With board composition and renewal under increasing scrutiny, this recent EY reportsummarizing views of institutional investors, investor associations and advisors about board composition and board composition disclosure is instructive.
Among the key findings are that most investors don’t believe companies are doing a good job of explaining why they have the right directors in the boardroom. And the vast majority of investors believe that rigorous board evaluations – not, e.g., director term limits, retirement ages – are the most effective way to stimulate board refreshment.
Based on insights gleaned from the interviews, the report suggests these three ways companies can enhance board composition disclosures:
1.Make disclosures company-specific and tie qualifications to strategy and risk — Be explicit about why the director brings value to the board based on the company’s specific circumstances. Companies should not assume that the connection between a director’s expertise and the company’s strategic and risk oversight needs is obvious. Also, explaining how the board, as a whole, is the right fit can be valuable, particularly given that most investors are evaluating boards holistically.
2. Provide more disclosure around the director recruitment process and how candidates are sourced and vetted — Disclosing more information around the nomination process — how directors were identified (e.g., through a search firm), what the vetting process entailed, etc. — can mitigate concerns about the recruitment process being insular and informal.
3. Discuss efforts to enhance gender, racial and ethnic diversity — Many companies — nearly 60% of S&P 500 companies — say they specifically identify gender and ethnicity as a consideration when identifying director nominees, but that is not always reflected in the gender, racial and ethnic makeup of the board. Disclosing a formal process to support board diversity, including providing clarity around what is considered an appropriate level of diversity, can highlight efforts to recruit diverse directors.
The report also identifies potential disclosure tools, which may include a strategy-based skills matrix, a lead director/chair letter discussing board succession planning/refreshment/composition, and/or shareholder engagement.
Board Skills Matrix Considerations
This recent guidancefrom the Goverance Institute of Australia provides a thoughtful approach to creating or refreshing a board skills matrix – which (regardless of geography) is an effective tool for identifying existing and desired competencies and skills on the board.
Among other things, the guidance addresses:
Potential alternative approaches to identifying existing skills – which may entail involvement by the board chair, corporate secretary, each director individually, the board as a whole and/or the nominating committee
Non-exhaustive list of competencies the board may wish to consider which – aside from the standard fare – may include, e.g., geographic experience, diversity, tenure
Board’s consideration of a deeper dive ratings system to weight each competency (e.g., high, medium, low), as well as perhaps identifying whether the experience was attained in a management or non-management context
Other thoughtful considerations such as whether identified gaps need to be addressed now and – if so, how. Depending on the circumstances, gaps may be satisfactorily addressed via an external subject matter expert, new director(s), management input and/or education/training
This is a good read – even for matrix veterans.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Survey: Disclosure Committee Insights
– Successful Whistleblower Profile Revealed
– Audit Committee Disclosure: SEC’s Chief Accountant Talks Concept Release
– Waiver of IPO Lock-Ups: Delaware Declines to Dismiss Board, But Dismisses Underwriter Aiding & Abetting
– Making the Case for Fee-Shifting Bylaws
The results of NIRI’s 2014 Earnings Call Practices Survey are summarized in this recent memo. Notable stats include:
Quarterly calls common: A whopping 97% of respondent companies hold quarterly earnings calls, compared to 80% 20 years ago.
When quarterly earnings calls are held: Over 70% of surveyed companies hold calls on Wednesdays or Thursdays. 75% of companies hold their call on the same day that earnings are released. There’s almost an even split between holding calls during and outside of market hours.
How calls are announced:
– Press releases (93%)
– Corporate website (83%)
– E-mail blasts (55%)
– Twitter (9%)
When calls are announced: 86% announce between one week and one month in advance of the call. 35% announce 2 – 3 weeks before.
Length of calls:
– 46 – 60 minutes for 68% of respondents
– 30 – 45 minutes for 20% of companies
Formats used to broadcast calls to listeners: Telephonic (94%) and webcasts (almost 90%)
Call script & rehearsal practices:
– 63% begin preparing for an earnings call three weeks in advance or less; 30% prepare four weeks out. 22% ask the Street during their preparation period which topics they would like the company to address during the call.
– The IRO, CFO & CEO are most commonly involved in both script development and review. 37% and 71% involve in-house counsel in script development and review, respectively.
