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Chairman Schapiro Resignation and SEC Rulemaking Progress

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As reported in NACD Directors Daily, two weeks from today Mary Schapiro will step down from her current role as chairman of the Securities and Exchange Commission (SEC); she will be replaced by a current democratic commissioner, Elisse Walter. Commissioner Walter has served as an SEC commissioner since 2008. Although Commissioner Walter has not been designated as “acting chairman,” her appointment will last until the end of her current term at the SEC. According to the Wall Street Journal, an official from the White House has indicated that a permanent successor will be named before Commissioner Walter’s term concludes at the end of 2013. Until then, the commission will be split between two democrats and two republicans.

A significant portion of Chairman Schapiro’s tenure at the SEC was focused on implementing Dodd-Frank’s many provisions—and it is expected that Commissioner Walter will continue on this path. According to Davis Polk, the SEC has met 32, or approximately 33.7 percent, of the 95 requirements mandated by the legislation with finalized rules. However, the commission has also missed 50 deadlines. The SEC is not alone in its struggle to meet deadlines: the overall Dodd-Frank implementation process has proceeded in a similar fashion. From all regulatory agencies tasked with fulfilling Dodd-Frank legislative mandates, just 33.4 percent have been met with finalized rules.

To date, the SEC has finalized a number of critical Dodd-Frank rules on corporate governance, including: conflict minerals, compensation committee and advisor independence, say on pay and say on golden parachutes, and the elimination of broker discretionary voting. The SEC’s rule on proxy access was invalidated by the DC Circuit Court, due to the lack of an adequate cost-benefit analysis. Looking ahead, the agency is scheduled to implement rules on: pay for performance and pay ratios, compensation clawbacks, employee and director hedging, and the use of compensation consultants. The timeline for the implementation of these rules is uncertain; while the SEC posted a proposed timeline for Dodd-Frank rulemaking early this year, it has since has replaced the timeline with a list of pending actions.

How C-Suite Perspectives Can Strengthen Board Performance

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Over the past two decades, I’ve worked with an array of boards in multiple capacities—serving as general counsel, secretary, board advisor and board member.

In my current role as general counsel and head of NACD’s Board Advisory Services, I’ve had the opportunity to counsel and facilitate board evaluations for companies ranging from large family-run businesses to the top of the Fortune 500. Over the years, I’ve concluded: no board evaluation is truly holistic without some form of feedback from senior management.

The management team’s participation in the evaluation process creates a critical 360° view that often brings to light factors that are limiting the board’s ability to operate at peak performance. This approach can naturally raise some very sensitive issues between executives and directors. Yet my belief that anonymous, candid input from the management team is essential to a complete and credible evaluation remains constant.

The insights and information that the c-suite and beyond provide are invaluable. Not only does the input enhance the quality and validity of the evaluation, it typically uncovers information that will directly lead to concrete action steps to improve alignment between the board and senior management.

There are a couple of important dynamics that the evaluation process commonly uncovers:

Talent vs. Engagement

  • In more cases than not, management teams believe they have strong assets on the board. Yet they often find that some very qualified directors are not as engaged as they could be. The company is not fully benefiting from the wisdom and unique experience these talented advisors bring to the table.
  • Often, management sees—and reports to my team—that one or two strong personalities on the board dominate meetings, limiting the opportunity for others to contribute.

Tactics vs. Strategy 

  • Many directors tend to drill down into tactical issues, moving away from the real responsibility of the board to provide strategic direction. The board may not realize how serious the issue is until the management team reveals the extent to which that misplaced focus hinders their ability to get things done.
  • Conversely, boards often find that it’s the management team that spends too much of the meeting focused on operational minutiae, trapping them in “PowerPoint hell.” With limited time for the full board to meet, the agenda should be devoted to the most critical strategic opportunities and risks facing the company. Operational and tactical issues should be reserved for the committees.
  • Interestingly, we’ve often found that the reason for this is that management tends to drive meeting agendas, which naturally results in a focus on operational issues. In most cases, management would welcome collaboration with the board on defining the agenda to ensure the board’s time is devoted to strategic discussion and risk oversight.

We recognize that giving management a voice in a board evaluation process can be extremely sensitive for both the board and management.  To facilitate the most valuable and practicable outcomes from board evaluations, NACD’s approach ensures that feedback is completely anonymous with no risk of attribution. Our approach of weaving the results into strategic education lowers defensive barriers, enabling the “ah-ha moments” that focus the entire process on solutions rather than criticism.

Unless c-suite-boardroom disconnects are brought to light, they can fester and potentially jeopardize the organizational mission. Done right, the management team’s involvement in board evaluation clarifies expectations and fosters a healthier collaborative environment.

My experience has led me to conclude that senior management has a sincere desire to capitalize on the wisdom, leadership and unique business experience of each and every board member. By involving the management team in the evaluation process, boards capitalize on management’s expertise in the same way. Result: the organization’s full intellectual capital is leveraged for the collective benefit.

NACD Directorship 100: By the Numbers

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With the 2012 political elections over, the nation has been quick to move forward—shifting attention to numerous geopolitical and economic issues, including the fast-approaching fiscal cliff and the European debt crisis. As the dust has settled, however, worth noting is a group that made considerable gains in the U.S. Congress: women. In 2012, the election of female candidates brought representation to record heights. With the addition of five female senators, the overall total now stands at a record high of 20. The U.S. House of Representatives will also comprise 78 female representatives, also a record.

In 2012, the composition of the NACD Directorship 100 mirrors Congress. Of the directors named to the list—men and women who have made outstanding contributions to their boards and their companies’ performance—29 percent are women. This marks a 53 percent increase over 2011, in which 19 percent of the honorees were women.

Particularly this year, the increase is a welcome result. Although NACD has championed diversity in the boardroom for the last 35 years, in 2012 it was the subject of our Blue Ribbon Commission (the report was released in September). Numerous roundtables have also been convened across the nation to discuss increasing diversity, and it is a critical area of focus for the NACD Directorship 2020 initiative.

The current complex and fast-paced business environment necessitates a board with the skill sets and experiences to guide its company in meeting strategic objectives. In analyzing the 2012 list of honorees, several data points stand out:

36: Percentage of honorees with MBAs. Fifteen percent have master’s degrees, 13 percent have PhDs.

Harvard University: Most frequently attended school, for both undergraduate and graduate degrees. For undergraduate degrees, honorees also attended Princeton University, Cornell University, Georgia Institute of Technology, and Tufts University. The top-five list of graduate schools is rounded out with the Wharton School of Business at University of Pennsylvania, Stanford University, University of Chicago, and Columbia University.

232: Number of public companies represented.

43: Age of the youngest NACD Directorship 100 honoree. The average age is 64.

8.2: In years, the average board tenure held by honorees.