This newsletter’s Table of Contents is as follows:
- As the U.S. Seeks to Roll Back Regulations, the European Parliament Adopts New Corporate Governance Rules
- FAILURE IS CLEARLY AN OPTION!: Directors are failing in their self-evaluations
- Why marketing should matter to boards
- New SEC rules for appointing Directors
- Boards Solve Problems Faster When They’re More Cognitively Diverse
- A look inside nominating and governance committees
- Boards increasingly facing disruption, competitive threats
- Why Internal Audit oversight by the Board and Audit Committee so important?
1. As the U.S. Seeks to Roll Back Regulations, the European Parliament Adopts New Corporate Governance Rules
Just when the U.S. is looking at how to roll back its regulations on corporations (among others), the rest of the world seems to be headed in the opposite direction. On Tuesday, the EU Parliament approved a Shareholder Rights Directive, which introduces, among other things, the concept of binding say-on-pay votes for companies listed in EU markets (over 8,000 of them). The Directive also includes some interesting measures intended to impede short-termism. According to the press release fact sheet issued by the European Commission, the Directive must still be adopted by the European Council (expected shortly) and, assuming adoption, will become effective two years thereafter.
Source: Harvard Law School Forum on Corporate Governance and Financial Regulation
2. FAILURE IS CLEARLY AN OPTION!: Directors are failing in their self-evaluations
The New York Stock Exchange requires that the boards of all publicly traded corporations “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.” Research evidence suggests that, while many directors are satisfied with the job that the board does, director evaluations and boardroom performance fall short along several important dimensions.
According to a study by The Miles Group and the Rock Center for Corporate Governance at Stanford University, directors expressed the view that board evaluations do not appear to be effective at the individual level. Only half (55 percent) of companies that conduct board evaluations evaluate individual directors, and only one-third (36 percent) believe their company does a very good job of accurately assessing the performance of individual directors. More attention to individual assessment is a necessary step to ensuring the performance of the group in aggregate.
Directors also have only modest satisfaction with boardroom dynamics. Only two-thirds (64 percent) of directors strongly believe their board is open to new points of view; only half strongly believe their board leverages the skills of all board members; and less than half (46 percent) strongly believe their board tolerates dissent.
Forty-six percent believe that a subset of directors has an outsized influence on board decisions (a dynamic referred to as “a board within a board”). The typical director believes that at least one fellow director should be removed from their board because this individual is not effective.
Source: Rock Center for Corporate Governance, Stanford
3. Why marketing should matter to boards
As marketing becomes a more powerful channel for building a company’s brand, promoting collaboration across the enterprise, and gathering customer insights, boards should consider reexamining the role of marketing and how the marketing function might be tapped to fulfill the board’s oversight responsibilities. As published in NACD Directorship magazine, March/April 2017, Board members should actively learn about the organization’s marketing capabilities and what the function does to analyze and monitor the market ecosystem, including customers, competitors, vendors, regulators, and others. To do so…..
Directors should ask questions such as:
How connected is marketing to other functions to continuously monitor, filter, and address social media and other reputation risks?
Do the aforementioned functions work in siloes?
How well does the organization incorporate marketing data and analytics into strategy and operations?
What analysis and reporting should the board expect to help it monitor disruptive threats and potential opportunities?
Source: Deloitte
4. New SEC rules for appointing Directors
The SEC adopted rules in November to improve public companies’ disclosure of the processes they follow in appointing directors and the means by which securities holders can communicate with them (www.sec.gov/rules/final/33-8340.htm).
Among the rules’ provisions—which took effect January 1—are, for example, requirements that each company disclose:
Whether members of the committee nominating directors satisfy independence requirements and what minimum qualifications and standards the company expects of director nominees.
Whether the company has a process by which shareholders can communicate with directors and—if not—an explanation why and whether the company screens such communications and—if so—in what way.
