Boards of the Future: A Conversation With Richard W. Leblanc

Professor Richard W. Leblanc recently posted an article to his blog titled The Boardroom of the Future: Changes that will reshape corporate governance that merits wide exposure. Leblanc is a tenured, award-winning teacher and researcher, consultant, lawyer and specialist on boards of directors… a recipient of Canada’s Top 40 Under 40™ award. His research expertise is in corporate governance, specifically in the effectiveness of boards of directors.

At first read, I loved the post… but then got thinking the devil is in the details. My questions and comments are in italics. Professor Leblanc is a provocateur, setting us thinking and perhaps taking necessary action now. A day later, here is an updated version with Leblanc’s responses below my questions and comments.

Democratization of governance

Your shareholders will nominate and elect your directors by electronic voting directly on your website. They will base their vote on the accomplishments of each director and track record of acting in the best interests of shareholders and the company overall.

Electronic registries and meetings will be the primary basis upon which shareholders select directors to your board. Director competencies will be fully disclosed.

What changes are necessary with regard to share registration or otherwise for elections to be held on corporate websites? Why should shareowners trust the company? Will boards of the future be releasing their minutes? What would be the basis of a director’s track record? Will directors face an opposition? If not, how will disclosure of competencies make any difference?

Let me start from the last question and work towards the first. Director competencies are not disclosed for the most part, beyond boilerplate bullet points of past positions drafted by legal. I am talking about a specific competency matrix of what competencies directors possess and to what degree, so shareholders know whom to nominate and vote for. Director performance also needs to be disclosed fully, so shareholders have meaningful information upon which to vote. Boards will have to assess individual directors and board leaders (chairs and lead directors) if they do not already to this, and disclose the results. The foregoing will be the basis of the director’s track record. Director performance indicators will be like any other team (sports or management) and public.

I am not sure boards will be releasing minutes. They will argue confidentiality, but we have seen that risk and compensation metric arguments argued on this basis are not all that persuasive, to regulators.

Shareholders should trust the company so far as end to end voting and its integrity is assured. We are a long way from this happening. Good point. However electronic voting is inevitable given the technology and its accessibility. Other financial institutions, associations and professions have started electronic voting (on their websites) for their boards by voting directly by their members on their computers with a password.

There will need to be shareholder identification (respecting privacy), coordination, engagement and voting platforms established on corporate websites. A central clearinghouse might be used, but companies and shareholders both have the most at stake in getting it right. Companies have the resources and should bear the cost. Shareholders should be able to post information on agenda topics and seek proxies from other shareholders, on the company’s website.

Diversification of boardrooms

Your board will be 40% to 50% women and have far fewer CEOs on it in the next five to seven years. Your directors will be independent experts within their relevant strategic domains, will be quick studies, and will have access to the best learning of the company. They will request an Office of the Board be established. Board tenure will not exceed 9 years.

Why should we expect so much progress over the next five to seven years? Will an affirmative action program be mandated or will boards just see the light? What will be housed in the Office of the Board?

I probably should have said 5 to 10 years, but the change has already started. We should express so much progress because regulations are afoot (quotas, targets and/or full disclosure) in the UK, US, Germany, France, Australia and several other countries in the last few years. Shareholder and industry associations are preparing (CalSTRS, NACD, etc.) for the diversification of boards. It won’t be possible to credibly resist and have male- or CEO-dominated boards, without being offside on regs or encountering the wrath of shareholders and the public. Diversity (all forms, including background, perspective, age, as well as gender and ethnicity) has been said to be the number one issue in governance. Change is inevitable. Long-serving (15+ years on the board) male directors and chairs who are laggards out of self interest will be shamed, cajoled by progressive directors and eventually replaced to make room for renewal.

Resources and expertise the board needs will be housed in the Office of the Board. The information and assurance processes are so vital that relying solely on management, or allowing management to control the purse strings, is wrong. Expectations on boards have never been greater. Boards can’t work harder. They need to work smarter. They can’t have all these responsibilities and not have the necessary tools and availability to fulfill them. This is where the Office of the Board assists.

Corporate reporting

Reporting to shareholders will be fully integrated and online. Non-financial risks and internal controls will be independently assured. All reporting will be accessible, complete, accurate and independently validated.

What kind of tools will shareowners have access to? Who will audit non-financial risks and internal controls? 

Re: who will audit non-financial risks and internal controls, it will be internal audit and external audit – the same as S-Ox and financial controls, except the whole audit committee assurance process and learning will now move to compensation and non-financial risks. The big4 will want to get into assurance processes over safety, the environment, health, etc., as this is a revenue stream and an annuity, like the financial assurance was. Specialized niche auditors will also be used. Over the next 5-10 years, assurance standards will be developed like GAAP and GAAS for financial accounting and auditing. The movement towards integrated reporting (in other words, no separate financial reports and CSR reports, where companies can pick and choose (game to their advantage), but one report with discipline, rigor and consistent standards) will accelerate the development of reporting standards and assurance processes for non-financial risks.

