1-ACQ Spring WEB 2009 09-06-2009 14:14 Pagina 1Audit Committee QuarterlySpring 2009AUDITTheme: Governance in the downturnWelcome 3Signals 4Interview Kees Storm 6Interview Jorma Ollila and Jeroen van der Veer 10Shaping the audit committee agenda 14Jaap Winter about one tier, two tier andpsychology 17Around the tables 19Current developments 21Programme Roundtableseries Spring 2009 231-ACQ Spring WEB 2009 09-06-2009 14:14 Pagina 22 Audit Committee Quarterly – Spring 2009About usThe Dutch Audit Committee Institute The Audit Committee Quarterly (ACI) was set up by KPMG with (the ACQ) is designed to help keepthe aim of providing members of audit committee members abreast audit committees with the required of developments and changes in the knowledge and to offer a forum for corporate governance arena. The ACQexchanging knowledge and views will be distributed at the direct while carrying out their tasks. request of audit committee members, ACI follows developments in the supervisory board members, corporatefield of corporate governance in directors or other officers.general, and audit committees in particular, both in the Netherlands For more information on the work and internationally. of ACI please click on our websitewww.kpmg.nl/aci or contact:The tasks, roles and responsibilities of audit committees – but, no doubt, Audit Committee Institutealso the expectations of stakeholders – KPMG Accountants N.V.appear to be constantly ...
Jaap Winter about one tier, two tier and psychology 17
Around the tables 19
Current developments 21
4
Signals
Interview Kees Storm 6
Interview Jorma Ollila and Jeroen van der Veer 10
2-009190-960WEB200QSpringCA-1
About us
2Audit Committee Quarterly – Spring 2009
The Dutch Audit Committee InstituteThe Audit Committee Quarterly (ACI) was set up by KPMG with(the ACQ) is designed to help keep the aim of providing members ofaudit committee members abreast audit committees with the requiredof developments and changes in the knowledge and to offer a forum forcorporate governance arena. The ACQ exchanging knowledge and viewswill be distributed at the direct while carrying out their tasks.request of audit committee members, ACI follows developments in thesupervisory board members, corporate field of corporate governance indirectors or other officers. general, and audit committees in particular, both in the NetherlandsFor more information on the work and internationally.of ACI please click on our website www.kpmg.nl/aci or contact: The tasks, roles and responsibilities of audit committees – but, no doubt,Audit Committee Institute also the expectations of stakeholdersK–PMG Accountants N.V. appear to be constantly changing. P.O. Box 74555 ACIhasthereforestartedanumberof1070DCAMSTERDAM initiatives to assist members of audit auditcommittee@kpmg.nl committees. or tel. +31 (0)20 656 7098 ACI initiatives include roundtable meetings, publication of the Audit Committee Quarterly, conference and board presentations, periodic distribution of time-sensitive information and a website.
Governance in the downturnoversight role of the audit committeeexperience they gained from their Inchoosingthethemeforthisissueowfillcontinuetoexpandandtogrowinexecutiveandsupervisory the Dutch Audit Committee Quarterlyimportance. Audit committees need toresponsibilities. In both interviews we haven’t tried to win a prize for be independent and must review the search for the “ideal board model” originality! Governance in the management decisions with healthy that strikes the right balance between downturnissimpltyhedominantcriticism.Thisprocessnecessarilysupervisoryindependenceand perspective for management and includes a close analysis of the way commitment was an important topic supervisory boards at the moment. companies assess and manage risk. of conversation. LookingatitfromtheviewpointoftheManyauditcommitteemembersaudit committee, two remarks can befeel they have to spend more time In a third interview, the choice for a made. Fist of all, it is clear that the and effort to perform these tasks, if one tier or a two tier board structure only because the public (including was put into perspective by corporate analysts, government and regulators)lawyer Jaap Winter. His view, which demands it. was not limited to legal considerations, was rather sobering: in his opinion the On the other hand, we must be quality of oversight over management careful not to pretend that future has very little to do with the choice for economic problems, let alone a specific board structure. worldwide crises, can be prevented if only audit committees’ oversight The theme of this issue of our over management would become Quarterly would not be well covered more severe. I believe we must keep if it didn’t look forward as well. The a good balance between independentaudit committee must not only concern oversight and its involvement with itself with crisis management, but also management. with new business opportunities. The articles about Shaping the audit FindingthisbalancewasanimportantcommitteeagendaandCurrent ingredient of the interviews we had fodrevelopments aim to provide relevant this issue of the Audit Committee information for you in this respect. Quarterly. We were very fortunate to have interviewed Jeroen van der Veer,Ben van der Veer Jorma Ollila (CEO and chairman of Chairman Royal Dutch Shell) and Kees Storm (a.o. supervisory boardmember of Aegon), who have shared with us some of the enormous insight and
