This newsletter’s Table of Contents is as follows:
1.Making data a board agenda issue
2.Can executive remuneration improve stakeholder trust?
3.The SEC announces its largest-ever whistle-blower awards
4. Are Dual-Class Companies Harmful to Stockholders?
5. Inspiring innovation: Is your board ready?
6. Institutional Shareholder Services (ISS) Announces Launch of Environmental & Social Quality Score
7. The role of the board in organizational culture
8. Spotlight: NEW Director induction/orientation best practices
1. Making data a board agenda issue
There is a fundamental differentiator that will play a critical role in how companies effectively compete in the decade to come: getting the right data, extracting insights from that data, and identifying the platforms on which data can be used strategically. Every company today should now consider itself a data company with a differentiated platform. Directors can help their CFO take a leading role in the data revolution by asking about the tools and technologies they’re using that are tied to the company’s strategy. How is the enterprise being digitized? What trends should be monitored using data analytics? Have data sets been identified that will provide insights to driving shareholder value?
Equally important is understanding whether the finance function has the data science skills needed today. In a recent survey of finance and internal audit leaders, while 86 percent of respondents use analytics, only about one-third of them are using them at an intermediate or advanced level. Two thirds are still using basic, ad hoc analytics (like spreadsheets) or no analytics at all.
Source: adapted from Deloitte
2. Can executive remuneration improve stakeholder trust?
There is clearly a heightened level of mistrust about the corporate world. So, how can executive remuneration and the way it is communicated contribute to improving stakeholder trust?
Don’t set and forget
An active approach to setting and revisiting remuneration should be adopted. A discussion about remuneration on hiring is not enough. Each year the remuneration arrangements and expectations around them should be recommunicated and any changes and anticipated impacts described to individuals.
Listen to your own advice – don’t be a follower
Market data is an input to decision-making, not ‘the answer’.
- Be prepared to say no to an increase this year if there is no justification for a raise, or to not review quantum every year. Don’t simply “chase the industry median” for fixed compensation.
- Don’t automatically ratchet up incentive opportunities when changes are made to fixed remuneration.
- Ensure less experienced incumbents are offered a noticeably smaller package than their predecessor – let them prove themselves and leave yourself room for increases if the performance is delivered.
- Look at other alternatives to money for rewarding performance, focused on what is of relevance and value to the individual – leadership development is a good example.
Keep it simple
Can you explain your organisation’s executive remuneration program in three sentences? Aim especially to reduce the number of metrics and choose those which add value to your shareholders and resonate with your executives. Complex scorecards with multiple measures cannot really deliver strong messages and influence day-to-day behaviour.
Put it bluntly
The public are highly alert and generally averse to well-crafted but meaningless messages. People don’t want rhetoric when issues arise, they want authenticity; to understand clearly what action was taken to address the issue and how it will be prevented from happening again.
Who’s gaming who?
While we like to think we can trust the people we work with, people sometimes do funny things when money is involved.
- Conduct a thorough and sceptical review of plans and metrics. Mitigate any scope for potential gaming of outcomes – for example, can earnings be ‘bought’? Would a return metric be more appropriate? Conversely, can you analyse a capital portfolio to ensure assets aren’t depreciated to simply meet a return measure?
- Ensure the Board retains discretion to reduce or eliminate payments for misconduct or behaviour that is not aligned with the organisation’s purpose and values.
Noise around executive remuneration is a sign of mistrust. If you start to hear the volume increase, it is time to act.
Source: EY
3. The SEC announces its largest-ever whistleblower awards
On March 19, the SEC announced its largest Dodd-Frank whistleblower awards ever. One whistleblower received an award of nearly $33 million, and two whistleblowers shared an award of nearly $50 million. The previous record was an award granted in 2014 for $30 million. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said, “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.” The SEC has awarded more than $262 million to 53 whistleblowers since its first award under the Dodd-Frank whistleblower program in 2012. Whistleblower awards are paid out of an investor protection fund established by Congress that is funded by monetary sanctions paid to the SEC by violators of securities laws. Awards range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.
Source: PWC
4. Are Dual-Class Companies Harmful to Stockholders?
Recent academic research corroborates the outperformance of the newly public companies with dual-class stock. For example, one study concludes that dual-class companies, avoiding short-term market pressures, have more growth opportunities and obtain higher market valuations than matched single-class firms. Even with respect to perpetual dual-class stock companies, research shows that these companies, when controlled by a founding family, “significantly and economically” outperform nonfamily firms. Another study maintains that it might be more efficient to give more voting power to shareholders who are better informed, thereby allowing them more influence, and correspondingly less voting power to those who are less informed, including passive index funds. Passive investors would pay a discounted price in exchange for waiving their voting rights.
