BDO in the Boardroom

Join BDO's Amy Rojik as she and Tom Bradbury, Founder/CEO of Broad-Gauge, discuss culture within organizations – specifically how it is measured and what the board’s role is around culture. Key Takeaways• Culture is a team sport that requires the right data for the right stakeholder (including the Board). • Protecting culture is just as important as strengthening your culture. • There is a measurable ROI to culture. • A proxy for culture is measuring organization effectiveness.Resources:     • Nominating & Governance Committee Priorities for 2024: Excelling in Board Leadership • CalPERS, Schroders Launch Framework Tying Human Capital Management and Value

Key Takeaways:While simple in structure, these new requirements have complex implications for companies, many of which may not be already gathering and reporting this level of climate data.The laws were years in the making but have now pre-empted the country-level SEC climate rules that many have been anticipating. Scope 3 reporting will be required for some companies, which includes the full value chain. Third-party assurance will be required in some cases.Even though the full extent of the requirements won’t come into force until 2030, the first requirements will be in 2026 covering the year 2025, so companies should get started now.Resources:Prepare Now: California Climate Laws Impact Thousands of BusinessesSustainability and ESG Regulations Are GrowingThe Greenhouse Gas Protocol: Measuring Scope 1, 2 and 3 EmissionsPreparing for the Proposed SEC Climate Disclosure RuleBDO Sustainability and ESG Services

Key Takeaways:Establishing a “safe” environment for AI isn’t just a protective stance, it is itself a strategy that accelerates innovation, builds trust, and ensures long-term success.In making the decisions to address entity- readiness to greenlight AI initiatives, boards’ due diligence includes: understanding how competitors, customers, employees as well as supply chains are using or would like to use/leverage AI; establishing a robust management risk management and oversight governance framework that provide appropriate mechanisms to protect proprietary data; and ensuring internal organizational parameters of AI use consider ethics, explainability, data reliance/privacy/security, talent/expertise, and strategic fit; andapplying standardization for consistent and ethical development and deployment.

Key Takeaways:Using AI and predictive capability is not new but generative AI brings AI to the mainstream due to its human-like communication and ease of accessibility to companies of all sizes. For boards to properly oversee AI risk, they need to require management to establish a model risk management process along with a model risk governance framework around AI implementation that includes standardization of algorithms, governance and ethical considerations as well as validation of data inputs and outputs.Moving to AI changes the human role and underscores the need for a strong risk culture and exercising of healthy skepticism to contend with potential bias, complexity and lack of integrity within both data sets and AI algorithms.Underlying data sets must be of high quality and representative of population they are intending to serve – free from bias, properly labeled and annotated.Boards, management and auditors will need to continue to stay apprised of what is sure to be a continually evolving standard setting and rule-making environment as technologies continue to evolve.

Key Takeaways:Leveraging data analytics for strategic decision-making: Use of data analytics in the boardroom to is becoming increasingly important to help directors make informed, evidence-based decisions that drive growth and efficiency. By incorporating data-driven insights, businesses can better understand their customers, optimize operations, and identify new opportunities.Overcoming challenges in implementing data analytics: Organizations need to be prepared to face significant challenges when adopting data analytics, such as data quality, integration, and fostering a data-driven culture. Listen to best practices and practical advice for overcoming these obstacles and ensuring a successful analytics implementation.Board’s role in promoting data-driven culture: The board can play a critical role in promoting a data-driven culture within the organization. By asking the right questions, setting expectations, and ensuring alignment with business objectives, boards can support management teams in harnessing the full potential of data analytics for the organization’s success.

Boards need to work with management team to continue to identify and prioritize opportunities in automation to enhance all aspects of operations, product development and service delivery. Challenges in implementing automation need to be identified and incorporate into a strong change management program to ensure enterprise-wide acceptance and adoption.Boards can play a significant oversight role in the automation process by helping management establish guardrails – policies, protocols and controls – and require reporting back on progress as an accountability mechanism in driving change. Become and remain familiar with emerging automation technologies and methods to be competitive and optimize the business’ capabilities.

