This newsletter’s Table of Contents is as follows:
- Companies That Perform Worst Pay CEOs the Most
- How to improve board performance
- The Ideal board “candidate”
- Culture is a critical element for high-performing boards to oversee and, if necessary, take action to address.
- Telia’s $965 Million Global Bribery Settlement
- How boards can promote post-merger integration success
- Winning with digital: What boards need to know about digital transformation
- ISS’ 2018 Global Governance Survey Results
1. Companies That Perform Worst Pay CEOs the Most
The WSJ reported that, although large US companies have for years sought to tie executive pay to financial and stock market results, a new study suggests their efforts aren’t working over the long term. The MSCI study compares 10 years of stock market returns at 423 US companies to the compensation their CEOs received over that period. It finds highly paid CEOs among the worst performers and vice versa, even counting market gains on their equity compensation. ‘There wasn’t really any pattern that seemed to link back to the way the pay worked out,’ said Ric Marshall, executive director of environmental, social and governance research at MSCI.
Source: Wall Street Journal
2. How to improve board performance
To make boards work better and more efficiently, a landmark Stanford University study recommends the following:
- Assess each director’s position on critical issues
Questions to ask include the following: How effective do you think the board and board committees are? Do composition, structures, processes, agendas, and materials allow the board to meet strategic needs of the enterprise? How well do the board and management communicate? Is the board leadership effective? Is a board succession process established? Detailed findings of the assessment should be combined in a report, along with recommended actions. Also, the board should decide how to monitor any actions taken and measure their effectiveness.
- Assist directors in their improvement efforts
Develop a skills-and-experience matrix to help the board and the nominating governance committee assess directors’ skill sets and pinpoint areas that need improvement. Put together board education plans (e.g. attend the CGTI Chartered Director program) and coaching plans for individual directors. Schedule feedback sessions to let directors know whether they are doing well or falling off.
- Periodically reevaluate and refresh the board
Create an independent process to periodically reevaluate and refresh the board. Identify a point person on the board who is accountable for managing the process and following through on recommendations. In addition to annual self-assessments and peer evaluations every two to three years, the NACD’s board advisory services suggests directors ask themselves after every meeting whether the board followed the agenda, accomplished the goals it set in the executive session before the meeting, and spent enough time discussing strategy and risk oversight.
- Plan for board succession
Develop a succession plan that includes processes for removing underperforming directors and refreshing the board when changes in corporate strategy require different skills and experiences on the board.
Source: Journal of Accountancy
3. The ideal board "candidate"
Who is an ideal board member candidate today? Some emerging criteria for new directors include experience with digital business and risk, in both the B2B and B2C arenas. Many companies are also more interested in adding an investor perspective to the board, by tapping directors who come from investment, asset management or private equity firms and who understand what the markets are looking for regarding company performance. There is also a growing emphasis on board members with international experience. In fact, 67% of new Fortune 500 board members can point to such experience, according to the 2016 Board Monitor, with consumer, industrial and financial services experience most in demand. In addition, more companies now seek directors with experience from within their own industry, a demand driven in part by investors and activists who want to see more core sector experience represented on the board. That said, there is also plenty of room for “utility players,” or directors whose breadth and depth of experience across sectors and functions enable them to add value to the board. Other qualities and characteristics often found in strong candidates include: advance meeting preparation, continuous learning, diligent in-person attendance and “nose in/hands off” approach
Source: Wall Street Journal
4. Culture is a critical element for high-performing boards to oversee and, if necessary, take action to address
As a result, culture emerges as an important driver of company performance and value. Boards therefore should work closely with management to make certain that the corporate culture is appropriate for the company’s goals.
Where culture and (a good) strategy are closely aligned, companies are better positioned to realize their desired results and can achieve greater success while mitigating risk. Boards can serve a compelling role in demonstrating and providing for effective leadership on culture, the right “tone from the top” and seeing that management communicates and exemplifies the right culture for the company.
Key Board Questions include:
- How does the board describe the culture of the company?
- What company strategies might call for cultural shifts? And what changes would be appropriate?
- What active, measureable steps is the board taking to make certain that the company’s culture is actually being lived and experienced by all employees and relevant constituents?
- How thoroughly has the board considered the range of potential consequences of compensation structures on culture including desired behaviors and decision-making processes?
