Keep Your Sarbanes-Oxley Off My CFO

Self-proclaimed shareholder advocates have extended Sarbanes-Oxley reforms deeper and deeper into the business. Now some are going too far, pushing those regulations into areas that intrude on effective corporate administration. The latest and most misguided attempt to “improve” corporate governance in this way comes from Nell Minow, founder of the corporate-risk rating firm, GMI Ratings, who was recently quoted in The Wall St. Journal arguing that CFOs should report directly to the audit committee of the board.

Not “report regularly.” Not “report in executive session, without the presence of the CEO.” Both of these are common enough practices today. No, Minow is suggesting that CFO essentially work for the audit committee. As she puts it, when she’s evaluating a company, “the most important thing I look for in a CFO is someone who reports directly to the audit committee, because what I want is a CFO who is absolutely clear that his or her job depends on telling the truth to the board.”

There are four main problems with her proposal.

First: It’s not necessary. I don’t know of any CFO of a public company who would tell you that the job doesn’t already depend on telling the truth to the board. And we don’t need to hear again about Andy Fastow at Enron, thank you. None of the major surveys or blue ribbon commissions on board governance that convened in the wake of the Enron scandal has reported an epidemic of CFOs lying to audit committees. In other words, Minnow is suggesting a solution to a problem that doesn’t actually exist.

Second: It will do no good. Even if the problem did exist, this proposal wouldn’t fix it. Putting a solid line between Andy Fastow (or any other CFOs) and the audit committee is unlikely to change his (or their) behavior. If a CFO is operating outside the bounds of policy or law or GAAP and is willing to lie to the board about it, I doubt that he or she would be overly concerned about whether the line being crossed is dotted or solid.

Third (and most important): It will do great harm. The CFO is most often the closest advisor to the CEO. In my recent research on the structure of senior management teams, I found that the most common subordinate in a CEO’s informal kitchen cabinet — the people the CEO trusts when making the most important decisions about running the company — was the CFO. As one senior financial-services executive told me, “If your CFO isn’t your most trusted partner, it’s time to get yourself a new CFO.”

Imposing a solid line between the CFO and the board risks shutting down the intimacy that a good CEO and good CFO must have to run a complex modern corporation well. CEOs and their advisors float many trial balloons within the informal environment of the kitchen cabinet, the vast majority of which don’t survive very long and don’t deserve to. If the CFO’s first job is to report — day to day — to the board and potentially be asked to breach confidences that were intended just as wisps in the wind, it’s likely that all that would happen is the CFO would be excluded from the kitchen cabinet. The board would be none the wiser, and the CEO and the firm would be far the poorer if that happened.

Fourth: I have to ask: “When will this all stop?” Have we finally crossed the line into foolishness? Sure, there were excesses. And reform was required. And, with Sarbanes-Oxley, reforms were initiated. Admittedly, those reforms were not perfect. But the continued push of for-profit industry watchdogs to impose their views on the day-to-day management of corporations is nothing but a misguided attempt to differentiate themselves within their own marketplace — to try to justify their fees by providing additional value-added services. Since there’s no fire for the advocates to put out, they’re running around trying to create one.

Certainly, let the board, and the audit committee, spend all the time they need, in whatever setting they choose, getting whatever reports they request and asking whatever questions they need to ask. Let them continue to expect nothing but straightforward, honest answers, and let all CFOs know that their jobs depend on being candid and honest.

But let CFOs do their jobs. Let them continue to report to, and support, their CEO bosses. Asking executives other than the CEO to report directly to the board will set a foolish and dangerous precedent.