Last month, the Securities and Exchange Commission adopted new rules requiring public companies to disclose information about their board leadership structure, their risk oversight processes and certain information about compensation structure and how it relates to the company's risks. The goal, according to the SEC, is to provide additional transparency regarding what goes on in the boardroom so that investors can make more informed decisions.
It makes sense in these days following the recession to give the investors more information with which to work, but I was curious about why the board is the SEC's target in this particular set of rules. After all, it's not as if the SEC has the authority to tell boards what to do or how to run their businesses. Since internal audit and business consultancy Protiviti had already released a report to its clients about the new requirements, it made sense to speak to a Protiviti representative to gain more insight. Last week I got that chance.
Jim DeLoach told me Thursday the rules appear to be driven by a fundamental belief among legislators and regulators that many boards of directors did not perform as they should have before and during the financial crisis. By requiring more transparency in areas such as risk oversight processes, the thinking was that investors could, for example, compare the risk oversight processes disclosed by different companies, decide which they liked best and make investment decisions accordingly. In theory, then, the company with the best processes would end up with the most capital.
DeLoach also pointed out that the very nature of the new disclosure requirements will generate more discussions between boards and management teams regarding who is responsible for what and what the risk oversight process should look like. He said:
When you talk about disclosing the board's role in risk oversight, you're going to force dialogue and discussion between directors and management that is much more explicit, much more granular, than the conversations that have been conducted on these topics in the past.