This newsletter’s Table of Contents is as follows:
- “Purpose” enters the Boardroom
- OMG: Making “data” a board agenda issue??? Seriously?? YES!!
- WARNING: Delaware Court Offers Practical Lessons for Compensation Committees (or ANY Committee for that matter)
- The Board’s RISK COMMITTEE: To have or have not?
- Board Evaluations and Boardroom Dynamics
- Virtual-only AGMs criticized
- CSA finds social media disclosure deficient
- INTENSE BOARD MONITORING DESTROYS FIRM VALUE!
1. “Purpose” enters the Boardroom
Organizational Purpose is not the product of a brand agency brainstorm or a board’s philanthropic impulse. More boards of directors and their managements are applying “organizational purpose” to drive change, create new value propositions and inspire employees – and increasingly finding the potential to drive shareholder value through purpose.
A new EY Report has the following highlights
There are five ways purpose enables success.
1. Purpose instills strategic clarity.
2. Purpose channels innovation.
3. Purpose is a force for and response to transformation.
4. Purpose taps a universal need.
5. Purpose builds bridges.
Questions for the board to consider
• Does the company have a compelling purpose (and have it well articulated and communicated in their “mission and vision statements”) – and do the board, management and employees understand what the organization is working toward – and why?
• Are there important stakeholders (Customers? Employees? Communities? Regulators? Suppliers? Etc.) that the organization’s purpose (“mission statement”) does not currently address?
• To what extent is the board engaged on the company’s talent agenda, ensuring alignment with the “mission” to support innovation, growth and competitiveness?
Source: EY
2. OMG: Making “data” a board agenda issue??? Seriously?? YES!!
There is a fundamental differentiator that will play a critical role in how companies effectively compete in the decade to come: getting the right data, extracting insights from that data, and identifying the platforms on which data can be used strategically.
In a recent poll of Fortune 500 CEOs, the rapid pace of technological change was voted the single biggest challenge facing companies, with 67 percent of respondents saying they consider their company to be a technology company. This response is striking given that less than 10 percent of Fortune 500 companies are designated as being in the technology sector.
Yet, there’s an even more fundamental differentiator that will play a critical role in how companies effectively compete in the decade to come: getting the right data, extracting insights from that data, and identifying the platforms on which data can be used strategically. In short, every company should consider itself a data company with a differentiated platform.
Taking a leading role in the data revolution
The audit committee is uniquely positioned to help navigate these changes through the company’s finance function, which is privy to data spanning sales metrics, revenue, margin, marketing performance, valuation, manufacturing, and supply chain vendors. Directors can help their chief financial officer and finance team take a leading role in the data revolution by asking about the tools and technologies they’re using that are tied to the company’s strategy. How is the enterprise being digitized? What trends should be monitored using data analytics? Have data sets been identified that will provide insights to driving shareholder value?
Equally important is understanding whether the finance function has the data science skills needed today. In a recent survey of finance and internal audit leaders, we found that while 86 percent of respondents use analytics, only about one-third of them are using them at an intermediate or advanced level. Two thirds are still using basic, ad hoc analytics (like spreadsheets) or no analytics at all.
Source: Deloitte USA
3. WARNING: Delaware Court Offers Practical Lessons for Compensation Committees (or ANY Committee for that matter)
The Delaware Court of Chancery’s recently published opinion in Amalgamated Bank v. Yahoo!, Inc. (the “Opinion”) provides a reminder for directors about the importance of process in satisfying fiduciary duties when evaluating and approving executive compensation packages. Vice Chancellor Laster discusses practices that should be routine in a board’s review of executive compensation.
Tips on Best Practices
Explore potential conflicts: Both Mayer and de Castro worked at Google before she sought to hire him for Yahoo!. As part of its argument, “Amalgamated observes that just as Eisner was negotiating with his friend Ovitz in the Disney case, Mayer was negotiating with a colleague from her former employer.” Vice Chancellor Laster concludes that once it became aware of this relationship, the Board should have considered whether it was appropriate for Mayer to continue to lead the negotiations, or whether someone else should take over.
