Archive for the ‘Regulations & Legislation’ Category

FAQs on Two Recent Concept Releases on Audit Committee Matters

September 18th, 2015 | By

1. On July 1, 2015, the Securities and Exchange Commission (SEC) issued a Concept Release on Possible Revisions to Audit Committee Disclosures. What does it say?

The release asserts that current  disclosure rules may not mandate enough disclosures about activities of audit committees  in the reports they make in annual proxy statements and explores possible disclosure mandates in several areas—most of them pertaining to the external auditor. The areas outlined are as follows:

  • Audit Committee’s Oversight of the Auditor
  • Audit Committee’s Process for Appointing or Retaining the Auditor
  • Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected by the Audit Committee
  • Location of Audit Committee Disclosures in Commission Filings
  • Smaller Reporting Companies and Emerging Growth Companies

In addition to these areas, the SEC asks for comment on the possible need for disclosures on accounting and financial reporting process or internal audits and invites comment on the scope of audit committee work.

Throughout the 55-page release, the SEC asks questions—74 in all—seeking the views of interested parties, such as audit committee members and investors, on what disclosures would be valuable. All but two of these questions pertain to oversight of the independent auditor.

2. What exactly is a concept release?

A concept release is an early indication that an agency is thinking about a matter and may issue new rules or standards on it. Any agency may issue a concept release. This current SEC concept release is the only one issued so far in 2015, and it is the first SEC concept release issued since 2011. (There were no SEC concept releases at all from 2012–2014.) While there are no recent studies showing the correlation between concept releases and rulemaking, we can assume that new rulemaking may follow. In this sense, concept releases are not the same as interpretive releases, which interpret new laws or court decisions, or policy statements, which clarify the SEC’s positions on particular matters.

3. How does this SEC concept release fit into the SEC’s overall “disclosure effectiveness initiative”?

The release is aimed at improving audit committee disclosures in concert with the stated goal of the SEC’s ongoing disclosure effectiveness initiative, described in a recent NACD Directorship article. Under this initiative, the SEC’s Division of Corporation Finance is reviewing the disclosure requirements under Regulation S-K (regarding company disclosures generally) and Regulation S-X (regarding company disclosures in financial statements) to “facilitate timely, material disclosure by companies….” So far the SEC has focused on the forms 10-K (annual report), 10-Q (quarterly report), and 8-K (updates). Later phases of the project will cover the compensation and governance information in proxy statements.

If the SEC’s new concept release on audit committee disclosures leads to rules mandating additional disclosures that are not material to investors, it would operate against the goals of the initiative. As SEC Chair Mary Jo White said in her keynote speech at NACD’s fall conference two years ago, “[w]e must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward.”

4. Has NACD commented on the SEC’s concept release?

Yes. On Sept. 8, 2015, the NACD submitted a comment letter affirming the importance of improved disclosures. However, the letter also argues that the choice of what to disclose should be up to audit committees themselves because they are in the best position to describe how they are fulfilling those duties. The NACD letter cautions that information should only be included in a proxy statement (or any other disclosure for that matter) if it would be useful to investors.

In the letter, NACD proposes that audit committees take voluntary action by finding new ways of disclosing the broad scope of their work. NACD has also offered to convene a meeting between the SEC and audit committee leaders in order to accomplish this.

The NACD letter followed a more detailed comment submitted to the SEC on Aug. 3, 2015, by Dennis Beresford, a member of the NACD board of directors, an experienced director and audit committee leader, and the former chair of the Financial Accounting Standards Board (FASB).

In his letter, Mr. Beresford states that the concept release focuses too heavily on the audit committee’s relationship with the auditor, which he says is important but should not dominate the committee’s work. He notes that of the 74 questions asked in the release, all but the last two focus on this topic.

