NACD Insight and Analysis: Communicating for Long-Term Value

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This week, NACD bridged the gap between corporate directors and the investors they represent. In conjunction with Broadridge Financial Solutions, NACD hosted a Virtual Roundtable at the Newseum in Washington, DC, bringing together leaders from the investment community with directors to discuss the disclosures and communication strategies.

Hosted by NACD President and CEO Ken Daly, the Roundtable featured investment community representatives from T. Rowe Price, CalSTRS, and Vanguard Group, Inc. They engaged in dialogue with board members from Forrester Research, Broadridge Financial Solutions, Kimberly-Clark, Legg Mason, SmartPros Ltd., and Assure Holding Corporation. With the intent to inform directors on what investors are looking for in the proxy in the upcoming year, the Roundtable discussion covered compensation, committee reports, and director qualification disclosures.

The investment managers represented at the Roundtable do not take a “check-the-box” approach based on guidance from proxy advisory firms; instead, they choose to complete their own analysis. Notably, these active shareholders emphasized quality over quantity with respect to disclosures in the proxy statement. Simply an increase in the amount of disclosures from companies only makes it more difficult for investors to uncover the valuable information in the proxy. The participating investors further suggested companies should make an effort to provide quality disclosures regarding how executive compensation matches performance, and how incentives are linked to the business strategy, for example.

The participating investors also stressed the improvements that need to be made regarding the new director qualification disclosures resulting from the SEC Proxy Disclosure Enhancement rules. They felt many companies did not fully explain how each director’s skill sets contributed to the company’s business strategy.

Lastly, the investors offered advice to the boardroom on director succession. After directors have analyzed their board’s composition in light of the company’s strategy, they find a larger challenge in recruiting directors to fill the gaps in skill sets. As a solution, Anne Sheehan of CalSTRS suggested that directors should “think of their shareholders as stakeholders.” Long-term investors have the same interests as directors and might be able to offer potential candidates whose skills complement the company’s business strategy and build its long-term value.

Obama Urges Businesses to “Get in the Game”

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President Obama recently implored American business leaders to “get in the game” by spending trillions of dollars in corporate cash reserves on investments that would spur the economy. But he may have been preaching to the proverbial choir.

After years of stockpiling cash in the wake of the 2008 financial collapse, American businesses appear poised to do just what the President requested: invest and create jobs. Consider the latest NACD Board Confidence Index (BCI), in which a majority of directors forecast that their companies will expand their current workforce in 2011. This is a significant development in what has been, in many key respects, a lethargic economic recovery.

Even after the economy began emerging from the depths of the recession in 2009, American corporate leaders remained fearful of another downturn, prompting companies to safeguard their cash reserves, now estimated to be about $2 trillion. That, of course, has contributed to a mixed economic picture today: many companies, while profitable, are unwilling to make the kind of large-scale investments that would put millions of unemployed Americans back on the payroll.

But as the NACD BCI for Q4 2010 suggests, the widespread fear of a double-digit recession appears to be over, with many corporate directors saying that they see the prospect of continued economic growth over the next year.

Now is the time for directors to begin looking at what best practices their companies should be putting in place to help position them for growth in the year ahead—whether those policies focus on compensation, ethics, accountability or competence.

NACD Insight & Analysis: SEC Whistleblower Program

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In Thursday’s NACD Directors Daily, the Wall Street Journal reported on the actions large companies have taken in response to the SEC’s proposed whistleblower program. While the SEC has received hundreds of comment letters opposing various provisions of the proposed rules, the Journal reported on more than two dozen of the country’s largest companies that have asked the SEC to revise the proposed rules. One of the more contentious issues is the proposed “bounty” that would be rewarded to a whistleblower if the company receives a sanction of more than $1 million. That bounty could range between 10 and 30 percent of the penalty paid by the company.

The article covers both sides of the debate surrounding the new whistleblower program. Businesses fear that employees will bypass the internal compliance programs and whistleblowing hotlines mandated by Sarbanes-Oxley, and report directly to the SEC. On the other hand, attorneys defending whistleblowers argue that requiring the use of internal reporting channels prior to the SEC would discourage fraud reporters for fear of losing anonymity. The SEC has just weeks to issue final rules that balance the use of internal reporting systems with reporting fraud.

Since the SEC first proposed rules on the new program last fall, NACD has worked to amplify the voice of the director on this issue. In our comment letter, we voiced concerns similar to the reservations expressed by the companies in the Journal article. Our letter stressed that the SEC should work to enhance and strengthen the internal reporting channels already in place, rather than bypass those channels by going directly to the SEC with an issue. Encouraging internal reporting can help management address and solve issues in the early stages, which in many cases are best solved by internal human resources professionals.

In the past months, NACD has also met and discussed the possible consequences of the proposed whistleblower rules with key members of the regulatory and investor communities to discuss your concerns and suggestions as we heard them in our survey prior to submitting our comment letter. In addition, last week’s edition of NACD BoardVision features NACD’s Managing Director & CFO, Peter Gleason discussing the whistleblower provisions with PwC’s John Barry.