This newsletter’s Table of Contents is as follows:
1.The Board’s Role in Strategy: Lessons Learned from GE
2.Crisis resilience and the board—Taking risk oversight to the next level
3.A comparison between US boards and boards around the world
4.Growing Pressure from Investors Is Resulting in Increased Climate Change Related Commitments by Some Public Companies
5.How boards can approach human capital management
6.Board Priorities for 2019: Looking Inward and Outward to Meet Stakeholder Expectations
7.Nissan faces governance row over board chairmanship
8.think like an activist
1. The Board’s Role in Strategy: Lessons Learned from GE
LESSON #7: Do Our Compensation Plans Align with Our Strategic Objectives? It is the role of the Compensation Committee to ensure that the remuneration of the company’s top leaders is aligned with shareholders’ long-term interest. During Immelt’s tenure the S&P 500 Index increased by 133%, GE’s share price fell by 30%, and yet Immelt’s total compensation rose by 600%.
Admirably, Immelt declined his annual bonus on multiple occasions. However, in 2011, Institutional Shareholder Services (ISS) recommended shareholders vote no on his remuneration package, stating “there is a misalignment between long-term company performance and the compensation of [GE’s] CEO.” Don’t ignore them just because you don’t like them.
The question for the compensation committee in evaluating the CEO’s compensation package – how should the CEO’s remuneration be impacted by failure to achieve pre-established objectives over both the short and long term?
Source: Corporate Board Member
2. Crisis resilience and the board—Taking risk oversight to the next level
Companies seek to anticipate and avoid or proactively mitigate crises that pose risk to their business. According to a recent Deloitte survey of over 500 crisis management executives, 80 percent of organizations worldwide have had to mobilize their crisis management teams at least once in the past two years, with cyber and safety incidents topping the list of crises requiring management intervention. As part of their oversight responsibility, boards need to assist management in carrying out risk/crisis mitigation responsibilities. However, no matter how prepared a company is, and regardless of the levels of management attentiveness and board oversight, crises will happen; they are a matter of when, not if. Because of this reality, it is important for companies, including their management and board, to build resilience – that is, they should be able to quickly and effectively continue or resume operations and execute their strategic plans in the wake of a crisis, whether caused by external or internal forces.
Resilience is an intrinsic component of risk mitigation; without it, the company may be unable to survive a crisis, even one that the company has anticipated and planned for. It is important to note that resilience is not absolute. Just as a company cannot mitigate all risk, it cannot prepare to react efficiently and effectively to every situation. However, companies can plan for those crises that are most probable and can help to make the company more resilient overall.
Questions for board members to consider:
1.What is the company’s incident response plan?
2.Has the company performed crisis simulations to test key processes and build agility in its response?
3.Does the company have a proactive and holistic plan in place to prevent and detect potential threats to people, material, information and facilities?
4.Should the company consider third party partners to increase resilience?
5.What is the board’s role during a crisis?
6.How does the company build resilience against the unknown?
7.What education can board directors get to cultivate resilience at the board level?
Source: Deloitte
3. A comparison between US boards and boards around the world
Spencer Stuart released an interactive webpage that explores Boards Around the World. The webpage provides global data in areas like board composition, diversity, compensation, assessments and new directors. The key findings include:
- Board size – The US has an average of 11 directors per board, consistent with the average in Europe, although within Europe, the average varies by country from 8 to 14.
- Board independence – In the US, boards are comprised of 85% independent directors on average, second only to the Netherlands, with 87%.
- Board tenure – Directors in the US have a longer average tenure (8 years), than all but two countries, Peru and Mexico.
- Board diversity – Women represent 46% of directors in Norway, almost double that in the US, which is 24%. The 24% of women at US boards is in the middle range of all countries where female representation on boards range from 6% to 46%. The US also has the second lowest percentage of foreign board members at 8%, and the highest is 58% in Switzerland.
- Board compensation – The average non-executive director compensation in the US is nearly $300,000, compared to the lowest fee of $36,000 paid in Poland.
