The relationship advantage: Maximizing chief audit executive success by Richard F. Chambers, Charles B. Eldridge, Paula Park, and Ellen P. Williams
March 2011 Relationship acumen, or the ability to initiate and develop strong connections with key stakeholders, is becoming more crucial to chief audit executives, who must navigate complex needs and competing agendas of senior managers and audit committees.
As chief audit executives (CAEs) find themselves in a highly visible, pressure-packed role, many have come to realize that business and financial acumen are no longer enough. Relationship acumen—the ability to establish and maintain strong connections with key stakeholders—is now also a prerequisite for success. Given most auditors’ accounting background, such interpersonal savvy hasn’t been readily ascribed to the profession. Accountants, by nature, were often green-eyeshade-wearing bean counters… but that stereotype has crumbled. Corporations increasingly view the role as critical, and look beyond the walls of internal audit when filling it; many make the position a short-term, rotational, executive-development platform. Armed with broader organizational experience, these non-traditional CAEs in fact exhibit impressive relationship-building skills. CAEs certainly need them. Most have dual reporting structures—to the CFO, CEO, or another C-level officer (administratively) and to the audit committee chair (functionally)—and so they must craft effective relationships with both. That can mean navigating complex, competing stakeholder agendas, including with external auditors, regulators, and others. Thus, if management wants a CAE in a business partnering or consultant’s role—which is increasingly the case—while the board is looking for an advisor and internal watchdog, the CAE must traverse these seemingly conflicting agendas and preserve a good working relationship with everybody. “We try to operate as a professional services organization,” said Mike Cowell, who heads the internal audit function at TIAA-CREF. “We ask, ‘Who are our customers?’ and we focus on what they see as value and how can we help them be successful. Yes, we must be an independent and objective audit organization, but if we can do our work and deliver our
services in a manner that helps business professionals succeed, ultimately, we will get them to a place where they see value in what we do.”
Contributors Hal Garyn Vice President, North American Services The Institute of Internal Auditors Stuart Kaplan Global Chief Operating Officer Korn/Ferry Leadership and Talent Consulting
Korn/Ferry and The IIA thank the CAEs and directors who participated in the creation of this paper. Dennis R. Beresford Ernst & Young Executive Professor of Accounting at the University of Georgia Director and Audit Committee Chair of Doosan Infracore International Inc., Fannie Mae, Kimberly-Clark Corp., and Legg Mason Inc.
Mike Cowell Senior Vice President, Chief Auditor TIAA-CREF
Mark Gaumond Retired Partner, Ernst & Young Director and Audit Committee Member of Rayonier Inc. and Booz Allen Hamilton
Robert Guido Retired Vice Chair of Ernst & Young; Director and Audit Committee Chair of Commercial Metals Company and Bally Technologies Inc.
V. Ann Hailey Director and Audit Committee Member of W.W. Grainger Inc. and Avon Products
Kiko Harvey Vice President, Corporate Audit and Enterprise Risk Management Delta Air Lines Inc.
Successful CAEs acknowledge that these competing expectations can be uncomfortable and stress-inducing. On one hand, the CAE must be a keen observer and assessor of organizational risks, which requires access that comes only with a close working relationship with management. On the other, this same CAE must remain objective, diligent, and guard the independence of the internal auditing function. That job inevitably results in the occasional unflattering if not damaging report about senior executives. Such conditions easily can erode relationships over time; nearly everyone associated with internal audit knows of a highly respected CAE colleague whose career was upended by conflict with senior members of corporate management. But as Alex Stephanouk, vice president and internal audit director at Aflac, put it, “Having high-quality relationships is not an accident. You have to work at it purposefully.”
