Board of Directors Under Attack

In the wake of the financial crisis of 2008, boards of directors are coming under attack for their role in overseeing companies at the center of the firestorm.  Evidence can be found in yesterday's announcement by a prominent proxy advisory firm that it is recommending the removal of directors at Citigroup.  Here is a summary of their case against the directors as reported in the Wall Street Journal.

Proxy-advisory firm Egan-Jones is recommending that Citigroup Inc. shareholders withhold votes for six incumbent directors at the annual meeting April 21, saying the current or former members of the board's audit and risk management committee failed to fulfill their risk-management responsibilities. Egan-Jones said the directors in question -- Michael Armstrong, Alain Belda, John Deutch, Andrew Liveris, Anne Mulcahy and Judith Rodin -- "failed to protect shareholders from excessive exposure to credit, market, liquidity and operational risk." The firm added that Citi's board failed to effectively manage risks, "helping cause the company's current instability and increasing volatility in the global financial markets." Egan-Jones cited as examples of that failure an increase in Citi's exposure to mortgage-related assets from $28 billion in 2005 to $234 billion in 2006, as well as an 85% increase in the number of subprime mortgages originated. Citi's 2008 losses "are a clear indication that the committee failed to properly assess and control risks," Egan-Jones said.

Directors at other companies should take heed of this action and ensure their corporate governance and enterprise risk management practices are solid.  Wheelhouse Advisors can help board audit and risk committees gauge the effectiveness of their current practices.  Visit www.WheelhouseAdvisors.com to learn more.

ERM Case in Point

This week's rescue of Citigroup serves as a prime example of how fragmented approaches to risk management can have disastrous consequences.  The New York Times presented a thorough review of the actions and inactions occurring within the ranks at Citigroup that ultimately led to far excessive risk-taking.  In short, the risk oversight was relegated to those in the business units who had the most to gain by taking excessive risks.  This, in turn, led to the creation of a culture that considered risk management as an after-thought and did not promote a full understanding of risks across the enterprise.  Lynn Turner, formerly the chief accountant at the Securities & Exchange Commission, offered his view of Citigroup in the article.

“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

Financial and non-financial corporations alike should use the case of Citigroup as an example of how not to structure their risk management programs.  To be truly effective, enterprise risk management programs should be supported by a strong culture, strong controls and strong competencies in risk management disciplines. Visit www.WheelhouseAdvisors.com to learn more about building an effective enterprise risk management program.