Paul Koster’s view may be a little discomforting for audit committee members.
Far from the view that audit committees are doing alright, Koster, head of the VEB—the Dutch shareholders’ association—has demanded more from them, setting an agenda for a significantly different kind of audit body.
Koster’s view, in fact, is that audit committees across Europe could be doing more to support and protect shareholder investments.
He hammered his point home earlier this year at the International Corporate Governance Network conference in London, where he declared that audit committees should become a new line of defence for shareholders; they should be able to offer binding advice to boards; and they should be “aggressive” in proactively launching their own internal investigations.
Speaking more recently to Board Agenda, Koster points out that underlying his belief about audit committees is a view that a cultural shift has taken place in European corporates, in which the shareholder interests are no longer considered as important as they were.
His proposals for audit committees are driven by an urgent need to shore up those interests against what he described as the sometimes “whimsical” approach of corporate management.
Though it was unravelled after he appeared in London, he cites the VW scandal as a case to illustrate his point that managers often aim for the “improbable, the impossible”, and that someone needs to be on hand to challenge it. The error of VW’s management, he says, was to aim for being the number one motor manufacturer in the world with a strategy that involved convincing the US market that diesel engines were much better than they thought—a strategy that left competitors bewildered.
Koster’s point is that problematic information to challenge wayward strategies is often already known, and finding it should be a role for the audit committee.
“You need to put your ear to the floor, you need to be aware of things being discussed by people who really deal in making the cars the quality that they are. You may hear things you are not aware of when you stay at a distance. I think the audit committee can play a role by being more prominently and more physically present,” says Koster.
He says audit committee chairmen should also be carefully publishing details of what they will be pro-actively investigating and what they want management to examine.
“I’m not saying the audit committee should be in an executive role, but they should be more focused on taking initiatives on their own to challenge management on their assumptions,” says Koster.
He adds: “Management clearly has an agenda that might not align with what the shareholders want: management is seeking power, management is seeking respect. But why is it that management should be free of critical comments when shareholders pay the price when things go wrong?” He adds a further rhetorical question: “Why should shareholders not be aware of something that the audit committee is concerned about?”
Much of this thinking is underpinned by two further proposals Koster has. Audit committees should be staffed by properly qualified people. And non-executives should change as an organisation’s strategy shifts to target new markets, new technology or a changing business environment.
He says audit committees are the logical place to add more checks and balances. “How should they do that?” he asks. “By bringing in people who are truly and genuinely qualified to look at aspects that come into play—risk, compliance, audit-related matters and financial reporting.”
He adds: “Audit committees should be recognised and respected for their specific knowledge. It puts a burden on them and they will be more liable if things go wrong, and that’s not an easy thing to accept. But the audit committee chairman should be in the critical place of initiating, directing, suggesting what he or she considers relevant for the benefit for the company…”
And when strategic direction changes, so should the non-executives to suit new objectives. It may not involve all non-executives, but boards should move to bring people in with relevant expertise quickly. This challenges the ideas that non-executives should be just allowed to see out their terms.
“I cannot talk strategically longer than three years down the road,” says Koster. “We know that disruptive technologies can wipe you out overnight.” Changes in the marketplace make it an imperative that younger people make their way into non-executive positions on boards.
But make no mistake, Koster’s demands are not reserved for board and audit committees alone. Shareholders have a responsibility to bear too.
“Beyond any doubt, shareholders should be blamed for not asking more of audit committees,” says Koster. “It really requires shareholders to speak up far more about the issues that they are concerned about.”