As has been widely reported, SEC Chair White recently delivered this speech about gender diversity on boards. In her speech, Chair White identified studies demonstrating the positive impacts on company performance associated with women on boards, and regulatory and investor-driven efforts to increase gender diversity. She also expressed her own views about how to effect and accelerate change.
Among the points I found particularly noteworthy were her observation of investor and other stakeholder disappointment in board diversity disclosures in proxy statements and how they should affirmatively react, and her express disagreement with – and response to – those who indicate that the lack of gender diversity on boards reflects the lack of suitable women candidates.
As to the former, she noted the SEC’s board diversity disclosure requirements in Item 407 of Regulation S-K, and then stated:
I do recognize, however, that there is also disappointment about the quality of some of the disclosures that companies provide. This is a shared responsibility. Shareholders and interested stakeholders have a responsibility to make it known that this is an issue that is important, that they want more information on what is being done to promote diversity, and, if not enough is being done, what actions they expect to be taken. There are a number of different avenues to make these views known – from direct engagement with public companies to shareholder proposals asking a company to establish more specific policies and commitments – and I encourage you to use all of them.
As to the dearth of women on boards, she indicated:
It is also important for companies to work harder to identify qualified women to serve on boards. Some defenders of the status quo still say that there are not enough qualified women to fill board vacancies at higher rates. I disagree. There is no shortage of highly qualified candidates. And if that is the view of any company, its nominating and governance committees should broaden their searches. The challenge is not a lack of suitable candidates. There is adequate supply, but, the challenge is creating real and committed demand.
Commissioner Aguilar similarly emphasized the board’s responsibility to actively seek diverse (women and ethnic minority) candidates in his 2010 speech on board diversity.
Chair White also mentioned that, based on survey data, there would be more opportunity in coming years to nominate women candidates due to increasing vacancies resulting from board term and age limit policies and the associated statistics (e.g., EY’s 2013 study indicating that 20% of S&P 1500 board seats are held by directors nearing or exceeding the common board retirement age of 72).
She concluded by noting that to effect real transformative change, investors and other stakeholders would need to seek change from companies, “and those who support this effort need to recognize those companies that are doing things right, and not just those that are not doing enough.”
See also this interesting new Paul Hastings study, which explores the role and influence that stock exchanges globally currently have – and could potentially have – on improving board gender diversity.
Directors Survey: Perceived Impediments to Gender Diversity
In contrast with Chair White’s view – as expressed in her recent speech – that there is no shortage of highly qualified women board candidates, a majority of directors in PWC’s latest annual directors survey indicated that there are no perceived impediments to increasing gender diversity, the balance cited lack of awareness of qualified women candidates as the top impediment to increased board diversity:
In general, what impedes a board’s ability to increase diversity?:*
Directors are unaware of many qualified diverse candidates
Directors don’t want to change the current board composition to create a position for a diverse candidate
There are insufficient numbers of qualified diverse candidates
Directors don’t view adding diversity as important
Board leadership is not invested in recruiting diverse directors
*Results shown from greatest impediment to least impediment
Also noteworthy is the fact that 61% of female directors described gender diversity as very important – compared to only 32% of male directors.
However, note that ISS’s just-released gender diversity report reveals measurable progress – particularly among S&P 500 companies, with women filling nearly 3 of every 10 vacancies so far in 2014, almost double the rate compared with 2008.
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:
– It’s Time to Fix the Very Pale, Very Male Boardroom
– The Risks of Too Much Risk Assessment
– Survey: Challenges with Complying with Internal Control Requirements
– No Link Between Interim CEO Appointment & Company Performance
– Surveys Show Need for Continued Focus on Effective Compliance Programs
As Steve Quinlivan notes in this blog, a new Corp Fin CDI 141.05 (Securities Act Rules) indicates that companies may use IP addresses to effectively limit their offers to particular states or territories to qualify for Rule 147’s intrastate offering exemption:
In a new CDI, the SEC indicates it may be possible to use IP addresses to control internet communications so that offers are made only in one state and qualify for the intrastate exemption under Rule 147. In Securities Act Rules CDI 141.05, Corp Fin states:
“Issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer.”
See also this Cooley blog, which addresses the practical implications of this CDI – i.e., the alleged difficulty in implementing these technological measures such that they serve as a reliable control.
