Fiona Lu

About Fiona Lu

Posts by Fiona Lu:

March 4 2020

Tone at the Top: Why Board Member Values Matter

Fiona Lu Board Strategy, Corporate Culture, Corporate Governance board culture, board of directors, board of directors best practices, board organization, company values, corporate culture, corporate governance, tone at the top

No matter how many policies and guidelines a corporation issues regarding standards of behavior, the lessons that matter are not expressed through writing. Tone at the top tier management level is all about trust, and trust is earned through actions. People on all rungs of the corporate ladder notice on a daily basis the attitude of their leaders and talk about it at the water cooler. If leaders do not act in a trustworthy and ethical manner that upholds consistent company values, its effects will be amplified throughout the organization. This can generate a detrimental cascade of morale loss and productivity plummets whose effects extend beyond the company to its shareholders, ultimately hurting one of every firm’s most important intangible assets— public goodwill.

It won’t be long before these effects are reflected financially as earnings per share begin to drop and the company’s reputation falls apart. Not to mention, the loyal employees of the company will also lose respect for its management, causing efficiency to decline and structural organization to weaken. Employees value the sense of pride and integrity that comes with working for a company, beyond simply turning a profit. When choosing where to work, employees look for companies exhibiting strong, cohesive values that resonate with the public.

Hence, establishing and exercising core values in the boardroom early on is imperative to ensuring a company’s credibility and unity.

Strategies Proven to Improve “Tone at the Top”

Establish clear values and expected standards of behavior. The CEO and upper management should design and publish operating principles that reflect the company’s principles as well as provide stringent operational and ethical expectations for its workforce.
Strive for consistency between standards and actions. When dealing with corruption cases, companies must issue a swift response and honor its guidelines. It is important for board members to focus on enforcing company principles rather than depart from them during high pressure situations to mitigate the damage of such cases. Failing to comply with company standards or trying to slide the problem under the rug will result in a larger scandal down the road and risk a major breach of corporate trust.
Stay vigilant for internal dissatisfaction. Monitoring corporate buzz and internal affairs will afford a richer understanding of company culture from the perspective of different stakeholders. This gives management a better idea of what’s working and what isn’t in striving to achieve greater employee satisfaction levels and productivity.
Reward principled performance. Successful companies develop a framework for recognizing and rewarding ethical performance, especially in ambiguous or difficult circumstances. Spotlighting and rewarding good behavior throughout the company, regardless of status, will incentivize others to follow that same model.
Manage upward paths carefully. Management should be careful not to promote anyone with blemishes on their ethics or compliance track record. Negligent promotions feed the belief that poor compliance records are overlooked and acceptable, leading to future nonconformism should ethical issues re-arise.
Genuine networking to spread company ideology. Businesses are all about connections, so it is well-recommended for the CEO and board to establish connections with key stakeholders both within and outside of the organization. Leaders must openly communicate their values on an ongoing and transparent basis, using different platforms and dissemination systems.
Communicate with top management. While the behavior of all members of an organization carries a weight, remember that the CEO’s behavior is the most publicized when it comes to telling the company story and holding responsibility for a company’s growth or mishaps. Behind the scenes, boards hold a direct responsibility in overseeing and understanding how management’s actions are perceived by the public. Establishing collaborative communication between the two parties will keep company performance in check and boost the company’s public standing.

Key Takeaways

Setting the right company tone is pivotal to ensuring company success and reputability. Communicating the right values to both internal and external players will facilitate healthy corporate relations with investors, employees, suppliers, regulators, and other constituents. Many corporate failures can be linked to CEOs and governance boards who have neglected to develop a cohesive company culture grounded in integrity, leaving room for scandals to arise. Sometimes, all it takes is a single rumor of impropriety and inefficient conflict management to turn a company’s reputation on its head. Ultimately, the moral fiber of an enterprise rests upon the collective effort of its board members and management to monitor these rumors, deliver judicious consequences, and enforce strict company regulations.

March 5 2020

The Importance of Audit Committees

Fiona Lu Audit Committee, Board Committees, Board Structure, Corporate Governance audit, audit committee, board composition, board of directors, Board Structure, corporate governance, cybersecurity, independent directors, risk management, US GAAP

Public companies are required to have audit committees to perform annual audits of their financial reporting and disclose certain financial information. This requirement was established by the Security and Exchange Commission (SEC) in 2002 after the passage of the Sarbanes-Oxley Act (SOX), which formally defines the roles of the audit committee as overseeing financial reporting accuracy, hiring independent external auditors to examine financial statements, and reviewing the company’s internal accounting controls. Having accurate and honest financial reporting that abides by the standards set forth by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) is important for conveying company performance to internal investors and external shareholders. In the past two decades, the roles of the audit committee have significantly expanded to encompass a greater risk management responsibility due to the emergence of new technological forms of risks (i.e. cyber risks, cloud safety, etc.)

Challenges Facing Audit Committees

With the ever changing landscape of technology, there has been a growing range of risks that the audit committee must oversee. Risk management is an imperative part of the audit committee’s job that has grown increasingly complex due to new components, such as cyber risk, Environmental, Social and Governance (ESG), and corporate culture. This rapidly evolving agenda of audit committees has led many firms to begin considering forming new committees to conquer and divide the responsibilities.

