Archive for the ‘Corporate Governance’ Category

Ken Daly’s 2015 Letter to NACD Membership

January 23rd, 2015 | By

Dear NACD Members,

As I look ahead to the challenges that boards will face in 2015, I am more confident than ever in NACD’s mission to help directors navigate an increasingly complex environment. Our programs and resources remain focused on helping directors improve their performance as strategic assets for their organizations. We achieve this primarily by providing the foresight to anticipate emerging issues, thereby enhancing stakeholder confidence in the board’s ability to provide effective leadership.

I’d like to briefly share with you the three critical issues that NACD will focus on this year.

1. Cybersecurity. It will surprise no one that cyber-risk oversight has become a top agenda item for boards. NACD’s latest survey found that the majority of directors are dissatisfied with the cybersecurity information they are getting from management. How well does your board understand the company’s cyber risk practices? Does your board have an established response plan in the event of a cyber-breach? These are the issues that NACD will continue to help directors resolve throughout 2015.

Suggested NACD Resources:
Director’s Handbook on Cyber-Risk Oversight
– NACD Advisory Council on Risk Oversight: Cybersecurity Oversight and Breach Response

2. Board-Shareholder Communications There’s no question that shareholders will continue to influence boardroom agendas in 2015. In our most recent meeting with major institutional investors, we asked the participants to list their priorities for board focus in 2015. The three areas identified were: (1) focusing on “drivers” of effective board leadership, (2) holding directors accountable when investors believe shareholder rights have been undermined, and (3) ensuring communication between boards and investors are about context, not volume. We will continue to meet with both institutional investors and activist shareholders throughout the year and will share their perspectives with you.

Suggested NACD Resources:
– Investor Perspectives: Critical Issues for Board Focus in 2015
– NACD Blue Ribbon Commission Report on Board-Shareholder Communications

3. Strategy. You may be wondering why strategy is on this list. Isn’t oversight of the organization’s strategy an inherent responsibility of the board?  The answer is still yes. However, in an increasingly dynamic climate, boards can no longer afford to take an annual “review and concur” approach to management’s strategy. Our 2014 Blue Ribbon Commission Report strongly recommends continuous board engagement with management in the strategy development, and course correction, process. Our members’ reaction to this new – and potentially radical – approach has been very positive, and we will continue to provide guidance on this topic in 2015.

Suggested NACD Resources:
NACD Blue Ribbon Commission on Strategy Development
– The Board’s Role in Strategy: Interview with General Mills Director

Two final notes. Our NACD Directorship 2020 initiative, which puts a spotlight on the market disruptors that will impact companies in the years to come, continues to be very popular. We will hold three member-exclusive events again in 2015. Please be sure to register early as the sessions tend to sell out.

We are holding our inaugural NACD Strategy and Risk Forum in San Diego on May 12-13. The forum will include a full day dedicated to cybersecurity, with former Department of Homeland Security Secretary Tom Ridge as a featured speaker. Click here to learn more about this exciting new program.

Thank you for your membership. I wish you a successful year ahead and encourage you to continue to work with your dedicated NACD Concierge to identify the educational programs and topical resources to enhance your board leadership.

Ken Daly
Chief Executive Officer
National Association of Corporate Directors
Advancing Exemplary Board LeadershipTM

NACD BLC 2014 Breakout Session – Balancing Shareholders and Capital Markets

December 2nd, 2014 | By

On the morning of Tuesday, October 14, 2014, a group of Board Leadership Conference attendees  joined Alan M. Klein, Partner, Simpson Thacher; Jamie S. Moser, Partner, Joele Frank; and moderator Chris Ruggeri Principal, Deloitte for a power breakfast session entitled “Balancing Shareholders and Capital Markets”.

The Landscape

It is well known that there has been a rise in shareholder activism over the last few years. There are more than 400 activist funds today with more than $100 billion under management. If viewed as an asset class, activist funds are a top performer. Money flows to where it can generate the largest return, and activist-backed funds have flourished. In turn, panelists observed that this has emboldened shareholders of all stripes. In their quest to have a more prominent voice in how companies are run, these investors have changed the dynamics of company-shareholder interaction.

There are many different kinds of shareholders ranging from professional, established investors to newer, smaller entrants into the market. Moser believes that some larger organizations that tend to maintain long-term positions in companies can be considered activists as well. While they prefer not to run campaigns on their own, they feed ideas to others who will. Klein noted, “In a sense these ‘long only’ funds have outsourced their activism”.

Tactics

Panelists noted that activist shareholders don’t pick targets lightly. They spend a significant amount of time drilling down into companies, and have a surprising depth of knowledge. As such, it would be a mistake to disregard them or view them as superficial. Nevertheless, there is often a mismatch between the way those who run companies view their businesses and the perspective of many activists.