Audit Committee Quarterly – Spring 20039
Welcome
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The US FASB staff has issued additional are no longer active The IASB will work with unnecessary.. Therefore, a guidance on two financial crisis ‘hot’ the FASB as part of its comprehensivelevel playing field exists in this area. topics, measuring fair values in markets project to ensure global consistencyTo ensure ongoing consistency in the that are no longer active, andapplication of IFRSs and US GAAP, impairment approaches. in impairment of financial instruments.the IASB will include relevant guidance in the IASB’s exposure Commenting on the IASB’s decisions, The IASB has reviewed these US draft on fair value measurement, Sir David Tweedie, IASB Chairman, amendments and considered comments which was published in May. said:“We have heard a clear and and advice received from various consistent message on financial sources, following a shortened 30-day • On the important question of instruments accounting - fix this once, consultation process. The IASB impairment, the IASB agreed with fix it comprehensively, and fix it in an concluded as follows: the widespread view amongst urgent and responsible manner. The commentators that the IASB should IASB is committed to do just that by • The new FASB guidance on fair improve its impairment requirements. developing proposals within six months value measurement is consistent The IASB will take up the broad for public comment.” with existing guidance on IFRSs, issue of impairment as part of its Further information on the IASB’s contained in the IASB’s Expert comprehensive and urgent review of timetableto revise IAS 39 is included Advisory Panel report,Measuring in the section Current developments onIAS 39. The IASB believes that an and disclosing the fair value of page 21 in this publication.immediate response to the recent financial instruments in markets that www.iasb.org/Current+ProjectsFASB position on impairment is
Signals A selection of topics relevant for audit committees
IASB Discussion Paper on Leases Plans for new lease accounting mayforward, as a recent Discussion Paper liability would initially be measured at bring all leases on the balance sheet.(DP) issued jointly with the US FASB the present value of the lease payments proposes, for lessees, to eliminate the over the most likely lease term (i.e. not Although the Discussion Paper on requirement to classify a lease contract the contractual minimum lease term), Leases issued by the IASB will probably as an operating or finance lease. The using the lessee’s incremental borrowing have a long lead time before it results in proposal would instead require a single rate. For example, in a five year lease accounting standards, it can be quite accounting model for all leases. contract with an option to extend the relevant to know what is coming, as The DP proposes that a lessee recognise lease for an additional five years, the long-term lease contracts are often in its financial statements a “right-of- lessee would determine whether the agreed on the assumption that treatment use” asset representing its right to use most likely lease term is five or ten as operating lease (off-balance-sheet) the leased asset during the lease term, years and include an asset and a liability will remain available in the future. This and a liability representing its obligation in the balance sheet on that basis. assumption may be a shaky one going to pay lease rentals. Both asset androjent+Purrerg/Cbso..wai(ww)stc
IASB under pressure to ease fair value and impairment rules
IT audit highlights company vulnerability A recent KPMG survey showsrespondents said they do present their next 18 months. The survey, which 'disconnect' between internal and at 297 finance professionals lookedfindings to the audit committee, but only external auditors when it comes37% of external auditors receive a copy Europe, the Middle East and Africa, from to technology.of the findings, showing a 'disconnect' highlighted that over half of respondents between internal and external reporting. are not aligning their IT internal audit A survey published by KPMG looking For 62%, security is the biggest skill set with the company's wider governance at internal IT audits has highlighted in demand, with 40% of respondents remit and that almost four in five will various security risks in companies admitting that they will use outsourcing only look at their IT on an annual basis. around the world. The survey to a acquire the necessary skills set with)moce.agcyanwnwt(owucc.a highlighted that the majority of this trend expected to continue over the