Re: tools, with standardization of non-financial reporting — There will be metrics, ratios and comparables, similar to financial ones. Tools will be digital/electronic and shareholders will compare and contrast non-financial reporting with ease, as will directors.

Certifications over financial reporting (S-Ox) will also include independent assurance over non-financial reporting. No longer will the CEO and CFO, by themselves, say all risks and controls are fine. South Africa for example under King III is already starting to have audit committees insist on external assurance over non-financial risks. In the UK, external board evaluations now have to occur. BP and NOTW were failures of non-financial risk management. Independent assurance would likely have prevented or at least detected the mis-management before it was too late.

Technology

Your board will be paperless and directors will have access to any piece of information they need to oversee and advise management. Technology will be used to attract and communicate with international directors. Risk appetite frameworks, established by the board, will translate into clear incentives and constraints using integrated firm-wide information systems.

And board members will be doing a lot more work between formal meetings.

Exactly right Jim. It won’t be the case that you close your binder and forget about the board till the next meeting. It won’t be the case that you get press clippings and emails on what is happening between meetings, or a phone call. Directors will monitor things this for themselves, on their iPads, using customized and secure dashboards, digital media and tailored analytics. The best boards are already paperless and doing this.

The continuity of directorship will change the workload and relationship to management for directors. Wise chairs will need to ensure boundaries are respected. A director will check in (and check out) the companies of which they are a director at least weekly to keep abreast of performance, risks and developments. The technology alone will drive this. With XBLR and tags, directors will see how their companies’ performance compares to the competition with ease, anytime. Consulting fields will change too as information and performance will become readily accessible not like it was.

Executive compensation

Executive compensation will be established by shareholder-directors. Professional standards will be imposed on any consultants retained by these directors. All compensation will be fully risk-adjusted and linked to performance. Current models and methods will change significantly.

Promises, promises. Aren’t all directors shareholder-directors? What does that mean? All directors are shareonwers? They are nominated by shareowners? 

Compensation committees (indeed, all directors) now are not selected by shareholders directly, and not beholden to them as a result. SOP voting was by institutional shareholders, who own 70% of US companies according the NACD conference (a lot in other words, up from 10% in 1960s). The majority of voting, if the figure is correct, was not by beneficial owners of the stock, who even then had to mail in their proxies or attend meetings in person. Institutional shareholders may not appropriately oversee asset managers and conflicts of interest may exist (see EU Green Paper) by asset managers or the institutional shareholder who do business with the company.

More importantly, shareholders (retail or institutional) do not have proxy access, but this is also inevitable even if through private ordering. And access may be at less of a threshold than 14a-11 was.

The business associations will fight but it is still a closed shop (directors and management) in terms of directors serving on boards. So the future is shareholders as I said, selecting directors directly, and these directors (“shareholder-directors” as I term them) would oversee compensation, as opposed to what we have now. Most directors own stock yes, but they are not “shareholder-directors,” at least as I’ve defined them.

Office of the Board

An Office of the Board will be established. It will house independent staff and resources available and accountable to the board and paid by the company.

Give us a glimpse of their activities. How will it really function differently than the corporate secretary?

The corporate secretary is a part of management and works for the CEO, directly or indirectly. The Office of the Board (or Office of the Chair or Office of the Lead Director) would be a separate “secretariat” if you will whose role would be information and assurance. The Office would be tailored to the needs of the board and may even be co-sourced (need to think about this). The important thing is that personnel are independent and paid by the board, and probably don’t even have an office at the company to avoid capture. Protocols would be set up so management knows Office personnel are agents of the board. The Office would not micromanage or compete with management, but would be a repository for training, resources and advice for the board and its activities. Other assurance providers (audit, compensation consultants, search firms, etc.) would communicate/coordinate with the Office. Think of the Office as the arms and legs of a board that currently doesn’t exist. Rather than being infrequent visitors, the Office provides continuity and a counter-point when necessary so the board or a committee is not out gunned and out resourced by management.

Regulation of corporate governance

The unprecedented intrusion into the governance of companies will continue until most or all of the above reforms are implemented.

Conclusion

The above changes are significant and will fundamentally change the way directors are selected and how boards control management.

Great vision Richard, but what I’m seeing is still a pretty fuzzy picture with a lot of assumptions. Can you turn up the focus? I’d like to see you frame this out a little further. Great start.

And he did. Thanks for filling in the blanks Richard. I must say, Professor Leblanc seems to think a lot of what I’m fighting for is inevitable. I sure hope so but I don’t feel I or other shareowners should assume so. Keep up the struggle. However, it is nice to know we have already won over one Canadian on many issues.

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