This newsletter’s Table of Contents is as follows:
- Is The CEO Telling The Truth?
- Board Independence – Too Much of a Good Thing?
- Bridging The Board Room Technology Gap
- Quarterly Reporting Goes Out The Window !
- Running Effective Audit Committee Meetings
- CEO Succession Planning: A Critical Board Responsibility
- CFO’s and Boards: Higher Pay Lower Performance
- Gender Equality Is a Finance Issue Too!
1. Is The CEO Telling The Truth?
After studying Q&A sections of transcripts of hundreds of calls with CEOs and CFOs, the researchers then looked to see whether financial statements being discussed were substantially restated at some point after the call. If they were restated, Professor David Larcker and Anastasia Zakolyukina, a PhD student at the school, reasoned that the executive had been less than candid in describing their firm’s quarterly figures.
Larcker, the James Irvin Miller Professor of Accounting and senior faculty of the Stanford Rock Center for Corporate Governance, and Zakolyukina developed a model to analyze words and phrases used based on prior deception detection research conducted by psychologists and linguists. CEOs who were hiding information were less likely to say “I” and more likely to use impersonal pronouns and references to general knowledge such as “you know.” They also expressed more extreme positive emotions (“fantastic” as opposed to “good”), used fewer extreme negative emotions, and fewer certainty and hesitation words. Most interestingly, they were less likely to refer to shareholder value.
Source: Stanford University Corporate Governance Research Initiative
2. Board Independence – Too Much Of A Good Thing?
Chief executive officers are often the only insiders serving on corporate boards. A recent study published in Strategic Management Journal found that having a “lone insider” on the board may not be ideal. Having more than one insider allows the board to more accurately evaluate the CEO’s performance and to set the appropriate amount of CEO compensation. The practice also gives directors the opportunity to assess future CEO candidates and reduce succession risk.
Source: The Wall Street Journal as reported in Director Journal
3. Bridging The Boardroom’s Technology Gap
Directors with meaningful technology experience can help corporate boards understand and oversee critical technology-driven initiatives and opportunities, but only a small percentage of boards have appointed technology experts, according to a comprehensive analysis of public company data. Directors and chief information officers can take a number of steps to bridge the boardroom’s technology gap. For instance, with responsibility for so many other oversight activities, some companies delegate technology oversight to the audit or risk committee—largely because of the importance of cybersecurity and cyber risk. Others have formed separate technology committees, although this is a rarity.
Only 9 percent of S&P 500 companies had a technology committee in 2016, but this number has been increasing over time. This alignment of boards and technologists can help businesses drive growth, increase competitive advantage, and effectively manage risks. “Many boards today still look like they did 20 years ago,” says a board leader. “It used to be good to have a bunch of CFOs in the room, but we are at a crossroads in corporate board structure. We need to get to the point where the majority of the board is tech-savvy.”
Source: Deloitte Digest
4. Quarterly Reporting Goes Out The Window !
the Canadian Securities Administrators (CSA) – an umbrella group representing
provincial and territorial regulators – is asking for comments on allowing issuers to
report their financial results semi-annually rather than quarterly.
Source: National Post
5. Running Effective Audit Committee Meetings
- Thorough preparation is key for audit committees to address responsibilities mandated by its charter and to handle emerging matters. Leading audit committee chairs work with management to build meeting calendars for the year to address routine oversight and add timely matters to each meeting’s agenda. They also ensure materials are concise and delivered in a timely manner before the meeting to ensure all members are ready to meet.
- Audit committees benefit from effective use of executive session to address questions, allay confusion or allow members to speak candidly on sensitive topics. Members of management may or may not be present, depending on the topic and the questions at hand. Inviting executives separately also can help members understand points of disagreement so they can better focus during the meeting itself.
- By delivering regular reports to the full board, the committee can build a broader understanding of its work among non-committee members. Different approaches work better for different boards, but the importance of this reporting is consistent across companies.
Source: EY
6. CEO Succession Planning: A Critical Board Responsibility
CEO succession is arguably the most important responsibility of the board of directors. The CEO develops the company’s strategy, drives execution, and sets the “tone at the top.” The board has oversight of all of this—and having the right person at the helm is critical. How are boards doing at CEO succession planning in general? Boards are simply getting better at it, Spencer Stuart’s North America CEO practice head James Citrin of recently told The Wall Street Journal. This was Spencer Stuart’s conclusion after noting an increase in insider candidates getting the CEO role at S&P 500 companies.
So what does getting better at succession planning really mean? Boards that do this well focus on CEO succession on a regular basis, whether they have a brand new CEO or a CEO close to retirement. According to the Spencer Stewart Annual Corporate Directors Survey, only 48% of directors stated they “very much” agree that they were spending enough time on CEO succession. And only 45% believed they were adequately prepared for an unplanned CEO succession emergency.
CEO succession planning needs to be key element on the board’s agenda on a regular basis. The most important reason for succession planning is to avoid forced turnovers, which often lead to a loss of momentum that can significantly harm financial performance. For that reason, the best managed companies will continue to develop their own leadership talent.
Source: PWC Governance Insight Centre
7. CFO’s and Boards: Higher Pay Lower Performance
A top corporate executive serving on another company’s board of directors may provide strategic advantages for both the executive and the company. With the additional perspective gained from unique sets of issues faced by another company, he or she may bring back valuable insights that can help improve strategy and operations. It’s well known that CEOs of public companies frequently serve on other boards of directors, to the point that investor advisors have made explicit guidelines about the appropriate commitment to other boards from these individuals. But what about other C-Suite executives?
Equilar recently undertook a study of CFOs at large-cap companies over the past three years to identify how many also serve on other public company boards of directors.
The study had two key findings:
- CFOs that served on boards of directors outside their own company were awarded higher pay than their counterparts in the most recent fiscal year, and the gap was much wider among those who served on two or more outside boards.
- BUT…Companies with CFOs serving on outside boards saw lower performance when it came to total shareholder return (TSR), revenue and net income, which was amplified for companies where CFOs served on two or more outside boards. Apparently, serving on boards can be a major distraction of their attention.
The findings therefore raise important questions for investors and companies when evaluating executive board commitments.
Source: Harvard Law School
8. Gender Equality Is a Finance Issue Too
For some time now, Norway has had a law requiring public companies to have a gender-balanced board of directors. Fascinated by this, business professors Kenneth Ahern and Amy Dittmar wrote a paper called, “The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation,” which concluded that the Norwegian quota caused a 20 percent decrease in the market values of firms listed on the Oslo Stock Exchange.
However, visiting Professor of Finance Karin Thorburn of the Tuck School of Business found this to be outrageous and set out to challenge the findings. In the spring of 2014, she presented her research to the Swedish government in the white paper, “Women on Boards: A Review of the Research.” The findings reported in her paper concluded: a positive relation between female board members and firm performance; gender-diverse boards are more efficient monitors; companies with
more female board members are more likely to have more women in top management positions; and the pay gap for female executives is much lower at firms with one or more women on the board.
Then, in a subsequent paper entitled, “Board Gender Quotas, Firm Value, and the Rise of Female Director Power”, and using a more robust empirical methodology, she reversed Ahern and Dittmar’s conclusion: “the quota law did not cause a statistically significant change in the market values of Oslo Stock Exchange-listed firms,”. The women were just as competent as the men; there were just less of them on boards, for some reason.
Source: Lindenauer Center for Corporate Governance, Tuck School of Business, Dartmouth University