Source: EY
5. Telia’s $965 Million Global Bribery Settlement
On September 21, 2017, U.S. authorities announced the first major Foreign Corrupt Practices Act settlement under the Trump administration—a $965 million global resolution with a Sweden-based international telecommunications company, Telia Company AB, and its indirectly owned subsidiary in Uzbekistan, Coscom LLC. Through separate agreements with the Department of Justice, the Securities and Exchange Commission and the Public Prosecution Service of the Netherlands (Openbaar Ministerie or “OM”), Telia resolved allegations that it paid more than $331 million in bribes to Gulnara Karimova, the daughter of the late Uzbek President Islam Karimov, in order to expand into the Uzbek telecommunications market.
Telia is the second major settlement resulting from a sprawling investigation into bribe payments made to Karimova to obtain business in Uzbekistan. More than a year ago, in February 2016, Amsterdam-based VimpelCom Limited and its wholly owned Uzbek subsidiary, Unitel LLC, resolved a similar set of allegations through a $795 million global settlement. Despite the magnitude of the Telia settlement, which is the third-largest global resolution of charges to date under the FCPA, it would be premature to conclude that FCPA enforcement remains a high priority under the Trump administration. The settlement does reflect, however, the continued collaboration by U.S. authorities with their foreign counterparts to combat international bribery.
Source: Harvard Law
6. How boards can promote post-merger integration success
To address the critical PMI issues, a board should consider pressing for the appointment of an integration leader who can be decisive and understands the complex challenges a post-merger company faces – and who has the authority to address those challenges.
Key recommendations for boards overseeing the PMI process include:
- The board’s focus in M&A transactions should not be limited to early-stage issues.
- Board governance oversight should be applied to all stages of M&A transactions – including PMI issues.
- A critical component of PMI oversight is the selection of an integration leader who understands the challenges of integration and has the authority and ability to address them.
- The board might consider assigning a specific board committee as a primary contact for the integration leadership throughout the PMI. This adds a layer of oversight and can provide additional clarity between the role of the board and integration leadership.
- The integration leader should consider providing metric-driven reporting to the board regularly on the integration strategy, obstacles encountered along the way, progress in addressing those challenges and the overall timeline, as well as anticipated outcomes.
Source: Corporate Secretary
7. Winning with digital: What boards need to know about digital transformation
A board member’s role is to help the company create sustainable advantage for the long term. In today’s environment, that includes a broad understanding of the benefits and risks associated with digital transformation— including the risks of inaction. Digital transformation is not just about technology. It is about how a company can compete better using technology. Companies rarely benefit from random acts of digital. As a board member, question whether or not there is a digital strategy, and understand how digital fits into the overall company strategy for long-term success. Question if the digital initiatives underway are tied to the strategy, vs being “random acts of digital”. Board members are responsible for overseeing a company’s digital vision. When it comes to digital transformation, one secret is to stop thinking that the end-goal of digital is focused on a digital device or technology initiative. Rather, the end-goal is about creating a winning business for the future—which is the true measure of digital BUSINESS transformation success.
Source: Deloitte
8. ISS’ 2018 Global Governance Survey Results
- One-share-one-vote: Among investors, 43% indicated that unequal voting rights are not appropriate for public companies, while another 43% stated that they may be appropriate in limited circumstances.
- Gender diversity: When asked if lack of gender diversity on a public company board is problematic, 69% of investor respondents and 54% of non-investors answered yes.
- Virtual shareholder meetings: Approximately 19% of investors and 42% of non-investors indicated, without reservation, that “virtual-only” or “hybrid” shareholder meetings are acceptable to facilitate shareholder communications when physical attendance is not possible
- Pay ratio disclosure: Seventy-two (72) percent of investors say they will use pay ratio disclosure information to compare across companies and industries and to assess the year-on-year changes in the ratio at a company. Forty-four (44) percent of non-investor respondents indicated they have some doubt about the usefulness of the pay ratio data.
- Share issuance and buyback proposals: The majority of the investor group, 44%, and a small group, 8%, of non-investors indicated that shareholders should vote on share issuance’s and buybacks. A majority, 61%, of non-investors believe that share issuance’s and buybacks are matters for the board to decide.
Source: PWC
