This newsletter’s Table of Contents is as follows:
1.Why Boards need to Engage with ALL stakeholders
2.The 2018 “Board Agenda”
3. Cyber risk in the boardroom: Accelerating from acceptance to action
4. ISS launches new quality score measure for ESG (Environmental, Social and Governance) disclosures
5.The Supreme Court and the Scope of Whistleblowing Anti-retaliation Protections
6. What You Should Know About BlackRock’s position regarding women on boards and “overboarding limits”
7.You Should Care About Climate-Competent Boards
8.Board Composition and its Required Evolution
1. Why Boards need to Engage with ALL stakeholders
Amidst the partisan rancour in American politics, a recent and rare example of Washington bipartisanship has produced a sensible piece of legislation that could eventually have implications for Canadian corporate governance. In late December, the U.S. House of Representatives passed the Corporate and Governance Reform and Transparency Act, which requires proxy advisory firms such as ISS and Glass Lewis to disclose to the SEC their methodologies and any conflicts of interest.
The Institute of Corporate Directors (of Canada) has long-believed in the need for regulatory oversight of proxy advisory firms and had previously recommended similar requirements in Canada to those proposed in the U.S. Bill.
Better investor engagement is a constant and growing concern for all organizations and isn’t predicated solely on financial performance. Boards and companies can expect investors to weigh in on broader issues – including those commonly referred to as Environmental, Social and Governance, or “ESG.”
Just recently, two major investors called on Apple to curb young people’s so-called phone addiction, citing parental concerns as well as the impact to Apple’s own reputation and business. A new shareholder resolution puts Facebook and Twitter on notice, calling for greater action on online sexual harassment, fake news and hate speech – which are also identified as threats to long-term shareholder value.
However, the future of the business also hinges on stakeholders outside the traditional investor circle, such as a company’s employees. Tim Hortons, a Canadian darling, is in hot water, after one of its franchisees cut paid benefits and breaks for employees in response to the rise in minimum wage. Although parent company Restaurant Brands International (RBI) has washed its hands of responsibility, analysts predict the public outcry will hurt stock prices. If boards want to protect the reputations of the companies they govern – and by extension, their financial success – greater oversight of employee relations is necessary.
Indeed, boards have to be cognizant of their ever-increasing array of stakeholder groups and interests. Like investors, directors need to take the long view. The best place to start is ensuring that there is a strategy for identifying and engaging all stakeholder groups and that potential risks to the organization’s reputation are appropriately monitored.
Source: ICD – Canada
2. The 2018 “Board Agenda”
EY (Ernst and Young) anticipates the following priorities will be top-of-mind for board members in 2018 (NOTE TO READERS: PLEASE LET US KNOW WHICH TOPICS YOU MIGHT LIKE US TO REPORT ON IN FUTURE ISSUES OF THE NEWSLETTER):
- Developing long-term value and defining corporate purpose
- Interacting with shareholders
- Focusing on corporate reporting
- Optimizing capital allocation decisions
- Enhancing talent and corporate culture
- Defining reward
- Strengthening partnerships and governing risk
- Managing cyber risk – a new era of security
- Reflecting new responsibilities for audit committees
- Creating boards of the future
Source: EY
3. Cyber risk in the boardroom: Accelerating from acceptance to action
Cyber risk is a top-level business risk that boards may find challenging to oversee and difficult to address. Boards are being constantly bombarded by the breadth, depth, and technology-specific aspects of cyber risk. NYSE Governance Services and Corporate Board Member magazine recently surveyed 200 audit committee members and found that nearly 60 percent of them believe that it’s necessary for companies to have at least one board member with a specific IT background. Moreover, nearly 60% also worry that their boards, as currently constituted, may have members without the skills and understanding of technology necessary to provide effective oversight of IT and cyber risk. Deborah DeHaas, Vice Chairman, Chief Inclusion Officer and National Managing Partner of the Center for Board Effectiveness, Deloitte, agrees. “Frankly, a lot of boards start out bewildered by this topic,” she said. “It’s unlike most topics that are covered in the boardroom. Many directors feel they don’t have the knowledge to provide effective oversight.”
But she also says that she sees many move along a continuum from ‘acceptance’ to ‘understanding’ to ‘meaningful oversight.’ “I’ve seen that over time, good boards evolve. They can then question management and learn how their company is prepared to address the issue.”
