Below are some notes I took during the morning sessions at the Corporate Directors Forum 2014, held on the beautiful campus of the University of San Diego, January 26-28, 2014. This year, I was only able to attend on January 27th. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion.
This is always a great event. The more of these Forums I go to, the more I am catching up with friends and colleagues and less time I spend taking notes… still plenty to learn. If you are a director or candidate, investor, senior corporate officer, board or management advisor, academic, or are in some way part of the corporate governance industrial complex or want to be, I hope to see you there in 2015. If you attended the Forum this year and have ideas for articles you would like to see or to write for CorpGov.net, please email me your ideas or drafts. Part2.
First, a quick shout out to Linda Sweeney, Executive Director, Corporate Directors Forum; Larry Stambaugh and Michael J. Berthelot, CDF program co–chairs; James Hale, Anne Sheehan, and Aeisha Mastagni, meeting co–chairs, as well as the sponsors, for making this important event possible.
Shareholder Hot Topics
Moderator: Ann Yerger, executive director, Council of Institutional Investors. Panelists:
- Kerrii Anderson, chair, Chiquita Brands; former president & CEO, Wendy’s International
- Michelle Edkin, managing director, global head of corporate governance & responsible investment, BlackRock
- John Keenan, corporate governance analyst, AFSCME
- Robert McCormick, chief policy officer, Glass Lewis & Company
So, what are the hot topics? Compensation – 2nd year of smaller companies having to deal with say on pay. How do we ensure independence, refreshment of directors? Issue of compensation of directors by investors and possible shift to constituent representation? Watching binding say on pay in Australia. Diversity (companies should disclose a robust process- language in charter or bylaws, proof in new appointments), political spending and citizens united, proxy access, director accountability, board leadership (such as split chair/CEO). Regarding diversity (or perhaps any other real change), it is helpful to have 1/3 of the directors to change the dynamic. This year there is more focus directly on boards. For corporations, getting their proposals, including say on pay and stock plans approved takes some increased level of engagement. About 1/3 to 40% of shareholder proposals get withdrawn. Director tenure is increasing, even though so many at the Forum are calling for board “refreshment” and greater diversity.
Put your arguments in plain English, so the lowest level analysts understand. Not brought up at the Forum, but I recently learned that some of the outsourced proxy research is outsourced to analysts paid as little as $300/week. If true, plain English becomes even more important.
Approach with open mind. Not us vs them. This is an opportunity to hear concern. If a shareholder proposal wins a majority vote, there needs to be action. How is your leadership team engaging with proponents? If the company is changing strategy on corporate governance elements, then disclose. But simple disclosure is not enough. Shareholders want to know the depth of commitment. If contacted after the proxy is out, shareowners feel like the outreach is a solicitation not engagement.
Director engagement is situational, not the real norm at this point. It isn’t the right thing for every board or situation. Having the right director engaging is critical. Much depends on who’s comfortable and can represent the board in this situation on this issue. Directors should not address shareowner issues off the cuff. Be on message. You are there to listen. Engagement is productive when there is a need. Early radar. Not operating in a vacuum. Do a mock interview first. Need to communicate with outsiders.. not just insiders, so watch use of insider terminology. Some directors are “past their best-buy date” and a little bit behind the curve. They shouldn’t be the representatives (and shouldn’t remain on the board).
How manage the demands for engagement? Is there a reason? “We’re not doing it to get to know each other. I’m sure everyone is lovely.” Most are not going to give a green light in advance. Anticipate something coming up that will concern shareholders before proposal. Anticipation. No one is willing to have that conversation past the best buy date. After engagement some director decides it time to spend more time with the family (they can blow it that badly). Often, issues should be brought up by chair of governance committee or board.
If the meeting is about CEO compensation, don’t send the CEO! Don’t send a compensation committee chair who has to ask the compensation consultant during the meeting how the compensation plan works. Significant improvements in disclosures on how pay plans work and how evaluated. Reminder that compensation is not the only subject and it is more of a symptom than a cause. Downfall is more likely to be not doing job or poor risk analysis.
Use of social media? I use it but not to discuss board. Not best vehicle. Not much influence. Maybe use as an announcement of a filing.
Here I will get specific, despite the Chatham House Rule because I’m sure McCormick would welcome it. During the conversation he said Glass Lewis tries to make its updates well before the meeting… usually well before most votes. If they recognize and correct and error (about .001% of the time), they will alert clients through e-mail. If companies or investors see an error, he asks that Glass Lewis be notified through its dedicated e-mail box, which I believe is email@example.com.
NACD reported that only 39% of companies surveyed had formal succession planning, 55% have an informal process and 6% none. Download The Boardroom Guide to Succession Planning. How should succession planning be disclosed? If not done well, it will look like your company believes in the indispensable man theory. Lack of planning can create a real vacuum… then you have to go outside firm for “superstar.” Should not just be we have a plan; trust us. Give enough information on process and procedures – regular agenda item with board – to be informative. Frame it to the CEO as a “legacy issue.” Disclosure should talking about why… and how we look at talent beyond the c-suite? How do we ensure the expectation of key people when one gets the appointment but others don’t? External CEOs only make a dif when a company really needs a change. It is generally much cheaper to train them from within. Strategy and talent development. Not just CEO, but directors and top management as well.
