Rob Swystun, Pristine Advisers
With a new year stretched out in front of us, we take a look at what will be important for company directors this year with the help of Robyn Bew, director of strategic content development with the National Association of Corporate Directors, who recently sat down for an extensive interview with Metropolitan Corporate Counsel about what the year ahead holds for boards and the investors who elect those boards.
Investors Will Continue to Shout
Investors have more influence now than they did five or 10 years ago, Bew says, and will continue to speak with louder voices in 2016. And that doesn’t just mean activist investors. Major investors last year were proactive in telling boards exactly what was expected of them from an investor standpoint, marking a shift in corporate governance from a unilateral board responsibility to a shared responsibility between boards, management and investors.
Investors Will Continue to Drive for More Fulsome Views of the Companies in which they Invest
Heads of the corporate governance teams at major institutional investors are working closely with their counterparts on the portfolio management side of the big investment houses and because of this close collaboration, the degree of alignment — or lack of alignment — between a company’s strategic objectives and business decisions on one hand and things like CEO compensation plan design on the other hand become apparent, Bew explained.
With these conversations being less compartmentalized than in the past, a company’s approach to shareholder communications needs to be well-coordinated and well-integrated with the investor relations team and the corporate secretary’s team working in tandem, in terms of their outreach to the investor community and also in reporting information back to the board.
The Era of the “Activist Board Member” Will Continue in 2016
As has been happening since about 2007, the level of time investment by directors will go up, as directors focus on staying current with trends in the company’s industry, Bew opines. Staying up to date with current trends could include everything from reading trade publications to asking management to organize visits for the board with suppliers or key customers to attending industry conferences or asking the NACD what they recommend on various governance issues.
Bew says directors will be more inclined to seek information from sources outside the company, which shouldn’t be a sign that directors don’t trust management. Rather, Bew sees this as an indication that directors are taking their jobs seriously, and they want to be as well-prepared as possible to engage with management on the important issues that are being discussed in the boardroom.
“Directors are seeking ongoing education to keep their boardroom skills fresh,” she said.
The Constant Threat to Cybersecurity Will Make it a Broader Concern for Companies
There is a growing realization, according to Bew, that cybersecurity is not an IT issue that can be compartmentalized and given to the IT department. It’s a business issue and an enterprise risk issue that has to be part of every key conversation about how the company is doing business, including:
- Human Resources: What are the company’s HR policies, and do they account for things like access to data? How are employees being trained on things like not responding to a spear-phishing email by clicking on a link?
- Business Development: If a company is entering into a new joint venture agreement or a new supplier contract, is it having conversations involving understanding privacy, data security and cybersecurity?
- Board of Directors: How does the company think about technology and how technology drives business strategy? What does that mean in terms of how secure the company is in its operations across the enterprise on a day-to-day basis?
Regulation FD Will No Longer be an Acceptable Reason to Cite for Not Engaging Investors
The concern that the NACD hears from directors about Reg FD is related to the prohibition on selectively disclosing material nonpublic information, Bew says. Because directors don’t want to do anything that would run afoul of that rule, it has been used in the past as a reason to avoid interaction with investors.
However, the NACD plans to continue to emphasize that Regulation FD is not a barrier to investor relations and shouldn’t be seen or used as such.
Most of the topics that investors typically want to discuss with directors don’t have anything to do with details about business operations, Bew explains, and investors are well-aware of Reg FD themselves, and they understand what questions are appropriate to ask management versus the board.
“Typically, if investors are asking for a meeting with a director, it’s because they want to talk about issues like board composition or executive compensation,” Bew said. “Those would be instances where they have specific questions about how the board is handling those things, and so typically, they would want to talk to the lead director, the nonexecutive chair or the compensation committee chair.”
In these situations, boards should work with general counsel and investor relations to prepare for those meetings by developing an agenda, preparing discussion points, making sure they are briefed on the policies and priorities of that specific shareholder, then have counsel or someone from management attend the meeting.
