Guide Your Company Into Corporate Governance Excellence
Updated: Nov 16
CFOs play a critical role in advising the board of directors on corporate governance. When analyzing the company's finances, the CFO must consider the best interests of both the organization and its stakeholders. The person in this position should be able to provide the financial expertise needed by the board of directors to determine the company's overall strategy.
Some of the key roles of the CFO, according to Jonathan Joyce, who has worked as an auditor, controller, and 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," as he writes in his book The CFO's Guide to Good Corporate Governance.
You must familiarize yourself with the problems that today's organizations face to adequately guide the board on corporate governance concerns. From there, you can then determine how to apply your financial acumen and provide recommendations for the best course of action. But corporate governance isn’t static. Depending on the company's conditions, whether it's an economic boom or a pandemic like COVID-19, boards face unique problems to solve.
Increased Cybersecurity Risks
With numerous cybersecurity breaches in the S&P 500, there’s significant stakeholder scrutiny around this risk. The "global average total cost of a data breach in 2020," according to IBM's Cost of a Data Breach report, is approximately $4 million.
Because many finance teams have transitioned from on-premises to remote operations, COVID-19 has worsened cybersecurity governance concerns.
“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 protect their organizations from cyber-threats through effective governance? "The cloud is the safest bet for the financial services industry," says Bryson Koehler, Equifax's chief technology officer. In finance, where confidentiality is so vital, cloud-based technology is especially important.
A cloud-based system for financial planning and analysis (FP&A) can have governance built into its deployment model by IT teams. Equifax was able to quickly implement security and governance standards since they were pre-programmed and custom-coded to meet the company's requirements. And, thanks to cloud-based technology, Equifax didn't have to establish governance protocols after deployment, making implementation and updates a breeze.
CFOs are in a unique position to help organizations make the transition to proactive cybersecurity measures. According to Nabil Hannan, managing director at NetSpi, CFOs can collaborate with chief information security officers to quantify and convey the ROI of secure technologies to the C-suite (CISO).
Hannan believes that recognizing the KPIs that matter to leadership is critical to gaining C-suite buy-in. These questions can assist you in making your case:
What is the impact of ignoring security upgrades on our organization's risk posture?
What return on investment do we get from our investment in secure technology?
How well are we adhering to our compliance obligations?
Insufficient Environmental, Social, and Governance (ESG) Oversight and Disclosures
Investors and shareholders are concerned about environmental and social issues such as climate change.
Larry Fink, the CEO of BlackRock Inc., has recently urged businesses to reveal their action plans for how their business models can support a net-zero economy by 2050. Organizations that do not prioritize the move to net-zero run the risk of BlackRock voting against management and selling its shares.
Furthermore, the SEC announced the Climate and ESG Task Force earlier this year, which is tasked with discovering gaps or misstatements in corporations' climate change risk disclosures.
Through standardized, audited ESG reporting, CFOs are in a great position to lead ESG efforts.
“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.”
Businesses must be proactive about ESG governance, according to Townsend, for long-term success. According to CFO Dive, CFOs should divide ESG-related financial communication and reporting into four categories:
“Investments in sustainability projects (both in terms of the total dollars spent as well as a percentage of overall corporate investments).”
“Financing indicators, such as the use of sustainable corporate finance instruments including green/sustainable/social bonds and loans.”
“Governance indicators, such as board composition.”
“Operational metrics, such as reduction in exposure to climate-related financial risks.”
However, keep in mind that environmental regulations and practices are always changing, so these categories aren't fixed in stone.
When it comes to reporting, be transparent about who is in charge of climate-related concerns. This includes the procedures used by the board when reviewing options and how the board tracks progress toward the stated climate-related goals.
The World Economic Forum's International Business Council worked with KPMG to develop a standardized set of global indicators and disclosures for businesses around the world. These principles might assist your team in assessing ESG's current state and identifying deficiencies.
High Executive Compensation
For years, excessive remuneration of the CEO and other executives has been a source of concern for corporate governance. However, in light of the pandemic, investors are paying more attention to C-suite salaries.
Numerous studies have already shown that high CEO pay frequently comes at the price of shareholders and that there isn't always a direct correlation between higher CEO pay and increased shareholder return.
However, because of the pandemic in 2020 and 2021, many businesses have had to deal with mass layoffs, government aid, worker safety concerns, and more. Given these considerations, it's reasonable why shareholders, investors, employees, and other stakeholders are looking for an explanation for the high CEO and C-suite compensation packages.
According to Ethan Rouen of Harvard Business School, when CEOs are overpaid and employees believe it is not justified, corporate performance declines. Around one-fifth of the companies analyzed overpaid their CEOs. The employees, on the other hand, 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.” To guarantee that talented executives drive the firm, CFOs must collaborate with human resources to ensure that executive compensation is solely based on "established and clearly documented performance-based metrics" and that equitable benefits and rewards for success are provided. Compensation could even be an annual retainer based on clearly defined performance metrics.
Transparent disclosures about executive compensation in your company's annual report are critical to exercising good governance and keeping accountable to your stakeholders—whether shareholders, investors, or employees. Take the disclosures a step further and explain the board's functions and responsibilities, as well as how this relates to the compensation of directors and other executives.
Set the Standard for Corporate Governance
Shareholders rely on clear financial data to make informed business choices, and CFOs are the best people to provide that data. CFOs are also well-suited to guiding the company's policies and procedures in the direction of excellent corporate governance. As Jonathan Joyce says: “If the CEO does not sweat the small stuff, no one will.”
A solid, secure FP&A platform can assist you in dealing with corporate governance challenges by ensuring data accuracy, effective compliance, and transparent disclosures.