Attributes that add up for CAEs To determine how effective CAEs build these high-quality relationships, we spoke to more than a dozen veterans from the field and also a number of audit committee chairs. Their comments reflected a wide range of perspectives on how to manage these complex, intertwined relationships. From those, we teased out some common themes. It goes without saying that strong technical audit skills and business savvy remain essential to today’s CAEs. But the attributes that constitute what we’ve dubbed relationship acumen benefit CAEs in specific ways: Positive intent: A fair, independent, and objective approach to the job that projects the CAE has everyone’s best interest at heart. Makes clear that he or she isn’t set on being right, but is set on finding the right answer. Diplomacy: Direct, forthright communication (including listening) skills, political astuteness, and sensitivity to the organization’s culture and how things get done. CAEs need to be intuitive about people and have the ability to read an audience. The best can be skillfully contrarian without being confrontational. Prescience: Spotting the risks ahead requires curiosity, an ability to see matters with fresh eyes, and a willingness to question assumptions. Top CAEs can “see around corners”—that is, anticipate needs before they’re felt and issues before they arise.
Trustworthiness: A CAE must always walk the talk, keep confidences, operate with integrity, and be mindful of maintaining credibility with those he or she advises. While consistency and predictability may sound boring, they’re desirable qualities in this job. Leadership: A CAE must set the tone for the entire internal audit staff, to be sure. But he or she must also be able to steer others toward consensus, manage conflict, and gain alignment on issues. Being a leader also contributes to comfort with other corporate leaders. Empathy: CAEs must be able to understand and focus on each stakeholder’s point of view, and be sensitive to those needs and feelings. He or she must listen. A genuine caring about others amplifies all the other qualities on this list.
Acknowledgments Continued Leslie Heisz Director and Audit Committee Chair, Ingram Micro Inc. Director, HCC Insurance Holdings Inc.
Jeanette Hughes Vice President, Internal Audit Ingram Micro Inc.
Leon J. Level
Applying relationship acumen
Director and Audit Committee Chair Levi Strauss & Co. and UTi Worldwide Inc.
Ken Robinson, CAE at Procter & Gamble, oversees a global internal audit function with more than 150 people in six cities around the world. He attributes his successful eight-year run at the $80 billion company to his commitment to absorbing and understanding the business goals of his colleagues. This didn’t stem just from casual business lunches and quarterly meetings, but from previous experience: before joining internal audit, Robinson was the senior finance manager in P&G’s personal beauty care business and also ran global customer business development’s finance organization. “I know the company very well,” he said.
Senior Vice President, Chief Audit Officer adidas Group
Understanding the corporate culture earned him credibility in building the internal audit organization he now oversees—but listening is a job that never stops. “We spend a lot of time bringing senior leaders in to talk to our group about what’s going on in the business and what they’re trying to accomplish. It allows us to engage with them, but more importantly, it also allows us to understand the business.”
Joe N. Steakley
Robinson employs what he calls “the customer relationship model,” which he uses with all of P&G’s senior managers. It reflects his diplomacy, trustworthiness, and positive intent right off the bat. “One of the things that has worked for us is getting alignment up front,” he explained. “We say to senior managers, ‘Now that we understand the business, what do you expect of us and what do we expect of you?’ We drive this by establishing our credibility, by demonstrating our commitment to transparency. We don’t pull any punches and we are clear where we see concerns. We raise those concerns through the appropriate channels. And most important, we are consistent. One of our challenges in
Ken B. Robinson Vice President – Finance, Global Internal Audit The Procter & Gamble Company
Manny Rosenfeld Vice President of Internal Audit Commercial Metals Company
Julie Scammahorn Senior Vice President and General Auditor American Express Company Senior Vice President – Internal Audit and Enterprise Risk Services Hospital Corporation of America
Alex Stephanouk Vice President, Internal Audit Director Aflac, Inc.
Brian Thelen Vice President, Internal Audit Services Delphi Automotive
Charlie Wright Vice President, Internal Audit Devon Energy Corporation
the past in an organization as big as P&G has been an inconsistent approach to audit from region to region around the globe. During my time as CAE, we’ve been driving a consistent approach that helps build credibility.”
Forging a bond with the audit chair Many CAEs report that the regular annual or quarterly meetings with the audit committee chair are simply a starting point. CAEs and chairs who establish stronger bonds tend to reap the benefits. At American Express, for example, CAE Julie Scammahorn, a veteran with twentyseven years of financial experience, described how she created a strong relationship with one recent audit committee chairman. “It was important for me to establish a relationship outside of formal company time,” she said. “Once a quarter, we would spend a morning together to address concerns strategically and to discuss any issues we see forthcoming for the company.… The audit chair knows that if I reach out to him outside of our established meeting, the issue must be of importance and requires immediate attention.” That not only creates a stronger working relationship, but adds value.