Source: Deloitt
4. ISS launches new quality score measure for ESG (Environmental, Social and Governance) disclosures
Institutional Shareholder Services Inc. (ISS) has launched a new quality score measure—the Environmental & Social Quality Score—for environmental, social and governance (ESG) disclosures. ISS will rate a company’s disclosures on a scale of 0 to 10, based on multistakeholder initiatives, specific risks for the company’s industry group and standards set by groups such as the Global Reporting Initiative, the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures. The launch comes after increasing demand for these disclosures from ISS’ institutional investors, says Stephen Harvey, ISS’ Chief Operating Officer. According to ISS, the quality scores will cover over 380 unique social and environmental factors at 1,500 US, Canadian, EMEA and Australian companies. The environmental analysis will consider disclosures related to factors such as waste and toxicity, carbon and climate. The social analysis score will consider disclosures related to human rights, labor, health and safety, and product safety, among others.
Source: PWC
5. The Supreme Court and the Scope of Whistleblowing Anti-retaliation Protections
February 21, 2018] The Supreme Court of the United States (SCOTUS) handed down its decision in Digital Realty v. Somers, a case regarding the application of the Dodd-Frank whistleblower anti-retaliation protections: do the protections apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company? You might recall that during the oral argument, the Justices seemed to signal that the plain language of the statute was clear and controlling, thus suggesting that they were likely to decide for Digital, interpreting the definition of “whistleblower” in the Dodd-Frank anti-retaliation provision narrowly to require SEC reporting as a predicate. There were no surprises. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language.”
The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.
Source: Harvard
6. What You Should Know About BlackRock’s position regarding women on boards and “overboarding limits”
BlackRock updated its proxy voting guidelines, and some of the key highlights since its last update include:
Two women on boards. In its discussion of the importance of boards comprising a diverse selection of individuals bringing to bear a range of experiences and competing views and opinions, BlackRock emphasized that in addition to other elements of diversity, the investor would “normally expect to see at least two women directors on every board.”
Overboarding limits. BlackRock’s views that outside directors should only sit on four boards have long been more restrictive than the proxy advisors. Now BlackRock also indicates that CEOs should just serve on one other board besides their own (for a total of two boards).
Source: Davis Polk
7. Why You Should Care About Climate-Competent Boards
Vanguard Group CEO William F. McNabb III just tipped the list. The world’s top three asset managers—Blackrock, Vanguard, and State Street Corp.—are now calling the companies that they invest in to adopt climate risk disclosure.
Summing up the challenge of climate risk, McNabb says that it’s the kind of risk that tests the strength of a board’s oversight and risk governance. As investors ratchet up the pressure on companies to analyze their exposure to the impacts of a warming planet, they’re calling on boards to be knowledgeable about material climate risk and capable of preparing for its impacts and capitalizing on its opportunities.—ranging from climate risk, natural resource capital, and implications of the Paris Climate Agreement.
Board-level competence around climate change and other sustainability risks is the way forward. Through an understanding of what climate change means, why it matters to their business, and what their organizations are capable of changing, directors can successfully make climate risk part of their governance systems.
Three key principles that companies and boards can use as they work to build a sustainability-competent board:
1. Sustainability needs to be integrated into the director nomination process.
2. The whole board needs to be educated on sustainability issues that impact their company.
3. Boards should directly engage a diverse array of stakeholders, including investors, on sustainability issues impacting their company.
It all comes down to the bottom line. Risk and opportunity define business. Corporate boards will have a difficult time performing their fiduciary duty to the companies they lead and the shareholders that they represent without understanding the risks and opportunities created by climate change.
Source: NACD
8. Board Composition and its Required Evolution
Board evolution historically has been driven by directors reaching retirement age and, periodically, by the emergence of a profound need for new perspectives on the board — such as financial expertise after the passage of the Sarbanes-Oxley Act and, more recently, digital and cybersecurity experience or diversity.
About three-quarters (73 percent) of S&P 500 boards report having a mandatory retirement age for directors, consistent with the past five years. Beyond board policies, slow board turnover has been driven by the traditional mindset that directorship is a lifetime appointment. As a result, the average age of S&P 500 directors today is two years older than a decade ago, 63 versus 61, and 19 percent of S&P 500 directors are 70 to 79 years old.
Boards therefore need to establish mechanisms to refresh themselves more frequently and embrace a continuous improvement mindset.
With this in mind, we have identified four best practices for board composition:
- View director recruitment in terms of ongoing board succession planning, not one-off replacements.
- Embrace a continuous improvement mindset based on individual director assessments.
- Set expectations for appropriate tenure (terms and term length) at both the aggregate and individual levels.
- Proactively communicate the skill sets and expertise (required and present) in the boardroom, as well as the roadmap for future board succession.
Source: Adapted from Spencer Stewart
