Directors are Optimistic about the Economy

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If anyone is in a strong position to assess the state of the economy, it is the men and women who serve in the nation’s boardrooms.  And they are offering some encouraging words.

The National Association of Corporate Directors (NACD) just released the most recent finding of its Board Confidence Index (BCI), a snapshot of the health of the economy as seen through the prism of corporate directors. The findings, covering the 4th quarter of 2010, show that U.S. corporate directors are confident about the strength of the economy as 2011 unfolds. The 64.4 confidence rating recorded in the latest BCI represents nearly a 14-point increase over the previous quarter in 2010. The findings come as other positive indicators emerge in the economy, including rising corporate profits and a rebounding stock market.

As the only economic measure of its kind, NACD’s BCI is a strong barometer of economic recovery because it is based on the opinions of 370 leading corporate directors, as well as the plans they say their organizations have for the future. Conducted in conjunction with leadership advisory and search firm Heidrick & Struggles and executive compensation consulting firm Pearl Meyer & Partners, the latest survey predicts economic growth over the long term, suggesting that the fear of a double-dip recession has lifted among corporate directors. For example, nearly three-fourths of the directors surveyed expect economic improvement a year from now.

The confidence levels were not same for every industry. In the information technology and utilities industries, directors say that their companies will do better than the overall economy over the next year. Comparatively, more directors in the healthcare sector expect their industry to do “moderately worse” in that same period. On the other hand, directors from the materials and telecommunications industries largely felt their industries would mirror the overall markets.

The survey also offered a somewhat promising outlook for the labor market: 42.3% of companies with revenue under $1 billion said they expect to do more hiring, and 34.4% of companies with revenue above $10 billion expect to add workers. Companies with revenue greater than $1B and less than $10B were less optimistic about the future state of their industries.

But in the short term, there is uncertainty. That may account for the muddled picture of the job market that emerged when the Labor Department recently reported that the economy added a mere 36,000 jobs in January, even as the unemployment rate dropped to 9 percent, the lowest rate since April 2009.

We’ll have to look for the next quarterly BCI—results expected in early May 2011— to see if that uncertainty still exists.

Award Season!

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OK, director-colleagues (and those who are similarly aligned), I am sure you are all following the current season of best-film and best-acting nominations and awards with great interest. Or, maybe not. In either case, it’s time to step away, and to take a brief detour from your desktop, or your laptop, or your iPad, or whatever device on which this appears.

AwardWe’re going to have our own little group of highly unofficial award nominations. Not “Best Director,” not “Best Committee,” not “Best Board.” Those—or their facsimiles—have already been created. Our job here is to identify the awards that we hope our own boards would win for their own work. And my job is just to start the ball rolling, or rather, to get you thinking.

Here are my categories and a few comments on potential nominees. I hope you’ll read them, and then add to the list. After all, if we’re going to turn this into a three-hour event worthy of a network telecast, we’re going to need awards across a whole barrelful of categories. I’ll start, but then you’ll need to chip in.

  1. Most Over-Worked Topic on Board Blogs: And the nominees are: Social Networking, Social Networking, and Social Networking! Oh, yes—and Social Network—259,000 entries on Google. Current Favorite: Hmm…let’s think.
  2. Women in the boardroomTopic That Most Boards Aren’t Sure How to Deal With: Nominees: Social Networking, Political Contributions, Number of Women on the Board. Current Favorite: All of the above. One that won’t go away for a while: Number of women on the board. Our colleagues around the world have begun mandating membership ratios.
  3. Least-Favorite Current Topic among Board Members: Nominees: Social Networking, Proxy Access, Say on Pay, CEO Compensation, Director Compensation. Current Favorite: All of the above.
  4. Most Fruitful “New” Board Practice: Nominees: Instituting and participating in a regularly scheduled, board-management offsite on corporate strategy; reallocating more board time to committee meetings, as opposed to full-board sessions; changing the location of meetings from isolated boardrooms or offsite rooms to onsite, “middle-of-the-action” company locations; changing where people sit at meetings; and putting in a speaking-time limitation or edict to reduce the effect of “air-hogs.” Current favorite: Unclear, but we sure know the LEAST favorite. People HATE changing where they sit. Alas.
  5. Wildest Idea to Improve Board-Member Focus: Nominees: Measurably increase mandatory director shareownership and retention requirements; Take the Undercover Boss reality show concept and apply it to directors by making them go “undercover” as employees; Administer a How Much Do You Know about Your Company?” quiz to members at the board meeting and openly grade it immediately thereafter; Conduct a “Zero-PowerPoint” board meeting; Have board members randomly selected to present on the topic: “What I Learned in the Past Month about Our Company.” Current Favorite: None. In fact, just the mention of any of these could easily induce a lively—if not awkward— conversation about social networking.

Other nominees?  Other categories?  The envelope, please. 

Over to you.

