This newsletter’s Table of Contents is as follows:
- What Directors Need to Know About Digital Advertising Fraud
- HOT TOPIC 2019: The social purpose agenda
- Boards must Embrace the Duality of Strategy
- NACD’s annual survey highlights governance trends
- 2018 CEO Activism Survey (or ‘Tis better to keep your mouth shut!’)
- Sustainability Reports: Be careful what you disclose
- CII Analysis of Board Evaluation Disclosure
- A year in activism: Looking ahead to 2019
1. What Directors Need to Know About Digital Advertising Fraud
A key director role is to perform oversight for the shareholders on how capital is spent. Boards of directors are responsible for ensuring that corporate budgets maximize shareholder value, but how can board members ensure that the huge sums spent to advertise through Facebook and Google are getting the returns for shareholders that these platforms “self report?”
One indicator that corporations are over-paying for advertising through Facebook and Google is the extent of digital ad fraud, recently estimated by US Senator Mark Warner at $7.4 billion This amounts to an enormous overpayment by advertisers. Then there is the Buzzfeed exposé of a multimillion dollar fraudulent scheme using Android apps. Blind trust in Facebook and Google is therefore both imprudent and inconsistent with the board’s enterprise risk management business practices that require independent verification. Boards need to ensure corporate advertising budgets are getting the right results for shareholders.
In television advertising, advertisers do not merely rely on a networks’ audience measurement; Nielsen also provides independent measurement, which is then audited by the Media Ratings Council (MRC). But ad dollars continue to move from television to digital, with mobile ad spending expected to surpass television advertising this year.
Board members should demand transparency and third-party verification of advertising data spend. There’s often hundreds of millions of dollars spent on digital advertising in order to eliminate fraud and waste from ad budgets. Boards may want to consider asking management to challenge Facebook and Google to use a third party independent verification that they give real access and transparency into their closed systems. In this digital age, boards need new, independent verification systems to be sure their companies are getting true value digital spend for the shareholders.
Source: Directors and Boards
2. HOT TOPIC 2019: The social purpose agenda
In 2019, boards will almost certainly continue to address “social purpose” issues. These issues cover a broad swath of topics, ranging from climate change to sustainability to corporate culture to pay equity and more.
The current wave of interest in corporate social purpose began in 2016, when shareholder proposals on social issues increased to become the second most prevalent type of proposal. During the 2018 proxy season, this type of proposal constituted 43 percent of all proposals submitted. In addition, throughout this period, several “mainstream” investors have communicated their belief that corporations should have a role in our society beyond a monetary return to investors.
However, investor pressure is not the only driver of the focus on corporate social purpose. First, employee activism is on the rise, with several companies experiencing work stoppages or walkouts to protest company policies and/or actions on various issues. Second, several groups are developing standards to evaluate sustainability performance by corporations. Moreover, companies increasingly recognize that embracing social purpose issues provides a strong value proposition in terms of brand differentiation, talent engagement, risk mitigation, operational efficiency, and access to capital.
Source: Deloite
3. Boards must Embrace the Duality of Strategy
Companies today must strategize for challenges beyond the horizon while driving current business. This duality is key to surviving and thriving in this period of seismic disruption. The life-span of S&P 500 companies is shrinking. Innosight reports that by 2026, the average tenure of S&P 500 companies will be only 14 years, with around half of the index being replaced over the next decade.1
To endure, businesses must initiate and respond to disruption.
The board should lean in with management in a collaborative manner to help guide a strategy that positions the company for long-term success. Rather than see the duality as a tension, boards can help management embrace it as a synergy that can help inform a stronger and more resilient strategy. Asking “What can be done today to make the company better and stronger tomorrow?” can provide a clear and motivating path forward while considering multiple dualities: short-term vs. long-term, disruption vs. sustainability, profit vs. investment, risk vs. opportunity and use vs. conservation.
To allow for these strategic discussions, the one-off, annual board strategy session needs to be challenged. Boards should work with management to frequently revisit the strategic plan and its key elements and assumptions. Boards also should challenge whether reinvestment in existing businesses, products or solutions makes sense or whether a new strategic path should be forged. They must confirm that management has embedded an agile strategy and innovation process into the company’s culture and talent agenda.
Finally, it’s important that the board and management review the objectives, related processes and effectiveness of stakeholder communications and other disclosures about the strategy. These communications should clearly and effectively present how the organization is governing and executing on the strategy. If the company’s stakeholders have a clear understanding of how the company is addressing today’s challenges while focusing on the future, they are more likely to support the company in the long run.
Source: EY
4. NACD’s annual survey highlights governance trends
The National Association of Corporate Directors (NACD) released the results of its 2018-2019 Public Company Governance Survey. The report captures feedback from over 500 directors of Russell 3000 companies and covers a spectrum of governance topics. The key findings include:
· Eighty-eight percent (88%) of directors say they have a strong understanding of their companies’ tone at the top. However, a lot less say the same about the mood in the middle (45%) and the buzz at the bottom (27%).
· Eighty-one percent (81%) of directors believe their board has a better understanding of cyber risk today than they did two years ago.
· Directors ranked change in the regulatory climate (49%), economic slowdown (48%) and cybersecurity threats (42%) as top trends that will have the greatest effect on their company over the next 12 months. Climate change seems to be less of a priority as only 6% of respondents indicated it would have an effect on their company.
· When asked to rank the importance of certain areas for improvement over the next 12 months, 68% of respondents say their boards need to improve their understanding of risks and opportunities affecting company performance.
