This newsletter’s Table of Contents is as follows:
1.Reality check: more women on boards doesn’t guarantee diversity
2. Non-financial information disclosures – ITALIAN STYLE
3. The Board’s involvement in the Acquisition decision.
4. The Board must have an ongoing open dialogue with the company’s IR team
5. Technical Competence & the BOD
6. Climate change acumen for Directors
7. Oracle of Omaha Slams Independent Directors for Kowtowing to CEOs
8. Reputational Risk: A Bigger Piece of Investor Legal Actions against Directors!!
1. Reality check: more women on boards doesn’t guarantee diversity
More women on boards is seen as an important indicator of gender equality and board effectiveness. The Australian government’s annual gender insights report, published last week, says greater female board membership helps drive more equitable pay across all levels of an organisation. The Australian Institute of Company Directors (AICD) emphasis’s other benefits.
All this might be true, but there’s a problem in thinking board gender statistics alone indicate significant progress on diversity if the women getting picked for boards generally belong to the same networks as the male directors.
The evidence from Australia’s banking royal commission shows that equal numbers of women and men on the boards of IOOF or Commonwealth Bank, for example, didn’t seem to lead to any better outcomes than at ANZ (37.5% of directors female), Westpac (33%) or NAB (30%).
Perhaps that’s because board membership is still an extremely exclusive club. And social connections drive appointments, according to researcher Sherene Smith. There are few “outsiders”. The lack of outsiders means group think is still a problem, because people from similar backgrounds and social circles are less likely to have very different perspectives, or be prepared to challenge the group.
For greater gender equality to really contribute to greater thought diversity, we have to think about all the other factors that might be just as important, such as ethnic, cultural and socio-economic backgrounds, work and life experiences, educational attainment, or even personality traits.
Gender is only one facet of diversity. Ideally a board should have members who are able to not only arrive at different solutions but also voice these solutions.
Source: The Conversation
2.Non-financial information disclosures – ITALIAN STYLE
Recent reporting provisions require large companies (including listed companies) in the EU to include non-financial information in their public disclosures.
The Italian 2019 Budget Law broadened the scope of non-financial information that companies are required to make public with regard to key social and environmental issues. In particular, listed companies are now required to include descriptions of the management procedures they have adopted in order to (i) manage and mitigate key environmental, social risks and risks relating to personnel, (ii) ensure the promotion of human rights and (iii) fight against corruption.
The 2019 Budget Law entered into force on 1 January 2019, therefore its provisions should only affect non-financial information prepared in relation to 2019 and subsequent financial years.
We would recommend that companies implement or improve processes for the collection, validation and disclosing of non-financial information and structuring of risk management procedures, in order to ensure future compliance and even to try to be – a market leader by being among the first to institute practices compliant with the 2019 Budget Law.
Source: White & Case LLP
Recent reporting provisions require large companies (including listed companies) in the EU to include non-financial information in their public disclosures.
The Italian 2019 Budget Law broadened the scope of non-financial information that companies are required to make public with regard to key social and environmental issues. In particular, listed companies are now required to include descriptions of the management procedures they have adopted in order to (i) manage and mitigate key environmental, social risks and risks relating to personnel, (ii) ensure the promotion of human rights and (iii) fight against corruption.
The 2019 Budget Law entered into force on 1 January 2019, therefore its provisions should only affect non-financial information prepared in relation to 2019 and subsequent financial years.
We would recommend that companies implement or improve processes for the collection, validation and disclosing of non-financial information and structuring of risk management procedures, in order to ensure future compliance and even to try to be – a market leader by being among the first to institute practices compliant with the 2019 Budget Law.
Source: White & case LLP
3. The Board’s involvement in the Acquisition decision.
Once a board understands management’s rationale for an acquisition and how it fits with the company’s strategy, it needs to review the benefits and risks of the deal. It may take repeated discussions with management to fully understand how a transaction will impact shareholders, customers, employees, and other stakeholders.
Risks are real … and can affect value. Companies have to take the bad with the good in any deal, and boards should push management to assess the key risks that can affect the value of an acquisition. These range from the target’s vulnerability to lawsuits, underpayment of taxes, under funding certain parts of the organization, to the presence of activist investors.