SEC Charges Company With Accounting Fraud & Uses SOX Clawback
As described in this recent press release, the SEC charged Saba Software and two of its former VPs for an accounting fraud where management directed its Indian subsidiary’s consultants to falsify timesheets so that the company could hit its quarterly financial targets. Both the company and VPs agreed to settle the charges.
The SEC also used Sarbanes-Oxley’s Section 304 to claw back $2.5 million in incentive compensation and stock profits from the CEO, who was not charged with misconduct.
See also this Reuters article discussing the clawback, and noting SEC Enforcement Chief’s Andrew Ceresney’s remarks about the case, including the fact that it reflects “the SEC’s increased focus on financial reporting fraud” and underscores “the need for companies with offshore operations to have effective internal controls.”
Podcast: Shareholder Engagement on Executive Pay
In this podcast, Frank Glassner of Veritas discusses engaging with shareholders on executive pay, including:
– What do you think has caused the increase in shareholder engagement on executive pay issues?
– What are the advantages of engaging with shareholders?
– What are some of the pitfalls of engaging with shareholders?
– Is there a better than average method of engaging with shareholders?
– What would a best practice with shareholder engagement process look like, and what do you think companies should do?
I found this recent blog noteworthy because it discusses the influence of a CEO’s age on the company’s strategic direction – a previously inconclusive and undocumented association.
The article cites a new study (purchase required) of the S&P 1000, which demonstrates that older CEOs take fewer risks. Specifically, older CEOs invest less in research and development, make more diversifying acquisitions, manage companies with more diversified operations, and maintain lower operating leverage. Using the company’s stock price volatility as the indicator of risk, older CEOs are associated with less stock price volatility – less risk. Further, company risk and the riskiness of corporate policies are shown to be lowest when both the CEO and the next most influential executive are older, and highest when both are younger.
As noted in the blog, the author also identified a correlation between the company’s risk profile and its CEO hiring practices – i.e., lower risk profile companies tended to hire older (and presumably more risk-averse) CEOs, as compared to higher risk profile companies that tended to hire younger CEOs. That’s not to say that lower risk behavior is a better investment strategy. To the contrary – the study apparently determined that the risk-adjusted portfolios of companies managed by younger CEOs outperformed those managed by older CEOs.
The blogger’s bottom line: “Older CEO’s, who tend to make more conservative decisions, can be ideal stewards for firms seeking stability. But younger CEOs’ willingness to take on risky projects can pay off for shareholders in the long run.”
Study: Diverse Boards Are More Risk-Averse
Interestingly, this recent Workplace Diversity article also addresses the correlation between management and the company’s risk profile – but in a different way. It cites a soon-to-be-published study of more than 2,000 public companies that shows that companies with more diverse boards are less prone to taking risks (i.e., are more risk-averse), and more likely to pay dividends and have richer dividend policies.
Board diversity was defined broadly – to include gender, race, age, experience, tenure and expertise. Risk in this case was a function of each company’s capital expenditures, research and development expenses, acquisition spending, stock return volatility and accounting return volatility. Companies with more diverse boards spent less on cap-ex, R&D and acquisitions; exhibited lower stock price volatility; and were more likely to pay dividends and to pay greater dividends than those with less diverse boards – leading to the authors’ conclusion that, “In general, risk-averse firms are more likely to avoid investment projects with uncertain outcomes and return cash to shareholders in the form of dividends.”
The authors of the study acknowledge that taking risks is part of doing business, but caution that excessive risk-taking can jeopardize a company’s survival.
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:
– Strategies to Address SEC’s AQM-Triggered Scrutiny of Your Financial Reporting
– Creating a Formal Framework for Accounting Judgments
– How Boards Need to Evolve Over Time
– ISS QuickScore Data Reveals Key Governance Trends
– Director Orientation & Onboarding Considerations
Even if you are already familiar with their voting policies and policy-making processes, I found this King & Spalding memo noteworthy for the additional insights ISS and Glass-Lewis provided directly during their participation in a recent joint Lead Director Network/Compensation Committee Leadership Network meeting. Noteworthy points include:
– Involvement in developing customized voting policies
Both ISS and Glass Lewis work with investment managers to develop customized policies. Glass Lewis noted more than 80% of its 900 clients use a custom policy or process for their voting decisions. And ISS indicated: “Our house views are a benchmark, but most of the ballots [cast on the ISS voting platform] are either client-directed or based on a customized policy. Custom policies are a tremendous growth area for ISS.”