Source: Governance Insights
5. 2018 CEO Activism Survey (or ‘Tis better to keep your mouth shut!’)
In later part of 2018, the Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 3,544 individuals — representative by gender, race, age, household income, and state residence — to understand how the American public views CEOs who take public positions on environmental, social, and political issues.
“We find that the public is highly divided about CEOs who take vocal positions on social, environmental, or political issues,” says Professor David F. Larcker, Stanford Graduate School of Business. “While some applaud CEOs who speak up, others strongly disapprove. The divergence in opinions is striking. CEOs who take public positions on specific issues might build loyalty with their employees or customers, but these same positions can inadvertently alienate important segments of those populations. The cost of CEO activism might be higher than many CEOs, companies, or boards realize.”
“Hot-button issues are hot for a reason,” adds Brian Tayan, researcher at Stanford Graduate School of Business. “Interestingly, people are much more likely to think of products they have stopped using than products they have started using because of a position the CEO took on a public issue. When consumers don’t like what they hear, they react the best way they know how to: by closing their wallets.”
Source: Stanford University
6. Sustainability Reports: Be careful what you disclose
Many companies are now publishing sustainability reports on their websites. These reports detail the ESP impacts of the company’s activities and how the company’s values and governance model facilitate the company’s overall long-term strategy. SEC rules require that a company include disclosures on issues related to sustainability in its proxy statements or periodic filings if the company considers those issues to be material to its financial condition or results of operations. However, unless such disclosures are actually required under SEC rules, it is not advisable to incorporate all or parts of a company’s ESP-related disclosures into its SEC filings. The inclusion of these disclosures (or any other current “governance “hot topics” such as board refreshment goals) in a SEC filing may have unintended legal implications: namely, subjecting the company and its underwriters to liability for these statements and, therefore, resulting in additional offering-related due diligence by the underwriters and external counsel.
Source: Sullivan & Cromwell
7. CII Analysis of Board Evaluation Disclosure
The Council of Institutional Investors (CII) has published an update to its analysis of disclosure on board evaluations in proxy statements, highlighting as “Seven Indicators of Strength” a wish list of information.
The report contains multiple qualifications and statements designed to reassure companies, including that they are not expected to reveal any specific details about the results of the evaluations, but instead the disclosure should focus on the process for continued improvement. In addition, the seven benchmarks selected in the report are not intended to be prescriptive, as they are observations of what CII believes investors find to be useful information based on CII’s review of the proxy statements of more than “100 prominent companies”.
Evaluation of board, committees and individual directors indicate multiple levels of review. Disclosure could convey that that the process may be different across the levels. For example, board and committee evaluations could involve questionnaires, while individual reviews may be conducted by interviews.
Peer review. Peer reviews as part of individual director assessments should at least be considered, even if ultimately not incorporated into the process.
Timing and Format. Disclosure is expected to include how the board sets the timing of evaluations and determine the best format. The timing of evaluations is usually an annual formal process, although informal discussions or feedback from directors may be solicited throughout the year. The format could include written questionnaires, interviews, group discussions or the use of third parties.
Follow-Through. Disclosure of examples of specific actions taken and changes made internally in response to evaluations, without revealing any confidential or proprietary information, is considered helpful. For example, the responses to a board evaluation may enhance the processes around board materials.
Succession planning for the board. The evaluation process should include discussions of the ongoing attention to board composition, whether director skill sets continue to meet established board criteria and board refreshment and recruitment processes.
Independent director leadership. Explain how the board leaders, whether an executive chair, independent chair or lead independent director and the committee chairs help facilitate board, committee and individual director evaluations. For example, the chair of the nominating and governance committee may play a role in structuring the process or the lead independent director may solicit individual director feedback.
Use of third parties and technology. CII recognizes that the use of third parties may not be appropriate for every company, especially every year, but believes disclosure should indicate whether boards considered the benefits of using third parties or technology platforms to improve the process.
Source: David Polk
8. A year in activism: Looking ahead to 2019
When stocks take the kind of nosedive they did in December 2018, market prognosticators tend to pronounce slowdowns in all types of activity from M&A to IPOs and debt financing. Shareholder activism often gets tossed into this mix. From our vantage point we see the record shareholder activist activity that occurred in 2018 continuing into this year not despite of but – in many cases – because of the market turbulence.
Remember that, at their core, activists are deep-value investors: they search for undervalued companies that can benefit from new strategies, new management and/or fresh board oversight. When stocks are all moving up in tandem, it’s much harder to find relative underperformers and more expensive to build sizable positions. During times when investors are fearful, though not in a full-blown panic, underperformers become more visible.
We expect a busy 2019. To be sure, last year’s activity could be tough to top. According to Activist Insight, a record 284 companies above $500 million in market cap were targets of activists in 2018, up roughly 15 percent from 2017. In terms of board seats secured, activists and other investors landed 194 spots last year, a 42 percent increase on the year before, according to Activist Insight data.
Of note, approximately two thirds of all the board seats garnered by activists came from settlements with companies as opposed to shareholder votes in 2018. Companies are increasingly willing to avoid going all the way to a vote because they have embraced the idea that refreshing the boardroom is vitally important for long-term performance, and suggestions from shareholders should be taken seriously. Companies also know (or should know!) that very large institutional investors are much more willing to embrace change coming from outsiders.
A rise in settlement activity further indicates that investors of all types, from activists to index funds, have increasingly louder voices in how US corporations are run and governed. This year, as traditional investment managers become more engaged with the companies they own, activist investors will have more opportunities to enact change.
Source: Corporate Secretary
