Robyn Bew, director, strategic content development at National Association of Corporate Directors (NACD) leads NACD’s initiatives with the institutional investor community, including dialogues between investors and directors and the development of the recently released “Investor Perspectives: Critical Issues for Board Focus in 2016.” Below she offers her perspective on the evolving environment for board-shareholder engagement. Her remarks have been edited for length and style.
MCC: In “Critical Issues for Board Focus in 2016,” NACD extends and amplifies some of the themes from the Blue Ribbon Commission Report on Long-Term Value Creation, which came out earlier this year. It seems like we’ve reached a watershed moment in terms of the engagement of corporate board members on many levels, something NACD has long encouraged. The message appears to be getting louder and more focused. Is that intentional? Is there an underlying reason?
Bew: In terms of engagement with the investor community, there are a few drivers. For one thing, investors certainly have more influence now than they did 10 years or even five years ago. Some pay votes may be advisory only, but they still get an awful lot of attention. On most boards, larger cap companies have majority voting, and the results of those annual direct elections are also very visible. Investors are speaking with louder voices these days. It’s been a sea change over the last couple of years that has really gathered momentum.
It’s not just the activist hedge funds that are speaking up and speaking with louder voices, although they tend to get a lot of attention in the press. Earlier this year, Larry Fink, CEO of BlackRock, and Bill McNabb, Vanguard’s CEO, sent letters to the boards and management teams of all their portfolio companies, setting out pretty explicitly what their expectations are about good governance, and about companies’ and boards’ engagement with them as major investors. I think all of that is part of the sea change.
At NACD, we bring together a group of Fortune 500 nominating and governance committee chairs a couple of times a year. We had our most recent meeting in October. One of the directors said, “It’s no longer a unilateral world for boards. Corporate governance is more of a shared responsibility now than it ever has been before.”
MCC: That thought is echoed in the document’s three major areas for board consideration in preparation for the 2016 proxy season. The first arises from feedback from major investors that discussions with companies are becoming “more integrated with strategy at the center.” Unpack that a little bit. It sounds like investors are tired of fragmented conversations with corporate secretaries and investor relations staff and are driving for more fulsome views of the companies in which they invest.
Bew: What heads of the corporate governance teams at major institutional investors – in other words, the people who are voting the shares – told us was that they and their teams are working very closely with their counterparts on the portfolio management side of the big investment houses, the ones who are making the buy-sell decisions. As a result 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.
Because those conversations are now less siloed than they have been in the past, investors are looking to really understand how these things are linked. What we’re telling directors is to set the expectation with management that our company’s approach to shareholder communications needs to be well-coordinated and well-integrated. It can’t be siloed. The investor relations team and the corporate secretary’s team need to be working in tandem, in terms of their outreach to the investor community and also in reporting information back to the board.
MCC: Companies and their board members are being asked to do a lot more homework than ever. Some call this the era of the “activist board member”: directors being more prepared, drilling into specifics about the business environment or the priorities of top investors. Do you sense that’s happening? How does it manifest itself?
Bew: I would absolutely agree with that. The annual governance surveys that we do at NACD do show that the level of time investment by directors is going up. That’s been a pretty consistent trend since about 2007. In terms of preparation, directors tell us that they’re really focusing on staying current with trends in the company’s industry, which could include everything from reading trade publications to asking management to organize visits for the board to suppliers or key customers to attending industry conferences. In other words, directors are going well beyond saying, “I’m going to read the board book that’s sent to me before the board meeting and consider myself sufficiently prepared.”
Another important component of the homework you talked about is the preparation that directors are doing related to their own role. Take cybersecurity oversight as an example: it’s pretty much on the top of every board’s agenda regardless of what industry you’re in or how big your company is. Cybersecurity is very complex. It’s fast moving. It’s changing all the time. Directors are coming to NACD and saying, “We really want to stay on top of this. What does good board oversight of cybersecurity look like? What practices are most effective? And we know that six months from now, all of these might look very different, so we have to stay up-to-date.” Directors are seeking ongoing education to keep their boardroom skills fresh.
