The Fear All of SumsVisibility, 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 challengesContinued from Page 2 Karpoff: One response I heard, from a prominent member of the Seattle business community, was: "You know, for public corporations, it's no longer fun to be a board member. What I'm doing is resigning all my public board seats and that's my advice to everybody else." His reason was that board meetings are increasingly about compliance. The benefits of experience — of thinking that you are somehow adding value through your oversight function — is going down, and the potential costs are going up. In fact, a number of firms have been reporting difficulty in retaining and recruiting quality board members. My second observation is that we're starting to find out quite a bit about what happens to firms that get into trouble. As I said earlier, the market penalties swamp the legal penalties; if you display less than sterling integrity, you risk losing consumer and investor confidence. You risk losing generous terms on trade credit. You risk higher financing costs. The price of these effects, and the decreased revenues that usually follow, become the market penalty. Now, market penalties differ depending on the misconduct revealed, but for accounting misrepresentation, we are finding out that the penalty is large. We are finding that for every dollar a firm overstates its earnings or inflates its asset value, it takes a hit of two dollars in market penalties. Audience: Irving, as a CIO, what is the interaction you have with a CFO? Also, how do the both of you balance what we've been talking about here with the needs and desires of a CEO who wants to push the business aggressively? Tyler: I report to the CFO and come from that background as well so I have a little bit of the CFO DNA in me. Here's what strikes me as the challenge here for all of us: Do we take the lemons and make lemonade? How do we make governance a part of our day-to-day behavior, so that it's not additive and punitive, but is instead something that we can use to run our businesses more effectively — and as aggressively as we need to? There shouldn't be any regulation on aggressiveness. However, there should be restraints on greed and fraud, which has always been the case. I don't think it's a matter of calming down the aggressive CEO; we all just need to understand the world we work in and the constraints that exist in the context of doing business. Bad things happen if you do stupid things. We need to find ways of preventing companies from doing stupid things. I see an immediate sense of urgency right now, but I really don't see much of a change at Quaker Chemical. Having said that, this does cost money. Compliance with the new regulations has an earnings-per-share impact. It sounds almost counterintuitive, but we must creatively find ways of complying with regulations that are not fully defined. There's no manual that says, "Do this." We're trying to outguess the regulators in some respects because they don't have a rulebook either and are not completely certain of what they're doing. We are trying to comply without damaging our financial results, paying more fees, or constraining our business practices. However, this challenge is no different from dealing with other business conditions. You do the best you can with what you have to work with. IS has a big role because everything that comes through the process flows through our channels. We have to step up to our role. Audience: Bob, do you see a company's risk tolerance level changing with the new regulations? Walley: Risk management and risk mitigation have become huge parts of our business. Companies need to know the risks for credit, and where they exist in the market, operational processes, or other areas. Right now, operational risk is getting interesting; it's very broad and undefined, and data integrity is a huge piece of that puzzle. We see this emerging in coming years with regulations like the Basel II Capital Accord and the Sarbanes-Oxley Act. Organizations must get their arms around new risks presented by these regulations and figure out how to mitigate the risks. Obviously, so much will turn on IT's ability to deploy, capture, monitor, and manage the necessary information. From being in the IT world, I've learned that it's critical to design for change. We know that operational risks exist; but what are the risk factors, and how do you evaluate them in a risk model? We don't really know, so you must anticipate change and build it into your foundation systems and models so that you can adapt in the future. Audience: I am seeing IT take on more of a strategic role. CEOs are coming back to IT and saying, "How are you going to enable our businesses?" Given the risk issues that we're talking about, what are you hearing CEOs say to IT? Guard: David, why don't you take a crack at that from the CFO's perspective? Then we can get Irving's CIO perspective. Klementz: Your strategy is your strategy, and there's always a component of risk built into that. We have recently shifted IT to report to me, the CFO. However, the issue wasn't really that our risk tolerance had changed; it was about how to make our company better able to manage risk. Earlier, I touched on some of the financial solutions we put in place for getting the right analysis done and making sure we have the right information upon which to base our decisions. I see IT and finance being linked from the standpoint of understanding risk, working together to manage it effectively, and making sure that the risks are in line with the tolerances built into our strategy. Tyler: I certainly wouldn't disagree. However, we have to remember that unless you're in the computer industry, IT is not a strategy; IT is an enabler. Our real goal is visibility — providing a better view of what's happening. We do think about managing risk, but there's risk every day. Our competition could take away our accounts. Customers could decide on a different kind of technology and no longer need our products. There are bigger risks than the potential of having someone defraud the company: But we have to deal with all the potential risks. This is sound business practice founded on clear and common information. What's interesting is the problem with definitions, which is something we're working on. Today in our enterprise, if you were to look for a common coding system among products, you're not going to find it. Is that a compliance problem? How can I serve my shareholders if I myself am confused about what I'm selling? This has very little to do with regulation per se, but everything to do with good, intelligent business management. I think all firms are starting to pony up to the fact that this is their job — to create a consistent enterprise around the world so that they can manage risk more intelligently. It will lead to better business and fewer worries. Guard: Panelists, thank you very much. We appreciate your insight. What we've heard is that the regulatory requirements are here, but that they are evolving, and you must also respond to that evolution by being flexible. The regulations present a golden opportunity for companies to improve their internal business processes. And for IT, providing greater information visibility is a key part of that. More than ever, C-level executives are going to have to work together to run aggressive businesses that maintain compliance and do not tolerate misconduct. It's a tough environment, but also one full of opportunities. Acknowledgements: Intelligent Enterprise extends its thanks to SAS and SUGI for providing us with the original transcript of this discussion, which we boiled down to its essence for our readers. We also thank the esteemed panelists for their insights.
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