This newsletter’s Table of Contents is as follows:
- Is it time to review your board of director compensation program?
- DIGITALIZATION: How Boards can change the game!
- Anxious “investor optimism” in a complex world: Top Issue
- FEARLESS GIRLS: Substantive Gender Diversity in Boardrooms
- Scoundrels in the c-suite how should the board respond when a CEO’s bad behavior makes the news?
- What You Show Know About Engaging with BlackRock on Human Capital Management
- Top 100 U.S. Settlements of All Time as of December 2017
- Accountants and lawyers ‘must report’ aggressive tax avoidance schemes
1. Is it time to review your board of director compensation program?
Unlike compensation for executives, non-employee director compensation is not subject to independent review. While shareholders must approve equity plans in which non-employee directors may participate, and while those plans frequently include limitations on individual equity grants or aggregate pay levels, shareholders are not required to approve the director compensation program as a whole. As a result, non-employee director compensation programs that result in high levels of pay can be a lightning rod for proxy advisory firm criticism, shareholder litigation, negative media attention, and more. Conversely, there also many instances in which directors are BEING UNDERPAID for the work they do.Accordingly, here are some important questions your board needs to consider tohelpit determine if its Total Compensation fits the work load and time commitments required:
- When was the last time we reviewed our director pay program?
- How often do we review our director pay program? (NB it should be at least every two years!)
- Have we compared our director pay program to those of other organizations similar in size, operations, and other factors? How does our pay program compare?
- Should we compare our director compensation program to a broader set of organizations? And Why?
- What is the rationale for the mix of cash and other non-cash payments paid to our directors?
- Is the type of TOTAL Compensation we give to non-employee directors appropriate for our organization?
- Are there any benefits or “perquisites” in our program that we should (re)consider – travel policy, expense reimbursement, pension, discounted/free goods and services offered by the organization etc.?
- Should we engage an outside advisor to help us review our director pay program?
Source: adapted from Deloitte
2. DIGITALIZATION: How Boards can change the game!
Digitalization is one of the most profound business game-changers and disruption by digital will radically alter the way things are done. For boards, now is the time to recalibrate strategies, structures and leadership models to thrive sustainably in the new superfluid world.
Digital as mindset, not technology
Boards may assume that they need heavy capital investment in technology and large teams to get started on a digital transformation program. However, being digital is not about IT, but about taking on a fluid and agile mindset that is focused on innovation, using technology as an enabler.
Organizations tend to apply digital transformation to customer experiences while sidelining significant opportunities in operations, such as applying blockchain in smart contracting, artificial intelligence in forecasting, and robotics in order management automation.
Digitalization does change an organization’s risk profile, so this is an opportunity to shore up resources in cybersecurity for overall organizational resilience. Technology can also improve the compliance landscape, as in the case of pharmaceutical companies using spend analytics to spot fraudulent behavior in their sales teams.
In harnessing digital transformation, independent directors continue to be an important source of ideas, innovation and experience. Relatedly, board evaluation and succession planning criteria may need to be reviewed on a more regular basis, with an emphasis on a broader range of capabilities and experiences.
To successfully lead the business through disruptions, boards should seek to address the following questions:
- Does the board embrace a disruptive mindset? (It should!)
- Is strategic planning a once-in-a-year affair? (Hopefully not!)
- Will you buy or build capability?
- Is digital transformation seen as a project in isolation? (it should not!)
- Is the board part of the solution or part of the “problem” for regulators?
Source: EY
3. Anxious “investor optimism” in a complex world: Top Issues
PwC released the results of its 2018 Global Investor Survey, capturing views from nearly 700 investment professionals in 96 countries and including feedback from 19 in-depth interviews in six countries. The report covers topics such as threats, challenges and global growth issues. The survey’s key findings include:
· Investors are more confident about the global outlook than they were last year. Fifty-four percent (54%) of investors think global economic growth will improve over the next 12 months, versus 45% in 2017. Investors are cautious about the longer term, however, and suggest that companies should aim to grow organically and reduce costs.
· Geopolitical uncertainty, cyber threats and the speed of technological change are top concerns for investors. Populism and protectionism ranked next among investors’ concerns.