A target’s environmental record has also become increasingly important. And acquiring companies in other countries may introduce or add cross-border risks—such as Foreign Corrupt Practices Act violations—as well as different regulatory hurdles. In general, the farther the target is from the company’s current situation—geographically, operationally, or product-wise—the riskier the deal.
In addition, today’s digital, connected world has made cyber security a top priority at most companies. Acquisitions heighten the potential risks by introducing new systems and their vulnerabilities to an existing enterprise. Yet many companies don’t invest appropriate resources to analyzing cyber security during the deal process. As a result, you can have situations when a massive data breach at an acquisition target that comes to light before the acquisition closes can be an issue in closing the deal.
Depending on the risks, the board may want to discuss if the target still should be acquired or if another type of deal structure makes more sense. When considering the goals, a joint venture or an alliance could be a better approach to unlocking value while managing risk.
Look especially for culture clashes The due diligence phase is a time for directors to raise the issue of culture. They should confirm that management has considered any hurdles to integrating the target into their company and areas where the cultures align. Culture should be considered before the deal closes so the integration efforts can be focused and efficient. Management should be able to share with the board a clear understanding of the target’s culture and how it will be treated going forward. This ‘culture audit’ is important in developing a plan to assimilate the organization post-acquisition. Remember: CULTURE EATS STRATEGY FOR BREAKFAST!
Source: PWC
4. The Board must have an ongoing open dialogue with the company’s IR team.
Directors should be aware of what the IR team is hearing from the company’s shareholders, and regular updates on this subject should be incorporated into the Board’s agendas. Directors should work with their CEO’s, CFOs and investor relations teams to strategize regarding the best methods to engage shareholders, including the types of messages to be communicated, the number of and particular shareholders to target, and the company and/or Board representatives to include in the meetings.
Shareholder engagement meetings will be the most productive if prepared with a focused agenda based on shareholders’ top concerns, with the company demonstrating a willingness to take some actions in response to shareholder feedback. The role of the IR team is to educate and prepare the Board and to have a firm understanding of the holders of the company’s stock and their likely concerns regarding the company’s long- and short-term strategies.
One area where this can be very important is executive compensation. If a major investor says, for example, that it wants you to consider return on invested capital as a compensation metric, make sure your compensation committee knows of the suggestion, and in your next proxy statement either disclose that you’ve adopted it (and that it resulted from your engagement process) or that you didn’t (still disclosing that it resulted from your engagement process, but also why it didn’t work for you). This will inform the world that you’ve really listened to your investors, even if you don’t take their suggestions.
Sources: The Securities Edge & the Executive Exchange (Foley & Lardner LLP)
5. Technical Competence & the BOD
The Wall Street Journal’s suggestion that every company must now be considered a “tech company” may have a profound impact on board composition. The impact of new technology trends (e.g., the mobile internet, connectivity, automation and artificial intelligence) is spreading across industry sectors.
Effective governance will increasingly depend on the extent to which directors are technology-literate, and are keeping pace with digital transformation.
Source: Forbes
6. Climate change acumen for Directors
Global mega-trends such as resource scarcity and climate change are becoming ever more relevant to board discussions about strategy, risk, and performance. As just one indicator, proposals asking companies to publish a sustainability report attracted record-high backing: average support clocked in at nearly 32 percent of votes – up from 26 percent a year ago. Moreover, one recent examination by The Conference Board stated that sustainability oversight is now a board-level issue, driven increasingly by the scale of business risks and opportunities posed by sustainability issues and a sense of urgency given these impacts.
Directors need to understand the meaning of “climate-competency.” That’s the term small and large investors are using to describe one of the expectations they have for directors. As our research has shown, boards that are engaged on sustainability issues are more likely to take a longer-term view and thus are able to better foresee and prepare companies for potential risks and opportunities. The issue of climate change isn’t going away anytime soon….in fact it’s growing! For QUESTIONS directors need to ask about climate change see: https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/corporate-governance/publications/climate-change-questions-directors-should-ask
Source: Corporate Board Members
7. Oracle of Omaha Slams Independent Directors for Kowtowing to CEOs
Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. who’s known as the Oracle of Omaha, slammed independent directors for being too focused on their paychecks, and not on keeping the CEO in check.