The commission also approved rules the New York Stock Exchange and the Nasdaq stock market adopted to strengthen listed companies’ corporate governance standards ( www.sec.gov/rules/sro/34-48745.htm ). They tighten the definition of director independence and require the majority of a listed company’s board members to comply with the stricter standards. The rules also mandate and facilitate independent director oversight of corporate governance, auditing, director nomination and compensation functions management control systems.
Source: Journal of Accountancy ‘News Digest’
5. Boards Solve Problems Faster When They’re More Cognitively Diverse
“If cognitive diversity is what we need to succeed in dealing with new, uncertain, and complex situations, we need to encourage people to reveal and deploy their different modes of thinking. We need to make it safe to try things multiple ways. This means leaders will have to get much better at building their team’s sense of psychological safety.”
There is considerable focus today on including visible forms of diversity in the formation of teams. This is a positive development, and one that must extend to boards. When it comes to how teams (or boards) handle complex and challenging problems, however, it is the less visible cognitive diversity that is essential to success. How DIVERSE is your board?
Source: CSAE Board Ready Newsletter
6. A look inside nominating and governance committees
A nominating and governance committee (NGC) that is proactive and engaged on key corporate governance and public policy developments affecting the company is the linchpin to board effectiveness — and can provide for an effective, experienced and dynamic board.
The NGC serves as the board’s voice on governance. The role and profile of the NGC have expanded in recent years with the continuing rise in corporate-investor engagement and growing awareness of the need to address governance-related risks. NGC areas of responsibility as discovered in a large sample of NGC Charters include:
• Governance policies and practices. The NGC is explicitly responsible for the board’s and company’s governance guidelines and policies (100% of reviewed committees). In some cases, committee responsibilities may extend to maintaining the company charter, bylaws and policies on ethics and compliance matters.
• Shareholder proposals and engagement. Forty-eight percent of the NGC Charters reference oversight of stakeholder focus areas, such as political spending and environmental sustainability.
• Risk management. Fifteen percent of the NGCs are specifically charged with oversight of the company’s reputation, as well as governance and non-financial risks, or have responsibilities regarding enterprise management risk, such as reviewing the company’s ERM process, business continuity plans, and strategy for workplace and product safety.
• Performance evaluations. The NGC generally leads or facilitates board evaluations (98%), typically on an annual basis. Most oversee board committee evaluations (70%), and some also oversee individual director evaluations (35%).
• Committee composition, function and structure. In connection with performance evaluations, the NGC is positioned to drive or recommend for board approval committee assignments (90%), committee chair assignments (64%), and changes to committee structure and functions (59%).
• Director education. Fifty-one percent are tasked with oversight of, or providing for, director orientation and continuing education opportunities.
Source: EY
7. Boards increasingly facing disruption, competitive threats
Directors need to become more nimble as they face increasing technological challenges and shorter business cycles, says Stuart Jackson, global managing partner of L.E.K. Consulting LLC. Boards need to actively monitor their strategy to make sure it remains relevant. Adjusting strategies can be challenging, especially for successful companies, but the process is essential to ensure long-term sustainability. Having board members who challenge the status quo can be extremely beneficial in times of disruptive change, he adds.
Source: Harvard Business Review
8. Why Internal Audit oversight by the Board and Audit Committee so important?
As audit committees face a wider range of business risks and increased expectations from stakeholders, many audit committees are turning to a particular resource—the internal audit function. Internal audit (IA) can be viewed by committee members as an objective insider—one that can serve as their eyes and ears. Maximizing the value proposition of the internal audit group is an effective way to help audit committees address their risk oversight responsibilities. However, getting full value from the function isn’t easy: 62% of stakeholders expect more value from internal audit, according to PwC’s 2016 State of the Internal Audit Profession Study. Here, we outline how audit committees can get the most out of internal audit. The key things to focus on for internal audit oversight:
• Empowering the role, and specifying it in the IA Charter
• Having an IA team with the right structure and skills,
• Making sure the IA team’s mission is clear and is adhered to,
• Supporting findings by the IA team to drive organizational improvements, and
• Assessing performance of the IA team to enhance talent development.
Source: PWC