· Investors think the biggest challenge facing companies is the pressure to focus on short term. The most common response from investors (at 69%) was that there is increasing pressure to deliver business results under shorter timelines.
· Investors think cybersecurity should be a top priority for building trust with customers. Sixty-four percent (64%) of investors think that companies should be investing more heavily in cybersecurity protection.
Investors also ranked the US and China as the top two spots for investment.
Source: PWC
4. FEARLESS GIRLS: Substantive Gender Diversity in Boardrooms
A year ago, State Street Advisors, one of the largest institutional investors in the country, commissioned the “Fearless Girl” statue as a symbol of the increased attention by investors and the public to the lack of gender diversity within corporate boardrooms in the U.S. In the year since the “Fearless Girl” appeared on Wall Street the push for gender diversity in boardroom has gained traction within the investor community.
State Street voted against 400 corporate boards that failed to nominate female directors, the New York City Comptroller and the New York City Pension Funds launched their own initiative focusing on board diversity disclosure and ISS and Glass Lewis, the two largest and most influential proxy advisory firms have announced a new focus on gender diversity.
Finally, in early February Blackrock updated its voting guidelines to state that it now expects to see at least two female directors on every public company’s board. Indeed, while in 2017 women still only comprised less than 17% of corporate boards, with over 600 boards still having no female directors at all, these actions by investors have made a difference. For the first time ever, women and minorities accounted for half of the 397 newest independent directors at S&P 500 companies.
Source: Harvard
5. Scoundrels in the c-suite how should the board respond when a CEO’s bad behavior makes the news?
The board of directors has a duty to monitor the corporation on behalf of shareholders. This includes the obligation to investigate credible allegations that management has engaged in activity that is not in the interest of the company or its shareholders. If verified, the board should (and normally will) take corrective action, including termination, required leave of absence, reduction in pay, and changes to policies or procedures for executive conduct.
The decision becomes more important when these actions are picked up by the news media, bringing public attention to the executive behavior. In this case, the board must decide whether and how to investigate, and whether or not to address the matter publicly or privately. Equally important is the board’s assessment of whether CEO misbehavior will impact the broader organization and shareholder value. This includes determining the scope of the CEO’s actions, and whether the actions are indicative of systemic or potentially widespread cultural problems that adversely impact shareholders.
Concerns about the potential for bad behavior to spread are explored in many research disciplines. Studies of corporate illegality suggest that companies that engage in misbehavior tend to exhibit repeated violations over time, implying that corporate misbehavior can become persistent.1 Research also finds that the behavior of individuals within an organization is influenced by the “tone at the top” and that, when left uncorrected, misbehavior can spread.
To examine how corporations handle allegations of CEO misbehavior, an extensive review was conducted of the news media in which 38 incidents were identified where a CEO’s “bad behavior” garnered a meaningful level of media coverage (defined as more than 10 unique news references). These incidents can be categorized as follows:
- 34 percent involve reports of a CEO lying to the board or shareholders over personal matters—such as a drunken driving offense, prior undisclosed criminal record, falsification of credentials, or other behavior or actions.
- 21 percent involve a sexual affair or relations with a subordinate, contractor, or consultant.
- 16 percent involve CEOs making use of corporate funds in a manner that is questionable but not strictly illegal.
- 16 percent involve CEOs engaging in objectionable personal behavior or using abusive language.
- 13 percent involve CEOs making controversial statements to the public that were offensive to customers or social groups.
(Sadly, such examples of misconduct tend to endure. For instance, news stories continue to make reference today to former American Apparel CEO Dov Charney’s odd behavior of walking around the company’s offices in his underwear, even though it was first reported over 10 years ago.)
Among the sample, it was more likely than not that the CEO was eventually terminated for his or her actions: 58 percent of incidents resulted in termination. Also, among CEOs who were eventually fired for their actions, the time to termination varied widely, ranging from 9 years following initial media coverage to 20 days prior. (The CEO of Stryker was terminated before reports of his extramarital affair with a former employee made the news; the company initially announced that the CEO stepped down “for family reasons”). Alternatives to firing included: stripping the CEO of the chairman title, removing the CEO from the board, amending the corporate code of conduct, reducing or eliminating the CEO bonus, other director resignation, and other changes to board structure or composition.