Based on his experience, Mr. Beresford suggests that audit committee reports need to cover a wider range of topics, as suggested by the Audit Committee Collaboration, a group that includes NACD. In order of priority, these topics include:

  • Scope of duties (as referenced in the audit committee charter).
  • Committee composition (especially information on qualifications of the “audit committee financial expert”).
  • Oversight of financial reporting (highlighting how the committee is assessing the quality of financial reporting).
  • Oversight of independent audit (selection of the audit firm and lead engagement partner, and compensation, oversight, and evaluation of the audit firm). Mr. Beresford argues that the disclosure of the lead engagement partner’s name is unnecessary. [This is the subject of a separate Public Company Accounting Oversight Board (PCAOB) release on Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form.]
  • Risk assessment and risk management (which is often assigned to the audit committee).
  • Information technology (such as cybersecurity, which is also often assigned to the committee).
  • Internal audit (namely, internal audit plan review and results).
  • Legal and compliance (such as any discussions with legal counsel).

This list of possible topics for voluntary audit committee disclosures accords with NACD’s own publications on audit committee work. These subjects are frequently discussed in meetings of our Audit Committee Chair Advisory Council and in the webcasts and gatherings we produce with KPMG’s Audit Committee Institute.

Notably, Mr. Beresford warns against turning these subjects into mandatory “check-the-box” disclosures. Because audit committee reports are still in an early stage of development, he hopes “that the SEC allows them to continue to develop largely as ‘best practices’ without becoming overly prescriptive [emphasis added].” Regarding disclosure of the name of the lead engagement partner, he says that this should be left to the discretion of audit committees: “If they felt it would be useful to investors, they could include it in their reports in the proxy statement.”

5. Are there any other agency concept releases that audit committee members should know about?

Yes. On July 1, 2015, the PCAOB issued a concept release on Audit Quality Indicators (AQIs) with a comment deadline of Sept. 29, 2015. The release notes that “[t]aken together with qualitative context, the indicators may inform discussions among…audit committees and audit firms.”

NACD does not plan to comment on this release. However, we note that NACD member J. Michael Cook, chair of Comcast’s audit committee, together with Comcast’s executive vice president and chief accounting officer, Lawrence J. Salva, sent a comment letter advising the PCAOB of their views: “We encourage the PCAOB to be judicious with regard to the number of recommended AQIs, as we believe too many AQIs would lessen their impact. As you have previously noted, audit committees have many responsibilities and a limited amount of time, and as you are aware, audit quality requires more than measurable indicators; skepticism and independence are necessary to turn quantifiable indicators into real audit quality.”

6. What is the key takeaway from the SEC and PCAOB concept releases for audit committees?

The SEC and PCAOB are being proactive on the audit committee front. The SEC wants audit committees to say more about their activities in the proxy statement, and the PCAOB wants audit committees to use specific metrics to judge the quality of audits. Comments from the director community have pointed out the importance of ensuring that disclosures are material and that metrics are useful. In response to these two concept releases, audit committee leaders and members might consider taking two main actions:

  • Review disclosures and their metrics to ensure they are useful.
  • Reach out to the SEC and PCAOB to express views on these matters.

A Final Word

SEC and PCAOB regulators strive to strengthen the U.S. economy through enlightened rulemaking, but they cannot do it alone. They need to hear the voice of the director. NACD members can make a positive difference in this regard.

FAQs on the New SEC Pay-Ratio Rule

August 7th, 2015 | By

On August 5, 2015, the Securities and Exchange Commission released its final pay-ratio rule under the Dodd–Frank Wall Street Reform and Consumer Protection Act (hereafter Dodd–Frank). The announcement comes more than five years after Congress passed Dodd–Frank in July 2010 and nearly two years after the SEC first proposed the pay-ratio rule in September 2013. The release describing the new rule is a 294-page document that will be analyzed and applied in the weeks and months to come. Meanwhile, here are some basic FAQs to help boards and compensation committees understand the implications of this much-anticipated development.

  1. What disclosure will the new rule require?

While the release explaining it demands further study, the new rule can be summarized as follows:

  • Companies will be required to disclose the ratio of the median pay of all employees, excluding the “principal executive officer” (in most cases, the CEO), to the total pay of that principal executive officer for the most recently completed fiscal year, as disclosed in that year’s summary compensation table. The calculation for median employee pay can be made for any time during the last three months of the year.