Social Media and Compliance – It’s All a Matter of XYZ

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Despite the SEC’s 2008 interpretive admonition that all communications made by or on behalf of a company—even those made by employees on social media, blogs, and shareholder forums—are subject to relevant provisions of federal securities laws, widespread corporate adoption of appropriate compliance procedures in that regard remains elusive at small and large public companies alike. In an eye-opening IR Web Report article published in April 2010, Dominic Jones set forth a litany of issues facing investor relations professionals with respect to social issues, arriving at the austere conclusion that at literally hundreds of public companies studied, investor relations professionals are exposing their companies to material compliance risks by failing to suitably monitor the use of social media.  One of the principal impediments to widespread boardroom assessment of these risks is that many directors simply don’t have substantive experience with social media, its use, misuse, and potential legal and regulatory consequences.

To illustrate the potential scope of issues of which directors should be aware in this regard, consider the following hypothetical:  XYZ is a public company that manufactures widgets.  XYZ has an investor relations manager, and several employees throughout the organization who regularly contribute to XYZ’s website, XYZ’s industry blog, XYZ’s Facebook and Twitter accounts, and occasionally to their own Facebook and Twitter accounts.  XYZ is planning on releasing its quarterly earnings press release at
1:00 pm ET (during market hours) on its website; the results are far in excess of consensus estimates.  At 12:50 pm, a third-party financial blog that follows XYZ posts a note to the financial blog’s Facebook page stating that its “channel checks weren’t impressive – going to be a tough quarter for XYZ.  That said, we love their new ABC 5000 widget which will be a HUGE winner for them.”  At 12:52 pm, Sally, from XYZ sales and marketing, replies on the financial blog’s Facebook page that she “like[s] this posting,” and puts a link to that Facebook page on XYZ’s industry blog.  At 12:54  pm, Jim, an XYZ engineer, responds to a pejorative Tweet about XYZ by a friend who works for XYZ’s largest competitor, by posting a link on his personal Twitter page to a summary of a third-party analyst note reiterating that XYZ is a “strong buy.”   At 12:56 pm, Larry, XYZ’s investor relations manager, updates XYZ’s official Facebook and Twitter pages to remind people that the earnings release is forthcoming, but erroneously instructs people to look for the release on the wire, instead of at XYZ’s website.  The earnings release is posted on XYZ’s website precisely at 1:00 pm ET, but isn’t picked up by the wire services until 1:03 pm.  During the three-minute gap, the stock rises 10 percent.  Later that afternoon, Margaret and some of her overworked, dissatisfied colleagues in XYZ’s factory intentionally and untruthfully “tweet” in their personal Twitter accounts that the ABC 5000 is being shipped with a critical design flaw. The next morning, one of the research analysts covering XYZ elects to downgrade the stock due to the prior day’s price increase, but since it’s not good news, Larry decides not to state anything about that on XYZ’s website, Facebook or Twitter accounts.

As fanciful as it might sound to directors who are less social media savvy, fact patterns like these are playing out routinely, and the panoply of issues created in the process can be vexing.  Though Sally mightn’t have been intentionally seeking to mislead investors, what does it mean to an XYZ investor when an XYZ employee says they “like” a financial blog posting which predicts, among other things, doom for XYZ’s impending quarter; what if an XYZ investor reasonably relied on that and sold her stock eight minutes before a 10-percent rally? Similarly, Jim mightn’t have intended to mislead his Twitter followers by directing them to a summary of a positive analyst report, but are there ramifications to XYZ for its  employee omitting regulatory disclaimers in connection with what can be construed to be investment advice? Larry didn’t intend to misguide investors by directing them away from XYZ’s website for the earnings release, but, having done so, the three-minute news lapse could well have been costly to certain investors given the stock movement. Lastly, the intentionally false and misleading Tweets by Margaret and her colleagues are, per the SEC’s interpretation referenced above, attributable to XYZ.  It’s also plausible that Larry’s purposeful omission of the analyst’s downgrade could garner some regulatory attention if XYZ’s website, Facebook and Twitter accounts are, by design, places where the preponderance of XYZ’s investors are induced to get their information about XYZ.

Whether attuned to social media or not, a practical way for directors to start evaluating these risks is by simply providing this hypothetical to a company’s communications managers in advance of the next board meeting, and asking appropriate personnel to make a presentation about how and to what extent there are procedures in place to effectively manage these and associated risks. One thing’s for certain: these are challenges that are going to multiply, not diminish.

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Adam J. Epstein, an NACD member, is a director of OCZ Technology Group, Inc., and is the founding principal of Third Creek Advisors, LLC (“TCA”), which acts as a special advisor to small-cap boards with respect to corporate finance and capital markets. Prior to founding TCA, Mr. Epstein was co-founder and principal of Enable Capital Management, LLC, an investment firm whose funds have invested directly in hundreds of small-cap companies.  Preceding several senior operating roles in retail and technology, Mr. Epstein began his career as an attorney at Brobeck, Phleger & Harrison.  Mr. Epstein has been featured on CNN, ABC News, and in The Wall Street Journal.  Mr. Epstein can be contacted by email at ae@thirdcreekadvisors.com.