Building Trust to Support Growth in 2010

This week, Information Technology ("IT") executives from around the globe have gathered in Orlando at the Gartner Symposium/ITxpo.  A big focus of the event is how IT can become more transparent and accountable in order to support business growth in 2010.  The key is balancing risk management with performance management.  Here is what Gartner analysts have to say on the subject.

Risk management is about accepting that IT organizations cannot protect the company from everything, so they will have to make conscious decisions about what they will do to protect themselves, and what they will not do. They must learn to balance risk and performance. People need IT organizations to share information, so that they can trust them. IT leaders should accommodate letting outside information in, and sharing inside information appropriately. CIOs shouldn`t think they can shut down the two-way flow of information because they can`t stop it.

Gartner analysts said that the quality of data underpinning metrics such as measuring business productivity, profits, value, and efficiency of services delivered is inadequate. This stems from siloed and inconsistent business data, and from an over reliance on spreadsheets. Even where there have been investments in business intelligence, it`s not giving the business what it needs. The challenge for IT leaders is getting the information that everyone can believe in, and that everyone in the organization will trust. "IT leaders need robust information architectures and governance, coupled with data quality and integration capabilities to create an enterprise view across these silos," said Nigel Rayner, research vice president at Gartner. "You will need to rationalize and link performance measures across the business in an enterprise metrics framework. When the data is consistent, and everyone believes it, then you have built trust."

Wheelhouse Advisors recently partnered with Apptio, the leading provider of IT Financial Management solutions, to help companies achieve a balanced risk and performance management approach. Apptio’s on-demand IT Financial Management solutions provide greater visibility into the cost, utilization and operations of IT products and services so that businesses can identify ways to reduce IT costs, make better IT decisions and provide the business with a true Bill of IT. World class companies such as Blue Cross Blue Shield of Kansas, BNP Paribas, EMD Chemical and Starbucks use Apptio’s IT cost analysis capabilities to reduce cost and achieve greater visibility into their IT costs and cost drivers. For more information, please visit www.apptio.com.

The Spread of Risk Management Functionitis

While many in corporate America are working to reduce the impact of the H1N1 virus on their workforce, another virus has been infecting corporations for years.  As Jack Bergstrand, Founder of Brand Velocity, Inc., explains in his recent highly regarded book, Reinvent Your Enterprise, corporations of all sizes have been suffering from what he calls "functionitis".  Mr. Bergstrand examines how this virus has spread as more companies employ knowledge workers rather than manual workers. Knowledge workers typically organize into specialty areas within corporations based on their subject matter expertise.  This, in turn, can lead to a very bad case of "functionitis".  Here is Mr. Bergstrand's explanation of the virus and its possible cure.

"Functionitis" is a term for when functions become separated from the Enterprises they are supposed to support.  Functionitis is also an Enterprise example of where bad systems create bad behaviors.  It sometimes generates outright conflict.  More often, it generates less visible cross-functional productivity breakdowns driven by incompatible priorities and preferences.  A clear sign that functionitis has taken over is when one function considers itself an internal customer for another function.  With knowledge work, reducing moving parts at the top can systematically resolve many of the functionitis issues in and of itself.  It can also systematically improve the allocation of resources and accelerate Enterprise reinvention in rapidly changing markets.

Functionitis is at the core of the need for Enterprise Risk Management programs.  Not only does it impact the productivity of risk professionals across an enterprise, but also the ability for an enterprise to understand its true risk profile.  Is your company suffering from risk management functionitis and looking for a cure?  If so, Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

S&P Struggles with ERM Ratings

Yesterday, Compliance Week Magazine reported that Standard & Poor's ("S&P") is struggling to incorporate Enterprise Risk Management ("ERM") into its ratings methodology.  Evidently, the analysts at S&P are finding the challenge of reviewing risk management practices at non-financial companies to be more daunting than originally planned. Financial companies have had their ERM practices reviewed by S&P for years, but the task is easier since practices are more mature and standard across the industry. In addition to this challenge, S&P has also been distracted by the ratings debacle that led to the securitization meltdown late last year.  However, here is what Compliance Week reported about S&P's future plans for ERM evaluations.

S&P has no plans to abandon its ERM evaluations, but neither will it split out ERM as a separate component of a company’s overall rating score. Rather, ERM reviews for non-financial companies will be based primarily on information provided by issuers in public disclosures and through discussions with S&P. Following are the seven primary questions that analysts have been asking management teams concerning ERM:

• What are the company’s top risks, how big are they, and how often are they likely to occur? How often is the list of top risks updated?


• What is management doing about top risks?


• What size quarterly operating or cash loss have management and the board agreed is tolerable?


• Describe the staff responsible for risk-management programs and their place in the organization chart. How do you measure success of risk management activities?


• How would a loss from a key risk impact incentive compensation of top management and on planning/budgeting?


