Sarbanes Fatigue Strikes the Boardroom

Finance executives are helping to raise board members' compliance IQ.

Boards of directors are overwhelmed by Sarbanes-Oxley. They're exhausted from information overload and concerned that Section 404 minutia is biting into their capacity for strategic oversight. "From a director's point of view, there is concern that compliance is taking us away from providing value to the company," reports Roger Raber, president and CEO of the National Association of Corporate Directors (NACD), headquartered in Washington, D.C.

Directors are suffering from Sarbanes fatigue, an affliction that demands a regimen from the CFO. Phil Livingston, Vienna, Va.-based vice chairman of Approva Corp., a controls-management software company, and a corporate finance figure who now serves on two public-company boards, believes the "dynamic between the CFO and the board has changed tremendously" in the past 24 months. The shift is most evident in the amount of time -- before, during and after board meetings -- that finance executives spend with directors. Leading CFOs are treating directors' compliance fever by regulating their information diets and helping them understand and tame bulging workloads. Consequently, directors are depending on CFOs more than ever before.

"The CFO is now much more of an access point for the board," says Mark Kohler, CFO of AirIQ Inc., a Pickering, Ontario-based wireless communications company listed on the Toronto Stock Exchange. "Boards are tapping into the CFO and communicating with the CFO as a primary source of financial information and also as the source for credibility."

Tutoring the Directors

Directors are counting on assistance from finance executives because their role is changing, says Linda M. Sama, associate professor of management and director of the Center for International Business Development at Pace University's Lubin School of Business in New York City. Sama, who specializes in corporate governance and business ethics, says that directors are expected to become more involved in overseeing and even helping to craft corporate strategy. "And they're going to be held accountable for it," she adds. "That's disconcerting because of what I consider to be a much more important factor in board reform: Do directors really have the time to devote to understand the situations they're being asked to vote on and to understand the company they're being asked to serve?"

The answer depends, increasingly, on the curriculum a CFO presents to the board. "One of the CFO's most important responsibilities is making sure that the board understands the company and its industry," says Raber. "Frankly, a lot of the problems we've seen with Enron and WorldCom stemmed from the fact that some directors didn't know what was going on." He finds that more boards look to the CFO to provide guidance that "far transcends" the information sharing that takes place at formal board meetings. The education sessions can be formal or informal. Even an hour-long tutorial on financial metrics, accounting policies, operational risks and industry trends before a board or audit committee meeting can generate more informed boardroom debates. "Compared to two years ago," reports Colleen Cunningham, president and CEO of Financial Executives International (FEI) in Florham Park, N.J., "I would say the amount of director training has quadrupled in some way, shape or form."

Healthy post-Sarbanes CFO-board relationships are defined by such training and targeted information sharing. Many CFOs have developed a more consultative approach with their boards. Kohler discusses strategic initiatives with his directors more frequently than in previous years. When AirIQ acquired a California-based company last year, he had to file a business acquisition report in accordance with new rules for members of the Toronto Stock Exchange that parallel Sarbanes-Oxley. Before submitting the documents, Kohler scrutinized the draft with his directors.

Livingston chairs the audit committee for Cott Corp., a Toronto-based beverage company that must comply with Sarbanes-Oxley requirements because it is listed on the New York Stock Exchange (as well as the Toronto Stock Exchange). In that capacity, he now asks Cott's CFO to go over the "final, judgmental adjustments" made to the books before he closes them so he can understand the financial reporting process.

Even CFOs at privately held companies, which are not subject to Sarbanes-Oxley requirements, are increasing the amount of time they spend consulting with their boards. Bill Brown, CFO of Authoria Inc., a private human capital management software firm based in Waltham, Mass., is spending more time discussing financial reporting processes and controls with his board members and explaining to them that he is investing in a compliance application and instituting controls-documentation processes just in case the firm is acquired or opts to go public within the next several years.