– Rehearsal practices are diverse, and 22% don’t rehearse at all.
Call participants: IRO, CFO & CEO virtually always participate. Less frequently but still common are CCOs (83%), in-house counsel (78%), CMOs (70%)
Screening practices: More than 3/4 screen call participants
Archival practices:
– 73% archive a webcast on the corporate website. 73% archive the audio. 57% archive a slide presentation. Only 25% archive the full call script.
– 40% archive their call audio for less than 90 days.
– 46% archive their scripts and 51% archive their slide presentations for longer than one year.
In this new Deloitte piece, veteran IR managers share their views on how to handle difficult scenarios – including gaps in company and investor/analyst perspectives, communicating bad news and dealing with activist investors.
Transcript: “Rural/Metro & the Role of Financial Advisors”
We have posted the transcript for the recent DealLawyers.com webcast: “Rural/Metro & the Role of Financial Advisors.”
In its long-awaited FAQs, ISS indicates that it will generally recommend in favor of management and shareholder proposals for proxy access which allow for nominations to be made by shareholders owning not more than 3% of the voting power for 3 years, with “minimal” or no limits on the number of shareholders permitted to form a nominating group, and allowing nominations for up to 25% of the board. ISS will also review the reasonableness of any other restrictions and may recommend against proposals that are more restrictive than these guidelines.
ISS is tracking 96 shareholder proposals on proxy access. For companies that present both a board and a shareholder proxy access proposal in their proxy statement, ISS will review each proposal separately. Yesterday, we issued a memo on a decision framework for evaluating proxy access, including for those companies that do not have the proposal this season but are watching these governance developments, which is available here.
In addition, ISS will recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company excludes a shareholder proposal, unless it has obtained (a) voluntary withdrawal by the proponent; (b) no-action relief from the SEC or (c) a U.S. district court ruling. ISS may issue negative recommendations in these situations regardless of whether there is also a management proposal on the same topic. This is under ISS’ governance failures policy and expand beyond proxy access, to other situations where companies had also attempted to exclude conflicting shareholder proposals through the SEC no-action letter process, such as proposals requesting the right to call a special meeting. If a company has taken unilateral steps to implement the proposal, the degree to which the proposal is implemented, including any material restrictions, will also factor into the assessment.
Striking a Balanced View of Non-GAAP Disclosures
Non-GAAP measures have received some bad press recently – and in some cases, deservedly so. The WSJ reported that some companies are excluding costs that would seem to belong in earnings calculations such as “regulatory fines, ‘rebranding’ expenses, pension expenses, costs for establishing new manufacturing sources, fees paid to the board of directors, severance costs, executive bonuses and management-recruitment costs.”
Yet another WSJ article cites questions about exclusions of executive bonueses, fees for stock offerings and acquisition expenses, and notes that the SEC has sent comment letters to more than 30 companies in the past two years for giving their non-GAAP measures “undue prominence” in their filings. And this CFO article notes comments made by a PCAOB representative at an accounting conference about companies’ “increasing abuse” of non-GAAP measures, and an example he cited of a company’s exclusion of director fees because they allegedly related to governance – purportedly unrelated to company operations.
However, non-GAAP measures aren’t inherently bad. Used appropriately – in conformance with the letter and the spirit of SEC rules – they can significantly enhance comparability and provide tremendous insights into the business, ongoing operations and future prospects that aren’t otherwise discernable based on the use of GAAP alone. Rather than be deterred by – or ignoring – the bad press, companies should revisit the non-GAAP measure basics, and continue to use them effectively to enhance the utility of their disclosures.
PwC’s recent IPO study, although IPO-focused, provides a nice overview of the objectives, uses and SEC requirements pertaining to non-GAAP measures – as well as SEC comment letter examples that, for the most part, apply equally to mature companies. In addition, this Deloitte report (pgs. 72 – 74) includes a helpful discussion of recent SEC comment letter trends pertaining to non-GAAP measures that is instructive for future disclosures.
In this post, FASB Member Marc Siegel addresses some of the murmurings and studies on the use non-GAAP measures – and shares his view that the combination of GAAP and non-GAAP information is “more impactful” for purposes of understanding a company’s business than either dataset on its own.