Governance issues can be used as part of a shareholder’s demands. Although they are not typically the crux of an activist fight, these issues can become part of the story and set the tone. For example, panelists cited topics such as related party transactions or sluggish board turnover as “low hanging fruit” for shareholders. Even if these issues have been properly disclosed, a shareholder may use them to put the company on the defensive.

On the other hand, some investors – particularly the more well-established fund – ask for reasonable conversations with the board and management. Panelists observed that if directors can demonstrate to them the validity of the current plan and why their thesis is wrong, some investors may listen or even back off. That being the case, engagement is extremely important.

Outreach

It is critical that directors understand the perspective of the company’s shareholders. The first question Moser asks  a company is, “When’s the last time you spoke with your top 10 shareholders?

Further, the board should engage with shareholders for the first time outside proxy season, when the discussion is often centered around voting. Then, if a proxy contest starts, the company can reply “our board has been speaking directly with shareholders; we’ve been active and engaged.” Meetings between the board and investors should demonstrate transparency and openness. Directors can simply ask investors, “what’s on your mind?” Of course, panelists noted that it is important to remain conscious of Regulation FD; avoid the discussion of material items in a one-on-one setting.

Boards can also go beyond annual “deep dives” to ensure the current strategy is still viable. For example, Klein suggested that boards invite a banker to give a presentation, valuing the strategic plan and showing how it stacks up to strategic alternatives. If the board has conducted this type of analysis, they are more able to speak to the current strategy’s strengths and how it will produce the most value for the company. It is also important that the strategic plan for the company is communicated in the most compelling way possible. “The first three-quarters of any ‘fight letter,’” Moser noted, should be about strategy – how your strategy provides more value than what the shareholder is proposing.”

Activist Investors on the Board

Finally, the panel discussed how boards can work with new activist directors once elected to the board. Klein noted that most activist situations  today end in a negotiated outcome:  Either a proxy fight doesn’t start, or the fight may end before it ever gets to a vote. Typically, as the result of a negotiation, the shareholder ends up with one or two seats. If these new directors can make their case in a logical manner, a fresh perspective may prove beneficial for a board.

Ultimately, panelists agreed that there has been a sea change regarding how companies and their shareholders interact. To the question of whether activism is good or bad, the answer is “yes”– it depends on facts and circumstances.

Boards Beyond Borders: Global Panels at NACD’s Board Leadership Conference

November 6th, 2014 | By

It’s a mad, mad, mad, mad world—to echo a movie title from a half century ago—but it’s also a good one when nations cooperate. This is the big takeaway from the global track at NACD’s 2014 Board Leadership Conference, where representatives of nine nations convened to create a global village and to host a series of three staged programs.

GLOBAL-VILLAGE_MALAYSIA

The village itself featured colorful, information-rich booths where representatives from the embassies and consulates of Brazil, Canada, China, Germany, Ireland, Malaysia, Mexico, and the Russian Federation greeted trade-minded directors seeking to expand their knowledge.

In addition, the village featured a booth for the Global Network of Director Institutes (GNDI), a network of 12 director institutes (including NACD) and one confederation (ecoDA, in Europe). The GNDI booth offered an opportunity to meet incoming GNDI Chairman Stan Magidson, CEO of the Institute of Corporate Directors (ICD) from Canada; Paul Chan, the acting CEO of the Malaysian Alliance of Corporate Directors; and Simon Arcus, manager, Governance Leadership Center, Institute of Directors, New Zealand. Vicki Jordan, vice president of marketing, ICD, joined me in staffing the booth—a truly appropriate choice, as Canadians/les Canadiens are global by nature. For proof, see this new video produced at Laval University in Quebec (featuring yours truly) created for an exciting new ecoDa educational program also held in October.

The Global Village was home to a series of panels in the Global Track at the Conference. This blog offers takeaways for these dynamic panels.

Global Panel 1: Trade and Business in North America

Moderator: Dean A. Pinkert, vice chairman, U.S. International Trade Commission (USITC). Panelists: Gilles Gauthier, minister, Economic Affairs, Embassy of Canada; Francisco J. Sanchez, chairman, CNS Global; former under secretary at the Department of Commerce.