The final rule defines employees as “any U.S. and non-U.S. full-time, part-time, seasonal, or temporary worker (including officers other than the [CEO]) employed by the registrant or any of its subsidiaries as of the last day of the registrant’s last completed fiscal year” (p. 216). Like the proposed rule, the final rule allows statistical sampling and estimates as long as these are “reasonable” (p. 14). Although the word reasonable appears at least 100 times in the release announcing the rule, it is not defined because the SEC believes that “companies would be in the best position to determine what is reasonable in light of their own employee population and access to compensation data.”[1]The ratio would have to appear in any filing that requires executive compensation disclosure, including 10-K annual reports, registration statements, and proxy statements. The SEC final rule specifically mentions the compensation discussion and analysis (CD&A) and the summary compensation table. “In this manner, the pay ratio information will be presented in the same context as other information that shareholders can use in making their voting decisions on executive compensation” (p. 39).

  1. When will the new rule go into effect?

Companies must begin reporting the new data in the first fiscal year beginning on or after January 1, 2017. The pay ratio will appear in the 2018 proxy statement disclosing compensation for 2017. After that, companies will be required to update the disclosure at least once every three years.

  1. To whom will the new rule apply?

The new rule will apply to all U.S. public companies but exempts smaller reporting companies (defined as having a public float of less than $75 million) and emerging growth companies (defined as a having total annual gross revenues of less than $1 billion during their most recently completed fiscal year). It also exempts foreign companies (including Canadian companies listing in the United States) and investment companies (mutual funds). The rule also contains an exemption for U.S.-based global companies that cannot access the median pay data due to foreign data-privacy laws. New public companies would not need to comply with the new rule until their first annual report and proxy statement after they register with the SEC.

  1. What aspects of the rule are likely to raise concerns in boardrooms?

In a comment letter filed on December 1, 2013, NACD expressed concerns that the rule defined the term employees too broadly. We encouraged the SEC to increase the flexibility of the pay-ratio rule by permitting the use of industry averages, by defining employees as full-time U.S. employees, and by permitting supplemental notes to correct any distortions caused by the use of “total pay” figures. The SEC’s final rule does not specifically authorize the use of industry averages, although it appears to permit their use to supplement company-based data. Nor does the final rule exclude part-time workers or foreign workers, allowing an exclusion of only up to 5 percent of a non-U.S. workforce.

In combination, these factors in the final rule may cause the ratio of median employee to CEO pay to appear relatively small in industries that employ part-time or non-U.S. workers. Over time an industry pattern may emerge, but initially there could be a hit to reputation. Boards can start now in preparing for potential impact on company reputation and employee morale.

  1. What do boards and committees need to do in the short term?

First, board members should become familiar with the requirements of the new rule, with help from their compensation committees and their compensation advisor. Then they will be in a position to ask informed questions. Compensation committees can begin by asking their chief human resources officer (CHRO) and chief financial officer (CFO) the following questions:

  • Do we have the information available to calculate the two numbers required for the ratio so that the board can begin its analysis? What technical and definitional issues, if any, may arise in this calculation, and what support might you need to resolve those issues? What is your rough estimate of the cost of calculation (e.g., staff time, data systems requirements, and/or third-party analysis)?
  • Will you work with an external compensation firm or other external consultant (such as a payroll expert) to determine the ratio?
  • Can the external advisor estimate the ratios of peer companies on the basis of publicly available data? What are the pros and cons of having the company’s consultant collaborate with the board’s compensation advisor in calculating such estimates?

Similarly, they might consider asking the following two questions of the independent firm that advises the board on CEO and senior management pay:

  • What information, if any, is currently available on estimated ratios of employee/
    CEO pay for our industry peers so we know where we stand?
  • If you will be working with the company’s external advisor in collecting relevant data and/or preparing estimated ratio information (if one is retained by CHRO/
    CFO), would such activity be perceived as compromising your independence under current SEC rules? If so, how can we proactively counteract such a perception?