Observations that non-GAAP measures may indicate how similar information might be better organized or presented in the income statement appears to be the genesis for FASB’s Financial Performance Project:
If this project is officially added to our agenda, we would look to find ways to improve the relevance of information presented in the performance (income) statement for public and private companies. Our goal would be to increase the understandability of the performance statement by presenting certain items that may affect the amount, timing, and uncertainty of an organization’s cash flows. Specifically, the research is developing a framework for defining operating activities and distinguishing between recurring and infrequent items.
The project is currently in the research phase.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Study: 10-K Tax Disclosure as a IRS “Roadmap”
– Revealing Whistleblower’s Identity is Retaliation
– Darden Announces Governance Reforms
– Basics of Board Delegations
– Comment Letter Summary: Advertised Private Placements Under Rule 506(c)
– Giving Good Guidance
– Study: Director Appointment Trends
– CPA: More Companies Pull Back Veil on Political Spending
– IPOs: Use of Non-GAAP Measures
– Revenue Recognition Changes & SEC’s Five-Year Summary
– Free Database of Fortune 500 Codes & Policies: Useful?
– Whistleblower Hotline Checklist
In the context of increased investor interest and activism in corporate governance practices, governance roadshows are no longer deemed to be solely crisis-driven – i.e., they should be among the several tools companies may consider in the ordinary course to enhance their rapport and posture with major institutional and other investors.
This recent blog does a fine job of identifying upsides & downsides of governance roadshows, or – more broadly – engaging with investors’ governance teams, as well as discussing several recommended “success factors” assuming a decision to proceed with engagement.
Potential upsides include:
Seeking direct input from governance experts will help the board make informed decisions on governance matters and emerging issues (e.g., board tenure, board diversity, proxy access), and can also limit the surprise of a future vote.
Creating a forum for companies to explain their rationale and philosophy on governance matters may in turn help influence the way investors vote.
Direct engagement will allow companies to establish a personal relationship with proxy voters – theoretically facilitating future discussions and mutual understanding.
There is an expectation that activist investors are themselves communicating directly with investors’ governance teams so as to further their own proxy-voting objectives. So company engagement is viewed as a preemptive measure.
Potential downsides include:
Many companies don’t dedicate enough time to their core IR programs – so adding new responsibilities and yet more meetings to the annual schedule is difficult.
Investment firms’ governance departments are usually small and historically weren’t staffed to accommodate meetings with executives from all of their portfolio companies. As a result, big companies are getting an audience, but smaller companies – those that may also have serious governance issues to be discussed – can be boxed out.
Governance-side meetings are viewed by some as a waste of time, because proxy votes often follow a formulaic policy – if not the exact recommendations of the proxy advisors.
Opening up a dialog about controversial governance topics may have unintended negative consequences. If a governance expert takes a meeting and makes a suggestion around a specific bylaw or issue, the company will be expected to respond or make changes. If they don’t, it could worsen the relationship rather than improve it.
Possibility that starting a dialog may raise issues to the attention of busy governance experts that were previously under the radar or unconsidered
Understanding Governance Engagement from the Investor POV
In this article, CamberView Partners discusses key considerations relevant to successful governance engagement including investor diversity, identifying the most appropriate company participants for engagement, and the fact that such engagements commonly involve a 2-way dialogue – topics that were also very effectively addressed by Vanguard and BlackRock in our recent “Governance Roadshows” webcast.
Here are some of the many key insights from our webcast:
Sarah Goller, Senior Manager, Vanguard: First, there’s no one definition for governance roadshow or what we as investors want to get out of it. I think the one common denominator is that we always want a productive exchange. Firms like BlackRock and Vanguard hold shares of thousands of different companies in meaningful amounts. So we do hundreds of engagements every year, and it’s important that they’re productive.
It can vary a lot by meeting, but we always want to gather information. We want to understand what’s important to the company, what’s changing about the business, what changes they are thinking about on the governance front, within the board or about compensation, and understanding their rationale for those changes. Beyond that, we always want to be asked for feedback.
So we always want a call or a meeting to have a purpose. Maybe you’re thinking about a change. Maybe you’re thinking about something that will impact governance at a board and you want to hear what we’re saying. It’s also important to define the agenda in advance. We want to have a clear purpose for the meeting and the right sort of people at the meeting. We want the meeting to allow us to exchange information, to listen to each other, and then to provide us with the opportunity to give feedback.