Taken together, these trends are indicating to us that board members are realizing the bar for being a well-informed, well-prepared director is higher these days. The Blue Ribbon Commission Report on Long-Term Value Creation does make the point that this increased expectation is not a change in the board’s core oversight responsibilities or fiduciary duties. It’s just how those responsibilities are being carried out.
The other point that the commissioners made, which I think is an important one, is that seeking information from sources outside the company shouldn’t be a sign that directors don’t trust management. Instead, it sends the message that they are taking their jobs seriously, and they want to be as well-prepared as possible to really engage with management on the important issues that are being discussed in the boardroom.
MCC: Touching back on cybersecurity, this time of year all of the big surveys of general counsel come out, and it is not just at the top of the list, it’s above the top at this point. There is a galvanizing effect that goes way beyond cybersecurity in terms of the level of concern, and that concern is lapping into other areas. It’s so scary to people.
Bew: It is. Also, I think that there is a growing realization that cybersecurity is not an IT issue. It’s not a technology issue that can be stuck into an IT silo where you hear from the CIO once a year. It’s a business issue. It’s an enterprise risk issue. Therefore, it has to be part of every key conversation about how the company is doing business. From the HR standpoint: What are our HR policies, and do they account for things like access to data? How are we training our folks on things like not responding to a spear-phishing email by clicking on a link? In term of business development, if we’re entering into a new joint venture agreement or a new supplier contract, are we having conversations involving understanding privacy, data security and cybersecurity?
The role that technology is playing in so many industries now means that this has gone so far beyond credit card numbers or personal information, although those things are, of course, still in the mix. I think that’s one of the reasons why we see the galvanizing effect on boards. Directors are realizing that effective cybersecurity oversight includes understanding how our company thinks about technology, how it drives our business strategy and what that means in terms of how secure we are in our operations across the enterprise on a day-to-day basis. It’s a cross-cutting risk, just like any other major risk that has the potential to take the company down.
MCC: Regulation FD is suffering from a misunderstanding complex, or people may use it as a fallback, as an easy answer to why not to do something. Will you clarify the state of play with the SEC’s regulation? Is it a barrier to communication between board members and investors?
Bew: At NACD, we don’t think it is a barrier, and we are continuing to try to communicate that message. It was one of the themes in the Blue Ribbon Commission Report. Whenever we do panels on board-shareholder engagement at our education programs, we will continue to emphasize that message.
The concern that we here at NACD get from directors about Reg FD, is related to the prohibition on selectively disclosing material nonpublic information. Of course, directors don’t want to do anything that would come even close to running afoul of that rule. But that does not mean that board members, therefore, should avoid any and all interactions with investors. For one thing, many, if not most, of the topics that investors typically want to discuss with directors don’t have anything at all to do with details about business operations. Investors are well-aware of Reg FD themselves, and they have an understanding of 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. 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. If that situation arises, boards can, and in fact should, be working with general counsel and investor relations to prepare for those meetings. They should develop an agenda, prepare discussion points, make sure that they get a briefing on the policies and priorities of that specific shareholder, then have counsel or someone from management attend the meeting. All those things, we believe, create the conditions for a productive discussion in both directions with no concern at all about getting on the wrong side of Reg FD.
MCC: Board composition raises related issues about tenure, evaluation and whatnot. It is a tough balance. You want a certain amount of continuity, but we also live in a very fast-moving world, and you may need something today that you don’t need tomorrow but you then need again the day after tomorrow. How do you advise boards and directors on balancing investors’ desire for a certain amount of turnover but maintaining a measure of continuity?
