3 Corporate Governance Issues and How To Overcome Them

CFOs play a vital role in informing the board’s corporate governance. It’s the CFO’s responsibility to consider the best interests of both the organization and its stakeholders when evaluating the company’s finances. The person in this role should provide the board the financial knowledge needed to set the company’s larger strategy.

As Jonathan Joyce, who has worked as an auditor, controller, and CFO, writes in his book, The CFO’s Guide to Good Corporate Governance, some of the key roles of the CFO are “to ensure that the CEO and management communicate effectively and frequently with the board, […] to establish corporate governance and internal controls required to enable the organization to efficiently execute the business strategy, and to facilitate a clear mandate being given to the various departments of the organization.”

To properly guide the board on corporate governance issues, you must familiarize yourself with the problems that today’s companies are facing. From there, you can decide how to leverage your financial acumen and recommend the best way forward. But corporate governance isn’t static. Boards face unique problems to solve depending on the company’s circumstances, whether that’s an economic boom or a pandemic like COVID-19. 

 

1. Excessive Executive Compensation

Excessive remuneration of the CEO and other executives has been a corporate governance issue for years. But investor scrutiny of C-suite compensation is especially high in light of the pandemic.

Numerous studies already show that excessive CEO salaries usually come at the expense of shareholders and that there isn’t necessarily a direct correlation between higher CEO pay and an increased return to shareholders.

But due to the pandemic in 2020 and 2021, many companies have dealt with mass layoffs, acceptance of government aid, risks to worker safety, and more. Considering these factors, it’s understandable why shareholders, investors, employees, and other stakeholders look for a justification of these exorbitant CEO and c-suite salaries.

Recent research by Harvard Business School’s Ethan Rouen found that when CEOs are overpaid and employees feel it’s not justified, company performance suffers. In around one-fifth of the companies studied, the companies overpaid the CEOs. But more importantly, the employees were underpaid.

“When both occur—the CEO is overpaid and the employee is underpaid—that’s when you really see the firm performance suffer,” says Rouen.

So what’s the solution? As Governance Professionals of Canada says, “Effective governance is clearly the answer to resolving the pay-for-performance challenge.” CFOs need to work in conjunction with human resources to ensure executive compensation is purely based on “established and clearly documented performance-based metrics” and offer fair benefits and rewards for performance to ensure talented executives steer the organization. Compensation could even be an annual retainer based on clearly defined performance metrics.

Including transparent disclosures about executive compensation in your company’s annual report is key to practicing good governance and remaining accountable to your stakeholders—be it shareholders, investors, or employees. Take the disclosures one step further and explain the board’s roles and responsibilities and how that relates to directors’ and other executives’ salaries.

2. Increased Cybersecurity Risks

With frequent cybersecurity breaches in the S&P 500, there’s significant stakeholder scrutiny around this risk. According to IBM’s Cost of a Data Breach report, the “global average total cost of a data breach in 2020” is nearly $4 million.

COVID-19 has exacerbated cybersecurity governance concerns because many finance teams have shifted from on-premises work to remote work.

“Given the unprecedented impacts of COVID-19, many organizations had to re-think and re-frame their cybersecurity strategies,” says Sean Joyce, global cybersecurity, privacy, and forensics leader at PwC US.

What can finance leaders do to mitigate cybersecurity threats through good governance? According to Bryson Koehler, chief technology officer of Equifax, “The cloud is the safest bet for the financial services industry.” Cloud-based technology is especially critical in finance, where confidentiality is so important.

A cloud-based system for financial planning and analysis (FP&A) can have governance built in its deployment model by IT teams. Equifax quickly applied security and governance policies because they were built in and custom coded to suit the organization’s needs. And thanks to cloud-based technology, implementation and updates were smooth—Equifax didn’t have to add in governance protocols after deployment.

CFOs are uniquely positioned to support an organizational shift to proactive cybersecurity measures. According to Nabil Hannan, managing director at NetSpi, CFOs can quantify and communicate the ROI of secure systems to the C-suite by collaborating with chief information security officers (CISO).

To get c-suite buy-in, Hannan says it’s essential to recognize the metrics that matter to leadership. These questions can help make the case:

• What is the impact of foregoing security upgrades on our organization’s risk posture?
• What value are we getting from our investment in a secure technology?
• How well are we meeting our compliance requirements?

With our cloud-based FP&A platform, Planful has native data access controls such as role-based security and workflows, audit logs and trails, and point-and-click security setup. These features underscore Planful’s commitment to the security of your data and minimization of risk.

 

3. Insufficient Environmental, Social, and Governance (ESG) Oversight and Disclosures

Environmental and social issues such as climate change are top of mind for investors and shareholders.

Recently, Larry Fink, CEO of BlackRock Inc., pushed companies to share their action plans for how their business models will support a net-zero economy by 2050. Organizations that don’t prioritize net-zero transition run the risk of having BlackRock voting against management and selling its shares.

Moreover, earlier this year, the SEC announced the Climate and ESG Task Force, which is focused on identifying gaps or misstatements in companies’ disclosures of climate change risks.

CFOs are in the ideal position to lead ESG efforts through standardized, audited ESG reporting.

“Some of the acceptance of [ESG comes from] the ability to internalize the cost savings from better performance around energy issues,” says Blaine Townsend, director of sustainable investing at Bailard. “The CFO stands to benefit from better environmental practice. Long-term planning is a critical part of business success, and it lines up well with sustainability issues.”

Townsend continues to say that for long-term success, businesses need to be proactive about ESG governance. CFO Dive recommends CFOs break down ESG-related financial communication and reporting into four KPI categories:

1. “Investments in sustainability projects (both in terms of the total dollars spent as well as a percentage of overall corporate investments).”
2. “Financing indicators, such as the use of sustainable corporate finance instruments including green/sustainable/social bonds and loans.”
3. “Governance indicators, such as board composition.”
4. “Operational metrics, such as reduction in exposure to climate-related financial risks.”

But keep in mind that ESG regulations and practices are continually evolving, so these categories aren’t set in stone.

When it comes to reporting, disclose the oversight of climate-related issues. This includes the processes followed by the board when evaluating choices and how the board monitors progress against the set goals for climate-related points.

The International Business Council of WEF collaborated with KPMG to recommend a standardized set of universal metrics and disclosures for organizations across the world. These guidelines can help your teams evaluate the current state of ESG and identify gaps.

Lead the Way on Corporate Governance Issues

Shareholders rely on clear financial data to make informed decisions for the organization and CFOs are in the best position to offer that information. CFOs are also well-suited to guide the organization’s policies and procedures toward good corporate governance. As Jonathan Joyce says: “If the CEO does not sweat the small stuff, no one will.”

A robust, secure FP&A platform like Planful can help you address corporate governance issues by supporting data accuracy, effective compliance, and transparent disclosures.