CII doesn’t endorse age or years but directors say they need a gracious way to refresh. I would say that most on the panel and of those attending prefer a more robust board evaluation. In the UK, directors are said to have lost independence after 9 years. Better approach than term limits but in many boards too few have the courage to have that conversation. Need to normalize the internal conversation. Individual board members should take ownership of their responsibilities – have one on one with governance chair. How could I have contributed more? If the board won’t have the conversation about succession planning, they probably aren’t having other required conversations as well.
Larger companies are no longer immune from shareholder pressures. Most board members value their own contribution highly. Do get feedback on how your process could be improved. Everything you do and don’t do sends a message. People are watching you.
An audience participant talked about their experience of adding a non-director facilitator for ongoing evaluations and to tackle awkward issues. This was done at a nonprofit. A public companies, this is usually the lead director or chair’s role. Many would bring in an outsider as part of evaluation over an extended period of time, if in need.
Political contributions. What gets disclosed gets managed. Lobbying dwarfs political campaign contribution 10 to 1. Shareholders asking for process. They want to ensure contributions are not just at CEO’s bequest. Sunlight is best disinfectant. Want to ensure they are done on the up and up. Reputational risk if not. ALEC group support of ‘stand your ground‘ used as an example. Does the board have a process and are they overseeing it? There is a fine balance between disclosure and procedures. Pfizer and Prudential were cited as good examples. I’m guessing both were started under Margaret “Peggy” Foran‘s leadership. For this interested in digging further, see The Conference Board Committee on Corporate Political Spending.
Moderator: Mary Ann Cloyd, leader, Center for Board Governance, PwC.
- Panelists Laura Berry, executive director, Interfaith Center on Corporate Responsibility
- Silvia Garrigo, manager, shareholder engagement, Chevron Corporation
- Susan H. Mac Cormac, partner, Morrison & Foerster
SASB integrated reporting and IIRC, complement each other. Integrated reporting marries financial and non-financial to understand impact of non-financial on financial. SASB material indicators. Externalities not appropriately priced. Only a few people in the room knew much about the topic, so another important topic introduced. Sustainability (tend to mean environment) ESG with focus on G even though really talking about E & S as well. Risk factors around changing legislation – reports for GRI, carbon disclosure project. 20,000 data points not financial. How do you determine which are material?
IIRC more EU focused. Should work with SASB to get reporting similar. Now determining for each industry. Material by sector and should be included on 10-K and 10-Q. GRI now in 4th version. Indicators important by industry – sustainability lens. SASB board is mainstream compared to IIRC. Meeting with SEC quarterly. Trying to get SEC to come out with guidance and won’t need rule change. What information do shareholders want?
ICCR, on the other hand, is a coalition of interfaith investors founded in 1971, which has been the largest proponent of proxy proposals around environmental and social issues over last 40 years. Technological capacity to handle data has exploded. Question, what is the important data? Translate risks, opportunities, and externalities to money. Creating a lot of noise without agreement on that data. Core is the long-term health of our companies. Some would argue their timeline is eternity. They are certainly serious long-term investors.
Integrated reporting. There are about 110 companies looking at the data to determine how green or responsible companies are. Let’s have agreement on auditable standards and get away from greenwashing. Engagement with mainstream and our CSR investors. Mainstream wants detail connecting to financial performance. Board oversight process. Compensation. Non-mainstream focus on policy issues. We haven’t seen convergence.
Most will look at these factors from time to time… at something that raises an alarm. What reasonable amount of information is need to buy the stock or vote shares… that is SEC concern. Only 1% integrate sustainability with accounting. 43% link exec comp to sustainability. Reliable, verifiable and auditable. That’s what is needed. Companies must tell a story. It is less about specific policies, more about how applied. Reported by country. Much is nice to know but not need to know.
There is a deep level of concern about conflating anecdote vs data. Much we take on faith, based stories. How companies create value and how anticipated by investment community. Most good ideas start with the story. Imagine a different future… live into the next 20 years. Want new mechanism to get data to investors. Capture the anecdotal information in a more rigorous way with the data. Build more rigor around the conversion.
Stranded carbon assets. Dangerous if not paying attention. Political influence – risks inherent. Marketing practices and gathering big data – computation capacity to figure out some of these other emerging issues and how valuable it might be. Two primary reasons not to like: disclosure overload and liability. The more you disclose, the more likely you are to be sued. Should help simplify process if we can report agreed upon data. Could it lead to restatements? Healthcare standards decided. Not requiring new data but used in a better way to digest. Analysis of CSR reports close in coming to say material but not reporting in 10-K and 10-Q; would that be problematic?
Simplification? Many believe cost has outweighed benefit for most reporting. Transparency – 50/50. No new rule. Concrete data rather than boilerplate. 20-30,000 factors but only 30 may be material. Holy grail is to integrate good reporting and behavior, which leads to profitability and higher stock prices. What does SASB add to what we do and what is their a benefit?