– Board tenure/refreshment
Notwithstanding ISS Governance QuickScore 2.0, which reveals ISS’s view that a director’s tenure of more than 9 years is considered to potentially compromise a director’s independence and so is deemed “excessive,” at the recent meeting, ISS noted a lack of investor interest in director term limits. According to the article, ISS indicated that “investors prefer to scrutinize new nominees on a case-by-case basis, e.g., asking why a board with no women just nominated another man.” And Glass-Lewis indicated that they look for evidence of investor concern about board refreshment or diversity – that their clients “‘look for more information on this [than just statistics].”’
– Recommending votes against directors
Director participants criticized – for several reasons – ISS’s and Glass Lewis’s policies to recommend votes against directors based on their committee membership, e.g., recommending votes against governance committee members when the company doesn’t follow certain governance practices. Directors effectively noted that the proxy advisors’ policies are inflexible, whereas companies are dynamic, and can unfairly target directors who were in fact not involved in the decision-making or were part of a full board decision-making process.
Glass Lewis responded by indicating that the alternative to recommending a vote against committee members was to recommend a vote against the entire board which, not surprisingly, didn’t generate a lot of enthusiam among the directors. ISS seemed to suggest that companies’ full disclosure about what they did would resolve the directors’ concerns; however, I think instead there is simply a huge disconnect between proxy advisory firms’ policy positions for recommending votes against directors and what directors believe is reasonable based on what actually transpires in the boardroom.
Board Tenure Considerations
This thoughtful, balanced memo about director tenure addresses some of the common arguments in favor of and against director term limits, and notes other considerations including international trends and results of studies about the impact of director tenure on board effectiveness. Although authored by a Canadian firm, the considerations apply equally to US companies.
The discussion of studies is particularly noteworthy in view of concerns expressed by some investors and proxy advisors that long tenure equates to a lack of independence from management and, thus, reduced oversight effectiveness. Along those lines, here is a excerpt from Wachtell Lipton’s recent article on director tenure, which logically concludes that the academic studies (footnoted in the article) are not conclusive:
Academic Studies
Academic researchers have examined the question of whether there is an optimal length of tenure for outside directors, with varying results. Studies from the 1980s through the 2000s have shown, for example, that longer tenure tends to increase director independence because it fosters camaraderie and improves the ability of directors to evaluate management without risking social isolation. A 2010 study confirmed that companies with high average board tenure (roughly eight or more years) performed better than those companies with lower average board tenure, and that companies with diverse board tenure performed better than those with homogeneity in tenure. A 2011 study, by contrast, examined a sample of S&P 1500 boards and found that long-serving directors (roughly six or more years)—as well as directors who served on many boards, older directors, and outside directors—were more likely to be associated with corporate governance problems at the companies they served.
One 2012 study found that boards with a higher proportion of long-serving outside directors were more effective in fulfilling their monitoring and advising responsibilities, while another 2012 study found that having inside directors increased a board’s effectiveness in monitoring real earnings management and financial reporting behavior, presumably due to their superior firm-specific knowledge and operational sophistication. On the related topic of board turnover, a recent study of S&P 500 companies from 2003 to 2013 found that companies that replaced three or four directors over the three-year period outperformed their peers. The study found further that two-thirds of companies did not experience this optimal turnover and that the worst-performing companies had either no director changes at all or five or more changes during the three-year period.
A 2013 study on director tenure by a professor from the INSEAD Business School has received significant attention. The study hypothesizes that there is a tradeoff between independence and expertise for outside directors—a prejudgment that is widely disputed—and examines the effect of tenure on the monitoring and advising capacities of the board. After review of over 2,000 companies, the author finds that the optimal average tenure for an outside director is between seven and 11 years, though industry- and company-specific factors create substantial variability. He concludes that nine years is generally the optimal point at which a director has accumulated the benefits of firm-specific knowledge but has not yet accumulated the costs of entrenchment. As a policy matter, however, he suggests that in light of the significant variations across industries and company characteristics, regulating director tenure with a single mandatory term limit would not be appropriate.