Latest Audit Committee Institute Survey In the 4thannual public company audit spend 3-4 hours on each meeting,• We We • are satisfied with our external committee survey, members of Dutchsay 57% (39% say less time); auditor’s support in the crisis, audit committees answered questions• We spend 1-5 hours reviewing say 78%; about their work. Below are some of the are confident that management We •information before a meeting, most interesting results. the risks, say 87%; understandssay 64%; • Better prioritisation of issues would • Our AC does not have a formal • Our audit committee has three to improve meetings, say 58%; succession plan for the CFO, four members, say 67%; • We receive our materials less than say 69%; • There are no women on our audit eight days before the meeting, say • We are concerned our disclosures committee, say 73%; 91%; don’t give the right picture, say 31%; • Of our audit committee, 45% of • We have enough time to discuss • We are confident that our CFO has the members do not live in the topics and ask questions, say 95%; the resources to do his job, say 98%. Netherlands; • The crisis has increased our (The full survey report including • We are not satisfied with the skills of involvement with management, international results can be obtained at our audit committee members, say 0%; say 91%; the ACI)
Tax risks in the economic downturn An audit by taxing authorities is the cash flow and tax risk management inchallenges of the economic downturn, most significant tax risk facing theirsenior business professionals say the uncertain time. an organisations today, according to a than one third of respondents Moreincreased possibility of an audit by KPMG study. said their company’s primary tax focustaxing authorities is the most significant tax risk facing their organisations today, to help improve cash flow is to identify Taking steps to measure and manage according to a survey conducted by and increase the potential use of tax tax risk is a key aspect of any KPMG’s Tax Governance Institute (TGI). refunds, credits and incentives. enterprise risk management effort. In addition to concerns about regulation,w.ww(sniecnanrevogxatom)titute.c As companies grapple with the respondents cited efforts to improve
sparringpartnerandatthesametime“ThereisadangerthattherestofthethefunctionsofchairmanandCEOin a countervailing power to the CEO, board feels a subject dealt with by a one person is not ideal either, saysStorm.“Ithinktheonetierboarcdommitteedoesnotconcernthem.accordingtoStorm.“Achairmanwho fits well with a CEO model. But on We will read about it in the minutes, is also the CEO is often not very good the executive side there has to be a they say. Or the chairman does not at setting the board agenda. He is countervailing power as well, of the think it’s necessary to talk about a preoccupied with management and CFO against the CEO. In my view, thesubject because it has been discussedhas the tendency to ignore things CFO is the one who looks at the ideasin a committee. I refuse to cooperatethat might upset his plans. Appointing of the CEO with critical eyes.” with that, I always give a complete a lead director only partly solves reportoftheauditcommitteemeetintghisproblem.” Chairman and CEOin the full board. I see a real danger afraid to question accepted Not There are two features of the in the separation of the committees wisdom, Storm says he is not American system, which is familiar tofrom the full board. It takes part of convinced that the practice of him because of his board positions atthe responsibility away from the appointing people from all over the Baxter and Anheuser-Busch Inbev, board. Sometimes I think I am the world is so practical. “When half of that he does not agree with. “I am only one in the whole board who the board members fly in from all not happy with the fact that the reads the financial report from cover continents, the quality of the meeting board committees have become to cover. Not to mention the 20F.” and of the personal contact suffers. independent legal entities ,” he says. The American tradition of combining You see the chairman rush to push all the subjects through and at lunch half of the people leave after the soup. That’s not good for the cohesion in the board. The problem will become worse because meetings will be more frequent ” . For an entirely different reason Storm thinks board diversity has to be looked at. “Companies that get into trouble will only get state aid from their ‘own’ government, no matter how international they are. This means that the CEO has to be a national because a foreign CEO can never pull it through.” According to Storm one of the most important tasks of the non-executives,