• Tell us about discussions about risk management that have taken place at the board level or among top management when making strategic decisions.


• Give an example of how your company responded to a recent “surprise” in your industry and describe whether the surprise affected your company and others differently.

Is your company prepared to answer these questions?  If not, Wheelhouse Advisors can help. Visit www.WheelhouseAdvisors.com to learn more.

A Risk & Financial Management Balancing Act

Information Technology ("IT") is quickly becoming one of the primary areas within a company that is not only laden with risk, but also regulatory complexity.  At the same time, IT is one of the first areas to which companies look for cost reduction in an economic recession.  The combination of these factors demands better decision making and priority-setting by IT risk professionals and finance managers to meet the needs of the business while properly managing risk. In this month's issue of Information Security Magazine, an IT risk professional at credit information provider Equifax shares his view of this challenge.

Let's face it, we are entering an era of tighter statutory requirements and rapidly changing regulations. But focusing solely on statute requirements can lead to a disjointed strategy that is neither comprehensive nor aligned with business goals. While compliance mandates are often used to drive security investments, compliance by itself does not ensure a company's security posture.

Instead, businesses must look beyond their technology and compliance needs and understand the challenges of ensuring their company's security posture. Achieving this level of transparency requires the right mix of innovation, talent and technology underscored by a strategy that addresses risk at the broadest level. This is where relationships with business partners and vendors can play a valuable role. By joining forces with industry-leading third-party providers, companies gain access to new thinking and innovation to address key needs and challenges. With the right strategy and technology partnerships, businesses can drive a consistent and global set of security practices focused on risk reduction and information security.

Wheelhouse Advisors is uniquely positioned to help companies address their risk and security challenges while meeting the financial demands of the businesses they support.  To learn more, email us at NavigateSuccessfully@WheelhouseAdvisors.com or visit our website at www.WheelhouseAdvisors.com.

Back to the Drawing Board on Derivatives Regulation

U.S. House Financial Services Committee Chairman Barney Frank (D-MA) distributed a proposal for derivatives regulation this week and it was the subject of a hearing by the committee yesterday.  A major part of the discussion centered on a potential loophole that would allow many corporations, if not all, to avoid the new regulation altogether. Here is what Bloomberg.com reported about the hearing and draft legislation prepared by Chairman Frank.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.

While Frank’s proposal is a “step in the right direction,” its “ambiguous” definition of risk management may leave a large number of corporations unregulated, Henry T.C. Hu, director of the SEC’s new division of risk, strategy and financial innovation, told the committee.

“As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set,” CFTC Chairman Gary Gensler told reporters after the hearing.

“Major hedge funds” may be excluded from oversight, as may the mortgage-finance companies Fannie Mae and Freddie Mac “because of course the government-supported enterprises use swaps for risk management purposes,” Gensler said.

It looks like Chairman Frank may need to re-educate himself on the use of derivatives and go back to the drawing board on this proposal.

Improving Executive Compensation Oversight and Pay Processes

In light of the increased risks associated with executive compensation programs, The Conference Board recently established a task force to develop guidance for companies looking to improve their pay processes and oversight.  The guidance has been published and centers on five principles that companies should strive to achieve.  Here are the five principles.

Principle One—Paying for the right things and paying for performance

Compensation programs should be designed to drive a company’s business strategy and objectives and create shareholder value, consistent with an acceptable risk profile and through legal and ethical means. To that end, a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.

Principle Two—The “right” total compensation

Total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution, and fair to shareholders and employees, while providing payouts clearly aligned with actual performance.

Principle Three—Avoid controversial pay practices

Companies should avoid controversial pay practices, unless special justification is present.

Principle Four—Credible board oversight of executive compensation

Compensation committees should demonstrate credible oversight of executive compensation. To effectively fulfill this role, compensation committees should be independent, experienced, and knowledgeable about the company’s business.

Principle Five—Transparent communications and increased dialogue with shareholders

Compensation should be transparent, understandable, and effectively communicated to shareholders. When questions arise, boards and shareholders should have meaningful dialogue about executive compensation.

These guiding principles seem to provide what many may say is simply common sense advice.  However, given the environment that we find ourselves in today, common sense such as this may not be as common as one might think.

The Sarbanes-Oxley Countdown is Extended for a Final Time

The U.S. Securities and Exchange Commission ("SEC") announced last week that the deadline for full compliance with Section 404 of Sarbanes-Oxley Act for small companies has been extended for an additional and final nine months.  The primary reason for this final extension is the delayed publication of the formal study on the impact of changes to the compliance requirements made in 2007.  Here is the formal release from the SEC.

This extension of time will expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. This expiration date previously had been for fiscal years ending on or after Dec. 15, 2009. The extension was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the study was published less than three months before the December 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.

“Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,” said SEC Chairman Mary L. Schapiro.

So, the final clock is ticking.  Does your company need help implementing a cost-effective compliance program?  If so, Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.