US Boards Anxious About OTC Derivatives, PwC Survey Finds

75% of the board members of U.S. financial services firms surveyed said that the increasing use of sophisticated financial instruments such as derivatives will be the next big area of regulatory focus for the industry. Or so found a survey

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75% of the board members of U.S. financial services firms surveyed said that the increasing use of sophisticated financial instruments such as derivatives will be the next big area of regulatory focus for the industry. Or so found a survey PricewaterhouseCoopers. With near-unanimous agreement, 97 percent of board members said that the level of due diligence and understanding of sophisticated financial instruments being used in the market should be a major concern for boards.

The survey was conducted last month at PricewaterhouseCoopers’ 2006 Financial Services Audit Committee Forum in New York.

Approximately 300 board members attended, representing a cross-section of the financial services industry, including the banking, brokerage, investment management, insurance and real estate sectors.

Succession planning also was identified as a strategic area that may need greater board focus. While six in ten boards have recognized succession planning for the executive management team is a board priority and should be a board-led initiative, only about one-quarter (28 percent) have actually approved a succession plan.

“Over the past three years, board members have had to focus more of their attention on compliance issues rather than strategic business matters,” said Timothy F. Ryan, chairman of the U.S. Financial Services Industry Practice of PricewaterhouseCoopers. “But we are seeing boards making it a priority to spend more time on other important areas, including ways to gain market share in fast-growing markets and other key strategic business matters.”

When asked where they have been focusing their attention:

Nearly three-quarters (73 percent) of board members of U.S. financial services firms report that they have been spending less time on strategic business issues than on compliance-related matters. Approximately half (51 percent) say that the time devoted to compliance is beginning to decrease as they become more knowledgeable of the new requirements. Still, 61 percent said that the lack of knowledgeable board members willing and able to serve is a challenge, particularly to the audit committee. Executive compensation is an area board members identified as needing more of their attention. Seven in ten survey respondents do not think that audit committee members spend enough time and energy working with the compensation committee on this thorny subject. Nearly one-quarter (23 percent) said that compensation disclosures make them question the audit committee’s ability to definitively sign off on required filings to the Securities and Exchange Commission. Six in ten board members feel that the increased responsibilities, risk and accountability they have taken on in recent years is not adequately reflected in the compensation they receive.

While six in ten of those surveyed felt that the insurance for the company’s directors and officers is sufficient to address any potential lawsuits they may face as a board member, nearly four in ten (37 percent) are nervous that they have assumed personal risk by serving on the board. More than half feel that their compensation does not adequately address the time they now spend on board-related matters.

The survey found that boards of financial services firms are actively engaged in expanding into new markets and adapting and planning for the impact of major market events. Nearly a third (32 percent) said they are working with management to prepare for a major market downturn. Twenty-two percent are investigating ways to gain market share in emerging countries or fast-growing markets such as China and India.

Survey participants were asked to identify the biggest business concerns for their companies over the next one-to-two year period. Eighty-seven percent said they are concerned or highly concerned about managing performance expectations. This was followed by the potential impact of a recession in the U.S. (77 percent); rising interest rates (77 percent); a downturn in the bond market (77 percent); a downturn in the stock market (69 percent); rising healthcare costs (69 percent); and meeting pension and retiree benefit obligations (53 percent).

The annual PricewaterhouseCoopers Financial Services Audit Committee Forum is one of the few national events of its kind where board members of financial services companies gather at a single venue to share their insight and experiences regarding the major challenges and opportunities they face. Attendees represent a cross-section of the industry, including the banking, brokerage, investment management, insurance and real estate sectors.

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