For audit committee chairs, the CAE can be an invaluable conduit into the company, someone with a unique perspective and the ability to influence every part of the organization.
At the same time, Scammahorn has built strong relationships with the top fifty executives. If one of the executives encounters problems that become concerns for the audit committee, Scammahorn works side-by-side with the executive and attends all meetings in search of a solution. She recently worked with a newly promoted business unit president in this manner to resolve a challenging audit report. “Because of this, we have a great relationship, and he calls me to get my advice on any sticky issues,” she said. For audit committee chairs, the CAE can be an invaluable conduit into the company, someone with a unique perspective and the ability to influence every part of the organization. Dennis Beresford, audit committee chairman for Fannie Mae, among other boards, says the foundation of an effective relationship is setting expectations and establishing lines of communication. And a confident tone is important. Historically, the CAE has been extremely deferential with comments like “I hate to bother you but…,” a stance that rankles Beresford. “They should never feel that way,” he stated.
Beresford worries about the lack of self-confidence among CAEs. “They may feel that they don’t have the necessary support,” he said. “The audit committee chair needs to spend extra time with the CAE because they are really alone at the top.” Another audit chair we spoke with concurred that time with the CAE was well spent: “They have to know you won’t throw them under the bus,” she said. “The audit chair’s approach should be: ‘What can I do to help without jeopardizing your key relationships?’” At the same time, audit chairs expect more from CAEs than ever before. Robert Guido, audit chair at Commercial Metals Company and Bally Technologies, believes that CAEs need to be more prescient and diplomatic, and show more leadership in staking out their influence with the audit committee. “CAEs have to generate new ideas in order to provide value,” Guido said. “They can’t always show up on the doorstep of the business with bad news.” Relationship acumen, Guido pointed out, is based on the idea that you build the relationship before you need it.
Developing your own relationship acumen The abilities that got you the CAE job—observing, absorbing, probing, listening—should also be applied to your own development. Behavioral scientists have made strides over the past decade in decoding the personal attributes that lead to strong professional relationships. Daniel Goleman’s seminal work, Emotional Intelligence, brought these types of “EQ” skills into stark relief against the more “technical” skills prized within many corporate functions. Building on that, Korn/Ferry’s Lominger research, which identified specific competences that correlate to high EQ, clarifies how leaders can develop these skills over time. Experience is the best teacher, it turns out. Korn/Ferry refers to this as the “70-20-10” rule:
Key jobs (70 percent): It is essential that before stepping into the CAE’s role, the person has worked in jobs or situations in which strong relationships are required in order to succeed, and in which something important is at stake. These might include: change management roles, international assignments, staff leadership without formal authority, or turnaround situations in which roles are not clearly defined. The research is very clear that there are no shortcuts: people learn far more from situations in which they personally were stretched and challenged. However, these experiences alone don’t teach. What makes the difference is stopping to reflect on what has been, and still can be, learned. This extra step separates lifelong learners from those who don’t grow over time. CAEs, and aspiring ones, shouldn’t hesitate to volunteer for or accept opportunities that stretch your boundaries. That special project, assignment, or transfer could be the fuel to propel your career faster forward.
Mentors, coaches, and bosses (20 percent): The second most important way to deepen relationship acumen is through direct coaching and feedback from others, both in and outside of the organization. For current and aspiring CAEs, this might require actively seeking out some “tough love” on their people skills. Cultivate relationships with mentors who tell you not what you want to hear, but what you need to hear. In addition, objective measures, such as 360 assessments (which proffer feedback from supervisors, direct reports, peers, and clients), can provide essential input. Courses, seminars, and books (10 percent): While they are valuable framing for our developmental journey, these should not be substituted for the experience and coaching above. In ideal situations, course, seminar, and book materials are integrated so as to supplement the learning that occurs through action.
