Risk Management and the Board of Directors—An Update for 2014

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Daniel A. Neff, Andrew R. Brownstein, Steven A. Rosenblum, and Adam O. Emmerich.

Introduction

Overview

Corporate risk taking and the monitoring of risks have remained front and center in the minds of boards of directors, legislators and the media, fueled by the powerful mix of continuing worldwide financial instability; ever-increasing regulation; anger and resentment at the alleged power of business and financial executives and boards, including particularly as to compensation during a time of economic uncertainty, retrenchment, contraction, and changing dynamics between U.S., European and emerging market economies; and consistent media attention to corporations and economies in crisis. The reputational damage to boards of companies that fail to properly manage risk is a major threat, and Institutional Shareholder Services now includes specific reference to risk oversight as part of its criteria for choosing when to recommend withhold votes in uncontested director elections. This focus on the board’s role in risk management has also led to increased public and governmental scrutiny of compensation arrangements and their relationship to excessive risk taking and has brought added emphasis to the relationship between executive compensation and effective risk management. For the past few years, we have provided an annual overview of risk management and the board of directors. This overview highlights a number of issues that have remained critical over the years and provides an update to reflect emerging and recent developments.

…continue reading: Risk Management and the Board of Directors—An Update for 2014

An Informed Approach to Issues Facing the Mutual Fund Industry

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Thursday April 10, 2014 at 9:22 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Mutual Fund Directors Forum’s 2014 Policy Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As a practicing securities lawyer for more than thirty years, I have in the past advised boards of directors, including mutual fund boards, and I am well acquainted with the important work that you do. I also understand the essential role that independent directors play in ensuring good corporate governance. As fiduciaries, you play a critical role in setting the appropriate tone at the top and overseeing the funds’ business. Thus, I commend the Mutual Fund Directors Forum’s efforts in providing a platform for independent mutual fund directors to share ideas and best practices. Improving fund governance is vital to investor protection and maintaining the integrity of our financial markets.

…continue reading: An Informed Approach to Issues Facing the Mutual Fund Industry

Chairman’s Address at SEC Speaks 2014

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Wednesday March 19, 2014 at 9:39 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks at the 2014 SEC Speaks Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. I am very honored to be giving the welcoming remarks and to offer a few perspectives from my first 10 months as Chair. Looking back at remarks made by former Chairs at this event, the expectation seems to be for me to talk about the “State of the SEC.” I will happily oblige on behalf of this great and critical agency.

In 1972, 42 years ago at the very first SEC Speaks, there were approximately 1,500 SEC employees charged with regulating the activities of 5,000 broker-dealers, 3,500 investment advisers, and 1,500 investment companies.

Today the markets have grown and changed dramatically, and the SEC has significantly expanded responsibilities. There are now about 4,200 employees—not nearly enough to stretch across a landscape that requires us to regulate more than 25,000 market participants, including broker-dealers, investment advisers, mutual funds and exchange-traded funds, municipal advisors, clearing agents, transfer agents, and 18 exchanges. We also oversee the important functions of self-regulatory organizations and boards such as FASB, FINRA, MSRB, PCAOB, and SIPC. Only SIPC and FINRA’s predecessor, the NASD, even existed back in 1972.

…continue reading: Chairman’s Address at SEC Speaks 2014

White House Releases NIST Cybersecurity Framework

Posted by Holly J. Gregory, Sidley Austin LLP, on Sunday February 23, 2014 at 9:00 am
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Editor’s Note: Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Alan Raul and Ed McNicholas.

On February 12, the White House released the widely anticipated Framework for Improving Critical Infrastructure Cybersecurity (“the Framework”). Developed pursuant to Executive Order 13636 (issued in February 2013), the Framework strongly encourages companies across the financial, communications, chemical, transportation, healthcare, energy, water, defense, food, agriculture, and other critical infrastructure sectors to implement and comply with its voluntary standards. The provisions set forth in the Framework may establish a new baseline for industry standard practices, and may impact or guide FTC enforcement actions and plaintiff data breach lawsuits.

…continue reading: White House Releases NIST Cybersecurity Framework

Selected Issues for Boards of Directors in 2014

Posted by Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP, on Saturday February 1, 2014 at 9:00 am
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Editor’s Note: Alan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.

During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.

…continue reading: Selected Issues for Boards of Directors in 2014

Top 10 Topics for Directors in 2014

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 31, 2013 at 9:00 am
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Editor’s Note: The following post comes to us from Kerry E. Berchem, partner and co-head of the corporate practice group at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump corporate alert primarily drafted by Tracy Crum and N. Kathleen Friday; the full publication, including footnotes, is available here.

U.S. public companies face a host of challenges as they enter 2014. Here is our list of hot topics for the boardroom in the coming year:

  • 1. Oversee strategic planning amid continuing fiscal uncertainty and game-changing advances in information technology
  • 2. Address cybersecurity
  • 3. Set appropriate executive compensation as shareholders increasingly focus on pay for performance and activists target pay disparity
  • 4. Address the growing demands of compliance oversight
  • 5. Assess the impact of health care reform on the company’s benefit plans and cost structure
  • 6. Determine whether the CEO and board chair positions should be separated
  • 7. Ensure appropriate board composition in light of increasing focus on director tenure and diversity
  • 8. Cultivate shareholder relations and strengthen defenses as activist hedge funds target more companies
  • 9. Address boardroom confidentiality
  • 10. Consider whether to adopt a forum selection bylaw

…continue reading: Top 10 Topics for Directors in 2014

Some Thoughts for Boards of Directors in 2014

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. The following post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, and Karessa L. Cain.

