Board disclosures have long been one of the more dry, legalistic aspects of governance. Counsel kept track of what needed to be filed with whom, when, the board approved with a quick “aye” vote, and moved on to whatever was next on the agenda.
But now required disclosures have exploded in depth, breadth and timeliness, and penalties for non-compliance are hitting companies hard in the treasury.
Recent headlines include a $10 million fine for Lyft’s failure to disclose a board member’s interest in a transaction; a $25 million SEC hit to Deutsch Bank subsidiary DWS for ESG and anti-money laundering disclosure failures. Compare that with SEBI fine on Shaoorji Pallonji of a paltry ₹7 lakhs for “flouting disclosure norms.”
In the US, the SEC approved sweeping new cybersecurity disclosure rules, and the US Congress passed a Corporate Transparency Act with broad new disclosure demands for anti-money laundering enforcement.
Corporate boardwork divides into two major spheres: There’s a mentoring aspect — guiding management, coming up with good ideas and strategic insight, and making connections. Then there is the monitoring part — compliance, review, checking out the numbers and filings, and ticking boxes.
Boards now must also examine the company structures, procedures and assumptions used in shaping that disclosure.
Fool-proof compliance
How can you shape a compliance process that’s both manageable and bullet proof?
* Yesterday’s model — management tells the board what structures are needed to assure compliance. Today’s model – the board and management coordinate to build disclosure systems. This can mean giving management more instruction on the volume and level of detail they are looking for. This also applies to the timing of disclosures, which have grown more onerous.
* Give board structures fresh review for disclosure readiness. Make sure your committees know who’s doing what so there isn’t a lot of added work involved. As is too often the case, it’s easy to dump all disclosure review onto the audit committee, but that has become both burdensome and awkward. Is Audit really the best monitor of, say, company carbon emissions? Sit the board down with counsel for a checklist of all the disclosure demands on the company today, and rationally divide them among your committees.
* To make the management interface work, build solid bridges between the board and the management disclosure committee. For public companies, a disclosure committee has become a must over the past few decades, and typically includes the controller, legal counsel, risk manager, and the head of IR, along with other management offices as needed. There are plenty of good online best practice tools for disclosure committees available. However, a vital aspect is committee reporting to the board. Typically, the committee offers minutes and a full report on their meetings for the board, usually going through the audit committee. However, having the audit committee chair seconded to the management disclosure committee aids two-way communication.
* The board should ask disclosure committees several questions, including: Who are the business unit heads reporting to the disclosure committee, and how well trained are they on disclosure obligations? What are the committee’s standards on collecting, reporting and retaining disclosure information, and how often are these procedures reviewed? How do our disclosure practices compare to industry peers, and how is this reviewed?
Are “outsiders” members of the committee, and if not, how do they interface? Were there “judgment call” issues facing the committee, and how were they resolved?
Muneer is a Fortune-500 advisor, start-up investor and co-founder of the non-profit Medici Institute for Innovation. Ralph is global board advisor, coach and publisher.