Maximizing Executive Sessions with the Audit Committee
By Hal Garyn, Managing Director, Audit Executive Advisory Services, LLC
Chief Audit Executives (CAE) generally have a dual reporting relationship: one “Administrative”, and one “Functional”.
The “administrative relationship” provides for a day-to-day boss to get expense reports approved, obtain feedback and coaching, stay connected with the organization, and generally feel a part of the organization. The “functional relationship “helps establish internal audit’s independence, elevates internal audit as part of the organization’s governance structure, and provides for the approval of audit plans, CAE performance evaluations, and CAE compensation.
While both reporting relationships are critical and require some deft navigation on the part of the CAE, this article is about one aspect of the CAE’s functional reporting relationship to the Audit (or other Board level) Committee – the Executive Session.
What is an Executive Session?
To allow the CAE to have an avenue for unfiltered communications with the Audit Committee, a periodic Executive Session is typically scheduled on occasion as part of the committee’s meeting agenda. These sessions are held at or near the end of the regularly scheduled meeting, and all other company personnel attending the meeting are excused. As a result, the CAE has time alone with Audit Committee members to discuss things in private and in confidence. This is a two-way dialogue, where the Audit Committee members may have something they want to say to, or ask of, the CAE and the CAE may have things they want to say to, or ask of, the committee. In most circumstance, what is discussed is confidential, and not recorded in any official minutes of the meeting (at least not in any level of detail).
What Might be Discussed in an ExecutiveSession?
Executive Session dialogue between the Audit Committee and the CAE can be different from company to company, different from meeting to meeting within a company, and even different depending on the composition of a company’s committee. Regardless, though, the committee may seek the CAE’s perspective, in an unfiltered and unbiased way, on one or more topics. And, in turn, the CAE may have some issues they want to advise the committee members about in a confidential and unrestrictive setting. I have personally had Executive Sessions in my career where the discussed topics included: whether or not the disaster recovery plan will actually work, the relative competence and capability of an executive officer of the company, the relative truthfulness of what was being presented by a company officer, the general morale of the organization’s employees, and how well the company was living to its values and espoused ethics. Certainly, some extremely sensitive topics that required the savvy and political acumen to share both facts and opinions regarding the matter of interest.
What Can go Wrong with Executive Sessions?
Quite frankly, if not handled smartly, a lot can go wrong with executive sessions. Some of the things to manage, may include:
- Providing a response on a topic where you are not confident about your answer
While it is great that many Audit Committees look to the CAE as being knowledgeable about almost anything going on in the organization, and you are probably on top of a wide range of topics, you cannot know everything. Never bluff your way through an answer if you do not know. It would be better to say that you would like to investigate it, or that you would like some time to think about it. Using discretion if you are unsure is much better than speaking and being wrong.
- Surprising the Audit Committee Chair with a topic
As is often said, no one likes surprises (especially bad news ones). While a topic you raise to the Audit Committee may be unexpected by the committee members, it is generally not a good idea to surprise the Audit Committee Chair. If you plan on raising a topic in Executive Session, discuss it with the committee Chair in advance. At least, then, the Chair will not be surprised during the meeting and can guide you in the best way to raise the issue. It never hurts to have the full support of the committee Chair and advising them of an issue in advance goes a long way to making sure that their support is more likely.
- Having nothing, ever, to discuss in Executive Session
Some Audit Committees allow for an Executive Session with the CAE at every meeting, and some do it less frequently. Regardless, at least once or twice a year should be acceptable in most organizations to have these important private sessions. At each instance, over time, what if the CAE never has anything to share? At some point, the committee may stop asking or may start to lose confidence in the CAE given their silence.
- Having something to discuss in every Executive Session
As much as never having something to discuss in Executive Session is problematic, for quite different reasons always having something to discuss could be a bad move too. The committee members may start to begin wondering why the CAE always waits until the private session to raise issues as well as begin thinking that everything must be an issue with this person.
- Not realizing that anything you say in confidence might be repeated outside the meeting
Yes, the Executive Session is supposed to be private and confidential. But, if you have burdened committee members with something that is rather controversial and/or significant, they might feel obligated to follow-up on the matter on their own. And, if they do … watch out. It will be rather obvious that they know about the topic from the CAE. So, if possible, to cover your bases, consider giving the CEO, the CFO, or other applicable executive a, in confidence, “heads-up”. Of course, there may be instances where this is not possible or practical but consider doing it, nonetheless.
- Allowing the Executive Session to run too long
Most often, the Executive Session with the CAE is at or near the end of the committee meeting. At the appointed time, all non-committee members leave the room and the CAE is alone with just the non-executive directors who comprise the committee. The other executives and staff that left the room are, however, in most instances, waiting outside the room for the Executive Session to conclude. How awkward is it when the Executive Session goes on for an exceptionally long time? I would suspect the people waiting outside the room begin to wonder, what in the world are they talking about all that time? The longer the session goes on, the more there will be curiosity as to what was discussed and the more awkward it will be.
Be Strategic When It Comes to Executive Sessions
Just like any executive position, the CAE must be strategic and thoughtful when going about their work. How you, as the CAE, handle Executive Sessions with the Audit Committee is no exception. Know how to leverage the people, personalities, politics, and culture to strategically utilize these sessions in the best interests of what you know needs to be accomplished over the long-term. If you do not have a good rapport with the members of the committee, and especially with the Chair, then you need to invest the time doing that before you raise highly sensitive issues and topics in Executive Session. It is through good rapport with the committee members that you can then best position how you handle these important, yet challenging, sessions to the fullest advantage of the organization, the committee, and the entire board. These sessions are a powerful tool, but like any powerful tool they need to be wielded carefully and skillfully.
And, help is available for those who either are navigating Executive Sessions for the first time, or have found themselves in a situation where they just need a sounding board when it comes to how to handle the myriad challenges associated with Executive Sessions. Call it a coach, if you like, but having someone who has previously managed through these challenges as your confidential advisor may be all you need to take these sessions and make them work best for you and everyone else involved.
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