  1. To grow, consider going global. Eighty-five percent of world economic growth is occurring outside the U.S. The U.S. has bilateral or multilateral free trade agreements with 20 countries. Support for free trade is rising, according to Gallup polls.
  2. Know your trade agreement. A well-known example of a free trade agreement is the North American Free Trade Agreement (NAFTA), now 20 years old, which has been a success for all the economies This is why it is important to support the new and emerging free trade agreements of other regions namely: Transatlantic Trade and Investment Partnership (TTIP), and the Trans Pacific Partnership (TPP).
  3. Give bipartisan support to good trade agreements. Although free trade is often associated with the pro-business Republican party and opposition is often associated with the pro-union Democratic party, good trade agreements such as NAFTA get bipartisan including union support—especially considering that one can always seek a trade remedy to cure imbalances.
  4. Think beyond tariffs. If trade unfairness arises, a variety of trade remedies are available. Tariffs—charging duties on imports—are only one way to correct imbalance. Even more constructive is regulatory cooperation and harmonization of standards.
  5. Tell your company’s story so stakeholders and the public will understand. Reatha Clark King, chair of the NACD board of directors, noted that boards need to do a better job of ensuring that companies are more forthright in disclosing information about their global nature: where they are headquartered, where they employ people, where they source their products, and where they sell their products, among other topics. By revealing their global nature, they will build more informed support for free trade.

Global Panel 2: Translating Corporate Culture Across Borders

Moderator: Dennis Whalen, partner-in-charge and executive director, KPMG’s Audit Committee Institute. Panelists: Orlando Ashford, director, ITT Corp., Executive Leadership Council, and Streetwise Partners; senior partner, Mercer; Michael Marquardt, director, Commonwealth Trust Co., Delaware Theatre Co., American Cancer Society (South Atlantic), and CEO, Global Compass Strategies Inc.

  1. Live “la vida local.” Many companies think locally and act globally, when they must do the opposite. As a company, value your local talent; as an individual, live your local life. Companies acquiring outside their borders used to send in executives from headquarters. Now, they are more likely to hire and promote locals—including expatriates who want to stay longer on an assignment.
  2. Check your culture and mark your calendar. One of the best examples of culture arrogance is when we are oblivious to non-U.S. national holidays. Not all are marked on global calendars. For example, don’t try to schedule a meeting in Berlin on November 9 – when the fall of the Berlin wall is commemorated.
  3. Focus on outcomes. When two companies get combined, focusing solely on process may result in getting buried in protocol. Instead, focus on desirable outcomes—for example an effective workplace. This was the case for Orlando Ashford when he learned that as a matter of policy, a particular non-U.S. division of a U.S. company had collected information on blood type, then run a blood drive for an employee’s relative, and published the results, causing some disharmony at work. He changed the policy.
  4. Insource HR. It may be tempting to ask a local company to hire your talent but it is worth your own time. While professional support can be valuable, human capital is too important to leave entirely to third parties.
  5. Know your agents. Enacted some four decades ago, the Foreign Corrupt Practices Act (FCPA) does hold companies—and, by extension, boards—accountable for certain internal controls. Directors should ask for assurance from management that the people who are involved with selling the company’s products and services act within the boundaries of the law.

Global Panel 3:  The Global Start-Up Revolution

Moderator: Andrea Bonime-Blanc, chair, Epic Theatre Ensemble; audit chair, Counterpart International; CEO and founder, GEC Risk Advisory. Panelists: Andre Averbug, founding partner, Rankpad Consulting, Inc.; Mark Little, CEO and founder, Storyful; Bernard Moon, cofounder and partner, SparkLabs Global Ventures.

  1. Be “hyper-transparent.” In the new economy, “reputations can be lost or improved overnight.” Learn what the market wants to know about you and provide that information as soon as possible.
  2. Look around you. Any place and every place can fuel a start-up revolution. Berlin, Dublin, Nairobi, Seoul, and Tel Aviv are all current examples. Places with a long-established rule of law are ideal for startups, but no place is off limits. In these unexpected places, new ideas are finding the capital they need to become viable businesses—often in areas that do not require a large amount of funds to launch. (Cost of entry in technology-based businesses is generally lower than in traditional industries that require manufacturing plants, for example.)
  3. Respect Silicon Valleyand look beyond it. Silicon Valley is rightly known for the entrepreneurial ecosystem so important in the second phase of growth—a system that includes both financial capital (venture cap, angel investors, banks) and intellectual capital (fellow innovators, universities), not to mention savvy law firms. But such ecosystems are evolving elsewhere as well.
  4. Fail better. Don’t be afraid to start a business that may fail. Panelists noted that in the U.S., bankruptcy laws can be relatively forgiving. In locations where the bankruptcy laws are harsh, changes may be under way, and adaptations are possible. Also, remember that you need not go it alone. In a climate where the new form of research and development is mergers and acquisitions, a possible option may be to sell your start up to a larger company before a lack of funds brings the company to a halt.
  5. Give back. If you develop a successful startup, consider investing at least part of it in other new ventures, the way Google and Facebook founders have done. You can keep the global start-up movement going. Vive la revolution!