Key Takeaways:1. Approaching embedding AI into a service delivery model requires: Identifying and prioritizing AI business processes and use cases that align with your business objectivesAssessing the feasibility and potential impact of each use caseDeveloping a detailed implementation plan that contemplates the steps, resources, and timelines required for successful AI adoptionKeeping cybersecurity at top of mind as well as quality assurance approaches. 2. Adoption and use of AI requires encouragement of curiosity and innovation tempered with a good understanding of the risk and challenges AI poses to current methods of obtaining and authenticating data.3. Compliance with regulatory standards needs to factor into AI change management along with corporate culture, policies and procedures regarding the use of AI.4. Auditors are currently embracing AI in measured approaches – e.g.: Leveraging digital assistants as a gateway to demystify technologies and to bring the talent pool up to speed on the basics – what it is, how they work, and general best practices.Using generative AI environments to streamline and further standardize the firm’s service delivery models and build capacity.Embedding AI into existing tools to surface unusual and irregular transactions that the humans may otherwise miss as quality focused.Considering AI-powered image recognition in verifying physical assets and reconciling with financial records.

Key Takeaways:Use of technological automation in the audit can yield increased efficiency, improved accuracy, consistency and quality. Complexity, data quality, lack of flexibility, resistance to change and over-reliance on technology are challenges to automating auditing procedures that need specific consideration.Auditors are intentionally and systematically focusing on automating aspects of the audit that build capacity and streamline systems but that also focus on feedback and enablement of adoption.Board members should be asking auditors about automation use cases and recommendations for improvements to apply to their own financial accounting, reporting and controls areas.

Key Takeaways:Service delivery models demand that auditors demonstrate their efforts are directed principally to potential risks and anomalies and areas of higher risk.Boards that derive the most value from audits that leverage data analytics are those that have pretty specific views of what constitute outliers or anomalies for the business and that understand the auditors’ demonstrations of how their analytic tools can quickly surface and identify risks and patterns that may not be immediately apparent through traditional audit methods. Boards have potential opportunities to enhance both the value of the audit as well as the reporting information provided by management – e.g., address disparate systems, enhance limited data hygiene and inexact controls around data. Greater scrutiny of information, including relevant controls over data and data integrity, requires auditors to focus on modernizing their professionals’ experience, as well as audit technology development, as they are the agents of change in enhancing audit quality. Boards should be asking their auditors to show them the value that data analytics is providing and become better informed as to: how difficult is the data to extract; how much cleansing is necessary; does it reconcile; how well is it controlled; etc.

Key Takeaways:Building corporate sustainability is not about “being responsible for” but rather recognizing “how to work in concert with” a broader group of stakeholders to reduce friction and produce better results.Innovation in a staid industry requires: - Creation of an environment to embrace and enable change – first speak about what will remain the same and season in what the change will be.- Recognition that incumbency is NOT powerful (i.e., faulty assumption that formulas in the past will work in the future)- Innovate by embracing what is evolving – e.g., technologyAdopt a simple "Measure/Report/Reduce” framework – allows managements to act and the board to make informed decisions based on data-driven metrics to drive accountability and achieve whatever the “reduction” goals are – e.g., emissions, talent attrition, customer loss, use of resources, barriers to entry, etc. Don’t make the mistake of focusing heavily on low hanging fruit instead of looking broadly at both risk and opportunityOversight tool: Instead of asking management “How do we make this?” consider the asking “How do we make this better?”Resources:Book: BOOM! Deciphering Innovation: How Disruption Drives Companies to Transform or DieResource Center: BDO ESG Center of Excellence

Key Takeaways:The NEED: Data governance programs exist to manage change in data assets overtime. The WHAT: Data is an intangible asset that is constantly evolving and has a host of characteristics that make it difficult to manage compared to traditional assets. THE WAKE-UP CALL: When surveyed, 95% of respondents felt data governance programs were unsuccessful.The PITFALLS: Poor data governance stems from: poor data quality, lack of enforcement of policies and procedures; and data security and privacy practice that don’t evolve with hacker sophistication.The HOW: - Board directors should be asking corporate management the following: - Does the company have a data governance program? - Is the data governance program working? How do you know? - What assistance does the data governance program need from the board? Directors should encourage management to decompose data governance problems into smaller initiatives and ask for stratification of data governance decision-making so that people at the right level are making decisions about data.Resources:Data Privacy and Governance Checklist for the Board

