CORPORATE GOVERANCE is at the heart of the credit crunch, and it’s time for risk managers and lawyers alike to step up to the plate to ensure boards are answerable to their company owners, according to the Association for Chartered Certified Accountants (ACCA).
The news comes as Prime Minister Kevin Rudd last week announced that his Government has recommended some significant changes to global reporting for financial institutions — one of which is the need for clear internal incentives to promote financial stability, and to avoid executive remuneration packages that reward short-term returns or excessive risk-taking.
“The role and responsibility for risk needs to be reviewed and updated into these times — especially into contracts,” said Michaela Campbell, Acting ACCA head for Australia and New Zealand.
That means, she said, that along with risk managers, lawyers and human resources professionals may need to step in to ensure good corporate governance across their organisations, through effective risk management, reporting, regulation, and remuneration contracts that incorporate performance measurement based on risk.
“We are calling for [acknoweldgement of] the fact there is a greater link between remuneration packages and risk management,” said Campbell, “so that CEOs are rewarded based on their prudent risk management in their organisations.”
Such a process, she said, might require a rethink of current contracts and employment terms, as well as the status of in-house lawyers and risk managers who should be reporting directly into the board. With remuneration based for the most part on paper profit, ACCA is pushing the notion that it should instead be based on when cash flow is received and the dividend to match.
“The role of the lawyer [necessitates] considering this when reviewing or writing contracts,” said Campbell. “For HR, they need to consider it in designing organisational structures. We recommend they look at the role of risk and how much influence it’s given, and to implement appropriate controls and monitor and report on business risk.”
The ACCA’s latest international policy document, titled Climbing out of the Credit Crunch, reports that unprecedented growth in size and profitability of the global banking industry saw $788 billion in profits in 2006 — $150 billion greater than the next sector, which was oil, gas and coal. While the financial sector may have appeared to have been awash with liquidity, ACCA concluded that short-terminism, coupled with a lack of accountability, may be the root causes behind the problems the world is now facing.
The organisation emphasises that there is still much to learn about market liquidity — especially the growing differentiations between remuneration packages for CEOs and other board members.
Campbell said the ACCA has found that CEOs remuneartion compared with other board members and the wider staff base has been growing at an extremely fast rate. “They are actually being paid at a faster rate than the dividends paid to shareholders — driving a short-term vision and management,” she said.
Overall ACCA recommends five key areas that need to be addressed by financial institutions across the globe: including remuneration and incentives; corporate governance; risk identification and management; accounting and financial reporting; and regulation.
And, Campbell said, that while at the outset the policy report and recommendations might not appear specifically relevant to local institutions, it will no doubt have flow-on effects, impacting on organisations here.