How To Build Investor Confidence Through Good Corporate Governance
Keywords: governance, sarbanes-oxley, risk management
Corporate Governance, once relegated as a nice-to-have, has never been higher on the agenda of companies than it is now. Tough new regulations have been drafted, originating in the US, to try and restore investor confidence that has been eroded not only by the volatility of the stock market but by a string of public governance failures such as those at Enron, WorldCom, Martha Stewart etc
The Sarbanes-Oxley Act (the Act), named after the two US senators who proposed the bill, is designed to restore investor confidence through the implementation of strong prescriptive measures centered around Corporate Governance.
The most important outcome of the Act is to make Directors personally and criminally liable for infringements of the Act, notably the misstatement of information within financial statements (referred to as Section 404), and roles and responsibilities of a firms Board of Directors.
Evidence of the enforcement of this Act is best illustrated by a number of high profile cases, brought to court prior to the Act’s enactment, such as the ex-CFO of Enron, Andy Fastow, who has had his assets frozen and has been indicted him on 78 federal charges of money laundering, fraud, conspiracy and obstruction of justice.
The Act affects all companies listed on any U.S. Exchange, including non-US companies, but is being adopted throughout the world by countries such as Brazil, Mexico, Canada and to a certain extent almost every other country in the world. Companies hoping to list or be acquired would also do well to adopt many of the tenets within the Act if they wish such a move to be fruitful.
Though the Act is seen by many as a knee-jerk reaction to the scandals that have plagued the markets in recent years, much of what is being recommended is just good business practice with the oversight role of a companys board and its audit committee in achieving an effective control environment being promulgated by the COSO (Committee of Sponsoring Organizations of the Treadway Commission) internal control framework. COSO details that the control environment is influenced significantly by a firms board of directors and audit committee.
Boards should, and must, be held accountable for their actions and the influence they have on the ethical behaviour of Company employees.
The Cost of Compliance
The cost of the Act to all businesses has been high. Many firms have had to increase the size of their internal audit departments to cope with the provisions of Section 404 or recruit more members to the Board to comply with the governance requirements. Key-man or Directors & Officers (or Professional Indemnity) premiums have risen between 200 and 400% to guard insurance companies and underwriters against the increased likelihood that lawsuits may be brought against Directors.
Audit fees have jumped between 15 and 30% to cover auditors costs of increasing the size of audit teams needed to perform audits with extra assurance and to guard themselves about making incorrect judgments regarding the accuracy of financial statements.
For a start up business why is this important?
Traditionally in a start up phase the direction of a company is guided by its founding fathers. In the case of BioTech companies these are usually scientists with a basic understanding of finance. In order to gain the trust of either the market or Venture Capital firms an experienced financial practitioner, such as an ACA or CPA should be sought to add credibility and to enact control over the organization. The Act stipulates the need to have an expert on the Audit Committee with an expert being defined as someone who has the knowledge and experience to give assurance over both the internal controls and financial reporting environment.
It is never too early to start enforcing controls in spending at an organization. The inability to control costs or to come up with a sound business plan has caused the downfall of many firms. Most notably this has been seen in the dot-bomb bubble where billions of dollars of Venture Capital was spent on companies who had no experience in drawing up business plans that would ever generate a profit or had no controls over how the capital raised was to be spent.
Building a Board of Directors who have industry expertise and business acumen is just good practice. Diversification of these risks will only enhance a firms ability to navigate its way to success and avoid the pitfalls that plague start up firms.
The importance of good governance
1. Reputational impact mitigants - Reputational risks in terms of ethical behavior, restatement of financial statements (and any failures caught by Venture Capital firms in their due diligence work) can adversely affect a companies valuation
2. It will easier to attract good non-executive directors if they perceive that the likelihood of loss arising from taking a position is small (as they can be legally liable for non-ethical behavior of a firm). In fact there is a severe shortage of good non executive director candidates because the potential cost to them in case of legal actions outweighs the benefits associated with the position (i.e. the salary)
3. Good governance and a disciplined approach to financial controls can save you money (especially in control of expenditure)
4. Leads to potential reduction in both audit fees and insurance premiums through changing the control mindset of an organization
5. By implementing a more formal methodology for evaluating business risks and controls will enable CEOs to run their business more efficiently and effectively whilst reducing the likelihood of operational breakdown, litigation and fraud
Julian Fisher is a Managing Director at Crest Rider, a Management Consulting firm dedicated to helping clients navigate the complex arena of Risk Management. For more information on Crest Rider’s range of services go to www.crestrider.com
Previous Articles Highlighter:
What Is An Investment Club? (1)
Make sure that you understand all the reasons why you should start an investment group and the requirements needed to be successful as a group. The following is a list of important ideas and information that you should consider before starting your club: Be realistic.