Remember, emphasis is not on requiring more information – streamlining to the essential is what SASB is trying to do. Engagement has flipped… more in last few years. SASB will impact leaders less but will lift up the other companies. You can’t process through the information now; there is too much of it. Yes, their are costs associated with gathering information. “Every time we engage with ICCR we get blessed.” We did that on human rights policies and had very constructive results. More concerned with “special interest” inquiries that are not material at the enterprise level. Standards are out for two sectors at SASB.
Series of new corporate forms to create an additional fiduciary duty for various social or environmental factors. Benefit form. Shareholder rights bills. Creating enormous revenue opportunities for accounting firms. What’s auditable? No accounting firms on SASB board. Accounting firms only ones that have independence. They have the process to link these factors to financials. How to quantify that which can’t be quantified. Need statements with enough specificity that you can draw conclusions. ESG factors are equally important.
Material vs not. In 5-10 years we may be putting a value on water. How do you raise to enterprise value and level if operating in water rich and water poor areas. IRRC members (and most in the investment community) are not willing to accept lower returns for nonquntafiable risks. They have fiduciary obligations as pension funds.
CSR/ESG measures should be built into management incentives. Clients want to know what the factors should be around exec comp. Often functional equivalents are already there. Safety, people, environment. Look to what you are already doing re sustainability metrics. Make sure data reported up front for purposes of performance review. Third party verification with ISO, valuable? Yes, to ensure process in place to collect and report… but that’s it. They don’t have technical expertise to ensure information is correct. Seal of approval doesn’t mean robust. You are getting certification from people you pay but who are not in a regulated industry like accounting.
Hierarchy of impact. Highest is we will go to the press on companies making progress. Tooting the horn of Ford when they came out reducing emissions. Honored Disney recently on food advertising. Prefers publicizing good behavior, not bad. See also, Integrated Reporting and Corporate Value Creation: What It Means for Investors (Video).
Moderator: T.K. Kerstetter, chairman, NYSE Governance Services, Corporate Board. Panelists:
- Timothy R. Baer, EVP, general counsel & corporate secretary, Target Corporation
- Charles M. Elson, chair & director, Weinberg Center for Corporate Governance, University of Delaware; director, HealthSouth Corporation
- Laban P. Jackson, Jr., director, JP Morgan Chase; chairman & CEO, Clear Creek Properties, Inc.
- Aeisha Mastagni, investment officer, corporate governance, CalSTRS
All companies must face the realities of director turnover and building more effective and diverse boards. What are the options or prudent mechanisms around refreshing boards without dictating a one size fits all solution? Directors are getting on boards at younger ages, like 29 and 31. Recent PwC survey found that 35% of current directors say yes, there are people on their board that should be replaced. Male, pale, stale; can they keep pace with risk? 72% have retirement age. 16% of Fortune 500 have term limits.
Many do not see a correlation between independence and length of service over 10 years. Historically, CEO appointed directors. CEO has less authority. Now it is a “staleness” issue. If you have been there that long, you might just be too comfortable. Freshness of perspective is needed. Too long and directors begin to feel like they own the place. It is not independence issue anymore.
If governance committees did their job we would never have these conversations. They need the guts to fire people. What are their refreshment mechanisms? Will certainly ask if everyone has been on the board for a long time but may also ask diverse boards how they do it and how it works. Can silence dissent with board evaluation process but limiting term to 15 years can reduce heavy lifting required by governance committee – lifting they may be unwilling to do.
Some directors are captured by CEO in first 10 minutes, some never. Boards forget who they work for. Simple if they keep the shareholders in mind. If it was your bridge partner, you would tell them. Have several ways; many adopted decades ago. Must offer resignation if position changes. Cultural element. Term limits. Be constantly in the market, looking for next great director. Creates dynamic that is healthy. No longer personal because engrained in culture.
How important is it to refresh? Only 6.5% said not important in Corporate Boardmember survey. Most effective tools? 49% said age ceiling; 89% said board evaluation. Term limits came in the lowest. Peer to peer reviews can be critical. If on bottom two years on a row at some companies they have to submit resignation. To get diversity we need change.
Refreshed with experts. Looking all the time for stars. Refreshment is critical. Often believe they own the place. Term limit forces them out. I was once on a board where the average age of board was 82, said one. Organization had stalemated and didn’t grow. Can’t change a board overnight but have to gradually turn over. Board should turnover completely over 15 years. If you do have a term or age limit, keep in mind that you get in trouble when you waive it.
How do you refresh? Skills matrix for the board for the type of experts needed. Look for gaps. Create preferred profile for your superstar new boardmember. As board shifted to monitoring, need more specific experts and skill sets. Companies that outsourced facilitation of board evaluations say they would never go back because difficult to criticize each other. One concern is the possibility of using evaluations to stifle dissent.
Most often board decisions are unanimous. Healthiest is if directors retain no hard feelings when you walk out the door. Honor the dissenters. Differences with founders are the toughest. They have a hard time accepting that once they go public it is no longer their company. Get an outside facilitator every 2-3 years. Benefit of arms length. Everything comes back to board leadership. Select the right people; have the right structure. Investors want to know the company “gets it.”