Add another skill to the list of qualities every director should possess: technological literacy. Technology-specific issues can get short shrift in the boardroom, because most directors lack “expertise” in the field. However, there are constantly stories of the pervasive aspects of technology, an area no longer reserved for companies such as Google, Apple or Microsoft. Just this week, it was revealed that some smartphones track and collect user location, and there was a potential security breach at a popular online game platform.
It would be unfathomable for a director to ignore a discussion about the company’s financials, because they were not an “audit expert.” Technology should be viewed in the same manner. The topic of IT risk oversight has been covered recently in both this blog site,and in a recent NACD white paper, “Taming Information Technology Risk: A New Framework for Boards of Directors,” published in collaboration with Oliver Wyman. This white paper details four areas of IT risk a firm could be exposed to:
Service & security risk
Of the four areas mentioned, recent data has placed a spotlight on the oversight of competitive risk, or the risk of competitors getting to the market faster. According to Arbitron and Edison Research, the amount of time Americans spend consuming radio, television and the Internet increased by roughly 20 percent over the past decade, from a daily average of 6 hours and 50 minutes in 2001 to a daily average of 8 hours and 11 minutes in 2011. This dramatic increase in consumer use of technology should be considered in all strategic planning, which is consistently ranked by directors as the top boardroom priority.
Boards are also directly experiencing the pervasive quality of technology. A recent article from the Wall Street Journal noted the increased use of videoconferencing at the boardroom level. Once avoided due to slow connections and poor visuals, Cisco Systems has improved the technology in its “telepresence,” a system that simulates in-person meetings. Many high profile boards use advanced videoconferencing for meetings, including American Express Co., Wal-Mart Stores Inc. and PepsiCo Inc. While virtual meetings are unlikely to create the collaborative dialogue created by in-person meetings, their use can supplement those in-person meetings, reduce travel expenses and potentially facilitate more international diversity in the boardroom.
The governance community is waiting for the other shoe to drop. Amid proxy filings and annual meetings, directors are looking to the SEC for final rules on whistleblower provisions, proxy access, and compensation consultant disclosures. The following is a mid-proxy season recap, or “governance by numbers”:
The U.S. Congress finally came to an agreement on the federal budget. This included funding for the SEC, a topic that has been widely discussed.
$1.19 billion: SEC Budget for 2011 fiscal year
$74 million: Increase in budget over 2010 fiscal year
$1.3 billion: 2011 fiscal year allotment for SEC as requested by Dodd-Frank
For the first time, say-on-pay votes are currently being considered at public companies:
90.7%: Average approval from shareholders on say-on-pay votes, according to ISS
5: Number of companies that have failed to win majority support for say-on-pay votes
10%: Percentage of reviewed management proposals that have received a “no” recommendation from ISS and Glass Lewis
Also for the first time, say-on-frequency votes are up for discussion at public companies:
521: Number of companies recommending an annual vote
440: Number of companies recommending a triennial vote
87%: Percentage of shareholder that support an annual vote, according to Pearl Meyer & Partners
32%: Success rate at companies that recommended annual votes, according to ISS
“There is nothing new under the sun,” complained the author of Ecclesiastes. This old lament comes to mind when I hear about “new” solutions in governance. I can usually find a precedent near at hand—whether it is something we have done here at NACD within the director community, or else a solution we’ve seen coming from other governance groups such as managers, shareholders, and professionals.
But I have to say that Bridging Board Gaps:Report of the Study Group on Corporate Boards, released in late April, contains some new perspectives and some new thinking.
A New Gathering
The Study Group on Corporate Boards is new in the breadth of its representation across U.S. public company governance and, frankly, the celebrity status of its members. At NACD we take pride in our Blue Ribbon Commission reports, which bring together a diverse group of participants in governance. The Study Group assembled an equally strong group with a wide range of backgrounds and affiliations.
Study Group Co-Chair Charles Elson
Co-Chairs Charles Elson, University of Delaware; Glenn Hubbard, Columbia Business School; and Vice-Chair Frank Zarb, Hellman and Friedman, currently serve on a total of seven major corporate boards. The Study Group also includes other prominent corporate directors, plus an array of retired chief executives, senior managers, shareholders and professional advisors of note, and also two retired jurists—Chief Justice E. Norman Veasey, retired from the Delaware Supreme Court, and Chancellor William T. Allen, retired from the Delaware Court of Chancery.
Also serving in the Study Group is Arthur Levitt, former chairman of the Securities and Exchange Commission; former Treasury Department Secretary Paul O’Neill; former general counsel of the Securities and Exchange Commission, David Becker; and a representative of organized labor, Damon Silvers, policy director and special counsel of the AFL-CIO. The group even includes Jon Hanson, chairman emeritus of the National Football Foundation and a director of the
Study Group Co-Chair Glenn Hubbard
company that owns the New York Yankees.
So exactly what did the Study Group say that was new? The main message of their report is twofold:
1. There are natural limits to what boards (as part-time nonmanagers), by definition, can do, and we all need to face those limits and adapt to them. Previous reports leave this difficult truth unaddressed.
2. Even given these limits, some boards are falling short of their potential.
The Study Group identified seven gaps: gaps in purpose, culture, leadership, information, advice, debate, and self-renewal. Every member made a significant contribution to the discussion. My own area of focus was the issue of information asymmetry, which I have addressed in a number of NACD publications. Management will always know more than the board about the company; that gap is inevitable, but it can be narrowed.
In my view, however, the truly new message in the report lies in the last three areas: advice, debate, and self-renewal. Boards are not investing enough in advisors; their fear of treading on management’s toes leads to serious gaps in knowledge. Also, boards are too deferential in their discussions. Rigorous debate is required and there is also a place for outright dissent (votes need not always be, as they usually are, unanimous). And finally, the third message that to me seems quite new is the suggestion that although obviously evaluation is the best way to refresh board membership, boards should consider term limits—a backstop that fewer than one in ten corporate boards have implemented, according to NACD research.
A New Start
Although as a lifelong auditor, I am constitutionally incapable of being star struck, I must say it was an honor to serve with this distinguished group. Indeed, I can’t imagine any American man or woman of business being uninterested in what this unique and high-caliber team has to say. I commend this report to the attention of every corporate director, and to all who care about free enterprise in America and in our global economy.
Get the Report and Discuss Its Recommendations with Jon Hanson, Charles Elson, and Ken Daly
Ken Daly and Charles Elson will be joined by fellow Study Group member Jon Hanson to discuss the recommendations in their report at the Master Class NACD will conduct in Wilmington, DE, June 7- 8, 2011. The Master Class is open to experienced directors only, and is best suited to lead directors and committee chairs. Check out the full agenda here. To register for the Master Class, where you will receive a complimentary copy of the Study Group report, click here.