Taken together, the academic studies show that conclusions about optimal director tenure are elusive. Common sense indicates that a board should use tenure benchmarks not as limits but as opportunities to evaluate the current mix of board composition, diversity, and experience.
Webcast: “The Art of Negotiation”
Tune in tomorrow for the DealLawyers.com webcast – “The Art of Negotiation” – during which during which Cooley’s Jennifer Fonner Fitchen, Perkins Coie’s Dave McShea and Sullivan & Cromwell’s Krishna Veeraraghavan will teach you how to negotiate with the best of them in a chock-full of practical guidance program.
Continuing a several year trend, this EY report shows that an increasing number of Fortune 100 companies are providing non-required and increasingly robust disclosure in their proxy statements about their audit committees and audit committee oversight practices.
The report, the latest in a several year series, notes that increased transparency is being driven by a number of factors and constituencies in the interest of – among other objectives – enhancing investor confidence in audit committee oversight work; improving communication with investors about audit committee responsibilities (including external auditor oversight); and better informing shareholders in their consideration of auditor ratification proposals.
Among the highlighted dislosure practices are:
– Centralization of audit committee-related disclosures in an “audit-related” section of the proxy statement or the audit committee report
– Improved accessibility of the audit committee charter via a direct link
– Increased transparency about external auditor oversight practices, for example:
Auditor selection
46% of companies explicitly state their belief that their selection of the external auditor is in the best interest of the company and/or shareholders, up from 4% in 2012
44% of companies disclosed that the audit committee was involved in the selection of the audit firm’s lead engagement partner – compared to 1% in 2012
31% of companies explained the rationale for appointing their auditor, including the factors used in assessing the auditor’s quality and qualifications, compared to 16% in 2012
Approval of engagement fees and terms
80% of companies noted that they consider non-audit services and fees when assessing the independence of the external auditor.
19% of companies disclosed that the audit committee was involved in the auditor’s fee negotiations, up from just 1% in 2012
Auditor Tenure
Auditor tenure was disclosed by 50% of companies – up from 26% in 2012
28% of companies disclosed that the audit committee considers what the impact would be of rotating their auditor – up from 3% in 2012
A table on page 3 of the report shows three-year comparisons for these and additional audit committee-related disclosures.
Prior year reports and additional resources about audit committee disclosure are available in our “Audit Committees” Practice Area.
Podcast: Audit Committee Disclosure
In this podcast, Allie Rutherford discusses audit committee disclosure trends based on EY’s review of 2014 Fortune 100 proxy statements, including:
What were the key findings?
Were there any major surprises?
What do you believe are the primary drivers behind the increased disclosure?
Do you think that the trends are limited to larger companies?
What do you expect to see going forward?
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:
– PSLRA: Ineffective Motions to Dismiss
– Top Ten List of D&O Coverage Questions for Directors
– Bylaws Mandatory Arbitration Clauses Gaining Ground
– Survey: Board Tenure & Governance
– Weighing Pros & Cons of a Dual-Class Structure
Call me naive, but I was surprised and disappointed to read in this blog that, not only had a dispute arisen among three “joint” whistleblowers about splitting the proceeds of an SEC whistleblower award, but that the dispute among two of the three has now manifested itself in the form of litigation.
As noted, the complaint alleges that three people jointly developed information about a fraud committed in conjunction with an investment scheme. As the story goes, they initially planned to apply for a whistleblower award with the SEC on behalf of an entity in which they all had an interest. However, upon learning that the SEC rules require whistleblower award applications be submitted by individuals (not companies or other entities), they allegedly agreed that one of them (the defendant) would submit the application in his name, with the understanding that – upon receipt of any whistleblower award – all three would share in the proceeds.
To make a long story short, the SEC granted a $14.7 million award, which the defendant then refused to share with the other joint whistleblowers. The defendant allegedly settled with one of the two other whistleblowers, and the other then filed this suit. In response, the defendant filed this motion for a more definite statement or dismissal, which indicates:
“Plaintiff’s Complaint is an unintelligible assortment of confusing statements. While ostensibly bringing a claim for breach of contract, Plaintiff dedicates his complaint to unrelated allegations. The claims sounds like the claims of co-workers who are trying to claim a portion of a co-workers lottery winnings because they work together.”