Having gained insights from these initial questions, directors might want to consider the following:

  • How comprehensive and compelling are our current published disclosures about our pay philosophy? Have we clearly communicated the link between our strategy, pay plan design, and pay outcomes?
  • Does our pay philosophy include employee pay beyond the executive level? Are there opportunities to address this issue in a more detailed way? For example, does our published pay philosophy specifically discuss the issue of pay distribution patterns and/or “fairness”? If not, is this something we might consider addressing?[2]
  • What information, if any, have we received from surveys regarding employee satisfaction with compensation levels?
  • What feedback, if any, have we received from our major shareholders about our compensation plan and our pay-for-performance track record? If we have heard concerns, what have we done to resolve them?
  • If the early estimated ratio for total pay appears out of proportion to any available estimates for our peers and/or industry, how should we interpret this discrepancy? What would this tell us about the structure of our reward system?
  • What would be the impact of early voluntary disclosure?
  1. What implications might this new rule have for D&O liability?

Any new disclosure rule immediately triggers potential director liability, absent a safe harbor provision. Although shareholder lawsuits against companies are often triggered by weak stock prices, the putative grounds for lawsuits are usually based on alleged disclosure violations, particularly in changes-of-control.[3] For more on D&O litigation, see the May–June 2015 issue of NACD Directorship.

  1. Is the new rule likely to be challenged?

It is possible that trade groups such as the U.S. Chamber of Commerce may try to get the rule vacated by a federal court. In a statement released via e-mail on August 5, David Hirschmann, president of the Chamber’s Center for Capital Markets Competitiveness, stated,We will continue to review the rule and explore our options for how best to clean up the mess it has created.” In the past this type of cleanup has meant legal action. In July 2011, the Chamber joined the Business Roundtable to successfully vacate a proxy access rule under Dodd–Frank that would have mandated a particular form of shareholder access to director nominations via the proxy ballot. Similarly, in April 2014, the National Association of Manufacturers and others succeeded in getting a court to declare an aspect of the conflict minerals rule under Dodd–Frank to be a violation of free speech.

  1. What long-term impact might the new rule have on human capital at corporations?

Compliance with the new rule is important, but the core issue for companies remains the same: developing a pay structure, at all levels of the organization, that is aligned with the firm’s strategy and aimed at long-term value creation. Sustained corporate performance is based in large part on human talent, and compensation is one of the key factors in motivating employees. Furthermore, payroll and benefits represent a significant percentage of capital allocation at many companies. For these reasons, among others, many boards will likely take a greater interest in pay at lower levels, and they will want independent verification of a wider band of pay practices. More broadly, a growing number of boards are stepping up their oversight of management’s talent development activities across the organization. For guidance, directors can turn to the Report of the NACD Blue Ribbon Commission on Talent Development.

  1. What resources does NACD have to help compensation committees cope with this and other current compensation matters?

The following NACD resources may be helpful:

NACD will continue to monitor the pay-ratio disclosure issue and other Dodd–Frank compliance matters as they evolve, providing further guidance and perspective on these and related matters.

[1] “Consistent with the proposal, the final rule does not specify any required methodology for registrants to use in identifying the median employee. Instead, the final rule permits registrants the flexibility to choose a method to identify the median employee based on their own facts and circumstances“ (p. 113). “The proposed rule did not prescribe specific estimation techniques or confidence levels for identifying the median employee because we believed that companies would be in the best position to determine what is reasonable in light of their own employee population and access to compensation data” (p. 98).

[2] Note: “Fairness” was one of the five principles of pay recommended by NACD in the Report of the NACD Blue Ribbon Commission on Executive Compensation (2003), and was also cited in the more recent Report of the NACD Blue Ribbon Commission on the Compensation Committee (2015).

[3] Josh Bradford, D&O Claims Trends: Q2 2015, Advisen Ltd., July 2015.

Blue Ribbon Impact

April 17th, 2015 | By
  • If a tree falls in the forest, and no one hears it, does it make a sound?
  • If an NACD Blue Ribbon Commission (BRC) makes a recommendation, and no one heeds it, does it have an impact?