Michelle Edkins, Managing Director, BlackRock: When it comes to considering who in senior management attends and represents the company, I think companies need to be more thoughtful, without wishing to offend anyone, about not having people with a very traditional mindset, where you just do meetings with shareholders to broadcast the company’s message. That’s a real missed opportunity to hear shareholders’ views, and to listen for things perhaps not said. It’s important to hear shareholder’s views on issues and clarify what shareholders don’t understand about the company. Often that’s quite a significant factor, especially if in six months’ time there is an event where that lack of understanding means that the outcome is not optimal for the company.
In my experience, the role of the Corporate Secretary is becoming increasingly important in those “listening” meetings, rather than “broadcasting” meetings. I think that companies would do themselves a real service by thinking about how they structure that role and make it a more significant part of the outreach to their long-term steady-state shareholders.
If you haven’t already done so, be sure to check the webcast transcript out.
Podcast: Individual Director Evaluations
In this podcast, Kris Veaco of the Veaco Group discusses individual director evaluations, including:
– Why aren’t individual director evaluations more common?
– What is the process for evaluating individual directors?
– What do you do with the evaluation results?
– What are some of the benefits of individual director evaluations?
– Any final thoughts?
Regardless of staffing or other resources, companies are increasingly feeling pressured to separate their legal and compliance functions as a result of regulatory actions and commentary. However, recent comments by DOJ Senior Deputy Chief James Koukios provide some welcome assurance that a separation of the functions isn’t critical from a regulatory standpoint – provided the compliance function remains independent and autonomous.
According to this article, Koukios recently indicated that the DOJ will look to see: (i) if the compliance function is well-designed, (ii) whether it’s applied in good faith, and (iii) whether it works. In addition, regardless of the organizational structure, the DOJ will expect compliance leadership to have a direct line of communication to the board and the audit committee.
We have heaps of helpful compliance resources in our “Compliance Programs” Practice Area – including this podcast, where Kaplan & Walker’s Jeff Kaplan discusses his take on the compliance officer & GC independence issues and reporting relationships.
Regulatory Compliance Concerns Rank High for GCs & Boards
According to this new Law in the Boardroom survey, both GCs and directors ranked regulatory compliance as among their chief concerns that keep them up at night.
What Keeps You Up At Night?
Directors say:
Data security
Succession planning
Operational efficiency
Regulatory compliance
(TIE) Corporate reputation and crisis preparedness
GCs say:
Regulatory compliance
Data security
Corporate reputation
Crisis preparedness
FCPA
Regulatory compliance also ranked 2nd – just behind Enterprise Risk Management – in terms of areas that GCs indicate they need better information and processess on. Not surprisingly, IT strategy & risk made both directors’ and GCs’ Top 5 list:
In Which Areas Do You Need Better Information & Processes?
Directors say:
Strategic planning 56%
IT strategy & risk 52%
Competitive environment 44%
Succession planning 41%
M&A strategy 36%
GCs say:
ERM 48%
Regulatory compliance 46%
IT strategy & risk 44%
Social media risk management 38%
Legal & consultant fees 33%
The survey also reveals a much greater level of anticipated M&A activity than in prior survey years, with over 50% of both GCs and directors indicating an expectation to devote considerable time to M&A – compared to 36% and 42%, respectively, reported last year.
Podcast: Independent Board Leadership Trends
In this podcast, Jamie Carroll Smith discusses board leadership trends based on EY’s review of S&P 1500 companies, including:
Based on EY’s study, is there a predominant independent board leadership structure?
Which types of independent board leadership structures have increased/decreased over the past several years?
What types of companies are more apt to have independent chairs vs. lead directors?
What are the trends in shareholder proposals for independent chairs in terms of frequency & level of shareholder support?
Can you share any insights on board leadership structure disclosure practices?
The largest studies of CEOs and investors to date on sustainability reveal consensus on the value of sustainability generally, but a huge disconnect in CEOs’ and investors’ views on certain fundamental aspects of sustainability – particularly how well companies are (or aren’t) communicating their sustainability story.
These results reflect some of the major gaps:
80% of CEOs believe that their company is approaching sustainability as a route to competitive advantage. Only 14% of investors believe that the companies they invest in are doing so.