Of these roles, cybersecurity has been a hotly contended subject. Cybersecurity is a relatively new area of risk management that forms an important component of strengthening a company’s technological profile, efficiency, and data systems. While this area has been traditionally under the jurisdiction of audit committees, many firms have formed their own full-level “cyber risk” committees to oversee it. In today’s digital landscape, with many companies migrating their data and communication channels to cloud-based solutions, cyber risk becomes one of the greatest risks enterprises face, and audit committees manage an up-to-date eye on it by either focusing their resources to develop sound cybersecurity frameworks or assigning the role to a new committee.

Maintaining Independence

Audit committees also face the challenge of providing unbiased analysis of financial reports independent of their affiliations with or knowledge of the company. The SEC requires that audit committees be composed of independent directors in order to objectively manage a company’s accounting practices. Just like how having an independent board is important to overseeing the company’s welfare and balancing all party’s interests, maintaining an independent audit committee is especially important because it concerns providing an honest, accurate, and legally abiding accounting process and directly deals with profit misreporting or manipulations.

For this reason, the SOX requires public companies to hire external auditors for an added layer of security. Independent auditors are certified public accountants hired to provide an objective, third party assessment of a company’s financial reports and audit process. If they determine that a company complies with GAAP, then they will issue the company a standard audit report. Otherwise, they will order management to revise their statements and recommend changes to optimize the company’s system of internal controls.

How to Improve Audit Committees

Maintain and Refresh Committee Expertise. Since the roles of the audit committee are constantly expanding and evolving, companies must keep a vigilant eye on their audit committee’s governance and composition to ensure that they consistently include members of all areas of expertise. They must consistently reevaluate the company’s needs to assess new risks and expertise areas to recruit in.
Strengthen Cybersecurity within the Committee. Audit committees handle the company’s most sensitive information and are the most susceptible to data breaches. Educating audit committee members on basic data protection practices and establishing ground rules for communications, such as never using a personal email or texts, will reduce the risk of information leaks and hacks.
Understanding Regulations. Members of the audit committee should all be familiar with SOX. In 2003, the SEC adopted a new standard that mandates national securities exchanges to disallow listings from companies that do not meet the audit committee requirements of SOX. Since the audit committee’s key roles are all regulated by SOX, boards should understand these requirements in and out to ensure that their performance is in compliance.

March 30 2020

Representing Shareholders Best Practices

Fiona Lu Board Strategy, Corporate Governance, Shareholder Relations board culture, board directors, board of directors, board of directors best practices, board strategy, corporate governance, Institutional Shareholders, shareholder relations, stakeholders

Corporate governance is an important topic of interest to many investors because it represents a key metric for a company’s future sustainability and success. Both shareholders and stakeholders alike are keen to notice strong governance and a comprehensive board strategy, leading corporate governance to become a paramount determinant of corporate reputation.

Best Practices for Improving Shareholder Relations

Establishing a strong foundation of governance principles the board should operate by is the first step to establishing a good reputation with the public. Strong values are intrinsic to forming trust with a company’s shareholders and can lead to a higher valuation of the company. Setting the right values and tone also ensures transparency and provides guidelines that hold the company accountable for any potential abuses of power or fraud. Creating a sense of corporate liability within the board is a key component of board culture and effective leadership, which prevent scandal outbreaks such as Enron’s downfall.

When shareholders see that a company has a clearly structured framework of guiding principles and values, they are more willing to invest in the company. This is important for raising a company’s Earnings Per Share (EPS). Thus, company’s should keep their investors’ values in mind when forming such a framework. A robust and flexible set of shareholder rights must be established at the forefront to protect their stake in corporate ownership. Investors want to know that their investments are being protected against security and system risks.

Once the basis of corporate guidelines is formed, boards must remain vigilant of the changing consumer landscape, digital trends, and market demands to be able to consistently update and improve upon their principles. Modern governance must evolve and adapt to technological advancements, current events, and information spread. Maintaining a fresh perspective on current affairs is necessary for understanding shareholder interests.

How Much Control Should Shareholders Maintain?

The post Sarbanes-Oxley corporate climate defines a clear distinction between ownership and control. Security laws of the 1940s set up checks and balances to ensure that management operates in the best interest of all parties. The shareholders have ownership of the company, management controls the operations, and the board of directors are responsible for overseeing the operations and representing shareholder interests.

Board directors are responsible for making nonpartisan judgement based on the company’s established principles to reign back management’s decision-making power. They act as agents of the shareholders and must have a strong understanding of policies that create long-term shareholder value. Shareholders typically have limited power to influence how a company is run; but if company performance drops, shareholders exercise their right as the owners to ask questions, examine board practices, and elect a new board should the existing one fail to meet their fiduciary duties.

Board members are elected by shareholders based on the expectation that they will equally represent all shareholders, regardless of their ownership stake. During the annual meeting, all shareholders should have their opinions voiced by the board in terms of company values, goals, and vision. Board members must abide by a code of conduct which mandates there be no conflicts of interest between ownership and management. Should such conflicts arise, boards must ensure that management sets aside their personal gains for the interests of the company.

