In our annual missive last year, we wrote about the need to restore trust in our system of corporate governance generally and in relations between boards of directors and shareholders specifically. We continue to be troubled by the tensions that have developed over roles and responsibilities in the corporate governance framework for public companies. The board’s fundamental mandate under state law – to “manage and direct” the operations of the company – is under pressure, facilitated by federal regulation that gives shareholders advisory votes on subjects where they do not have decision rights either under corporate law or charter. Some tensions between boards and shareholders are inherent in our governance system and are healthy. While we are concerned about further escalation, we do not view the current relationship between boards and shareholders as akin to a battle, let alone a revolution, as some media rhetoric about a “shareholder spring” might suggest. However, we do believe that boards and shareholders should work to smooth away excesses on both sides to ensure a framework in which decisions can be made in the best interests of the company and its varied body of shareholders.
Posts Tagged ‘Rebecca Grapsas’
Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. have each made several important revisions to their proxy voting policies for the 2013 proxy season. ISS released new and updated FAQs relating to application of ISS proxy voting policies to compensation (including peer groups and realizable pay), board responsiveness to shareholder proposals, hedging and pledging of company stock, and other matters. This post provides guidance to US companies on how to address these policy changes.
Although discussions continue to be robust about effective corporate governance practices, review of the aspirational governance principles and guidelines issued by influential board, management and investor affiliated associations and pension funds indicates significant areas of agreement. Areas of apparent agreement include, for example, the appropriate voting standard in director elections (majority voting in uncontested elections with a director resignation policy, plurality for contested elections), the need for some form of independent board leadership (whether in the form of an independent chair or lead or presiding director) and the importance of formal board evaluation processes.
The Comparison of Corporate Governance Principles & Guidelines from Weil, Gotshal & Manges LLP highlights the convergence in views about effective governance practices and structures, as well as remaining areas of disagreement, by providing a side-by-side look at suggestions for board structure and practice from influential players in the investor, board and management communities. The Comparison shows a range of structures and practices that are generally acceptable, while reflecting general agreement that “one size does not fit all.”
As the 2010 proxy season nears, we encourage both boards and shareholders to rethink the contours of their relationship. We expect institutional shareholders to have greater influence in director elections this year given the increasing prevalence of majority voting requirements and, for the first time, the absence of discretionary voting by brokers of uninstructed shares. Institutional shareholder power will expand further in 2011 if the SEC moves forward with proxy access rules and Congress enacts legislation mandating majority voting and “say on pay.” In this environment, boards and shareholders will be well served by considering in an open way how this shift in influence should be reflected in changes in behavior.
For boards, the challenge will be to understand the key concerns of the company’s shareholder base and get out ahead on these issues. Boards should also consider whether company disclosures and communications can be improved to better inform shareholders and encourage them to make company-specific decisions through a long-term lens. This will require devoting more attention, resources and creativity to communications and relations with shareholders. Boards that are insensitive to shareholder concerns risk bruising election battles, while providing further inducement for the homogenized governance mandates currently percolating in Washington.
Recent events in the financial markets and the ensuing economic turmoil has shattered the trust of investors, regulators and Main Street in financial institutions and the capital markets on a global scale. The crisis has heightened focus on the importance of risk management at all corporations and has encouraged a fresh look at the role of the board in risk oversight. Although the manner in which a board fulfills its risk oversight responsibilities is a matter of business judgment, directors should bear in mind that conduct will be judged by investors, regulators, the media and others with the benefit of 20-20 hindsight. There is benefit to be had in going beyond the standards of care set by Caremark and its progeny, which require board oversight of an effective compliance and reporting system. Remembering that “best practices” provide a zone of comfort with respect to avoiding director liability, we set forth below ten areas for the board to enhance its focus in 2009 in light of the current environment. They are all related in some respect to enhancing the board’s ability to oversee management’s efforts to identify and avoid, mitigate or manage risk, with the caveat that specific actions to be taken will vary for each company.
1. Apply judgment in tailoring governance structures and processes to the current needs of the company. Remember that adopting a one-size-fits-all check-list approach to corporate governance is fundamentally inconsistent with effective governance. Care should be taken to avoid bowing to pressures to adopt practices that may not be in the company’s interest, while at the same time actively considering the viewpoints of key shareholders on appropriate matters. Boards should tailor their governance practices and structures to the company’s unique needs. The Key Agreed Principles to Strengthen Corporate Governance of U.S. Public Companies published in October 2008 by the National Association of Corporate Directors with support and input from The Business Roundtable and the International Corporate Governance Network (available here and briefly outlined in the Appendix to this document) reflect an effort to distill and articulate fundamental principles-based aspects of governance on which there is broad consensus. The Key Agreed Principles capture the current baseline consensus among boards, managements and shareholders about a range of effective governance practices. Their articulation may help improve the quality of discussion and debate about those governance issues that have not yet gained consensus, and also serve as a touchstone for boards in tailoring governance and avoiding a rote approach. We urge boards to gain familiarity with the Principles and consider them in tailoring their own governance structures and practices to meet the needs of their respective companies.
2. Take a fresh look at board composition and director competency. While a board is more than the sum of its parts, it requires key skill sets and experiences to be positioned to provide and oversight of risk and compliance. The nominating/corporate governance committee should review with rigor the composition of the board and determine whether the board is comprised of people with the optimal mix of experience given the business, circumstances and nature of the risks facing the company. The right mix of competencies will change over time as the company evolves and care needs to be taken to avoid a mindset of “permanent tenure” for directors. The board should use the evaluation process (as well as term/age limits where appropriate) to refresh itself periodically. It is not enough to pull together a distinguished group of men and women if those directors do not have the expertise necessary to understand the fundamentals of the company’s business as the business changes over time and the attendant risks. Given the emphasis on independent directors, boards need to take special care to ensure that persons on the board have industry specific expertise and distinct sources of information about the intricacies of the business and related risks. The board should consider ways to ensure that it is not simply dependent on management for its understanding of the business and the industry. The nominating/corporate governance committee should ensure that company-specific director education and orientation programs are presented to the full board periodically, especially programs that address risk oversight and risk management generally, providing directors with the opportunity to learn about specific risks affecting the company and changes in business conditions and legal standards that may impact on risk.
3. Consider implementing some form of independent board leadership. The ability to exercise effective oversight may be compromised where the board lacks any defined leadership for the independent and non-management directors. Management has natural conflicts and blind spots — in monitoring CEO performance, providing risk oversight and evaluating the strategic plan. The long-range trend is toward a separation of the chair and CEO positions, with an independent director filling the chair role, and that trend is likely to accelerate as shareholders seek assurances that the board is strongly positioned to provide objective judgment in its review of management decisions in key areas. The board — and in particular the independent directors assisted by the nominating/corporate governance committee — should evaluate whether to appoint a separate independent chairman or a strong lead director to assist the board in fulfilling its oversight responsibilities, and should explain its choice to shareholders. For companies that combine the roles of CEO and chairman, expect increased pressure from shareholders to separate the positions or at a minimum create a strong lead director position with an appropriate range of responsibilities. Indications are that independent board leadership will be a “hot button” issue for shareholders during the 2009 proxy season.