Ten Ways To Get Free Advertising For Your Business (2)
Suitable gatherings might include association meetings, professional seminars, trade meetings, and so on. Always make a point of being seen but and not by monopolising the proceedings. If you are an expert on some topic currently being discussed, make this known by contributing a few main points or by putting forward your own views on the subject.
How To Get The Most Out Of Your IPod (3)
Some of these advantages may seem very straightforward to you, while others might be an eye opener. Remember, too: you may not use a particular feature or advantage right now, but that doesn't mean the opportunity won't arise in the future for you to enjoy something new.
VOIP: What You Really Need To Know (4)
It is not only going to be the future of the telephone industry, but it will attract thousands of consumers because it comes with a lot of different advantages. No matter how budget conscious you are, you will most likely love VOIP's affordability.
Why It Pays To Advertise (5)
The argument is that display advertisements are more noticeable, more profitable than their counterparts buried amongst countless others in the classified columns. Hence the far higher cost of display advertising.
Low-Carb Beef Recipes (6)
Serving size,1 1/3 cups. Carbs per serving5.4 grams of carb. NUMBER OF SERVINGS: 4. Ingredients: 1 1/2 pounds beef tenderloin, trimmed well salt to taste freshly ground pepper to taste 12 ounces small button mushrooms 2 Tablesps coconut oil 1 ounce butter 3/4 cup stock or broth 2 Teasps Wondra flour 3/4 cup sour cream 2 Tablesps freshly chopped parsley (or small sprigs) Pound meat thin.
EBay Tips (7)
Anyone can sell anything on eBay. Open an account, list your product, and wait for the bids to start coming in. There are secrets to being a power seller on eBay.
The Secret Of Wealth (8)
Wealth, ease, comfort and even contentment are within the reach of each one of us, though we all travel different roads toward our selected goals. The paths of some of us lie over mountains where, if we have the strength, we may leap from peak to peak of success, but the many of us, the great multitude, who travel the level plains, must approach success steadily rod by rod, mile by mile, day by day and year by year.
Green Openwork Basket For Violets (9)
This process will take time and patience, for the edge of the basket should be even and on a line with the edge of the bowl. When this is accomplished the basket is turned upside down and a pliable weaver doubled around one of the groups of ends is woven in pairing for two rows to form part of a base.
Three Chocolate Candy Recipes (10)
Put the honey into a saucepan and stir until dissolved; then add the sugar and allow it to melt and get quite liquid. Now add the almonds, stir over a moderate heat until all turn a light brown color, then add the vanilla extract, and pour on a buttered slab.
Newer Articles Highlighter:
Secured Loan Options For People With Bad Credit (1)
Things such as late payments on credit or store cards can often affect your credit rating yet many people do not realise this. So, if you do think that your credit history is OK you may be wrong and it is always worth checking it out.
Bathroom Tile Design Ideas And Popular Materials For Tile Designs For Bathroom (2)
3. Mosaic - long ago, small mosaic tiles were carefully set by hand, creating beautiful patterns. Today, the same visual effect can be had by using rectangular mosaic tile sheets with the small tiles held together with a mesh backing.
For Sale By Owner - Taking Advantage Of The Internet (3)
Your own technical expertise can also be a limiting factor with creating a website to showcase your home. With so many options available to you through the internet, you should choose at least one.
The Beauty Of French Chandeliers (4)
A fireplace draws attention to a lower level in a room; a chandelier is the highest point of a room's decoration. The type of chandelier which is associated with French work is more open with its main structural support supplied not by a stem or chains but rather by a cage or frame with prettily curved members, often gilded and with drops or candles in the centre space.
Business Home Income Internet Work (5)
Have you met drastic situation you have had not much time to be with your family? Have you imagined in being its proper master? Have you required extra unable cash for your expenditures?
How To Write A Really Great Marketing Letter That Makes Readers Take Action (6)
You do not go up to the pretty girl (or handsome guy) who you have never met and say, Want to get married? That is akin to saying, I hope you will hire me, in your marketing letter.
4 Crucial Things You Need To Do To Build Your List (7)
Sometimes they may be confusing because there are so many and there different ways. Different groups of people would have different approaches in building an opt-in list, but no matter how diverse many methods are, there are always some crucial things to do to build your list.
SEO Ghostwriting For Online Publishers (8)
As search engine algorithms have evolved, it is no loner nessesary for a writer to pump their copy full of keywords; it is more likely to have a negative effect on search engine positioning, than a positive one.
Ways To Get Your Opt In Subscribers To Trust You Quickly (9)
Garner all the knowledge and information about your business. Ell, frankly if you decide to go into a business most probably you have an interest in it. Like how many basketball payers become coaches, you don't really venture into something you don't have any interest in.
2007 Lamborghini Murcielago Review (10)
3,4 seconds is all it needs to get to 100 km/h, and if you keep your foot on the gas pedal, it will not stop until you reach a mind-blowing 340 km/h.
Permalink to How To Build Investor Confidence Through Good Corporate Governance