A recent analysis also raises fundamental questions about how much value shareholders perceive in having voting stock versus non-voting stock in these relatively new to market technology companies. For example, consider Classes A and C of Alphabet, issued through a stock dividend four years ago, which are different only in specific ways, most notably that A has one vote per share and C has none. Atypically, for each of the last three trading days in February, Alphabet’s non-voting class C share, GOOG, had a higher closing market price than its voting class A share, GOOGL. More broadly, since GOOG was introduced on April 3, 2014, the correlation between the two classes’ stock prices is 99.9%, and they have similar stock price standard deviations, betas, trading volume, and short interest.
Source: Harvard
5. Inspiring innovation: Is your board ready?
The idea of innovation can be intoxicating, evoking images of trailblazers like Apple, Amazon, Tesla and Netflix – game-changers we admire and envy. Yet innovation can be a tricky concept for many boards. Our survey shows that 82 per cent of directors identify disruptive technology/innovation/cyber-threats as important political and socio-economic challenges facing their boards, while 42 per cent believe their organizations need to significantly innovate to stay viable in the next 10 years. But innovation itself can be a risk and put current profits on the line. How can boards navigate this dreaded ‘damned if you do, damned if you don’t’ dilemma? What’s the best way to govern innovation?
While innovative companies are often abuzz with vibrancy and passion, the stereotypical board meeting can be a downright snore. This could mean saying goodbye6 to directors that return each year despite minimal contributions.
Having the right team of directors at the table is critical to keeping the spark alive. Many directors and CEOs struggle with boards that lack the innovation experience necessary to properly assess the risk and reward of proposals. One corporate survey found that 74 per cent of board directors believe social media will significantly impact business in the next three to five years, yet 80 per cent of companies surveyed had no digital expertise via “digital directors” on their boards. Additionally, many boards are clueing in that diversity enables innovation, while groupthink paralyzes it. To truly fan the flames of innovation, boards may need to rethink their renewal and hire more women and even millennials. Finally, for some organizations, the best way to stay relevant is to as both Coca Cola nd Unilever have done.
Panic-inducing studies that indicate half of the companies on the S&P 500 could be replaced in the next decade suggest organizations must innovate to stay alive. With disruption taking place at lightning speed, your board needs to embrace innovation to keep up.
Source: ICD
6. Institutional Shareholder Services (ISS) Announces Launch of Environmental & Social QualityScore
Institutional Shareholder Services (ISS) has announced the launch of its Environmental & Social Quality Score platform (E&S QualityScore), a data-driven approach to measuring the quality of corporate disclosures on environmental and social issues, including sustainability governance, and identifying key disclosure omissions. The E&S Quality Score includes more than 380 environmental and social factors under analysis.
Source: ISS
7. The role of the board in organizational culture
While corporate culture can be hidden from the board in general, according to an expert panel from Governance Professionals of Canada, there are a few things you can do to make sure you are familiar with the culture within the organization, especially before you become a board member. They pointed out that before you accept a board position, not only do you sit down with the CFO or General Counsel, you also sit down with the head of Human Resources and ask how many harassment complaints have been launched against the company. If they haven’t kept track or the number is high, you should run away from that company.
All the panelists agreed that board members should take every opportunity to talk to middle managers and other employees they don’t have exposure to at board meetings. They should participate in off-site activities when appropriate as well as attend annual meetings in order to meet and speak with employees. But also important is keeping your ears and eyes open to the behaviour of the employees, the rapport, the underlying mood.
While getting culture on board agendas can be seen by some as an unnecessary or unpleasant issue, by framing it in a way that makes business sense board directors are more able to understand why it’s necessary. Using a measuring tool, such as the Barrett Values Assessment tool will help board members understand how the culture is at their organization and whether it is aligned with the company’s mission and values. In other words, is everyone walking the talk?
Source: GPC
8. Spotlight: NEW Director induction/orientation best practices
Most boards have a formal induction program. The best ones have the following:
- Presentations from management on the business model, profitability and performance
- A review of the previous 12 months’ board papers and minutes to provide context on the current issues
- Meetings with key business executives and functional leaders, including finance, marketing, IT, HR, etc.
- Site visits providing new directors a better sense of how the business works and an opportunity to meet people on the ground
- Meetings with external advisers such as accountants, bankers, brokers and others
- Explanation of regulatory and governance issues
- Attendance at an investor day
Mentoring: First-time directors, especially, appreciate having a mentor during the first six to 12 months on the board. An informal mentor program pairs a new director with a more experienced director who can provide perspective on boardroom activities and dynamics or help with meeting preparation, explain aspects of board papers, and debrief and act as a sounding board between meetings.
What new directors can do: Don’t be afraid to ask for the process to be tailored to your needs if you want to explore certain areas of the business in greater depth.
Raising questions
By definition, a new director lacks perspective on the board’s history — the sacred cows, the topics that have been debated ad nauseam already and other important context. This makes knowing when to raise questions or to push for more information all the more difficult. “Fresh eyes are good, but one of the worst things you can do is walk into the board and hone in on topics that aren’t going to be productive, that the board has already hashed to death.” That is why it is important, before you show up to the first meeting, to have read the board minutes, if not papers, for the previous year or so, so you can understand some of the key issues and debates.
Source: Spencer Stewart