- Board assessments – UK boards had the highest use of externally-facilitated board evaluations at 44%, compared to only 9% of US boards
- New directors – Italy had the highest percentage of female new directors in 2018 at 48%, compared to 40% in the US. Social Media and the Board
Source: PWC
4. Growing Pressure from Investors Is Resulting in Increased Climate Change Related Commitments by Some Public Companies
David Polk has written previously about Climate Action 100+, an investor led group representing over $32 trillion in assets under management, and its campaign against 161 or so of the largest publicly traded companies seeking to have these companies improve their greenhouse gas emitting practices.
Climate Action 100+ has experienced recent successes in its engagement efforts with a few companies, the details of which are available on its website
In particular, a few companies have agreed to increased public reporting of their climate change strategies and, most notably, to adopt executive compensation metrics tied to greenhouse gas reduction targets. Recently, the group issued a report describing what it believes the steel industry should do to reduce greenhouse gas emissions and related public disclosure of those efforts. Publicly traded steel companies generally and the companies that Climate Action 100+ is currently targeting may wish to review this report to be prepared for future engagement requests or shareholder proposals from the group and/or its individual members.
Source: Davis Polk
5. How boards can approach human capital management
Companies face growing investor pressure to discuss how they handle human capital issues
Human capital management is fast becoming an important topic for corporation and investors alike, and governance teams and directors need to be prepared to tackle the challenges and opportunities it entails.
Earlier this year, in his annual letter to chief executives, BlackRock CEO Larry Fink urged leaders to pay more attention to their human capital management efforts and disclose more information about these practices, repeating themes from his 2018 letter. In State Street Global advisers’ letter to board members this year, the investment management firm likewise urged board members to focus on corporate culture, which State Street links to human capital management.
The goal of human capital management is to enable an organization’s employees to contribute significantly to their organization’s productivity. Although the term is just now becoming commonplace, the underlying concepts of human capital management – including diversity, inclusion, talent development, succession planning and workplace culture and misconduct – are deeply familiar to boards.
According to BlackRock, research indicates that successful human capital initiatives make companies more profitable. Organizations that actively promote their workers’ well-being have positive operating margins, whereas organizations with a disengaged workforce tend to lose money. State Street cites recent research demonstrating that intangible assets, such as workplace culture, make up on average 52 percent of an organization’s market value.
Some companies have even wholeheartedly embraced BlackRock’s mission. Last year, Philippe Donnet, the CEO of international insurer Generali, wrote directly to Fink to applaud his message and inform him that his board had approved a charter of sustainability commitments. The charter prioritizes the goals of ‘build[ing] a work environment that inspires our people to give their best’ and ‘reach[ing] a tangible impact in the communities where we operate.’
Some investor groups, including the Human Capital management coalition, a group of institutional investors with a combined $2.8 trillion in assets, have petitioned the SEC to require companies to disclose more information about their human capital practices.
Some companies and their boards have already taken steps to put a higher priority on human capital management, including revising policies, identifying metrics to measure the status of their progress and creating a reporting structure to make sure this information reaches the board and top management.
Source: Sullivan & Cromwell
6. Board Priorities for 2019: Looking Inward and Outward to Meet Stakeholder Expectations
Each year, the proxy season puts a spotlight on how well public company boards of directors are meeting investor and regulatory expectations. For 2019, these expectations call for directors to look both inward and outward to foster a company culture that supports long-term value creation, improve the diversity of the board, focus on corporate sustainability issues affecting the company’s long-term strategy, enhance oversight of internal controls over risk, and strengthen engagement efforts with stakeholders.
Corporate Purpose and Culture: Top of the Board’s Agenda
The past year saw an alarming number of corporate missteps and scandals leading to CEO shakeups, government investigations, market value destruction and loss of confidence by investors, consumers and employees. In response, the institutional investor community is encouraging boards of directors to embrace their leadership roles in establishing corporate “purpose” and “culture”.
What to do now?
● Put Corporate Purpose and Culture on the Board’s Agenda. Directors should embrace oversight of culture as a key board responsibility in light of growing investor conviction that culture is inextricably linked with strategy and risk oversight. Directors should consider how various components of corporate culture, such as human capital management, can create opportunities to manage risk and drive results.
● Set the Tone for the Entire Organization. Boards should set the tone for the entire organization, establishing their commitment to good governance, integrity and a robust ethics, risk management and compliance program. Management should be encouraged to foster a “speak up” culture at all levels of the organization where employees feel confident that violations of workplace policies will not be tolerated.