These practices ensure that a company is operating with integrity, honesty, and corporate responsibility. Board members must maintain a transparent relationship with shareholders and be prepared to answer their questions to demonstrate that their investments are safe.

May 27 2020

Choosing the Right CEO

Fiona Lu Board Strategy, CEO, Corporate Governance, Executive Management board of directors, board strategy, CEO, corporate culture, corporate governance, Corporate Roles, executive committee, executive management, senior management, succession planning

One of the integral responsibilities of the board of directors is choosing the right CEO for the company. Directors must carefully weigh and discuss this decision, keeping in mind the company’s performance needs and actively planning for succession. The integrity of the CEO is essential to a strong company relationship and enabling the board to meet its expectations. The board of directors and the CEO work closely together in monitoring and managing the company; thus, boards must wisely choose a CEO who exhibits the same company founding principles and with whom they can work well with. If done successfully, this can lead to a wonderful symbiotic relationship of strength and leadership. However, if done poorly, the lacking communication and trust between a CEO and the board can present the downfall of a company.

Qualities to look for in a good CEO

A strong and capable CEO is one who is committed to the long-term value growth and success of his/her company, as well as someone who is receptive to the robust oversight of the board and willing to collaborate in effective teamwork. A well rounded set of analytical skills, social awareness, and communication skills is a key criteria to selecting qualified candidates. Beyond this, the board must have a well understanding of the company’s development needs and future direction in order to identify executives who will be able to fulfill their role amid these complex and ambiguous dynamics. Being able to forecast the challenges that potential CEOs may face is a helpful component in recognizing areas for improvement early on and establishing benchmark goals. Addressing these future challenges head on will provide boards and executives ample time to assess the readiness of each candidate, develop workshops, and establish mentor relationships to guide the company towards future success.

In addition to setting company-tailored criteria for CEOs, boards should maintain awareness to external benchmarks for executive success. Understanding how other company’s executives are performing is a good way to assess the relative strength of internal candidates. According to The Conference Board, between 2013 and 2016, the proportion of “internally” appointed S&P 500 CEOs grew from 76% to 86%. It is clear that boards are increasingly placing an emphasis on internal promotions, so it is well advised for boards to have an accurate and up-to-date overview of where their internal candidates stand against proven executives outside of the organization.

Finally, the board should include the incumbent CEO’s opinion during this consequential decision making process. Talking to the CEO about their experience in the role, what challenges they faced, and what areas they see for improvement moving forward is a good method for addressing future criteria needs. The incumbent CEO plays the important role of grooming succession-prepared executives at the senior management level and will thus likely have suggestions for who they think is a good fit.

Long-term succession planning

It is never too early to start thinking ahead about what the next CEO’s profile should look like. With the ever changing market and social landscape, an organization’s needs are also constantly evolving. Wise boards will try to foresee these changes and predict what the next step in company leadership is. What will the future of the company look like? What leadership skills and personality traits will be advantageous to navigating that future? How will or should company culture change? What kind of leader is able to promote that change?

Discussing these possibilities and building a consensus on a general criteria for the next CEO is an important step that facilitates a smooth transition process. Having a broad leadership profile in mind will help boards to develop needed leadership qualities among internal candidates and keep an eye out for executives whose strengths match these needs. Furthermore, it will prevent companies from falling into the trap of selecting repetitious candidates reminiscent of the incumbent CEO.

If concerns about the current CEO’s conduct, ability, or actions arise, they should be brought up and discussed immediately to determine if an early succession is required. Thus, having a sense of strong backup candidates is a smart way to stay prepared for any leadership scandals, emergency vacancies, or interim management. This ensures that issues with the CEO’s performance are caught early on and do not manifest in the company’s performance.

Getting to know the management team

Developing a forward-looking approach to seeking executive talent involves getting to know the senior management team. Directors and managers are both well-served by maintaining a mutual relationship of trust and understanding. Directors are endowed with a clear insight into what it takes to conduct key business decisions, and managers benefit from the ready ability to draw upon the independent judgement of directors.

Getting to know management comes in various forms, from conducting executive meetings to annual talent reviews to regular outside engagement. Staying involved with management on a continual basis will enable board directors to observe patterns of performance, identify the strengths and weaknesses of executives, and develop a more tailored approach to succession planning. It also gives boards the opportunity to expose senior management to opportunities that encourage entrepreneurship, leadership, and intelligent risk-taking in order to establish preparation for a healthy “succession culture.”

An assessment of the best succession planning processes noted that the top companies all exhibited several key commonalities:

Continual discourse between board members and the CEO to discuss the future outlook of the company and the needed skills of likely successors
Frequent exposure of senior levels to the board and fitting outside board service opportunities
A simultaneous top-down and bottom-up approach in which all levels of the organization are equipped with the right tools and training for advancement while maintaining an eye out for successors

As long as boards fulfill their objective oversight duty, the board and management teams should operate hand in hand and build upon each other’s roles to create a robust succession framework that fosters the company’s long-term success.