This newsletter’s Table of Contents is as follows:
- Preparing the new CEO pay ratio disclosure requirement
- CEO succession in the spotlight
- What Directors Think 2016: Successfully Navigating Today’s Challenges While Maximizing Shareholder Value
- EY 2016 Analysis of Audit Committee Disclosures show highly inconsistent reporting
- Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards
- New British PM proposes corporate governance reforms
- Board Oversight of Cyber Risk in the Wake of the Yahoo Breach: The Boardroom Response
- Become Social Media Literate!
1. Preparing for the new CEO pay ratio disclosure requirement
In 2015, the Securities and Exchange Commission (SEC) issued a final rule requiring disclosure of the ratio of chief executive officer (CEO) pay to that of the median employee under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure is required for the first fiscal year beginning on or after January 1, 2017, and as such, calendar-year companies will have to provide the ratio beginning with their 2018 annual proxy statement, based on 2017 compensation data. Despite this timeline, it is advisable that management consider providing the Compensation Committee with a preliminary assessment early in 2017, allowing the Committee sufficient time to understand the ratio and the underlying calculation, giving management time to develop its communication strategy (both internal and external).
Source: Deloitte, On the Board Agenda
2. CEO succession in the spotlight
Before Lawrence Kurzius even began his job as CEO of McCormick & Co. early this year, he met with the company’s board to discuss plans for his successor. Proactive succession planning at McCormick began with former CEO Robert Lawless, who purposefully identified senior executives with potential and helped them fill in their experience gaps. In 2003, Lawless requested that the board make a portion of his bonus dependent on talent development and succession planning. According to governance experts, boards should consider emulating the McCormick experience and use a lengthier succession planning timeline. The McCormick board’s early involvement allowed promising internal candidates to be groomed for the top job and resulted in a seamless transition of power.
Source: The Wall Street Journal, Bloomberg
3. What Directors Think 2016: Successfully Navigating Today's Challenges While Maximizing Shareholder Value
In response to an ever-changing marketplace, public boards are constantly realigning their priorities to ensure they can fulfill their fiduciary duties while enhancing shareholder value. To that end, Spencer Stuart partnered with NYSE Governance Services on its annual survey, What Directors Think to better gauge board practices and understand what’s on the minds of US public company directors, thus bringing fresh insight to the corporate governance community and better understanding about best practices for boards to follow. Key takeaways include:
- Close to half (42%) of directors surveyed believe their board needs to focus more on long-term strategic planning.
- Two-thirds (65%) of respondents agree that direct engagement with shareholders can serve to open dialogue in a meaningful way before critical issues come to a head.
- Industry (83%) and financial (78%) expertise/experience are the two most important attributes sought during the selection of a new board member.
- Half (48%) of the directors surveyed agree that economic uncertainty is one of the biggest challenges facing corporate boards in 2016, ahead of market risk (37%) and cyber risk (35%).
- More than a third of those responding (38%) believe that although they are doing all they can to protect the company’s data, most cybersecurity risk is really out of their hands.
- Nearly two-thirds (62%) of board members surveyed believe the recent wave of hedge-fund activism has reinforced and rewarded short-termism.
Source: Spencer Stuart
4. EY 2016 Analysis of Audit Committee Disclosures show highly inconsistent reporting
EY’s analysis of the 2016 proxy statements of Fortune 100 companies (versus the 2012 survey) indicates that voluntary audit-related disclosures continue to trend upward in a number of areas – though inconsitently applied. Below are some of the highlights from the research:
- The audit committees of 82% of the companies explicitly stated that they are responsible for the appointment, compensation and oversight of the external auditor; in 2012, only 42% of audit committees provided such disclosures.
- 31% of companies provided information about the reasons for changes in fees paid to the external auditor compared to 21% the previous year.
- 53% of companies disclosed that the audit committee considered the impact of changing auditors when assessing whether to retain the current auditor. In 2012, this disclosure was made by 3% of the Fortune 100 companies.
- Over the past five years, the number of companies disclosing that the audit committee was involved in the selection of the lead audit partner has grown dramatically, up to 73% in 2016. In 2012, only 1% of companies did so.
- 51% of companies disclosed that they have three or more financial experts on their audit committees, up from 36% in 2012.
