This newsletter’s Table of Contents is as follows
- Clawing it back: SEC adopts listing standards to prevent executives from benefiting from misstatements in financial statementsirectors
- 10 ESSENTIAL Keys to effective board strategy oversight
- There’s No ‘G’ In Meta. And That’s What Went Wrong
- The Board Imperative: Having and Partnering with the NEW Chief Sustainability Officer (“CSO”) Role
1.Clawing it back: SEC adopts listing standards to prevent executives from benefiting from misstatements in financial statementsirectors
On October 26, 2022, the United States Securities and Exchange Commission (the SEC) adopted new compensation recovery listing standards and disclosure rules which will apply to issuers with securities listed on a U.S. national securities exchange such as the New York Stock Exchange or NASD
Clawback requirements are meant to hold corporate leaders financially accountable for misstatement of financial statements. If a reporting error occurs, whether as a result of fraud or a failure to comply with accounting rules, companies must have a policy in place to recover or “clawback” formerly awarded executive compensation in excess of what would have been awarded based on the restated financial statements. The primary aim of such requirements is to prevent senior executives from benefitting from incorrect accounting information and compliance lapses.
There are no exceptions for foreign private issuers, emerging growth companies or smaller reporting companies. Any current or former “executive officer”, as defined in the new SEC rule, will be subject to the clawback requirements, including the company’s president, principal financial and accounting officers, any vice-president in charge of a principal business unit, division or function and any other officer or other person who performs policymaking decisions.
The recoverable amount is the amount that the executive would not have received if the financial statements had initially been presented correctly, and is to be calculated on a pre-tax basis.
The compensation recovery policy will be triggered in the event of both:
- “Big R” restatements, which correct errors that are material to previously issued financial statements
- “Little r” restatements, which correct errors that are not material to previously issued financial statements, but that would result in a material misstatement if the error were recognized or left uncorrected in the current period
SOURCE: Lexology
2.10 ESSENTIAL Keys to effective board strategy oversight
- Connecting board composition to strategy
The board’s composition ties directly to board succession. If your board doesn’t have the right people in the boardroom for the strategy discussions, it should be considering bringing in the right board members who can really contribute.
- Balancing the short-term and long-term
It’s important to think about the state of the company in terms of optimization and reinvention: how to optimize the business today and how to reinvent it for the future.
- Finding the right frequency to discuss strategy
Strategy changes all the time, so your board needs to supplement any dedicated annual meetings with regular discussions throughout the year.
- Measuring progress and knowing when to pivot
It’s helpful to think about two types of strategy discussions: those in a normal operating environment and those in a crisis environment.
- Information from management
Boards need to do their own homework and determine what information they really need and how to get it—especially if what they get from management is not enough.
- Challenging management’s assumptions
The board should ask about assumptions related to the company’s abilities, the competitive market and the broader economic picture, as well as other external factors that management’s strategy relies on.
- Risk: the other side of the strategy coin
It’s important for the board to have a comprehensive analysis of risks associated with the company’s long-term strategic plan.
- Playing the disruption game: offense and defense
Management and boards alike should think about disruption in two ways. How could we be disrupted? And how could we be a disruptor?
- Executive compensation checks and balances
Boards should understand how their plans support their strategy—and what needs to be done if the strategy shifts. It’s important for the board to make sure that performance targets and incentive plan goals are aligned with the strategy.
- Engaging shareholders about strategy
Directors should be able to explain how the company’s executive compensation plans incentivize the achievement of the strategic goals.
Source: PWC
3. There’s No ‘G’ In Meta. And That’s What Went Wrong
If you’re looking for a case for why a complex company needs a high-performing board of directors—or even any kind of board of directors—let me submit Facebook, aka Meta, as exhibit ‘A’.
A year ago, the company traded at an all-time high of $376 a share. Now it trades at less than a third of that. The stated reasons are familiar to all those who follow tech—the stalling ad market, the rise of TikTok, the thus-elusive pursuit of the “Metaverse”, etc.
But if you look more closely, you’ll see that all of this has one thing in common: The structure of the company itself. From the very, very beginning, a bet on Facebook has been a pure bet on a single thing: CEO Mark Zuckerberg’s skills, vision and ability to grow as a leader and execute flawlessly. And that’s really it.
But the Meta structure, which essentially turns the board into an advisory group and nothing else, shows the pitfalls for the CEO of not having a true backstop.
Too much of the current ESG debate over-indexes on the E and the S—but Meta is a clear reminder that without the G, there is nothing else. That’s what’s happened to Meta/Facebook over the years. Through Cambridge Analytica, the bubble-building, the social issues, the name change, the bet on the meta-goggles and so on. A soaring stock spackled over all these issues, but it clouded the central issue, too.
When Zuckerberg bets the house on himself, it is his house to bet. He really didn’t really shortchange investors—they knew the risks, or at least should have. But he did shortchange himself. Companies as large and complex and central to society as Meta deserve to have a great board of directors, with a wide range of views, opinions and experiences helping guide them. Their CEOs do, too.
4.The Board Imperative: Having and Partnering with the NEW Chief Sustainability Officer (“CSO”) Role
Organizations used to treat environmental, social and governance (ESG) as a fringe activity – an extension of corporate social responsibility. Now, ESG is integral to their strategy and operations and part of the social contract with their stakeholders. If executed well, it also represents a major commercial and growth opportunity. As a result, organizations and their boards are no longer asking: “Why be sustainable?” but “How can my business create value through sustainability?”
The Chief Sustainability Officer (CSO), or sustainability lead, plays a big part in answering this question and creating value-led sustainability. This role may not be directly responsible for the full breadth of ESG in an organization, but with the strategic imperative and the reporting expectations many organizations face, it’s becoming increasingly business-critical.
As such, both the role, and the ESG agenda it promotes, should have the full support of the board. Yet recent EY research shows a lack of communication, common understanding and priority setting between boards and CxOs in general. In a recent EY survey, around 43% of directors and senior managers at leading European companies cited a lack of board commitment to fully integrate ESG factors to drive long-term value as a significant challenge.
The role of the CSO – JOB DESCRIPTION
CSOs (or their equivalent) work to establish the organization’s level of sustainability maturity. This includes its carbon baseline, and that of its suppliers, and the extent to which its ESG efforts bring societal benefits.
They further support the CEO to determine which ESG areas to prioritize and subsequently embed them into the business strategy to protect and create value for stakeholders. Increasingly, those areas include broader ESG issues, including supply chain practices and workforce diversity and inclusion.
The CSO is also responsible for defining a sustainability action plan and making sure every function delivers on it by operationalizing sustainability. The plan should measure the true cost and opportunities of ESG in a way that’s financially relevant. Lastly, with ESG activism on the rise, it’s the CSO’s job to understand where the organization’s vulnerabilities lie and put strategies in place to mitigate those risks.
Clearly though, one person can’t be directly responsible for the full breadth of ESG across an organization. CSOs therefore delegate responsibility for specific areas to individuals or teams, collating information from those sources and presenting what’s most strategically relevant to the board and management team. In this sense, the role acts as a bridge between sustainability and business strategy.
Source: EY