The answer to both questions may be no, but neither question is realistic. You can’t have a forest without living creatures to hear its noises, and you can’t have a BRC without a community to hear its message. So let’s ask instead: “How much do readers of the BRC reports hear?” and “What do they do about it?” Certainly these matters are worth pondering. After all, what is the point of giving guidance if few follow it?

The current issue of NACD Directorship brings this question to life as Ashley M. Marchand interviews past chair Robert E. (“Bob”) Hallagan about the BRCs’ potential for shaping board practices. This blog validates that claim with some of the more convincing findings from NACD’s annual public company governance surveys, referred to here by the year the survey data was collected (titling conventions have varied over time). In conclusion, we will ponder what it all means.

1993 – The BRC on Executive Compensation recommended pay for performance. Before vs. After: Taking NACD’s 1992 and 1995 surveys as respective before and after snapshots, we see directors paying more attention to performance in the wake of this very first BRC report. The 1992 survey showed that corporate performance was the #1 corporate governance issue for only 15% of respondents. By 1995, corporate performance had become a top issue for 52% of respondents.

1995 – The BRC on Director Compensation recommended director payment in equity, with dismantling of benefits. Before vs. After: Whereas in 1995 it was common for directors to receive benefits but no stock, by 1999 the trend was the opposite. By then nearly two-thirds of companies included stock as part of director pay, and under 10% paid benefits.

1996 – The BRC on Director Professionalism recommended executive sessions. Before vs. After: The 1997 survey showed that 10% of companies held executive sessions; the 1999 survey recorded a rise to 44%. The Director Professionalism sold 10,000 copies in its first printing and has been reissued with updated notes and appendices several times since. It was cited in Brehm v. Eisner (2000) for its emphasis on director independence. The Brehm case would lead to the In Re Walt Disney Derivative Litigation (Del. Chancery 2005, Del. Supreme, 2006) over compensation awarded to Michael Ovitz. Also, Justice Jack Jacobs of the Delaware Supreme Court later made the following statement (in a talk at the University of Delaware):Are corporate guidelines relevant? Yes of course. Consider the Report of the NACD Blue Ribbon Commission on Director Professionalism. With perfect hindsight, one would think that the persons who drafted this document were clairvoyant, because many of their suggestions for best practices have now become law in one form or another” (Delaware Discourses: Governance Guidelines [2005], p. 19).

1998 – The BRC on CEO Succession recommended board engagement in succession. Before vs. After: The 1997 survey showed that CEO succession ranked #5 as a board concern at that time. But the following three surveys would show a steady rise from #3 to #2 to #1 in 20013.

1999 – The BRC on the Audit Committee recommended all-independent membership for the AC (as did a competing “Blue Ribbon Committee” report sponsored by the New York Stock Exchange that same year—a recommendation that would eventually lead to a listing requirement under the Sarbanes-Oxley Act of 2002). Before vs. After: Prior to 1999, audit committees only had to have a majority of independence members, so all-independent audit committees were relatively rare and not even the subject of a survey question. The 2001 survey did ask about committee independence and showed 70% of audit committees as entirely independent. (Percentages went up from there due to passage of new stock-exchange requirements for listed company governance in the wake of Sarbanes-Oxley: the 2003 survey showed that 75.3% of companies reported having only outside directors on their audit committee. By 2005, that percentage had risen to 86.3%.)

2000 – The  BRC on the Role of the Board in Strategy recommended that boards make strategy a higher priority. Response to this recommendation was delayed, but decisive. Before vs. After: In 1999, strategy ranked second, after corporate performance. From 2001 to 2004, in seeming contradiction to the Commission’s recommendation, it dropped progressively lower. But in 2005 it rose to number 1 and has held that place ever since.