Source: EY
5. Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards
“Society needs financial wealth … but it matters how you make the money,” said Rajendra Sisodia, co-founder and co-chair of Conscious Capitalism Inc., and director of the Container Store Group. “Businesses not only create, they can destroy financial wealth, as well.” Sisodia offers several considerations aimed at helping boards—and companies—become more conscious overseers:
- The primary duty of the board is to the corporation—which has its own significant role in society—rather than shareholders.
- Understand and shape the company’s higher purpose. Ask your board to reflect on why the company would be missed if it were to disappear tomorrow.
- Consciously seek to create value for all stakeholders.
- Appoint strong leaders with a capacity for love and care. It is not healthy to appoint leaders who are analytically smart but lack empathy and other forms of emotional intelligence.
- Build a culture of “full-spectrum” consciousness, meaning that you are not only concerned with service to people and a higher purpose, but also efficiency, effectiveness, and success.
- Ensure youth and feminine perspectives are heeded when making business decisions.
Humanity is more aware of its challenges and problems than ever before, Sisodia said, and the individual and collective capacity to respond to those challenges has never been higher. “We have to create the organizational forms and philosophies and build business on [the ideals of] purpose and caring. … [A]ll of those answers that we need to our crises are out there inside somebody. We just have to figure out how to liberate that.”
Source: NACD, USA
6. New British PM proposes corporate governance reforms
British Prime Minister Theresa May has proposed some striking changes to the way British companies are governed. One of her plans would see employee and consumer representatives secure a place on company boards. May is also proposing mandatory say-on-pay votes in an effort to curb what some see as excessive executive compensation. Although details are currently sketchy, the plans have prompted strong debate in the business community. Observers note that May’s proposals are in part a reaction to the criticism of British businesses made during the recent Brexit campaign to take Britain out of the European Union.
Source: The Guardian, The Globe and Mail
7. Board Oversight of Cyber Risk in the Wake of the Yahoo Breach: The Boardroom Response
Any company—whether public, private, or nonprofit—can fall prey to a cybersecurity breach, and even companies with formal cybersecurity plans can find themselves the victims of a breach. Preliminary data from the 2016-2017 NACD Public Company Governance Survey show what corporate directors are already doing to oversee cyber-related risks.
When asked which cybersecurity oversight practices the survey respondents’ boards had performed over the past 12 months—and directors could select multiple answers—the most common responses included:
- Reviewed the company’s current approach to protecting its most critical data assets (76.6%)
- Reviewed the technology infrastructure used to protect the company’s most critical data assets (73.6%)
- Communicated with management about the types of cyber-risk information the board requires (64.4%)
- Reviewed the company’s response plan in the case of a breach (59.3%).
“Corporate directors should ask management for an accurate and externally validated report on the state of the organization with respect to cyber risk,” said Robert Clyde, a board director for ISACA, which is a global IT and cybersecurity professional association, and White Cloud Security. “They should also ask what framework is being followed for IT governance.”
Aside from high-profile breaches of emails and email providers, Clyde says that breaches related to ransomware are increasing.
“Ransomware encrypts data that can only be decrypted by paying the attacker a fee in Bitcoins. According to many, the key control to reduce the risk of attack—including ransomware—is restricting user installation of applications, called ‘whitelisting’ or ‘Trusted App Listing,’” Clyde said. “Yet this highly recommended control is rarely implemented. Boards should ask organizations for their plans to implement this specific control.”
Source: NACD, USA
8. Become Social Media Literate!
Companies that ignore the significant influence that social media has on existing and potential customers, employees and investors, do so at their own peril. Ubiquitous connectivity has profound implications for businesses. In addition to understanding and encouraging changes in customer relationships via social media, directors need to understand and weigh the risks created by social media. According to a recent survey, 91 percent of directors and 79 percent of general counsel surveyed acknowledged that they do not have a thorough understanding of the social media risks that their companies face.
As part of its oversight duties, the board of directors must ensure that management is thoughtfully addressing the strategic opportunities and challenges posed by the explosive growth of social media by probing management’s knowledge, plans and budget decisions regarding these developments. Given new technology and new social media forums that continue to arise, this is a topic that must be revisited regularly.
Source: Harvard Law