apart from oversight, advising and shareholders has to be registration.” power. That is a better signal than decidingaboutnominationandStormalsobelievesitistimetoreviewmoneybecauseitexpressesbetter remuneration, is strategy. He believe the position of the shareholders’ that you value the vote of the long however, that this task is undervalue meeting. “The AGM has far too much term shareholders because they have “Non-executives often just listen to weight now. First of all, at an AGM in shown their loyalty for better and what management has to say about the Netherlands only Dutch for worse.” the strategy of the company. If you shareholders are present, while in theShareholders interests have been don’t like it, it is much easier to say case of Aegon nearly 80 percent of neglected for many years, Storm no than to say what you would like the shares are foreign owned. But observes. Only recently, companies instead. It’s difficult to initiate when the foreign owners don’t come to have shown more attention for you are in a reactive position. In my the meeting in person. So there is shareholders’ interests. opinion, boards should start with an no real exchange of views.” “Unfortunately, the pendulum has open discussion in a separate strate The proposal to reward loyal swung too much to the other side, meeting. Then the board can talk shareholders with extra voting powerwith activist shareholders who have aboutthevisionmanagementhasordividendhasbeenharshlycriticiseodnlyasmallnumberofstockcanaboutthefutureanddiscussbutStormthinksit’snotabadideaatbringentirecompaniestotheirknees.principles, assumptions, alternatives, all. “I am not for a reward in the formIt’s important to reach a new bala risks and resources.” of extra dividend, but extra voting Abolish bearer shares cAognrteaecitngbewtiwtheethnecoopminpiaonnietshaatnadtbheettirerWho is who shareholders can help avoid future clashes of interests and expectations, Storm is convinced that the systemKees Storm of bearer shares must be abolished. CEO of Aegon NV (1993-2002)• Former “This system is really outdated and it• Supervisory board chairman of KLM NV prevents Dutch companies to build a• Supervisory board member of Aegon NV relationship with their shareholders.• Supervisoryboard member and audit committee chairman of UnileverThe problem becomes worse as share• Non-executive board director and audit committee chairman of ownership is dispersed around theAnheuser-Busch Inbev world. In most countries share owners• Non-executive board director and audit committee member of Baxter Inc are registered and their names are• Supervisory board member of Pon Holdings known to the issuing companies. The first step for a better dialogue with
“The combination of a CEO, a non-substantial powers, you need the executive chairman and a one tiercountervailing power of a one tier non-boardisasynergeticcombinatio,n.executive chairman. “So, we believe ” say Jorma Ollila and Jeroen van derthe most appropriate board structure Veer. Talking with Ben van der Veerto go with the CEO model is the one of KPMG, the chairman and the CEOtier board.” They both add that they of Royal Dutch Shell explain theprefer the British model of separate governance structure of thisCEO and non-executive chairman company, in an interview that wasfunctions to the American custom partly given in writing. The choice of CEOof combining the functions for a CEO model with a one tierand chairman in one person. board dates from before the present“We doubt whether the checks and economic crisis. However, thebalances are sufficient in the American system has several advantages now.system. When a CEO has to go, things It allows the CEO and CFO todo not always go very smoothly. accelerate the communication andHowever, there are signs that the day to day decision making process.system is changing. Exxon, for In these circumstances a goodinstance, has appointed a senior relationship and close contact withindependent director.” the non-executives is vital. “The wide ranging experience our non-fundamentals of corporateConsensus executives shared with us really The Netherlands has a strong traditiongovernance. These views have a broadened our knowledge,”says of decision making by consensus andpractical rather than an ideological Jeroen van der Veer. forfoundation. “The most important many years the system of separate principle of internal supervision in anexecutive and supervisory boards has Jeroen van der Veer and Jorma Ollila organisation is to establish the right functioned well, also at Shell, says both know a few things about checks and balances regarding the Jorma Ollila. “The management was governance change. Royal Dutch Sh executives, ”he says. This balance of decentralised to a large degree and Group in 2005 radically changed its executive and supervisory power country managers had a lot of complex dual company structure in varies according to the governance independence. But the pace of two countries to become a unified pl structure. “In a classic two tier modelbusiness in the world has accelerated with one management board. So it’s with an executive board striving for enormously. not surprising that Van der Veer, who consensus, it is logical to have a Therefore the country system has was very much involved in this supervisory board that also works thacthanged into a world wide functional process, has strong views on the way. But when there is a CEO, with management structure and centralised