What next? Particularly given this litigation; the recent, very arguably excessive $30 million award to a foreign whistleblower; and my own in-house experience (wherein whistleblowers played a memorable role), I am inclined to believe that the UK’s assessment and rejection of the US whistleblower bounty scheme, which I blogged about previously, has some merit.
See also this recent Speechly Bircham memo about the SEC’s $30 million award, and the UK’s contrasting approach.
What Does It Take to Incentivize a Whistleblower?
As noted in this Venable alert, now outgoing Attorney General Eric Holder is seeking an increase to the $1.6 million cap on whistleblower awards available for financial fraud under FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) – akin to those available under the False Claims Act (i.e., 25-30% of the amount the government recovers). FIRREA was rarely used until the aftermath of the 2008 financial crisis, when it was used for recent, significant actions against, e.g., JP Morgan, Citigroup and Bank of America.
Holder apparently believes that the $1.6 million cap isn’t sufficient to incentivize would-be whistleblowers to come forward – thereby tempering the DOJ’s ability to learn about, investigate and stop misconduct before it evolves into a crisis. It’s difficult to know whether that’s the case given FIRREA’s historically low profile (and, accordingly, perhaps, low level of awareness), and the fact that, according to this WSJ article, there have been no known whisteblower awards to date made under FIRREA.
The article notes this reaction by former DOJ lawyer Andrew Schilling to the suggested increase:
Mr. Schilling said the attorney general’s proposal “raises the question whether the Firrea bounties are too low or whether those others [e.g., False Claims Act, Dodd-Frank Act] are too high. A lot of people would say you don’t need a $500 million reward to incentivize someone to come forward. You’d have to worry about the credibility of a whistleblower who would come forward only if they’re offered $50 million.”
As the WSJ article indicates, senior DOJ officials Marshall Miller and Leslie Caldwell also made notable speeches the same day as Attorney General Holder’s (but to different lawyer audiences) encouraging whistleblowing on white-collar crime. See also this DealBook post, which addresses the DOJ’s focus in these speeches on pursuing individual – not just corporate – culpability.
Transcript: “Cybersecurity Role-Play: What to Do & Who Does What, When”
We have posted the transcript for the recent webcast: “Cybersecurity Role-Play: What to Do & Who Does What, When.”
This recently published Korn Ferry/NACD board leadership survey of the S&P 500 and S&P 400 is particularly noteworthy because it delves into a number of important topics aside from merely identifying leadership structure types and trends.
Survey results include:
Continued trend toward separation of the CEO and board chair roles – which reflects almost equally increases in independent and non-independent chairs
Smaller companies are more likely to separate the CEO/chair roles than larger companies.
Larger companies that separate the roles are more likely to later recombine them.
About 50% of companies changed their leadership structure upon a succession event (i.e., new CEO or chair).
A slight majority of companies experiencing a succession event chose a combined rather than separated structure.
With the exception of founders stepping aside, separating the roles is more likely when an unexpected resignation or crisis (as opposed to a planned succession) triggers the succession event.
Planned successions involving founders are more likely to result in separating rather than combining the roles.
40% of succession events in 2012 included some sort of transition – such as the former CEO/chair remaining as chair for some time period after the new CEO was in place.
Certain industries (some characterized by having more founder-chairs) like IT tend to separate the roles at a much higher rate than other industries.
Based on the findings, the survey reaffirms that there is no “right” board leadership structure; rather, each company needs to determine for itself the most appropriate structure based on its particular facts and circumstances – which evolve over time. See more surveys, memos and other helpful resources in our “Board Leadership” Practice Area.
Enhancing CEO Succession: Directors Mentoring Executives
This recent Heidrick & Struggles article discusses how pairing directors with high-potential internal CEO succession candidates in formal mentoring relationships – well in advance of planned succession events – can reduce risks associated with CEO successsion, and motivate and improve company performance. Mentoring allows directors to gain an in-depth understanding of candidates’ leadership potential – not just past performance, which isn’t sufficient to predict future success.
So-called “soft skills” such as self-awareness and empathy, which are detectable by directors over the course of the mentoring relationship and which most CEO candidates lack, are described as the key differentiators between candidates that can succeed as CEOs vs. those that fail. The article also discusses a form of mentoring program implemented by Frontier Communications (see this 2010 WSJ article), and describes how companies can set up their own program.