Key Takeaways:The basic tenants of succession planning require continuous focus and consensus and can provide an outline for preparation and vigilance. These include:Agreement on short- and long-term company goalsNeeded skills for the position - Keeping the job description of the upcoming vacancy current Keep a pipeline of candidates that span an array of various disciplines and experiences Boards should build in process and policy around board refreshment.Board composition should be built for purpose - Consider directors with multiple skills and experiences so there is overlap existing in the boardroom.Succession doesn’t end with appointment – it further requires a robust onboarding system for the new director. Expanding the board to accommodate new board members before the departure of a retiring director can efficiently provide transfer of institutional knowledge and avoid “reinventing the wheel.”A board member with shareholder engagement skills and investor understanding that can help management articulate their story is the best defense against activists. Resources:  “What ‘Succession’ Gets Right (and Wrong) About Business Continuity Planning [Spoilers]Think Like an Activist

Key Takeaways:Funding for the CHIPS Act has been signed into law. This act provides tremendous opportunities for semiconductor industry organizations to expand production in the U.S. and additionally, provides many other benefits to the economy. This podcast discusses:Opportunities for national economic initiatives for organizations that can pass threshold question – How does the project enhance national economic security? Under the Act, lessons have been learned from PPP funding during COVID and the need for attestations to counter fraudulent/inappropriate use of funding, which came back to haunt many companies who could not support their use of PPP funds after the fact. Resources:Archive Webinar - The CHIPS Act Has Passed: Now What?What Semiconductor Organizations Need to Know about the CHIPS For America ActSemiconductor Industry Association

Key Takeaways:   Suppliers have become an integral part of a company’s ESG performance against targets and laws, and therefore have an outsized impact on operational and financial performance Boards should set clear expectations for including supply chain risk within Enterprise Risk Management and require detailed management action plans to address and mitigate risks as well as identify opportunities. Good questions to ask include: Has the company mapped their supply chain and knows their 3rd party vendors beyond Tier 1, globally? Have we evidenced processes and policies for supplier onboarding and data management?Is our existing technology adequate to collect and maintain large amounts of supplier data and documentation? How can our supplier management program of 3rd party vendors be verified to mitigate supply chain disruption due to ESG compliance issues? Is the board engaging with the right cross-functional operational leaders responsible for supply chain management? Is management monitoring industry trends and regulations and embedding those in supply chain planning, optimization, and monitoring? Resources:     Supply Chain Disruption isn’t Going Anywhere Three Key Supply Chain Management Questions for 2023 Ahead of Time Supply Chain Model eBook U.S. Senate Committee Expands Alleged Forced Labor Probe Involving Major Automakers to Suppliers.

Key Takeaways:Stakeholder-Centric: Ensure a communication strategy is developed around sustainability reporting that is driven by stakeholder needsDon’t neglect the passive or potential investorsDepth and Frequency: Don’t just stop at the launch date plans, have a plan for targeted communications specific to multiple audiences year-roundMulti-Channeled: Leverage multiple communication and media platforms, as stakeholders consume information in different waysSpokespeople: Identify and educate, from employees to the board, on how to tell your ESG storyAs ESG should be part of your sustainable risk strategy, so should the approach to ensuring consistency in public disclosures within and external to your financial reporting

Key Takeaways:Pillar Two comes in effect for accounting periods beginning on or after 1 January 2024 for multi-national companies with global revenue in excess of Euro 750m.Complexity will arise from both the detailed calculations involved as well as timing related to the phased-in approach by jurisdiction as to when each country will require implementation of global tax rules. Immediate steps to be undertaking by multinationals include an impact assessment and inventory of entities in different jurisdictions to determine potential increase in effective tax rates or cash tax increase, as well as financial statement and tax return compliance.Establish a strategic roadmap that considers accounting, systems, policy choices, resources, controls, disclosures and reporting requirements.Create the proper governance structure to properly monitor and drive accountability in both current and future decisions impacting the business. Resources:OCED Releases Additional Pillar Two Guidance