2001 – The BRC on Board and Director Evaluation recommended formal evaluation of boards and directors. Before vs. After: The NACD had visited the topic of CEO and board evaluation in 1994, but its recommendations at the time had little impact (so it is not listed above). This 2001 BRC came at a better time to ride a wave of interest. The 1999 survey showed 32% of boards conducted evaluations; the 2003 survey showed that 85% did so. This was no doubt due to stock exchange requirements referenced immediately above. But the stock exchange rules themselves were born in part out of the BRC process. In 2001, NACD CEO and President Roger W. Raber testified before the House Energy and Commerce Committee, which asked him to make listing recommendations to the stock exchanges. He submitted those in a letter dated March 4, 2002. Nine of NACD’s 10 recommendations—all based on Blue Ribbon Commission recommendations—subsequently became stock exchange listing requirements.

2002 –The BRC on Risk Oversight recommended that the board play an active role in overseeing risk management. Before vs. After: The 2001 survey showed that only 5% of respondents ranked this issue among their top three. The 2003 survey saw this percentage increase to 26.1%, and the 2005 survey saw it rise to 33.2%—more than one in three respondents.

2003 –The BRC on Executive Compensation recommended an entirely independent compensation committee for all public companies (not just those covered by the Sarbanes-Oxley–mandated stock-exchange rules that would be issued in November of that year). Before vs. After: The 2005 survey showed a rise in overall independence of compensation committees compared to 2003. “Three-fourths (75.9%) of firms overall, up from 65.5% in 2003, indicated that they had only independent outsiders on their compensation committees.”

2004 – ­The BRC on Board Leadership recommended that boards consider using an independent lead director in cases where they did not have an independent chair.

Before vs. After: In the immediate and near-term aftermath of this report there was an apparent surge in the use of the lead director—even greater than that seen when the “presiding director” disclosure requirement of the New York Stock Exchange became effective in 2003. The 2005 survey indicates that over a third (38.5%) of the boards studied had a designated lead director, almost four times the number (10.0%) shown in the 2003 survey.” The 2007 survey says that “44.8% of respondents’ boards have a designated lead director.”

2005 – The BRC on Director Liability recommended active board oversight of ethics and compliance. Before vs. After: In 2005 the prevalence of board committees to oversee ethics and compliance was 5% (with one in five committees combining with another committee, such as audit or governance). In 2007 the prevalence of a standing committee to focus on ethics and compliance doubled to 11.2%.

2007 – The BRC on the Governance Committee recommended director orientation (as well as ongoing director education). Before vs. After: In 2007, 60% of respondents said that their boards had a policy or program on director education. In 2009, 72.8% said they had such a program.

2008 – The BRC on Board-Shareholder Communications made several recommendations on improving relations with shareholders. Before vs. After: The 2007 survey showed that 80% of respondents considered relations with shareholders to be critical or important; the 2009 survey showed a rise in interest, with 90% seeing the issue as critical or important.

2009 – The BRC on Risk Governance, building on its 2002 predecessor, recommended strong board oversight of key risk factors. Before vs. After. Risk oversight had already been on the rise as a top of mind issue at the time of this survey, moving from a ranking of 14th in 2007 and 2008 up to 6th in 2009, partly as a result of the financial crisis. By 2011 it would rank 3rd.

2010 – The BRC on Performance Metrics recommended inclusion of non-financial metrics when assessing executive performance and awarding compensation. Before vs. After. The 2010 survey explored the use of non-financial metrics such as customer satisfaction, workplace safety, and workplace diversity in setting executive pay. In that year, between 14% and 54% of boards used specific nonfinancial metrics for this purpose. The 2011 survey showed a range of 13% to 50%, and the 2012 survey showed a range of 11% to 39%. So for the near term, at least, this BRC clearly did not change board behavior. The 2015 BRC report, which will focus on the importance of long-term value, will revisit this issue and build on this foundation.

2010 – Issued in the same year as the BRC study of performance metrics, the BRC on the Audit Committee recommended that the AC and board assess the “tone at the top,” including ethical performance of senior management. Before vs. After. The 2010 survey showed that 76.6% of companies measured ethics; the 2011 survey showed that 79.3% measured did so; and the 2012survey showed that 82.1 did.

2011 – The BRC on Lead Director (like its predecessor on board leadership) recommended continued use of the lead-director role as a viable alternative to an independent chair. Before vs. After: The 2011 survey showed that 65.4% of respondents sat on boards with lead directors; the 2012 survey showed 82.8% had a lead director; the 2013 survey showed “three quarters.”

