This newsletter’s Table of Contents is as follows:
- Business Roundtable re-envisions ‘the purpose’ of the modern corporation
- Trends in executive compensation
- Setting the pace or keeping up — is your board ‘future-fit’?
- The Board’s Role in Strategy: Lessons Learned from GE
- Proposed Legislation Seeks to Enhance CyberSecurity Risk Disclosures and Board Membership
- U.S. House Financial Services Committee Hearing on ESG Disclosure
- Opposition to CEO “Overboarding” intensifies
- TO BE OR NOT TO BE: Combined Chair and CEO Roles?
1. Business Roundtable re-envisions ‘the purpose’ of the modern corporation
The Business Roundtable (BRT) updated its Statement on the Purpose of a Corporation to reflect a focus on all stakeholders rather than just shareholders. According to its website, the BRT represents “chief executive officers (CEOs) of America’s leading companies.” Since 1997, the annual statement has focused on shareholder primacy; the new statement reflects the association’s commitment to a more broadly defined set of stakeholders, including customers, employees, suppliers, communities and shareholders.
One hundred eighty one (181) CEOs signed the new statement committing to lead their companies for the benefit of all stakeholders. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of the Business Roundtable.
Source: Business Roundtable
2.Trends in executive compensation
The 2019 proxy season is largely over for calendar year-end companies, so it is a good time to reflect on a couple of key themes in executive compensation that emerged during the season:
- Achieving significant shareholder support for “Say on Pay” remains a top priority.
- Institutional investors want executive’s compensation packages to align with long-term value creation.
- Environmental, Social, and Governance (“ESG”) policy and disclosure are increasingly important, including assessing whether such activities should be linked to executive compensation.
- Now that the CEO pay ratio disclosure requirement has been in place for two proxy seasons, it has demonstrated to be less impactful than some proponents and others may have expected. However, developments suggest that compensation disclosure is converging with broader concerns about issues such as gender, race and ethnicity pay equity, culture, diversity and inclusion, and employee engagement. As a result, more time is likely to be spent on human resource policies at both the board and compensation committee levels, and compensation committees may be thinking about broadening their charters to become human capital committees.
Editor’s note: Perhaps your board should consider sending members to the new CGTI board program: Human Resources and Compensation Committee Certified.
Source : Deloitte USA
3. Setting the pace or keeping up — is your board ‘future-fit’?
In recent years, the average lifespan of the largest US public companies has been declining as a result of economic or technological disruption and in some cases, this is because they have missed opportunities to adapt and innovate. Similarly, a significant percentage of companies that made up the UK’s list of largest public companies in the 1980s have either been bought, declined or disappeared. The ones still around are those who have been able to adapt and shape the future.
But is any of this new? Businesses have always operated in constantly evolving environments. So, what’s significant now?
Future-fit boards are forward-thinking and proactive in collecting diverse perspectives from numerous sources which could impact the business. They are varied and distinct by nature, inclusive and boldly navigate the provocative and the unexpected. They are outward-looking and show leadership in balancing multiple and competing interests for the long-term. They are transparent and responsive. They are innovative in their oversight of human capital and culture as a value driver. And they have an expanded view of risk with technology-enabled compliance, monitoring and mitigation.
Six key areas of action for boards to test their future fitness are:
- Gather new perspectives from all key stakeholders, not just investors
- Revitalize board dynamics, composition and processes
- Increase focus on the long-term, not just short-term profitability – INNOVATE
- Adapt communication, protect reputation
- Understand, Align and monitor culture with the strategy
- Enhance risk and compliance oversight
Source: EY
4. The Board’s Role in Strategy: Lessons Learned from GE
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. Proposed Legislation Seeks to Enhance CyberSecurity Risk Disclosures and Board Membership
This year, US Senators introduced a bipartisan bill seeking to promote transparency in the oversight of cybersecurity risks at publicly traded companies. The bill, titled “Cybersecurity Disclosure Act of 2019,” would require issuers to disclose in their annual reports or proxy statements whether any member of their boards has expertise or experience in cybersecurity and, if not, to explain why they do not believe such expertise is necessary.
Source: Sullivan Cromwell
6. U.S. House Financial Services Committee Hearing on ESG Disclosure
In a House Financial Services Committee hearing yesterday, committee members debated the merits of five draft bills that would require public companies to disclose information on several environmental, social and governance, or ESG, topics including climate change risk, political expenditures and human rights risk. Hosted by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, the hearing included witnesses representing CalPERS, Global Reporting Initiative (GRI), Ceres, Decatur Capital Management, an investment management firm, and Patomak Global Partners, a consulting firm for which former SEC Commissioner Paul Atkins serves as CEO.
Mandatory or Voluntary Disclosure?
The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework.
Source: Davis Polk
7. Opposition to CEO "Overboarding" intensifies
BlackRock is increasing its opposition to US CEOs sitting on more than one corporate board beside their own, arguing that working as a director takes increasingly more time, according to Reuters. BlackRock cast votes against 94 CEOs running for re-election to corporate boards outside of their own in this year’s proxy season, up from 32 last year, according to a report from the asset manager.
This change reflects BlackRock’s concerns about CEOs over-extending themselves. It also represents a shift in its actions. Under its previous guidelines, the asset manager had considered two external director positions beyond the CEO’s own board as manageable. This is the first year the firm is more strictly enforcing its new policy by voting against CEOs.
‘It sounds fine to sit on multiple boards, but what happens when something goes wrong at a company?’ BlackRock vice chair Barbara Novick said. ‘More and more companies are limiting how many outside boards their CEOs can sit on.’
Source: Corporate Secretary
8.TO BE OR NOT TO BE: Combined Chair and CEO Roles?
In their 2020 Annual Policy Survey which usually signals potential changes in its proxy voting framework, ISS acknowledges the long-debated questions of whether independent board leadership is essential or whether a lead independent director is an acceptable alternative to an independent board chair.
Specifically, ISS asks what factors or circumstances would most strongly suggest the need for an independent chair.
Examples provided by ISS are as follows:
- a poorly-defined lead director role
- governance practices that weaken board accountability to shareholders (e.g., a classified board, plurality voting, inability of shareholders to call a special meeting, lack of a proxy access)
- lack of board refreshment or board diversity
- poor responsiveness to shareholder concerns
- long-term underperformance relative to peers
- scale/complexity of the business (that is, a larger or more complex business indicating a greater need for stronger separation of the leadership roles)
- excessive or poorly-structured executive compensation
- a corporate crisis (e.g. a serious regulatory scandal, security breach, accounting scandal, or product/operational failure).
Source: Weil