Experience leads to empathy
“ I put myself in the shoes of the operating people. I’ve been there; I understand the environment in which they operate. Intent is important to us, as is the ability to adapt.” Brian Thelen
Vice President, Internal Audit Services Delphi Automotive
CAE Brian Thelen, considered a turnaround specialist, came to Delphi during the transformation of the company. During his five years at Delphi, he has worked through multiple transitions in leadership, including the CEO and board members. He has found that empathy is a key ingredient to building effective relationships. “I put myself in the shoes of the operating people,” Thelen said. “I’ve been there; I understand the environment in which they operate. Intent is important to us, as is the ability to adapt. I don’t have a textbook where every ‘i’ has to be dotted and ‘t’ crossed.” Among his first moves leading Delphi’s internal audit function was to make sure his staff understood the positive intent he wanted to project. “Our aim is not to be punitive,” Thelen declared. “We’re advocating behavior change. I don’t want my managers to hammer the organization; I want them to coach it and help it become even better.” Successful CAEs don’t take anything for granted, especially relationships. At Aflac, CAE Alex Stephanouk created what he calls a “relationship index” to rate and measure how well internal audit is working with key stakeholders. “It’s easy to say, ‘I’ve got a good relationship with my audit committee chair,’ but we struggled with how to measure all the influencers to these key people,” he said. The index is set up to rate internal audit against the goals it had set with stakeholders. How well, for example, are action plans being implemented? Are customer satisfaction scores improving along with management survey scores?
Long-term care Successful CAEs understand that even in the best of circumstances, the process of building and sustaining relationships is never-ending: senior executives come and go or change hats, and the audit committee roster changes. The CAE must reach out early and often to initiate The CAE must reach out early and often to initiate new relationships when new relationships when personnel change. personnel change. Tending to long-standing relationships is also imperative. Picking up the phone, or extending a lunch invitation to talk through a touchy issue, pays enormous dividends to the CAE, and the entire internal audit staff.
Building trust and understanding requires an investment of the CAE’s time and energy. It’s also a moving target. The needs and expectations of key stakeholders are constantly evolving. Successful CAEs recognize the signs of change and recalibrate. Establishing and maintaining important allegiances changes the entire CAE experience. Having the audit chair as an ally gains the CAE credibility with the whole committee and inspires respect from management. “One measure of success in building long-term relationships is receiving an invite from a new business unit leader to send in the team to evaluate the situation, to offer a view and perspective of where the business is today (relative to others) and what is needed to be best of the best,” said Wolfgang Muehlbauer, chief audit officer at adidas Group. CAEs report that they know a bond is solid when a senior executive solicits their input or advice outside of audit situations. In the long run, success depends on a balanced mix of strong technical knowledge and relationship acumen. One without the other inevitably will result in diminished results or failure. As Stephanouk said, “No one will tell you the truth unless they trust and value you.”
Richard F. Chambers, CIA, CCSA, CGAP, is the President and CEO of The Institute of Internal Auditors. He has more than 35 years of internal audit and related experience. Prior to leading the IIA, Chambers served as national practice leader at PricewaterhouseCoopers and held various internal audit and inspector general positions with the federal government. Charles Eldridge is a Senior Client Partner in Korn/Ferry International’s Financial Officers Center of Expertise, a specialized, global group of more than forty professionals dedicated to recruiting Chief Financial Officers and their direct reports, as well as financial experts for board of director positions. He is based in Atlanta. Paula Park is a Senior Client Partner in Korn/Ferry International’s Financial Officers Center of Expertise, based in San Francisco.
Ellen P. Williams is a Senior Client Partner in Korn/Ferry International’s Financial Officers Center of Expertise, based in Stamford.
About The Institute of Internal Auditors The Institute of Internal Auditors is an international professional association headquartered in Altamonte Springs, Florida. It is the profession’s global voice, recognized authority, acknowledged leader, chief advocate, and principal educator. Members work in internal auditing, risk management, governance, internal control, information technology audit, education, and security. For more information, visit www.theiia.org.
About Korn/Ferry International and The Korn/Ferry Institute Korn/Ferry International, with a presence throughout the Americas, Asia Pacific, Europe, the Middle East, and Africa, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, deploy, develop, and reward their talent. The Korn/Ferry Institute generates forward-thinking research and viewpoints to illuminate how talent advances business strategy. Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property, and research.
© 2011 The Korn/Ferry Institute
Published on Apr 16, 2012