This is certainly not the first article to tout the benefits of directors serving as mentors for potential CEO successor candidates. Among others, this report by The Conference Board (discussing the findings of a survey that focused on how well directors know senior executives positioned to succeed to the CEO) recommended that – while CEOs are ultimately responsible for mentoring and developing their direct reports, the board still play an active role by, e.g., serving as informal mentors or advisors, noting:
“It is important for directors to move beyond interacting with executives “when circumstances warrant” (as is commonly reported). Developing true insight into the professional quality and personal character of an executive requires dedicated time and effort.”
Contrary to the recommendation, however, the survey found that only a small percentage (7%) of companies currently assign a director to serve as a mentor for their senior executives.
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:
– Auditor Engagement Letters: No Company Intervention in Auditor-Directed Work
– PCAOB Roundtable: Mixed Views of Proposed Changes to Auditor’s Report
– Perceived Board Effectiveness Linked to How Board Allocates its Time
– FINRA: Pre-IPO Selling Procedures Need to Be Adequately Supervised
– Board Trends at the S&P 1500
According to this WSJ article, a recent study by GMI Ratings found that – among companies with a market cap of at least $10 billion, those with smaller boards produced substantially better shareholder returns over a 3-year period than companies with the largest boards. According to the reporter, the study isn’t being made publicly available, so it’s difficult to draw conclusions outside the confines of what’s presented there.
However, as noted in a LinkedIn discussion on this topic, other research (for example, see “Higher Market Valuation of Companies with a Small Board of Directors” and “Larger Board Size and Decreasing Firm Value in Small Firms”) has previously identified an association between smaller boards and higher market valuation for companies of all sizes. And those of us who have worked with various boards ranging in size from 7 to 13 or more members can personally speak to the many attributes associated with smaller boards compared to larger ones.
But there are some downsides to smaller boards as well. Here’s an excerpt addressing some of the upsides and downsides of smaller and larger boards from our Board Size checklist posted in our “Board Composition” Practice Area on TheCorporateCounsel.net:
Smaller Board
More opportunities for all directors to actively participate and be engaged in board deliberations
Greater flexibility and ease in scheduling meetings, setting agendas, distributing materials, communicating on impromptu basis
Individual directors more likely to assume responsibility rather than deferring to others – more likely to be a greater sense of ownership & accountability than with a larger board
More likely to accommodate detailed materials & discussions
Easier and less costly for company personnel to manage, coordinate, facilitate
Directors know each other better, increasing likelihood of cohesive board with feeling of common purpose and more productive working relationships
Greater workload burden on individual directors may diminish effectiveness – time commitment required may exceed time available on a per person basis
May have difficulty effectively staffing committees – particularly with continued additional regulatory-imposed responsibilities that increase committee work load & time commitment
More likely lacks diversity of experiences and perspectives characteristic of larger boards
Easier to reach consensus
Meetings tend to be much more informal
Larger Board
Can inhibit effective and equal opportunities for participation by individual directors
Larger boards tend to exhibit less questioning than smaller boards
Can interfere with effective functioning by limiting opportunities for meetings (due to conflicting schedules), necessitating formal procedures for communications, impeding collective input, discussion and consensus, etc.
Can more easily accommodate multiple committees effectively staffed
Conducive to more board work being delegated to committees (thus enabling active participation by individual directors that may be absent at the board level) – as opposed to remaining at full board level
Workload can be better allocated among larger number of directors regardless of committee structure
Can accommodate greater diversity in a traditional – as well as a broader – sense, thus allowing for broader range of viewpoints and ideas, which can lead to more thorough and thoughtful consideration of matters
More likely that few members will consistently dominate discussion while more reserved members fade into the background (consensus more likely achieved via a herd mentality)
At least some individual directors more likely to defer to others – not assume responsibility, accountability
Meetings tend to be much more formal out of necessity
Importantly, as noted in the LinkedIn discussion, even if there is an association between board size and shareholder returns, clearly board size is but one of many factors relevant to company performance – so this new study (and any other study) should be viewed in that context.
Study: Academic Directors Yield Better Corporate Governance & Company Performance
This interesting academic paper, “Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance,” describes the results of a study about the impact of having academic directors on the board. According to the paper, about 40% of the S&P 1,500 had at least one professor on their boards during 1998 – 2011, and for companies with academics on their boards, over 14% of their outside directors are academics. The findings certainly should make boards take a closer look at the academic director candidate pool as one of many great sources for quality candidates.
