Each year I find myself declaring that the profession of directorship has become more challenging than it was in the previous year. I believe we’ve now reached the point where we should recognize this escalation as the status quo, not an annual anomaly. The Securities and Exchange Commission’s director qualification disclosure requirements, the advent of proxy access, and the increasingly public role of shareholder activists have contributed to a business environment in which directors’ qualifications and performance are continually scrutinized.
NACD’s mission is to help directors lead with confidence—and to foster stakeholders’ confidence in their directors’ ability to effectively serve their companies. I’d like to highlight three critical issues that we believe directors—of all company types—should focus on during the year ahead.
1. Director Awareness
The dramatic slowdown in China’s economy, plummeting oil prices, recent terrorist activities, and the rise of the digital economy have put a fine point on the need for directors to be aware of disruptors that may cause a drastic change in sea conditions for their organizations.
No one can be expected to anticipate every potential disruption. (Who could have seen Uber idling around the corner?) But foresight comes down to one deceptively simple practice: asking the right questions. Are board members exploring the possible impacts of a terrorist act on the company’s supply chain, investigating their organization’s vulnerability to a cyber attack, or considering new competitors that can bring products to market faster than ever before and with nominal investment? Throughout 2016 our NACD Directorship 2020 initiative will continue to focus on disruptive forces, putting a spotlight on the issues that may affect your companies in the years to come.
It goes without saying that activist investors have gotten our attention. A record-setting 355 activist campaigns were announced in 2015, including 33 against Fortune 500 companies. Last year was also a record year in terms of activist campaigns resulting in board seats—127 resulted in at least one board seat for the activist or the activist’s appointee. Our own annual survey of public-company directors found that 20 percent of respondents’ boards were approached by an activist investor in the past year. But nearlyhalf of respondents reported that they are unprepared for an activist challenge.
Activists aren’t practicing black magic; they are performing effective due diligence and smart analytics on their holdings. Boards need to think like activists and anticipate the issues these investors may raise. Do your company’s metrics fall outside industry norms? Does your board composition have any perceived weaknesses? Do you engage with management about the assumptions that undergird your company’s strategy? In 2016, NACD will continue to provide resources that can help your boards to anticipate—and respond to—emerging issues.
M&A activity reached record levels in 2015. Given this phenomenon, it’s more critical than ever that boards understand their role in M&A. We believe it boils down to readiness and oversight.
At any given time, directors may need to consider either the sale of their own company or the purchase of another company. The board must carefully weigh all opportunities to buy or sell as part of its routine corporate oversight. Be on the lookout for NACD’s new M&A Board Resource Center, which will be available later this quarter. The center will serve as a one-stop shop to help boards participate effectively in the evaluation of proposed M&A transactions.
NACD Cyber Summit
On a final note, I’d like to call your attention to the 2016 NACD Cyber Summit, which will be held on June 15 in Chicago. With Congress now considering passage of a bill that would require companies to publicly identify the “cybersecurity experts” on their boards, scrutiny of the board’s role in cybersecurity oversight has never been greater. This year’s Cyber Summit will equip directors and management with the tools they need to foster cyber resiliency and confidently oversee cyber-risk management.
If you would like to receive additional resources on the three issues mentioned above or more information about the Cyber Summit, I encourage you to contact your dedicated NACD Concierge. If you have not yet had a chance to meet the concierge assigned to you, give us a call at 202-775-0509, and we’ll connect you.
Thank you for being an NACD member. I wish you a successful year ahead.
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 , 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 clearlydid 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 talent—and 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.
[S]trong boards should work with management to stay abreast of the full range of matters that may affect the success of companies. Today the emergence of significant issues on relatively short notice requires both management and boards to adapt more quickly.
To keep you current the first items on your reading list should surely be Directors Daily, NACD Directorship magazine, and the white papers and other timely content that flows from our Advisory Councils, NACD Directorship 2020® events, and many other educational programs.
But in addition to consulting these resources, consider making time for some of our deeper-dive publications, which provide extensive data and comprehensive guidance on key boardroom issues, both perennial and emerging. To help you locate the material that will be of most interest to you, here is a quick (at-a-glance) “catalog” of the most popular and most topical publications on the NACD bookshelves.
NACD’S ANNUAL SURVEYS. These studies cover governance trends among public, private, and nonprofit boards, as well as public-company director compensation. The facts and figures clearly presented here in charts, tables, and graphs—along with nuanced interpretation of the data collected—will enable you to benchmark your board’s practices against your peers’, no matter what size or type of organization you govern.
For more than 20 years, NACD has been tracking governance trends by industry and company size, from multibillion-dollar firms to those with under $50 million in revenues. Topics analyzed include board size, director hours, board priorities, committee variety, and specific practices for the oversight of risk and for CEO succession, to name just a few. While other fine organizations now support the effort to research board practices, NACD surveys are unparalleled in the scope of their topics and the size of respondent pools they cover.
BLUE RIBBON COMMISSION REPORTS. Our widely respected series of Blue Ribbon Commission (BRC) reports is required reading for directors who want to increase their mastery of the many issues facing them. Every year, NACD invites a new and select group of prominent board leaders and subject-matter experts to gather for dialogue about an emerging issue. Chaired by well-known leaders in the business or legal community, the commissions produce authoritative reports that have been cited in legal cases (notably Brehm v. Eisner, 2000) and have even been called “prophetic” by Delaware Supreme Court Justice Jack Jacobs, speaking at the University of Delaware. The following links lead to the most recent editions of 13 of these unique and eminently useful reports.
HANDBOOKS. Last but not least, for a firmer grasp of director duties, you may wish to consider one or more of NACD’s definitive handbooks, which are authored by experts and focus on the “how to” of directorship.