2012 – The BRC on Board Diversity recommended inclusion of diversity of personal identity as one of several value-adding dimensions (along with diversity of experience and expertise). Before vs. After: In 2014, 77% of boards had at least one woman director%, up from 72.6% in 2012 and 68% in 2011 (no data for 2013). Impact on minority representation was not as positive.

2013 – The BRC on Talent Development recommended that the board put more focus on talentand that talent cascade. Talent management stayed flat before, during, and after this BRC was issued. Surveys from 2010 to 2014 all showed that talent management ranked 5th—so the BRC did not raise this issue any higher than it had been. Note, however, that this was up from a much lower ranking (16th, calculated by a slightly different method) in 2009. In this case the survey was a lead, and the BRC was a lag.

2014 – The BRC on Strategy Development recommended that the board get involved in strategy earlier and more dynamically. Our 2015 survey just went into the field, so we don’t yet have results.

In 2015, the NACD’S Blue Ribbon Commission will focus on Value Creation, reprising the theme of the performance metrics BRC, which was a good half decade ahead of its time. The new Commission’s first meeting on April 9 included a lively exchange on the intersection of public and private interests, with both public servants and corporate directors engaged in the discussion. Luminaries in the room included not only this year’s BRC co-chairs Karen Horn (board member at Eli Lilly & Co.) and Bill McCracken (former CEO and chair of CA Technologies [now CA Inc.]) but also former Gov. John Engler of Michigan and former Sen. Olympia Snow of Maine, both retired from political leadership but active on corporate boards. NACD Chair Reatha Clark King and other BRC veterans (notably including NACD president and longtime BRC ex-officio member Peter Gleason) carried forward past wisdom even as all looked ahead.

Caveats and Conclusions

So, based on the foregoing, can we say that NACD BRC reports change the governance world? Maybe not, but they certainly do make ripples.

With 21 BRCs to date, and multiple recommendations per BRC (typically 10), overall impact is hard to trace. Proof of impact is more circumstantial than scientific, even with the many positive findings above. The surveys themselves present a moving target, as field dates, wording, response rates, and target populations have changed over time. Even BRC release dates vary, as some took more than a year to produce (there were no reports in 1997 or in 2006). Furthermore, there are other factors—such as new laws and investor pressure—affecting board behavior; so a mere change in a BRC-compatible direction does not mean much in itself. And even when change does occur in the wake of a BRC recommendation, independent of any other known causal factor, we can’t know for certain which came first: the respondent boards’ impetus to change or the BRC they read. (That is, did NACD foresee an impending change and thus mirror or reinforce it in their recommendations, or did the BRC reports in fact alter reality?)

All these caveats aside, survey findings have been instructive in assessing BRC impact. My “null hypothesis” was that no correlation exists between BRC recommendations and subsequent board behavior. My challenge was to disprove this hypothesis—to show that, in some cases, there is indeed a positive correlation. I made this case by comparing what the survey data showed about the issue shortly before and shortly after a BRC recommendation. The raw data stream indicates that, even when legislative and investor co-impacts are taken into account, BRCs accurately predicted trends and/or may have influenced them.

To be sure, there were negative or flat examples as well—two instances in which the data stayed the same or moved in the opposite direction from a recommendation, indicating ignorance or disregard of a key recommendation. These instances were rare, however, and may have needed more time to play out. The 1994 BRC on evaluating the CEO and the board did not change behavior, but it laid the groundwork for the 2001 BRC on evaluation, which did. And the 2010 BRC on performance metrics and 2012 BRC on board diversity have not yet moved the needle, but their influence may unfold over time. NACD will revisit both topics in 2015. As mentioned earlier, this year’s BRC will focus on value creation, and we plan to launch a new diversity initiative, paying sustained attention to the related issue of talent.

Clearly, there will always be a sound somewhere when a tree falls in a forest, just as there will always be some impact when a new BRC emerges. Get ready for the boom!


The following links lead to the most recent editions of these uniquely useful reports.