● Ensure Effective Escalation Processes. Boards should ask probing questions about their company’s systems for reporting, escalating and responding to workplace complaints and require that senior human resources personnel regularly report on significant risks – and opportunities. One way boards can keep a watchful eye on culture is to monitor the types and frequency of concerns coming through the company’s hotline and other internal reporting mechanisms, and management’s analysis and response. Boards should recognize that the absence of reported concerns may be as concerning as the prevalence of reported concerns.
Source: WEIL
7. Nissan faces governance row over board chairmanship
Within hours of Carlos Ghosn’s arrest on the runway of Tokyo’s Haneda airport, Nissan started talking tough on corporate governance. Panels of experts would be assembled; lessons would be learned; rot would be removed.
Just 115 days later, according to leaks last week to Japanese media, the solution had been found: Sadayuki Sakakibara — former head of the all-powerful Keidanren business lobby, ex-president of Toray, golfing partner of Prime Minister Shinzo Abe and Japan Inc heavyweight — was under consideration to become chairman of Nissan’s board in the new governance-focused era.
Moreover, the chairman of the board is a role that will be filled by an external director and kept separate from company chairman, a position now set to remain empty — a role split that breaks with global protocol but aligns Nissan with the practice of other Japanese groups including Hitachi and Toshiba.
However, analysts say that the fact Mr. Sakakibara is even under consideration is a sign the Japanese carmaker is still a long way from the kind of governance revolution it not only requires but has publicly promised.
“We see this as a large backward step for their governance,” said Zuhair Khan, head strategist at Jefferies, whose governance ratings on Japanese companies are highly respected in the market. During Mr. Sakakibara’s time as chairman of Keidanren, he opposed a series of proposed revisions to the corporate governance code that would have required company boards to comprise one-third independent directors and at least one female director.
It’s strange that the leaks are coming even before the nomination committee has been formed. The decision on the new chair is not for Nissan to make
Even the way in which his candidacy has arisen suggests Nissan’s governance remains stuck in the past: whoever leaked his name to Japanese media said “Nissan is considering tapping Mr. Sakakibara” for the role. But the newly formed nomination committee would make that selection, and Nissan would have no direct say.
The new nomination committee is expected to be set up by the company as part of recommendations to be made by a seven-member external governance panel formed in the wake of Mr. Ghosn’s arrest.
Nissan, and a spokesperson for the governance panel, declined to comment on the reports. Mr. Sakakibara could not be reached for comment.
Source: Financial Times
8. Think Like an Activist
A large advertising firm was approached by an activist about merging with another, smaller firm citing consolidation trends in the industry as a driver for the strategy. Unbeknownst to the activist, the ad firm had already considered the combination internally, having predicted an activist proposal about a merger might come along. The company’s management took the initiative to explore the possibility of an acquisition; an important step to help mitigate activist fallout.
This proxy season, instead of looking for ways to repel an activist proposal, consider a counterintuitive tactic: embrace the activist mindset.
Activist proposals have long been viewed as something to resist, even fear, but a new strain of thinking has become part of the debate. Boards are now looking at activist themes to inspire their own actions – as both an offense and defense strategy.
To derail activist conflict, consider several key steps.
First, take an activist’s view of the value screen. Is the company doing everything it can to extract value for shareholders without diluting the business? Are there other avenues the company should consider? This may require asking questions that challenge the stated plan of the CEO and ultimately the new avenue may be rejected.
Additionally, be proactive in evaluating risk. Ask yourself the hard questions regarding risk before an activist asks them for you. Often Boards today may have a mix of directors – some from traditional companies who are risk averse and others from digital backgrounds who are used to risking it all and going for broke.
Finally, have an agreed-upon activist engagement strategy. The board must have a process for engaging with activists in a constructive way. It’s important to have this as a Board-wide communications process – everyone on the Board needs to be singing from the same hymnal.
Be sure your engagement strategy addresses the key activist trigger points:
• Is there a potential value gap?
• Can the activist get votes?
• Is our board composition aligned with corporate strategy and stakeholder expectations?
There’s no need to wait for a costly proxy challenge to face these topics. Instead, internalize the key themes of the activist platform. Think like an activist and head that challenge off before it happens.
Source: KPMG