74% of CEOs believe that their company is measuring both positive & negative impacts of activities on sustainability outcomes. Only 17% of investors believe that the companies they invest in are doing this.
57% of CEOs believe that their company is able to set out in detail a strategy for seizing opportunities presented by sustainability. Just 8% of investors believe that the companies they invest in are able to do this.
38% of CEOs believe that their company is able to accurately quantify the business value of sustainability initiatives. Only 7% of investors believe that the companies they invest in can do so.
Notably, investors identified certain shortcomings in their own approach to sustainability as being part of the problem. They acknowledged viewing sustainability as merely a risk management/mitigation issue rather than an opportunity for company growth, differentiation and competitive advantage. Additionally, they noted a need to strengthen their knowledge and capabilities in order to ask the right questions on sustainability, and challenges in identifying which issues have a material effect on their investments.
Investors also identified certain financial market structural challenges – such as a short-term investment focus and quarterly reporting requirements – that contribute to the disconnect. Among the factors they identified to help bridge the communications gap and better integrate sustainability into the global markets are longer term investment strategies and the use of common, industry-wide sustainability metrics – on par with financial performance measures – to enable more accurate identification and comparison of industry leaders.
See the suggested concrete company and investor action steps on page 18 of the investor report, and this PRI release discussing the survey results.
How to React to SASB
The Sustainability Accounting Standards Board (SASB) is self-described as an independent non-profit whose mission is to develop and disseminate sustainability accounting standards that help publicly-listed companies disclose material factors in compliance with SEC requirements. This recent Baker & McKenzie memo does a fine job of succinctly describing how SASB works – as well as the legal and practical implications resulting from SASB’s work and its increasing visibility and influence.
See also this article where SASB directors Aulana Peters and Elisse Walter discuss the basis for SASB and its sustainability disclosure scheme – including a good explanation of how its standards are designed merely to help companies meet their existing disclosure obligations under Regulation S-K.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– UK Regulators Assess & Reject US Whistleblower Bounty Scheme
– Survey: Boards’ Risk Concerns Warrant Focus on Crisis Planning
– General Counsels: Tips for Managing Governance Demands & Risks
– CAQ Field Testing of PCAOB’s Auditor Report Proposal: Implementation Challenges
– Survey: Earnings Call Practices
With cyberattacks now prevalent, companies are seeking to institute whatever additional preventative measures and protections are reasonably available to mitigate their risks. In this podcast, Brian Finch of Pillsbury discusses how companies can use the Dept. of Homeland Security’s SAFETY Act to limit or eliminate claims after a cyberattack, including:
– What is the SAFETY Act generally?
– What kinds of entities are eligible for coverage?
– What are the protections afforded by the Act, and how does a company access them following a cyber breach?
– What kinds of cyber incidents are covered?
– What does it take to apply or get certified under the Act?
– How does the SAFETY Act differ from insurance?
– Is there anything else like the SAFETY Act available today?
See our heaps of additional resources including memos, surveys, webcasts and regulatory guidance in our “Cybersecurity” Practice Area.
Directors & Officers: Mitigating Impacts of Cyber Attacks
In this article, Pillsbury identifies five cyber security “truths” and related recommendations that will assist directors and officers in mitigating the risks and damage associated with a cyberattack, including:
Preparing now for inevitable litigation following a breach
Actively and regularly focusing on cybersecurity risk management
Cyberattack preparedness necessarily includes education and training at multiple levels. So it’s interesting to note that, in contrast to the predominantly high-level US approach, the UK has developed a comprehensive package of cyber security action steps and resources – including online training, education and guidance – aimed at businesses of all sizes to help bolster its reputation as one of the safest places world-wide to do business online. Among other things, it just launched a new free online training course for lawyers and accountants (for the benefit of themselves and their clients) on cyber security – and cyberattack preparedness and mitigation – as part of its national cyber security program.
See also this new Advisen white paper, which includes an easy-to-follow roadmap on how to optimally prepare for a data breach.