Create helpful Board materials: Vice Chancellor Laster noted multiple times that neither the Committee nor the Board had received any materials that illustrated: (i) how the different compensation components interacted, (ii) how much compensation would be paid in particular departure scenarios, (iii) the potential monetary effect of any change being considered or (iv) the way that changes affected the payouts associated with those previously analyzed departure scenarios. Directors should be provided with a summary of any agreement’s key features, so they can understand the material terms.
Run a redline: Vice Chancellor Laster noted that “[t]he Committee never received any calculations showing the value of the changes, much less the aggregate effect of all of the changes.” As Chief Justice Strine has advised, the board should always be provided with a redline to the previous version it considered, so it can see the changes made to a negotiated document.
Directors should not be passive: Vice Chancellor Laster was critical of directors who seem to have “accepted Mayer’s statements uncritically,” did not ask questions during either the hiring or firing of Castro and “rubberstamped what Mayer had done…” He cautions that “[a] board cannot mindlessly swallow information, particularly in the area of executive compensation” because “Directors who choose not to ask questions take the risk that they may have to provide explanations later.” This echoes Chief Justice Strine’s critique that: “Instead of pressing management for answers . . . directors sometimes act more like well-mannered season ticketholders to a stylized interactive theatre, in which performing managers shepherd the audience through ritualized plays, listen to management give set piece reports, ask a few brief questions so as not to disrupt the actors’ timing, and complete a series of management-driven acts, often written not in the blunt, earthy style of an Arthur Miller, but in the opaque, high-falutin style of a jejune drama student in a Master of Fine Arts program.” Vice Chancellor Laster describes this “ostrich-like conduct” as “warranting further investigation.”
Document the decision carefully in Board minutes: Vice Chancellor Laster states that there did not seem to be any evidence of discussion of the terms or questions about the executive compensation package reflected in the Board minutes. He noted that “[t]here is no evidence that anyone addressed the magnitude of the change” and “[t]here is no evidence that anyone examined the definition of cause.” As the Court noted in Disney, “a Board’s failure to properly document their decisions risks the time and expense of a lengthy trial and opens the door to the possibility of a finding that the business judgment rule has not been satisfied.”
Conclusion: Compensation committee members and their advisors should be disciplined in their focus on good process in the context of negotiating and approving executive compensation arrangements. There are sometimes obstacles to maintaining that discipline, including time pressures and the sensitivity of personnel and compensation decisions. Surrendering to the obstacles entails legal risks.
Source: Cleary Gottlieb
4. The Board’s RISK COMMITTEE: To have or have not?
Ongoing global economic and political uncertainty continue to put a spotlight on whether companies are prepared to both seize opportunities that emerge and protect themselves against threats. For their part, boards are reflecting on whether they have the right governance structures to oversee strategic risks like these effectively. Some are examining whether it makes sense to establish a risk committee—an independent group of directors responsible for overseeing risk management policies and framework. Barring a regulatory requirement, deciding whether to have a separate risk committee is not an easy decision.
Questions for the board to consider:
• How is the board currently overseeing risk? Would a risk committee increase the board’s effectiveness?
• Does the board need to reassure investors or regulators that it is devoting enough attention to risk—and would a risk committee be an effective way to do that?
• How do the benefits of adding a risk committee compare with the drawbacks?
• What are some considerations when setting up a risk committee?
Source: PriceWaterhouseCoopers
5. Board Evaluations and Boardroom Dynamics
The boards of all publicly traded companies are required to conduct a self-evaluation at least annually to determine whether they are functioning effectively. Research suggests that while many directors are satisfied with the job that they and their fellow board members do, board evaluations and boardroom performance fall short along several important dimensions. We summarize how they can improve.
Recommendations
• Choose board leadership using specific criteria tailored to the role. Not everyone has the behavioral attributes to be effective. Do not promote board members to leadership positions based solely on seniority.