In many respects, the relentless drive to adopt corporate governance mandates seems to have reached a plateau: essentially all of the prescribed “best practices”—including say-on-pay, the dismantling of takeover defenses, majority voting in the election of directors and the declassification of board structures—have been codified in rules and regulations or voluntarily adopted by a majority of S&P 500 companies. Only 11 percent of S&P 500 companies have a classified board, 8 percent have a poison pill and 6 percent have not adopted a majority vote or plurality-vote-plus-resignation standard to elect directors. The activists’ “best practices” of yesterday have become the standard practices of today. While proxy advisors and other stakeholders in the corporate governance industry will undoubtedly continue to propose new mandates, we are currently in a period of relative stasis as compared to the sea change that began with the Sarbanes-Oxley Act and unfolded over the last decade.

In other respects, however, the corporate governance landscape continues to evolve in meaningful ways. We may be entering an era of more nuanced corporate governance debates, where the focus has shifted from check-the-box policies to more complex questions such as how to strike the right balance in recruiting directors with complementary skill sets and diverse perspectives, and how to tailor the board’s role in overseeing risk management to the specific needs of the company. Shareholder engagement has been an area of particular focus, as both companies and institutional investors have sought to engage in more regular dialogue on corporate governance matters. The evolving trend here is not only the frequency and depth of engagement, but also a more fundamental re-thinking of the nature of relationships with shareholders and the role that these relationships play in facilitating long-term value creation. Importantly, this trend is about more than just expanding shareholder influence in corporate governance matters; instead, there is an emphasis on the roles and responsibilities of both companies and shareholders in facilitating thoughtful conversations instead of reflexive, off-the-shelf mandates on corporate governance issues, and cultivating long-term relationships that have the potential to curb short-termist pressures in the market.

…continue reading: Some Thoughts for Boards of Directors in 2014

The Path Forward on Disclosure

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Wednesday October 23, 2013 at 9:12 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the National Association of Corporate Directors 2013 Board Leadership Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is an honor to be with you today [Oct. 15, 2013]. The National Association of Corporate Directors has long played an important leadership role providing the insight and guidance that board members need to enhance shareholder value and effectively confront the various business challenges their companies face. The NACD has also been a very important partner to the SEC—providing valuable input on a number of our rulemaking efforts that affect companies and their boards of directors.

As members of boards of directors, each of you has an incredibly important job. You are fiduciaries and tasked with the oversight of company management—which requires a tremendous amount of time, knowledge and dedication. As a former director, I know all-too-well the heavy responsibility you have and the hard and time-consuming work involved to do the job properly.

One aspect of the job, which has taken on increasing importance in the last several years, is the role that you play in shareholder engagement and ensuring that management is considering the needs of investors in connection with the information that is provided to them.

…continue reading: The Path Forward on Disclosure

Preparing for the 2014 Proxy and Annual Reporting Season

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 14, 2013 at 9:14 am
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Editor’s Note: The following post comes to us from Laura Richman, counsel at Mayer Brown LLP, and is based on a Mayer Brown Legal Update.

While the proxy and annual reporting season for calendar year public companies typically heats up in the winter, by autumn preparations for the 2014 season should be underway. The following key issues for the upcoming season are discussed below:

  • Current Say-on-Pay Considerations
  • Say-When-on-Pay
  • Compensation Committee Independence and Compensation Consultants
  • NYSE Quorum Requirement Change
  • Pending Dodd-Frank Regulation
  • Proxy Access
  • Specialized Disclosures
  • SEC Interpretations Impacting Reporting
  • Iran Sanctions Disclosure
  • XBRL
  • PCAOB Audit Committee Communications Requirements
  • Director and Officer Questionnaires
  • E-proxy

…continue reading: Preparing for the 2014 Proxy and Annual Reporting Season

Directors and Information Technology Oversight

Posted by Mary Ann Cloyd, PricewaterhouseCoopers LLP, on Thursday February 14, 2013 at 9:23 am
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Editor’s Note: Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a publication from PwC. The full text, including footnotes, is available here.

The “IT confidence gap”

Overseeing a company’s information technology activities is a significant challenge for directors. The pace of change in this area is rapid, the subject matter is complicated, and the highly technical language used to describe emerging technologies and evolving risks makes this a challenging area. And many companies are relying more and more on technology to get ahead, often prompting substantial changes in how they operate. All of these factors can make the board’s IT oversight responsibility appear harder than it is.

Our research, which included surveying 860 public company directors, indicates many board members are uncomfortable with overseeing their company’s IT. Although many directors want to better comprehend the risks and opportunities related to IT, they sometimes don’t have an adequate understanding of the subject to be truly effective in their oversight roles. In addition, boards often lack a well-defined process that satisfies their needs in this area. On the whole, this confluence of factors creates an “IT confidence gap” for many board members. Consider the following:

…continue reading: Directors and Information Technology Oversight

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