Examining the relationship between CFOs and directors.

FEI and the National Association of Corporate Directors (NACD) have co-sponsored several forums over the last few years on "What the Board Expects from the CFO." These forums have been well attended by both CFOs and board members (and some CFOs who are also board members).

Our last forum was held this June in San Diego and covered topics such as the new era of corporate governance, sustaining Sarbanes-Oxley Section 404, audit committee effectiveness/best practices and heightened elements of risk for board members. These forums are highly interactive, and I really look forward to participating at these programs and understanding the current top-of-mind issues for CFOs as they relate to their jobs.

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CFOs all agreed that over the past few years, they are spending a lot more time with their boards. The board packages are more timely (generally sent out a week or two weeks in advance of the board meeting) and contain more relevant, proactive information for board members. In the past, the packages offered more of a rote reporting of how the company did financially. Now, there is more discussion of risk and the potential financial impact of decisions.

The audit committee is meeting more often and discussing items like the choice of accounting policies more robustly. The CFO is spending more time "training" the board members on the unique financial aspects of the business. Many CFOs, in fact, are meeting with directors one-on-one to explain the financials and the risks to them individually.

Many directors have said they insist on meeting with the CFO one-on-one, and in some cases, they meet with the general counsel and the chief accounting officer one-on-one as well. These directors indicated that these meetings are informative and enable them to understand the company's inner workings and decision-making process more fully. These meetings have helped build trust between directors and management.

Unquestionably, more time is being spent on internal controls. No one can argue that a strong internal control environment is not of vital importance to financial reporting, yet most agree that the effort and cost of implementing Section 404 far outweighed the benefits. Now, as many public companies are moving to a "sustaining" or maintenance mode, audit committees are becoming increasingly concerned with escalating audit fees. CFOs can be helpful in this area by providing benchmarking data to enable the audit committee to make more informed decisions on these fees.

Also discussed, for the first time by a separate panel, was the heightened risk faced by directors. The level of restatements has increased to the point where no company and no board is immune. One study indicates that 1 in 12 companies restated in 2005! Much of this stems from the fact that many items that would have been deemed clearly immaterial in the past are being restated as auditors take a highly conservative view of materiality. (Who can blame them? A piece of their fee increases results from "practice protection" costs, due to increased litigation.)

No Such Thing as Materiality

In fact, it has been said that in this "chilling" environment, there is no such thing as materiality; everything is deemed material. Often, it is the CFO who helps the directors cope with the increased risk and demands for information. For example, more audit committees are becoming involved with accounting policy decisions. There is a fine line that directors need to be sure they don't cross; they need to be involved in governing, not managing. This is sometimes a difficult line to see.

What to do in a crisis, whether it be a whistleblower issue or an SEC investigation, was also discussed throughout the program. The importance of obtaining outside advisory services that are truly independent was emphasized. It is also critical to establish a record of every step the company took to determine the appropriate response.

Directors also discussed the need to keep on top of current issues. Many CFOs are providing an update of what is going on in the standard-setting and regulatory worlds, with an analysis of the impact to the company should the current direction/proposals ultimately be adopted.

Executive compensation was also the subject of a separate panel. In light of the SEC's proposal on enhancing executive compensation disclosure, directors and CFOs agreed that the CFO must be involved in compensation committee meetings--especially if the finance chief will be required to "attest" to the executive compensation disclosures.

The themes were consistent with past events, but with more of a focus on risk. One panelist put it very well: "The CFO must be blameless. His or her credibility is their most important attribute."