Noteworthy findings include:
– Companies more likely to have academic directors:
Larger companies
More research-intensive companies
Those situated more closely geographically to universities
Larger boards
More independent boards
Boards with more female directors
Boards with older directors
Companies where CEO has greater equity stake
High-tech and financial companies
– Presence and percentage of academic directors on the board positively impacts company performance
As measured by Tobin’s Q (market value/book value)
As measured by ROA (net income before extraordinary items & discontinued operations/book value of assets)
– Academic directors score higher than other outside directors on certain governance indicators:
They are more likely to attend board meetings
They hold more committee memberships
They are more likely to sit on monitoring-related committees (e.g., auditing, corporate governance)
– Academic directors strengthen the board’s oversight of management
They are associated with significantly lower cash-based CEO compensation, but not equity-based compensation
They are associated with a closer relationship between CEO forced turnover and company performance
– Academic directors strengthen the board’s advising & monitoring roles
Companies are less likely to manage earnings through discretionary accruals
Companies are less likely to be the subject of SEC investigations
Company stock prices reflect more company-specific information
Presence of academic directors is significantly and positively associated with acquisition performance
Companies are more innovative as reflected by the number of patents & patent citations
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:
– PSLRA: Ineffective Motions to Dismiss
– Top Ten List of D&O Coverage Questions for Directors
– Bylaws Mandatory Arbitration Clauses Gaining Ground
– Survey: Board Tenure & Governance
– Weighing Pros & Cons of a Dual-Class Share Structure
This recent Corporate Board Member article about ISS’s sought-after ouster of the majority of Target’s directors due to the company’s data breach made several points worth highlighting.
As background, the article notes Target’s praise-worthy corporate governance platform, and informs that while ISS recommended shareholders withhold votes from most of Target’s directors (those who served on the audit and corporate responsibility committees), Glass-Lewis took a different approach – indicating that there wasn’t sufficient evidence available to conclude that the data breach resulted from the board’s negligence. Along those lines, see Donna Dabney’s (The Conference Board) earlier blog where she methodically set forth the then-publicly available information about the board’s cybersecurity oversight practices – concluding that ISS’s recommendation was unfounded. Ultimately, Target’s shareholders elected all of the director nominees.
Among the article’s key points are:
– Should directors, especially those whose performance of fiduciary duties is via adherence to good governance practices, be held responsible for all risks that might occur under their watch?
– What is the proper standard of fairness for holding directors responsible for cyber breaches?
– No organization can ensure absolute data/cyber-security – Target won’t be (now, more appropriately, hasn’t been) the only good company to suffer a large data brach.
– If directors will be automatically presumed negligent in the context of large data breaches – particularly in the context of otherwise good governance practices, what are the implications of that standard on director candidates’ willingness to serve on corporate boards?
– The article concludes that we must find a fairer way to review board performance. If we don’t, the negative consequences will be worse than the proposed remedy (i.e., ousting directors whose tenure includes a big breach)
The article indicates that “ISS is right to investigate what happened on Target’s board and to get a feel for how the board handles its fiduciary duties. If it comes out that a board was negligent and isn’t governance sensitive, then let the chips fall where they may.” The only thing I would add is that – but for circumstances where all of the pertinent facts about the board’s cybersecurity oversight are publicly available, I can’t see how ISS or any other outside third party would ever be positioned to “investigate” and fairly evaluate a board’s conduct to determine whether a data breach was due to board negligence. Fortunately, it appears that the majority of Target’s shareholders held a similiar view.
Board Cybersecurity Oversight Duties Grounded in In Re Caremark
This recent Gibson Dunn article addresses the standards that govern the board’s fiduciary duties to monitor and minimize cybersecurity risk based on In re Caremark and its progeny, and identifies certain steps boards should take to ensure compliance with their risk management oversight responsibilities.
It’s Mailed: 2015 Edition of Romanek’s “Proxy Season Disclosure Treatise”
Broc Romanek has wrapped up the 2015 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s been mailed to those that pre-ordered. You will want to order now so that you can get your copy as soon as you can. With over 1450 pages – spanning 32 chapters – you will need this practical guidance for the challenges ahead.