• Be proactive in developing a pipeline of talent available for leadership roles. Create a skills and experience matrix that plots the existing skill sets of directors against the needs of the board.
• Rotate committee chairs to develop a future lead director or chairman and to refresh committees with new perspectives. Do not rotate too frequently such that you create disruption.
• Set clear expectations for the work expected from board and committee members. Create opportunities for individual directors to give feedback on board and committee effectiveness.
• Establish executive sessions at the beginning and end of meetings. Set clear expectations about how directors are to contribute. Be conscious of time.
• Invest in board education. Schedule regular sessions for management or outside advisors to do “deep dives” on specified topics relating to the company, industry, and broad macroeconomic trends.
• Foster trust among board members through retreats, an extra day added to a board meeting, holding board meetings in locations that are conducive to spending some “down time” together, and inviting spouses or partners to join in social opportunities.
Source: Taylor griffin, David F. Larcker, Stephen A. Miles, and Brian Tayan; Stanford Closer Look Series
6. Virtual-only AGMs criticized
Scott Stringer, controller of New York City’s pension plan, is considering recommending that pension plans vote against all directors on boards of companies that host online-only annual general meetings. In their defense, businesses claim that virtual AGMs allow more participation by shareholders and that in-person annual meetings have been poorly attended in the past. Investors have been open to a hybrid option, which combines both in-person and online meeting participation, but virtual-only events can be perceived as an attempt to exert disproportionate control over the meeting’s agenda.
Source: The New York Times
7. CSA finds social media disclosure deficient
The Canadian Securities Administrators is questioning how public companies are using social media to communicate information to investors. In a recent report, the CSA raised concerns about the provision of misleading information, selective disclosure of material information and the absence of meaningful social media governance policies. The staff report recommends the use of press releases for the disclosure of material information and urges companies to develop social media governance policies to help prevent disclosure problems for issuers.
Source: Investment Executive
8. INTENSE BOARD MONITORING DESTROYS FIRM VALUE!
Corporate boards are designed to provide two distinct and essential services for management—strategic advising and management oversight. Best practices in corporate governance call for an increase in independent board members in the oversight/monitoring activities to provide a stronger foundation.
Recent research, however, reveals that the cost may outweigh the benefit when board members intensify their monitoring activities. It appears that the increased emphasis on monitoring effectiveness diminishes the effectiveness of strategic advising by board members, resulting in a negative effect on the company’s value.
More than 2,000 companies were examined in a study in which the authors defined a board as “monitoring intensive” if board members served on at least two of these three principal monitoring committees.
Positive outcomes with a monitoring-intensive board included lower executive compensation, reduced earnings management and a more realistic approach to performance-based CEO termination. The results suggest that when board members increase their management monitoring responsibilities, their knowledge of the company is enhanced and, simultaneously, their ability to direct management in areas such as compensation, employment and earnings quality is significantly increased.
However, companies whose independent directors served on several monitoring committees exhibited reduced quality in their strategic advising capacity and a management style exhibiting greater tendencies to micromanage. One negative implication of these side effects was measured by a reduction in corporate innovation, as measured by a decline in R&D investments. Additionally, intense board monitoring was found to reduce the success of corporate acquisitions, as measured by a variety of corporate performance measures after a merger, as well as an increase in the time for merger completions. For example, these companies typically took longer to complete the acquisition, and stock price changes at the time of the acquisition announcement were about 0.5% lower for these companies.
Essentially, intense monitoring creates the unintended side effect of a decline in strategic advising, weakened communications and a perception by the CEO that board support has declined. Moreover, research concludes that independent board members overly involved in monitoring activities exhibit an inability to effectively advise top management.
The study authors encouraged firms to be proactive in determining the optimal balance of board responsibilities to diminish the negative effects associated with a monitoring-intensive board.
Source: “The Costs of Intense Board Monitoring
http://www.journalofaccountancy.com/issues/2011/sep/20114036.html#sthash.tkMvPWNh.dpuf
