A Leg To Stand On

According to a recent article in the Washington Post, the Securities and Exchange Commission ("SEC") is gearing up for a review of corporate governance practices and the role of boards of directors in managing risk. The new SEC Chairman, Mary Schapiro, is looking to strengthen boards of directors in order to hold management more accountable.  Here is an excerpt from the article.

With few exceptions, boards have received little media attention as the country has sought explanations for financial firms' taking on such perilous risks. These boards -- which typically consist of a dozen or more well-known executives, politicians and other influential people -- were ultimately responsible for the decisions of the Wall Street companies, housing firms and banks at the heart of the crisis. The boards signed off on the risks the companies took and the compensation packages awarded to top executives.

But many corporate watchdogs say the boards of top financial firms had characteristics that promoted risky business practices and harmed shareholders. "Corporate governance is about managing risk. It's about incentive compensation. It's about corporate strategy and sustainability. And all of those things are what the boards failed to do," said Nell Minow, a co-founder of the Corporate Library and an advocate of reforming corporate boards.

Boards of directors must ensure a strong enterprise risk management program is a core component of management's responsibilities.  Without it, the directors will not have a leg to stand on when the questions are asked by the enforcers from the SEC.