Based on a proposal discussed in a recent issue of the Stanford Law Review, this recent Economist article promotes outsourcing corporate boards as a solution to corporate governance failures of the type we have experienced historically. As proposed, outsourcing would consist of replacing individual directors with a new category of professional firms – identified as BSPs or Board Service Providers – that companies would retain to supply them with a “full complement of board members.”
The article claims that, despite some reforms over the past decade, boards are (still) fundamentally flawed. Specifically, here is how the article characterizes boards:
Boards are almost exactly as they were a hundred years ago: a collection of grey eminences who meet for a few days a year to offer their wisdom. They may now include a few women and minorities. There may be a few outsiders. But the fundamentals remain the same. Board members are part-timers with neither the knowledge nor the incentives to monitor companies effectively. And they are beholden to the people they are supposed to monitor. Boards are thus showcases for capitalism’s most serious problems: they are run by insiders at a time when capitalism needs to be more inclusive and are dominated by part-timers at a time when it needs to be more vigilant about avoiding future crises.
I couldn’t disagree more. And I think a survey of GCs and Corporate Secretaries who interact with their boards on a regular basis would reveal a very different picture that is more comparable to what I myself experienced as GC & Corporate Secretary of two public companies, which is that – among other things – the vast majority of directors are appropriately engaged; hard-working; ethical; knowledgeable; responsive; thoughtful; intelligent; independently-minded while being sufficiently colloborative and respectful of management to forge a mutually beneficial (to the company) relationship; and use their tenure with the company appropriately to inform their current decision-making. And actual survey data (see numerous surveys posted in our “Corporate Governance Surveys” Practice Area) refutes the article’s rhetoric about directors devoting scant time to board matters. In addition, an outsourced board as proposed fails to take into account the importance of the mix of directors and associated ability to function well as a group – which is critical to an effective board.
See also Cydney Posner’s blog, where she raises a number of additional, legitimate concerns that would appear to undermine the proposal, including:
If management has a role in selecting the BSP, why wouldn’t the BSP be just as “beholden” to management as the current crop of “cronies” is to the CEO?
Could the problems inherent in “group think” be exacerbated by this approach, e.g., a BSP that fails to detect a problem besetting an industry would fail to detect it at many companies, not just one or two?
What about the loss of genuine hands-on experience that some directors bring?
What standards would be set and qualifications required for “professional directors” that would distinguish them from current directors?
How would success or failure of a BSP be determined under ordinary circumstances and who would make that determination in the context of dismissal or reengagement of a BSP?
What accountability or duty would BSPs have to shareholders, who are the owners of the company?
What Makes a Great Board?
This recently issued RHR International/NYSE Governance Services report reflecting the results of their poll of 300 directors about what factors make a great board appropriately challenges the often-exclusive focus on the attributes of individual board members and process – as opposed to the quality of boardroom dialogue and debate and other intangibles.
While the attributes of individual directors are – of course – critical to an effective board, it’s possible to have a boardroom full of great directors, but an ineffective board due to their inability to function well as a group. To illustrate the point, the report quotes RHR’s global practice leader as noting that the directors of the boards of many of the top financial services companies that suffered in the 2008 financial crisis were “often composed of a ‘who’s who’ of highly accomplished business leaders. Yet, the whole in many cases was less than the sum of its parts. The way board members operate together, not who they are, is what differentiates a great board from an average one.” Having spent countless hours over the years in boardrooms observing how differently composed boards function while serving as GC & Corporate Secretary, I couldn’t agree more.
Top factors that most contribute to the making of a great board
– Quality of boardroom dialogue and debate – 88%
– Ability to ask the tough questions of management – 77%
– Diversity of thought and experience – 62%
Top factors that undermine the making of a great board
– Lack of candor in the boardroom – 77%
– Lack of mutual respect/collaborative culture – 68%
– Lack of independence from management – 53%
Additional insights to board effectiveness include directors’ perceived importance of diversity of backgrounds & perspectives (as opposed to gender and racial diversity per se) and CEO evaluation/succession processes, and the need for continued focus on improved peer and self-evaluation processes.
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: Board Oversight of Sustainability
– Board Committee Structures Logically Circumstances-Driven
– Climate Change Disclosure: Heads I Win, Tails You Lose?
– Hut, Hut, Hike! First Fantex IPO in NFL Player
– Insider Trading: Big “Downstream Tippee” Case Might Change Standard