Shareholder Hot Topics: Corporate Directors Forum 2018

Shareholder Hot Topics: Introductory Notes

Most of the Corporate Directors Forums I have attended in San Diego start with “Shareholder Hot Topics.” There is widespread interest in the subject from directors, management, shareholders, consultants and academics. This year the Forum had an overall theme, “How Culture Impacts the Boardroom and Beyond.” Corporate culture is the hot topic, especially after the NACD Blue Ribbon Commission Report on Culture as a Corporate Asset. See also Earning It: Lublin @ Corporate Directors Forum.

Like all Corporate Directors Forums, this one operated under the Chatham House Rule, so you will not find any direct quotes below. These are my notes on Shareholder Hot Topics. As such, they include my opinions as well observations made by speakers panelists and others in attendance at the Forum. This is certainly not a transcript. However, I hope even those who attended the Forum will find the post useful, especially my attempt to provide additional context through links and commentary.

To learn more about the Corporate Directors Forum, click on the following: @corpdirforum on Twitter, tweets from #CorpDirForum2018 that often link to other posts, website, and Linkedin.

Shareholder Hot Topics: Panelists

• Moderator Alfred E. Osborne, Jr., Director, Kaiser Aluminum; Sr. Associate Dean, UCLA Anderson School of Management
• Margaret (Peggy) Foran, Chief Governance Officer, SVP & Corporate Secretary, Prudential Financial Inc.
• Aeisha Mastagni, Portfolio Manager, Corporate Governance, California State Teachers’ Retirement System (CalSTRS)
• Yumi Narita, Vice President, BlackRock Investment Stewardship

Shareholder Hot Topics: Takeaways

• Wells Fargo, how did they not know? They should have known. Troubles continue. (Wells Fargo’s 17-month nightmare)
• Integrated reporting on ESG should bein the proxy, not in a separate sustainability report.
• Engagement with shareholders is crucial. CalSTRS/Jana Partners letter to Apple is another huge step. Tech huge influence on society. Companies should have positive proactive engagement on responsibilities around choices and making products even better. Not just short-term profits. Used in most optimal manner. You have to be prepared for everything.
• We all have limited time and resources. How do you ensure collaborative approach? We are asking a lot. Spending more time on E&S, SASB metrics… can be several hours prepping and writing up meetings. Managing time and making sure right people are sitting around the table. Companies cannot engage with all shareholders, so we have to cost-benefit analyze to focus.
• Board members need to be curious about issues and trends. “Duty of curious inquiry” should be added to duties of care and loyalty.
• Who should speak to shareholders? CEOs shouldn’t be on the compensation calls.
• Sending out board diversity letters? Those would go to Nom/Gov committee. If board issue, ask to engage with a director.
• Boards are helped if they have a chief governance officer. That role can be played by corporate secretary or other dedicated staff. That person needs to be able to risk giving honest feedback to the board.
• Good to have experienced board members so they know what common practices are but also need some with curiosity and fresh ideas.
• Lawsuits and incentive structures – how set up? Some companies over report out of caution.
• Boards are really paying attention to cybersecurity. The gift that keeps on giving. Now taking a significant amount of time. Not a day goes by that they are not trying to get us. Companies testing their own employees to see if they are easy spear phishing targets. I agree with Commissioner Stein, the SEC could be doing more to help. Statement on Commission Statement and Guidance on Public Company Cybersecurity Disclosures.
• Board Skills Matrix – NYC and other shareholders are looking for boards to be reflexive about looking into performance. Average tenure, skills … we can only look at tip of the iceberg. Give more rationale. What are your mechanisms? Skills and experience metrics should be in proxy. Diversity – Yes, we need some directors that have seen several cycles but also need those with fresh look. Boards are addressing board members who add no value. Some may think some aren’t performing because they are prejudiced. Engage to give companies opportunity to change. If they don’t, fund may vote against nominating committee or even entire board. Diversity of phenotype vs genotype. Get outside your network. Everyone can benefit from unconscious bias training. More.
• Utmost is economic well-being of clients. There is no conflict between ES and adding value. Maintain innovative culture but be responsible.
• Companies don’t always respond. I was surprised to learn that many companies refused to engage after being sent letters by their largest shareholder. I was to naive to think that was even possible.

Shareholder Hot Topics: Supplement

Significantly since the session, the Federal Reserve took action against Wells Fargo on Chair Janet Yellen’s last day in office. These actions are likely to reverberate beyond the financial sector and underscore the evolving role of directors (Federal Reserve Takes Severe and Unprecedented Action Against Wells Fargo Implications for Directors of All Public Companies, Wachtell Lipton):

• Characterization of compliance breakdowns as failures of governance and board oversight;
• Required replacement of board members;
• Censuring of directors after they had left the board for “lack of inquiry and lack of demand for additional information”;
• Expressed view that a board’s composition, governance structure and practices should support the company’s business strategy and be aligned with risk tolerances;
• Expectation that business growth strategies be supported by a system for managing all key risks, including those arising from performance pressure and compensation incentive systems and the potential that business goals could motivate compliance violations and improper practices;
• View that “management assurances” of enhanced monitoring and handling of known misconduct be backed up by “detailed and concrete plans” reported to the board; and the citation to the company’s published corporate governance guidelines detailing duties and responsibilities that were not fulfilled.

Note: Photos by Bob Ross, courtesy of Directors Forum 2018.