Webcast: “Reg D Offerings: What Is Happening Now”
Tune in tomorrow for the webcast – “Reg D Offerings: What Is Happening Now” – during which McCarter & English’s Joe Bartlett, Cohen Gresser’s Bonnie Roe and Davis Wright’s Joe Wallin will provide a “bring-down” of what’s happening now in the Reg D area, including what are the open issues and how are practitioners handling them – as well as provide practical guidance about what you should be doing in this area.
About 20 comment letters have been submitted to the SEC so far in connection with Corp Fin’s Disclosure Effectiveness project. Common themes include strong investor interest in mandatory disclosure of sustainability/ESG information, and a desire among issuers to eliminate requirements and processes that elicit redundant and outdated disclosures.
The Society of Corporate Secretaries recommends elimination of obsolete and duplicative disclosures (citing specific examples in both categories), and provides other suggestions for enhanced disclosure including elimination of the “glossy” annual report and prior period results in the MD&A; institution of a formal post-adoption review process for significant new disclosure requirements to evaluate the continuing need for such disclosures in light of evolved economic, business and regulatory conditions; and allowing for sustainability disclosure to be effectively communicated outside of ‘34 Act reports.
The Center for Capital Markets Competitiveness also offers concrete suggestions – including what it characterizes as near-term improvements to Regulation S-K that the SEC can enact expeditiously with the widespread support of multiple stakeholders (e.g., eliminating specifically identified redundant and outdated disclosure requirements), and longer-term projects that reflect more fundamental change such as the CD&A and MD&A.
Near-Term Actions to Enhance Disclosures
In this recent memo, Deloitte summarizes Corp Fin’s views and recommendations about steps companies can take now to improve their disclosures pending formal reforms resulting from Corp Fin’s Disclosure Effectiveness project. The memo includes a table in the Appendix that identifies specific types of disclosures (e.g., critical accounting estimates in MD&A, risk factors) and suggestions for improvements.
See also this recent FEI article discussing FASB’s and the IASB’s disclosure initiatives, as well as the SEC’s.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Exclusive Forum Bylaws: California State Court Follows Delaware – Whistleblowers: SEC Receives Two Rulemaking Petitions – Are the Securities Laws a “First Amendment Free” Zone? – Why Ralph Whitworth May Be America’s Best Board Member – Compliance: SEC Expectations vs. Current Stats
Stephen Bainbridge recently shared his comments opposing ISS’s proposed revised policy on independent board chair shareholder proposals. The proposal (issued in connection with draft policy changes) adds new factors that ISS would consider in determining whether to support an independent chair proposal and – unlike the current policy – provides that ISS would consider all of the factors holistically, rather than require that each factor be satisfied for ISS to recommend against a proposal.
Although this holistic evaluation would afford companies greater flexibility in that a failure to satisfy any particular factor wouldn’t necessarily be determinative, the proposed new policy inherently contains additional judgments about what constitutes good or subpar governance. Additional factors ISS would consider include the absence/presence of an executive chair, recent board & executive leadership transitions, and director/CEO tenure – governance practices that vary widely among companies. Also, as noted in this Weil Gotshal article, it’s not clear how these new factors would play into ISS’s analysis. For example, what about director/CEO tenure – i.e., what precisely would ISS take into account, and how will that be weighted relative to the other criteria? And how does that factor relate to the effectiveness of any particular form of independent board leadership?
In support of his position, Bainbridge identifies studies and other information that demonstrate the absence of a link between an independent chair structure and company performance. In addition to those cited in his blog, this 2013 study is relevant and noteworthy. After evaluating all germane (almost 50) studies on “CEO duality” (i.e., combined CEO/chair vs. alternative structures) over the past 20 years and discussing relevant findings, the authors conclude as follows:
More than at any other time since Finkelstein and D’Aveni (1994) published their foundational study on CEO duality, board leadership is in flux. Large firms are increasingly opting for a separate and independent chairman of the board (Lublin, 2012). This shift has garnered praise from governance advisors and institutional investors (Monks & Minow, 2008), but has also introduced new problems, such as the very public disagreement between the CEO and the independent chairman at insurer AIG (Lublin & Ng, 2010). That conflict ultimately ended with the chairman resigning, raising questions about the integrity of CEO non-duality. At the same time, policy makers are weighing whether to mandate a separate chairman at all U.S. firms. We believe such action would be misguided, not because the issue of CEO duality is praise unimportant, but because it is too important and too idiosyncratic for all firms to adopt the same structure under the guise of “best practice.” The most consistent finding in the CEO duality literature is that separating the CEO and board chair positions does not, on its own, improve firm performance. Given that the performance implications of CEO duality are contingent on an array of factors (Boyd, 1995; Krause & Semadeni, 2013), only some of which are known, boards should be left free to adopt the structure they deem to be strategically beneficial for their firms.