Key Takeaways and Tax Planning Points:Enacted as part of the Inflation Reduction Act (IRA), corporations are now subject to a 15% minimum tax on book income of $1 billion or more. The IRA also provided $80 billion of funding for IRS – with $46 billion earmarked specifically for enforcement. Enacted as part of the 2023 Omnibus Appropriations legislation, the SECURE Act of 2022 contains a host of retirement provisions such as changes to 401k, IRS, Roth, and other plan rules. While the current Administration’s “Green Book” on tax policy has not yet been released, a few tax proposals were discussed during the February 2023 State of the Union Address: Establishment of a new increase from a 1% excise tax on stock buybacks (enacted August 2022) to 4% excise tax Establishment of a new “billionaires” tax – households with net wealth exceeding $100 million would pay a minimum rate of 20% on an expanded computation of income, which would include unrealized capital gains. Reaffirmation by President Biden that the government would not raise taxes on anyone earning under $400,000/year. As Congress is split politically, it remains difficult for meaningful new tax legislation to make it through both houses and clear the President’s desk in the near term.Resources: Navigating the Intersection of Tax & ESG Is Your Company Effectively Managing Tax Risk?How to Benefit from Total Tax Transparency

Key Takeaways:The discipline of modern governance today is really in a global realm – can no longer be thought of in simply local or regional terms.Governance should be viewed as a discipline and thus, your individual board “packaging” is critical to you being identified as a serious board candidate.Board Documents are not comprised of a resume or CV but rather are highly structured and specific tools and should be reflective of your core leadership traits, your “major” and “minors” with respect to the depth of your experience and your governance skills and how these link ethics, values, and culture to strategy and risk oversight. The time and energy put into crafting Board Documents is an important exercise for your board journey.The Board interview is a two-way dialogues and vetting process that allows: (1) the company to understand how well you understand the particular linkage of values, culture, risk and strategy to governance and (2) specifically, how well you will fit into the board and whether your depth and experience will enable you to be accretive to the board’s operations. Don’t be afraid to ask thoughtful questions and be intentional in developing linkage between yourself and the board dynamics. Resources: Becoming an Exceptional Board Director Candidate Education & Certification CourseAcross the Board: The Modern Architecture Behind an Effective Board of Directors

Key Takeaways:Be mindful of identifying material impacts of climate risk and whether you are satisfying current disclosure requirementsDon’t be lulled into complacency or the belief that mid-term elections may derail final rule-makingReview carefully current financial risk disclosures in line with other information being disclosed by the company Consider the resources you will need to implement expanded disclosures and leverage advisors to help you navigate the complexities of climate-related disclosures Remain abreast of developments – not only I the U.S. but globally, particular if your organization has significant international operationsResources:SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for InvestorsThe Enhancement and Standardization of Climate-Related Disclosures for Investors – SEC Comment Letter

Key Takeaways:As with any insurance, directors and officers need to have a clear understanding of the purpose of D&O insurance and what it is designed to cover and what is not included – e.g., deliberate fraud, criminal acts, and uninsurable fines and penalties as well as other exclusions or limitations including thresholds for triggering coverage.The velocity, volatility, and interconnectedness of risk evolves over time even though D&O policies are typically written for one year terms. Does your company have a framework for evaluating risk, risk tolerance, and risk mitigation in the longer term?It’s not uncommon for companies –particularly when in an early stage - to make concessions on the amount or scope of coverage in order to manage pricing. But it’s important that those decisions are anchored in an awareness of the external and internal risk landscape, and contemplate future strategic and financial objectives for the company. Traditionally, most securities class actions involve financial misrepresentations, but boards should be aware that in the past several years there has seen a significant increase in ‘event driven’ securities litigation. These claims can often be classified as “ESG-related events” given the broadness of the category.