Bew: As we said in the “Critical Issues for Board Focus” paper, investors told us that they want to know the answer to that question, just as you stated it. What’s the approach that the board is taking to striking the right balance between continuity and keeping the board fresh? I think that investors understand the answer could look very different from company to company. We tell directors that if your board is an outlier in its composition, in terms of tenure, demographic makeup or otherwise, you can probably expect questions from your investors. You’re going to 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 that the board’s going to be taking to change things.
In response to the increased interest in what has started to become known as “board refresh practices” – things like board composition, director succession planning, director skills, board evaluation – a lot of boards are starting to expand the information that they’re sharing on these issues in the proxy statement, going beyond the required elements. SEC regulations require proxies to include the directors’ biographies, for example, but we now see companies increasingly using things like a summary chart or a table that adds a big-picture view to the individual bios: “Here’s the overall mix of skills and experience on the board. When you look at everything together, here’s what it looks like.” There are some companies that do this graphically in a very effective way. The rationale behind spending the time and resources to tell the company’s story to the investor community in a really reader-friendly way is being able to convey, “This is why our board composition is the right one.”
You mentioned something else that I wanted to touch on: the idea that things change fast, and what you need this year might be different than what you need next year. Board seats are pretty expensive real estate, as I’ve heard it said. What we hear some boards doing is looking at different ways to bring specific types of expertise into the boardroom in areas that may be either time sensitive or very perishable and fast moving, like cybersecurity. They may say, “How can we get that knowledge into the boardroom discussion without necessarily having to find the perfect director who has this, that and the other skill.” That might mean scheduling briefings – again, I’ll stick with the cyber example – from either government experts or other third-party firms that can come in and brief the board on a regular basis about current trends. That expertise is brought into the boardroom discussion but not necessarily as somebody who is a director sitting at the table.
Another example might be if the company is thinking about entering a new global market. One option certainly is to recruit a director onto the board with deep expertise or who is from that area. Another option may be to set up an advisory board or advisor group that can, again, brief the board and management on a regular basis. Maybe the second thing is what you do while you’ve got the search going for a director with the right international qualifications in the longer term. NACD, for example, has a director registry, and we are able to assist boards with searches.
The important thing is to make sure that you’ve got the right expertise into the boardroom dialogue, via whatever channel is most appropriate.
MCC: As we look ahead to the 2016 proxy season, what should board members be thinking about regarding compensation?
Bew: One investor told us,“Compensation may seem like an old-hat topic, now that we’ve had several years of say on pay, but it does come up in most of our engagements with our portfolio companies.” This is in part because CEO and senior executive compensation is one of the most visible examples to investors and others who are outside the company looking in of how the company’s values, strategy, performance goals, objectives and talent philosophy come together and intersect. In terms of what compensation committees and boards should be looking at, I would think about two things. First, does our pay plan design clearly reflect the company’s strategic objectives, both short-term and long-term? Are we rewarding the right behaviors that are going to get us to those strategic objectives? Second, are we communicating our decisions about our pay philosophy, the design of the compensation plan and then the actual pay outcomes in a way that is very clear and understandable to shareholders?
CD&As are typically the longest parts of the proxy statement, and some of them can be fairly dull reading. Just like with board composition, and probably even more so because of the increased focus in the wake of say on pay, CD&As were one of the first places where we saw boards using graphics, executive summaries and other tools to get their message across in a way that is as reader-friendly as possible.
MCC: As in GE’s 10-K. Communicate in a way that a lot of newspapers, magazines and others are by using more infographics and making it easier to read.
Bew: Exactly. The GE example is particularly interesting because 10-ks are typically extremely lengthy, lots of required stuff, fairly boilerplate, standard, two-column format, black and white, not that exciting. Chris Pereira, GE’s chief corporate securities and finance counsel, came to one of NACD’s director programs a couple of months ago, and he described the process that they went through to revamp their 10-K. It was obviously not a small investment of time and resources, but they felt it was really important. They wanted the 10-K to be, as they put it, a strategically relevant document. For example, they’ve got a 10- to 15-page slide deck at the front of the 10-k that includes pages titled, “How We Allocate Your Capital,” and “How We Oversee Risk.”