I’m not advocating any particular form of board leadership; as GC, I experienced both independent chair and independent lead director structures, and each was suitable under the circumstances. Rather, particularly in view of the absence of a link between a particular structure and company performance, I’m advocating tolerance of multiple views and alternative structures based on what the board believes to be optimal under the circumstances.
See also my previous blog noting declining or flattening shareholder support for independent chair proposals over the past four years – as various forms of independent board leadership have trended up.
Survey: Investors Weigh In on Boards
Not surprisingly perhaps, most investors want boards to consider/discuss all of their governance policies that PwC identified in its new investor survey; However, policies on majority voting, board diversity, and overboarding clearly stand out – each garnishing 94% of investor support. In contrast, less than 65% of investors thought that the board should be revisiting their policies on separating the CEO/chair, director term limits and mandatory retirement.
On diversity, 85% of investors believe that the board will need to address these impediments to increased diversity in connection with revisiting their policy:
Q: What impedes increasing gender or other aspects of diversity on US corporate boards (gender %/other aspects %)?
Directors don’t want to change their current board composition – 55%/52%
Board leadership is not invested in recruiting diverse directors – 52%52%
Directors don’t know many qualified diverse candidates – 52%/55%
Directors don’t view adding diversity as important – 52%48%
No perceived impediments – 15%/15%
Insufficient numbers of qualified diverse candidates – 3%/3%
Note that only 3% of investors cite an insufficient number of qualified diverse candidates as an impediment to increasing board diversity; however, 55% of investors believe that directors’ lack of awareness of many qualified diverse candidates is an impediment. Consistently, of those directors responding to PwC’s recent director survey who believe there are impediments to increased diversity, the top factor cited was a lack of awareness of qualified diverse candidates.
“Board Risk Score” Gauges Risk of Activist Attack
In this podcast, Waheed Hassan discusses Alliance Advisors’ launch of its new “Board Risk Score” product, including:
– What is the purpose of the Board Risk Score?
– What factors does the score take into account, and why did Alliance Advisors select those factors?
– Which companies are scored? And how often or when are companies scored?
– What information does a company’s score reveal?
– What should a company do with the information?
– How does a company get its score?
According to this article, finance executives attributed a 4.5% year-over-year increase in 2013 audit fees to review of manual controls resulting from PCAOB inspections and other PCAOB-related issues. The findings are based on this year’s FERF (FEI)/Audit Analytics Audit Fee Survey (paid publication), and include:
Public companies paid an average of $7.1 million in audit fees in 2013 – an increase of 4.5% over audit fees paid in 2012
60% of respondents were required to change their controls, and 80% changed their control documents as a result of the PCAOB’s requirements or inspection feedback
Public company audits required an average of 17,525 hours in 2013, at an estimated average cost of $249 per hour
Average audit fees of companies with centralized operations – both public and private – were found to be significantly less than those with decentralized operations. On average, public companies with centralized operations paid $3.9 million for their annual financial statement audits, while those with decentralized operations paid an average of $9 million
Public companies have used their audit firm for an average of 23 years
57% of public company respondents indicated an increase in internal cost of compliance with SOX within the past 3 years. However, many financial executives stated they believe they now have improved internal controls, making it worth the additional overall expense.
92% of public company respondents stated their boards annually assess their audit firm’s performance and independence qualifications
Podcast: Investor Views on Forward-Looking Information
In this podcast, Sandy Peters addresses a new report from the CFA Institute about investor perspectives on the use of forward-looking information in financial reporting, including:
– What historical developments prompted obtaining investors’ views about the use of forward-looking information?
– What are the report’s key findings?
– What does the CFA Institute plan to do with the findings, and what are the ultimate objectives?
– What should companies take away from this report?
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Optimizing the Value of Internal Audit
– Why You Shouldn’t Decide Anything Important at Your Board Meeting
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