers"; now, it's "drive the business." Before, the board was more or less fraternal; now you've got boards that must be more vigilant. Before, it was acceptable to make a mistake; now, you could go to jail and pay an enormous fine. Things are more serious. Times and businesses are evolving. It's like you used to have a 401K; now, I believe it's a "201K."

Guard: David and Irving, what effect are you seeing on boardroom behavior due to regulatory pressure?

Klementz: We've gone from audit committee meetings where you kind of cruised through lists to very intensive, drawn-out meetings with major discussions around issues that in prior years might have been considered less significant. Now we need more granular information; we are turning over every rock.

Tyler: As a CIO, I get to see what happens before the board meeting. My customers are C-level folks like David, who are trying to prepare themselves intelligently so that they don't have these difficult, drawn-out discussions. Folks are much more interested in understanding how the structure works and what its weaknesses might be so that they're not caught unprepared. And of course, they're looking for a lot more information. Whereas before they might have been happy to summarize information in a few slides, now, as David said, they really need to drill down to many levels. C-level folks need more preparation: and this depends on our systems providing them with all possible answers to any possible question.

Guard: Bob, what are you seeing from your clients as they put pressure on you to help with board presentations and preparation?

Walley: In some organizations, companies are creating a new function called "corporate governance officer." We've actually seen boards completely dismissed and replaced by newly elected boards that have greater independence and better qualifications for carrying out governance procedures. With regulators now looking for board independence, new boards want to review information in tremendous detail. Boards are now looking at things like scope of services: what auditors are doing, the kind of services the auditors are or are not allowed to perform, and so on.

Guard: Phil, you've been talking to a lot of CFOs and CEOs. What are you seeing as the impact on the strategic acquisition of software or services?

Strand: It's interesting. If I could quote one I've spoken to recently, he said to me, "Confidentially, Phil, we used Sarbanes-Oxley to replace our board of directors." Frankly, the company wanted directors who understood what financial results were about, what the business was about, and how to drive its objectives. The friend-of-a-friend, "I'll serve on your board if you serve on mine" approach — with the 20-minute meeting once a year before the annual stockholders' meeting — is going away.

Having said that, we should keep in mind that a number of companies have had disclosure controls and processes in place for years, and their corporate officers have never been afraid to sign on the dotted line. As Arthur Levitt [former chairman of the SEC] has said, integrity either is part of your DNA or it isn't. Integrity is not about just financial numbers; it's about keeping promises — have the orders shipped or not, is the pricing correct or not, and so on.

Guard: Jon, have you seen the market put a premium on companies that have always had strong internal governance?

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