“The independent directors, in many cases, are the least independent,” he explained. If directors get about $250,000 a year, and that’s an important part of their income, he added, “they’re not going to upset the apple cart.”
The incentive for those directors, he continued, is to go along with the CEO. That way, if the CEO of another company calls about that director, he or she will be described as having never raised any problems. “How independent is that?”
Not everyone agrees with Buffett”s premise.
Charles Elson, director, John L. Weinberg Center for Corporate Governance at the University of Delaware says more directors are now holding an equity stake in the companies where they serve and nominating committees are making the calls on board appointments.
Research Elson has done shows “the greater the dollar value of the outside director equity ownership, the better the company’s overall performance and the more likely in a poorly performing company that there will be a disciplinary-type CEO turnover.”
Buffett’s attack is the latest high-profile criticism of independent directors.
“We just independent director-ized the world,” Delaware Supreme Court Chief Justice Leo Strine told Directors & Boards in a recent interview. “We went from having a bare majority of them to having a super-majority of them. “There’s great competition to be an independent director. Independent director pay has gone up. The typical pay just to be on one company board is higher than my judges in our judiciary. If you’re on three boards, you’re often making more than a half million dollars a year just as a director.
“The old concern was that directors had to be popular with management to stay on boards, but now you have to stay popular with the institutional investor community and with the proxy advisers, and therefore these directors are highly responsive to market sentiment.” (and not the best interests of the company).
Source: Directors & Boards
8. Reputational Risk: A Bigger Piece of Investor Legal Actions against Directors!!
Last year, the Securities and Exchange Commission (SEC) extracted a $5 million settlement from Sea World and its CEO because the company “described its reputation as one of its ‘most important assets,’ but it failed to disclose the adverse impact [of a recent documentary].” Meanwhile, shareholders in a derivative suit expect to extract $320 million from Wells Fargo’s board and executives for breaching their fiduciary duties and failing, at multiple levels, in “overseeing reputation risk” and “the company’s reputation risk management framework.”
They’re not alone. Reputation has increasingly become a focal point of investors’ legal action. Steel City Re’s research shows six derivative lawsuits filed in U.S. federal courts over the past nine months alleging board culpability for causing reputational harm – more than were filed in the entire seven years prior to that.
These are bright signs that reputation risk, historically tried in the court of public opinion, is now both a corporate and personal matter in the court of law. Directors and officers would be wise to head off this new material corporate and personal exposure with an appropriate protection strategy.
The SEC’s beef with Sea world and its leadership, which cost its CEO $1 million in penalties and disgorgement, centered on the fact that Sea World did not meet regulatory expectation for disclosing material change to its reputation. Sea World, along with countless numbers of other public companies and 90% percent of the S&P 500, create this expectation annually by referring to reputation in their SEC filings as a material asset, and its loss as a material risk.
In addition to a duty to report material changes, such disclosures also create the implicit expectation that reputation risk will be managed or mitigated. The 3rd Circuit Court of Appeals affirmed that board oversight of such risks is part of a board’s ordinary business.
Boards rightfully turn to insurances to help manage their risks and, up until now, that has mainly meant director and officer (D&O) coverage. But in cases like these, traditional director and officer insurance won’t help them. While D&O policies may insulate against direct litigation-related costs, it offers individuals no protection for damage suffered as a result of sullied reputations. As commonplace as D&O coverage has become, it holds no sway in the court of public opinion and cannot indemnify against lost future incomes, among other related losses.
They need to establish firmly in the minds of their myriad stakeholders—customers, employees, investors, and regulators, for example—that directors have fulfilled their oversight duties. Otherwise, they may find themselves in the position of having to explain why, having overseen companies that mention reputational risk repeatedly in public filings, their quiescence was not negligent.
Reputation has been on boards’ radar screens for many years. But now, it needs to mature from a discussion agenda item to a governance oversight and action item. Boards that fail to address reputational risk with a comprehensive, enterprise reputation risk management and governance strategy will be leaving their companies and themselves in serious peril.
Source: Nir Kossovsky, CEO of Steel City Re