Companies will Need to Communicate their Board Refresh Strategies to Investors and Bring in Third Party Experts When Applicable
Investors want to know the approach the board is taking to striking the right balance between continuity and keeping the board fresh, Bew says.
Companies need to either provide a rationale as to why the board believes its current composition is best-suited for the company’s situation and needs, or outline the action steps the board’s going to take to change things.
Proxy statements will also continue to evolve and present information about board composition in a more user-friendly way with items like a summary chart or table that explains the overall mix of skills and experience on the board so when investors look at everything together, they can see what the complete board looks like.
Recognizing that boards may need certain skills and knowledge right away and cannot afford to wait for the next round of director elections to bring them in that way, Bew says it will become more of a regular occurrence for boards to bring in third-party experts as sources of information to brief the board and share expertise.
If boards want to keep up to date on something like cybersecurity, for example but don’t have a cybersecurity expert on the board, or if they are considering entering a new global market but lack a director who has experience in that particular region, Bew says, boards will be inclined to bring in government experts or experts from third-party firms to periodically brief the board so they can have that expertise in the board room without necessarily having to have a director with that specific skill set or experience.
“The important thing is to make sure that you’ve got the right expertise into the boardroom dialogue, via whatever channel is most appropriate,” she said.
Compensation Will Need to be Communicated More Clearly than Ever
As CEO and senior executive compensation is one of the most visible examples of how the company’s values, strategy, performance goals, objectives and talent philosophy come together and intersect, compensation committees and boards should look at three questions:
- Does the pay plan design clearly reflect the company’s strategic short-term and long-term objectives?
- Are behaviors that are going to get the company to those strategic objectives being rewarded?
- Are decisions about the company’s pay philosophy, the design of the compensation plan and the actual pay outcomes being communicated in a way that is clear and understandable to shareholders?
Just like with board composition, the CD&A section of a proxy statement should use graphics, executive summaries and other tools to get the message across in a way that is as reader-friendly as possible.
Reader Friendliness Will be the New Benchmark of Success for All Documents
Citing the most recent GE 10-k as an example, Bew says companies should eschew the long, boring, black and white, standard, two-column format for documents and instead invest time and resources to make these documents easy to read like a magazine. These documents should include elements that make them compelling and allow investors to get an integrated picture of the entire company. She especially likes the slide deck at the front of the GE 10-k that explained how the company allocates capital and how it oversees risk.
Companies Going Public Will Need to Seek Investor Input into Board Practices
Many investors have told the NACD they are concerned when they see a board is unilaterally and without reason putting policies in place that undermine shareholders rights, such as classified boards or dual-class shares. This often happens when companies preparing for their IPOs just take their advisors’ recommendations without seeking any broader input, Bew says.
Investors and potential investors are looking for an explanation behind the rationale of having a board structure or bylaw that appears to impinge shareholder rights.
“‘We’ve weighed the alternatives, and here’s why we came to this conclusion’ sends a really positive signal,” Bew said.
Making an Effort to Hear Directly from Investors Will be an Expected Activity for Directors
Whether they listen in on analyst calls, attend the company’s investor-day presentation or invite an investment analyst in to present to the board, directors should be hearing from investors directly to gain a different perspective on the company. Bew says directors who have done this have found it highly informative.
Directors Will be Expected to Strive to be a Strategic Asset of Their Company
Over and above what’s required from a statutory standpoint in terms of independence and financial literacy, directors should have specific skills and experience that are relevant to the company’s current needs and relevant to its future strategic direction, Bew says.
They should bring diverse perspectives to the table and an openness to hearing and discussing diverse views from others, whether that’s fellow directors, members of management, investors or other stakeholders.
Directors also need a willingness to do the homework in light of board agendas that keep getting longer and expectations for directors that keep getting higher.
The new year promises to ask more of directors than has been expected of them in the past. More engagement, more proactivity and more effort are in store for 2016. Board members better be prepared.