Amid reports on the Olympics and presidential race, the flagging economy has been firmly in the news this week. In the second quarter of 2012, U.S.economic growth slowed to an annual rate of 1.5 percent, even slower than its 2 percent growth in Q1 2012. This lack of growth suggests the economy is at risk of stalling, a sentiment echoed in NACD’s Board Confidence Index (BCI), which dropped over 8 points in the second quarter to 52.4. The BCI’s second lowest score since its inception in September 2011, this overall index denotes directors’ uncertain view of the state of the economy.
Since its introduction in 2010, NACD’s BCI has trended with peer indices—showing fluctuations and improvements, but generally not enough to support a fully recovered economy. The University of Michigan and Thomson Reuters’ measure of consumer sentiment for July followed suit, dropping to its lowest point since December 2011. However, after the Conference Board’s Consumer Confidence Index dropped to a five-month low in June, it regained several points in July, moving to 65.9 from 62.7. According to Richard Curtin, chief economist of the University of Michigan Consumer Sentiment Index, the continued decrease in confidence is the result of consumer expectations, specifically the belief that “current economic policies are incapable of solving the problems facing the economy.”
This lack of confidence in the government’s ability to address economic issues early is evident in the boardroom. When asked about the nation’s progress in the past three months, as well as expectations for the next three months, levels dropped below 50 points, indicating little confidence in the nation’s short-term prospects. Confidence in the economy’s progress over the last year took the largest hit—dropping from 64 in the first quarter to a slightly more than uncertain 56 in the second quarter. In its history, it is not unusual for director confidence in the short term to waver in the 50s. However, when long-term scores drop to this range, it is not uncommon for the overall index score to significantly drop.
Current fears of a stalled recovery are not going unnoticed, however. Following its two-day meeting this week, the Federal Reserve is prepared to launch another round of stimulus to bolster the economy. While the bank has not yet formally announced this intervention, if unemployment and growth continue on the current path, it is only a matter of time.
It is no secret that the Securities and Exchange Commission has been slow to fulfill the rules mandated by Dodd-Frank. As of July 1, the agency had missed over half of the deadlines—56 out of 95 required rulemakings—according to the Davis Polk Dodd-Frank Progress Report. Despite this general lack of news, in late June the SEC released final rules on matters related to the compensation committee to little fanfare.
The rules focus on independence for both compensation committees and their advisors. Companies will now be required to disclose the existence of compensation consultant conflicts of interest and how these conflicts are addressed. Additionally, each national listing exchange is now required to propose heightened standards for independence of compensation committee members and the evaluation of compensation advisor independence. While the style of these new listing standards will be similar to those already existing for the audit committee, the SEC has established that the standards must consider the following two factors:
The source of compensation of the director, including any consulting, advisory or other compensatory factors paid by the listed company to the director; and
Whether the director is affiliated with the listed company or any of its subsidiaries or their affiliates.
While these rules affect proxy statement disclosures, compensation committee composition and boardroom procedure, they have received little attention. There are many possible explanations for this, including the fact that both the New York Stock Exchange and NASDAQ already address compensation committee director independence to an extent. However, timing is also a factor. The required disclosures of compensation consultant conflicts of interest will be effective for the 2013 proxy season. With respect to the new standards on independence, NYSE and NASDAQ have until Sept. 25, 2012, to propose new guidelines, which the SEC does not have to approve until June 27, 2013.
At NACD’s Compensation Committee Chair Advisory Council meeting in June, SEC Chief Counsel and Associate Director of the Division of Corporate Finance Thomas Kim spoke to the delegation on the SEC’s current activity. In addition to the rules on compensation committee independence, the agency is currently in the process of drafting proposed rules on the required pay ratio disclosure, as well as the “clawback” of executive compensation provision. Similar to the recently released rules, the clawback rules must be proposed and finalized by the SEC, then adopted by the listing exchanges—therefore placing the rules on the horizon, but not in the near future.
At the Advisory Council meeting, a key theme of the discussion was the necessity for boards to create transparent and comprehensive compensation packages. To this end, it was announced that NACD will produce a guide that will help boards develop pay plans to effectively compensate executives and communication strategies that articulate how these plans create long-term shareholder value.
For more information about the guide and the Advisory Council meeting, click here.
Last Monday, directors opened their email inboxes to find a disappointing employment report in NACD Directors Daily. In March, the U.S. economy added 120,000 jobs, far below economists’ projection of 210,000. This marks the first month since December that job increases failed to meet the mark of 200,000. While the unemployment rate dropped from 8.3 percent to 8.2 percent, it is speculated that this was largely the result of more people choosing to stop actively searching for jobs. While slightly more positive, NACD’s Board Confidence Index (BCI) also shows slow growth in employment.
Surveying directors on their confidence in the first quarter of 2012, the overall BCI score rose nearly six points to 60.6. Although an improvement over its Q3 2011 low of 47.5, the BCI is yet to reach its peak—achieved in Q1 2011—of 64.9. This growth is achieved through a consistently improved outlook for the long-term future of the economy, as well as progress made in the past year. Directors tend to be less confident in short-term economic conditions.
The boardroom is not unfounded in its hesitancy to predict the state of the economy in the coming months. The JOBS Act was recently signed into law, the future of the health care reform legislation is under debate, and most companies are in the midst of proxy season. Not to mention the list of proposed and final rules expected to come from the Securities and Exchange Commission and Public Company Accounting Oversight Board.
Thirty-six percent of directors responded that their company’s hiring practices resulted in a net gain in the last quarter. This is a 5 percent increase over Q4 2011. However, the amount of directors who plan to expand their workforce in the next quarter declined by nearly 15 percent.
Produced in conjunction with Pearl Meyer & Partners, this quarter the BCI introduced two questions that will provide significant benchmarks in the coming months. When asked if their CEO is on track to meet incentive plan performance objectives for this fiscal year, 74 percent of directors said their CEO was on schedule. Twenty-two percent noted their CEO was behind schedule. Furthermore, 60 percent of directors are confident their CEO will meet these incentive plan goals.