Unfortunately, in far too many cases, the board of directors is not the first within an organization to learn of CEO misbehavior and will respond only after reports of misconduct become widespread. Think Harvey Weinstein. However, mechanisms exist for the board to detect misconduct at earlier stages, including:
confidential workplace surveys,
third-party websites (such as GlassDoor), and
independent social media listening tools.
To what extent is your board proactive in employing these tools for early signs of CEO and employee misconduct?
Source: Stanford
6. What You Show Know About Engaging with BlackRock on Human Capital Management
BlackRock (one of the worlds largest investment firms) has recently elaborated on what companies can expect when engaging with them on human capital management (HCM) matters, which BlackRock defines as including “employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, and supply chain labor-standards, amongst other things.”
For industries and markets where talent is limited or constrained, BlackRock believes corporate strategies must address topics such as “how [companies] are establishing themselves as the employer of choice for the workers on whom they depend.” In these types of business environments, strong HCM can be viewed as a competitive advantage and a contributing factor to a company’s business continuity and success.
Role of the Board and Management. BlackRock believes boards must understand the opportunities and risks associated with HCM. Board oversight includes ensuring that HCM is effectively implemented throughout the company. Management must also include HCM as a central part of business operations.
Disclosure on HCM Risks. BlackRock recognizes that disclosure on HCM is still evolving and, depending on the market or industry, the impact from HCM risks may vary. Nonetheless, the firm “encourage[s] companies to aim over time to go beyond commentaries and provide more transparency. . . .”
Likely Topics. BlackRock provides two lists of likely engagement topics, which are summarized below. When BlackRock believes a company fails to perform on HCM matters at a level comparable to the company’s peers, they will inform the Board.
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Source: Davis Polk
7. Top 100 U.S. Settlements of All Time as of December 2017
Action Services LLC (“SCAS”) recorded 162 approved securities class action settlements, two of which are included in SCAS’ Top 100, which charts the largest U.S. class action settlements since passage of the Private Securities Litigation Reform Act of 1995. Collectively, 2017 delivered $2.1 billion in settlement funds for distribution. While the volume of settlements greater than $100 million was low, new cases filed in 2017 were sinificantly higher than the previous year. Underscoring the year-to-year ebb and flow in the value of U.S. class action settlements, a sizeable $3.5 billion in prospective settlement funds has thus far been announced in 2018 and awaits court approval. One settlement announced in early 2018 ranks within the top five of all time, pending approval of the settlement.
Source: ISS
8. Accountants and lawyers ‘must report’ aggressive tax avoidance schemes
Accountants, bankers and lawyers will face penalties if they fail to report aggressive tax avoidance schemes that help companies or individuals move money to offshore havens, under a new European Union law.
The rules, agreed by EU finance ministers on Tuesday, will affect the UK financial services industry despite Brexit, because they enter into force six months before the likely end of a transition period, during which the government must obey all EU law.
The finance ministers also added the Bahamas to the bloc’s tax blacklist, months after the former British overseas territory was caught up in the Paradise Papersleak of offshore secrets.
Two other British overseas territories, Anguilla and the British Virgin Islands, were put onto a “greylist” of jurisdictions that have promised to reform their tax policies to meet EU standards.
As a result of Tuesday’s agreement on tax transparency, accountants, bankers and lawyers will be obliged to report to national authorities “potentially aggressive tax planning schemes with a cross-border element”, or risk a penalty.
Firms will be obliged to report corporate or personal income transfers to low-tax or no-tax jurisdictions, or places with weak controls on money laundering. National authorities will share information about these schemes through a central database.
Penalties “should be proportionate and have a dissuasive effect”, but national governments are free to decide on fines or administrative sanctions when the directive is transposed into national law.
The new rules were agreed by finance ministers from all 28 EU states including the UK. A senior civil servant went in place of the British chancellor, Philip Hammond, who was giving his spring statement in London.
The reporting requirements come into force from July 2020 – six months before the end of a mooted Brexit transition period. Under the terms of a draft transition deal, the UK would be expected to follow EU law.
Source: The Guardian