From what they told us, they got a tremendously positive response from the investor community, and that this was incredibly helpful to give investors that integrated picture we were talking about earlier: OK, now we’re seeing how these dots connect.
MCC: In “Critical Issues for Board Focus in 2016,” investors said that they are wary of new public companies accepting their advisors’ advice on going with the so-called “standard IPO package” when it comes to governance. What’s the thinking there, and how would NACD advise board members of newly formed companies as they enter their first or second proxy season?
Bew: First, a bit of context: We are engaging in dialogue with the institutional investor community on an ongoing basis, in a variety of channels. Each fall, we issue the “Critical Issues” paper, where we ask investors, “Tell us what’s on your mind that you’d like our 17,000 members to know.”
The concerns they mentioned to us recently about post-IPO companies is, I think, an angle on a message that NACD has heard from the investor community in the past – investors are going to hold directors accountable if they believe the board is unilaterally and without clear reason putting policies in place that undermine shareholders’ rights. These could include things like classified boards or dual-class shares. Investors have said, “We get concerned if it appears that boards of companies preparing for an IPO are simply following advisors’ recommendations about board structure and bylaws, without seeking broader input, including from investors or potential investors.” And they are looking for directors to provide a clear rationale as to why these types of policies are in place if the board does choose to implement them. For a board to say, “We’ve weighed the alternatives, and here’s why we came to this conclusion,” sends a really positive signal.
In terms of the resources for new public company directors, NACD’s BRC reports, white papers and handbooks have a lot of good examples of everything from committee charters, to the types of information that boards should be requesting from management on different issues, to examples of how to think about alternative definitions of compensation, like realized pay or realizable pay.
We have regular director education programs across the year that cover a lot of these topics as well. NACD also does custom work with individual boards, and certainly new public-company boards are part of the segment that is coming to us for in-boardroom education and services like board evaluations.
MCC: In “Critical Issues for Board Focus,” NACD listed seven questions for directors to consider in reviewing board communication with investors. Is there one question worth singling out?
Bew: A question that more boards could be asking is whether or not they, as directors, have any opportunities to hear from investors directly, or is this information coming to them solely on a secondhand basis from a CEO or investor relations. A first step here might be simply listening in on analyst calls or attending the company’s investor-day presentation. Going beyond that, one thing that we hear some boards are doing is occasionally inviting an investment analyst to present to the board. Directors whose boards have done that have told us that it’s especially interesting and informative to hear the perspective of one who has a negative recommendation, a sell recommendation on the company, right from the horse’s mouth, as it were.
MCC: What does the corporate board member of the future look like?
Bew: I wish I had a crystal ball. I don’t think there’s one single profile, but I would start with something that NACD said back in 2001: “A director’s mission is to be a strategic asset of the company, measured by the contributions we’re making to the long-term success of the enterprise.” We came full-circle on that this year with the Blue Ribbon Commission Report on the Board and Long-Term Value Creation. How would that translate into a skill profile, over and above just what’s required from a statutory standpoint in terms of independence, financial literacy and so on? Some of the additional criteria would include the specific skills and experience that are relevant to the company’s current needs and also to its future strategic direction.
Another category of skills relates to the ability to bring diverse perspectives to the table and also openness to hearing and discussing diverse views from others, whether that’s your fellow directors, members of management, investors or other stakeholders.
Also, as we discussed earlier, willingness to do the homework. Board agendas keep getting longer. The expectations of the directors keep getting higher. As you mentioned, scrutiny is high, and the business environment keeps getting more complex, on top of all that. The job isn’t getting any smaller, and that makes it a challenge. Directors we talk to say that’s something that makes board service exciting – it’s part of what’s rewarding about being a director.
Robyn Bew, Director of strategic content development for NACD. [email protected]
Published January 6, 2016.
