A Well-Tailored Story of Shareholder Activism

Published by
ChicosFASTeamFlorida

From left: Shelley Broader, David Walker, Jan Fields, and Lauren Smith

Chico’s FAS, parent company of the Chico’s, White House Black Market, and Soma brands, made headlines in 2016 when an activist investor dropped its bid for board seats at the company. Chico’s FAS was one of the largest U.S. companies targeted in a 2016 proxy contest. The company’s victory was credited to a number of factors, including the new CEO’s clear vision and the board’s preemptive work on governance.

NACD’s Florida Chapter recently convened a program at the Chico’s FAS headquarters in Fort Myers, hearing insights from NACD Florida Chapter Board member and Chico’s FAS Chair David Walker; Jan Fields, chair of the company’s corporate governance and nominating committee; and Chief Executive Officer and President Shelley Broader.

To set the stage for the discussion, the group shared details about the company’s situation in 2015, prior to hearing from the activist:

  • In the spring of 2015, the company was coming off a weak earnings announcement. The stock was languishing.
  • Fields recognized the situation and began to put together a plan in her new role as head of the company’s corporate governance and nominating committee.
  • Walker became the chair of the Chico’s FAS board.
  • As the prior CEO retired, Broader was identified and slated to join in December of 2015.
  • She quickly assessed and provided the company with a four-pillar strategy that was underpinned by the philosophy that the customer is looking for an excellent experience.

Based on the actions the board took during this period, the panelists shared key steps that every company should consider—not just to fend off activists but, more importantly, to ensure the board and management are looking after all of the company’s shareholders:

  • Ask the question, “What makes us so appealing to an activist?” Think about operations, capital allocation, governance, etc.
  • Know your shareholders. The stock of Chico’s FAS is widely held, so having a strong and engaged investor relations group is a critical element in the company’s success.
  • Identify a team to help point out weaknesses and prepare for challenges. This team could include legal, public relations, proxy advisors, investment banks, etc.
  • Use the newly-formed team to help you look at the company like an activist shareholder might, and be willing to make tough decisions when performance lags. Look at your company against its peers and review what analysts are saying.
  • Utilize a skills and experience matrix to ensure the board has the talent it needs to provide oversight to the company. To avoid directors rating themselves as expert in all areas of the skills matrix, ask each director to rate his or her top three areas of strength. Consider term and age limits. Recruit “rock stars” when you need new board members and make sure they are filling any gaps identified in your matrix.

When the activist challenge arose, the Chico’s FAS board agreed on the key members who would focus on the issue, and management did the same thing, ensuring that all but a small group at the company would continue to devote themselves entirely to advancing the company’s four-pillar strategy and running the day-to-day business during the proxy fight.

For those tasked with meeting personally with an activist, Broader repeatedly stressed the need to actively listen to the activist.  Be sure to understand the activist’s point of view without reacting or prejudging any ideas or suggestions.

Though settling with an activist can sometimes be in the best interest of shareholders, leadership at Chico’s FAS determined that a fight to the proxy stage was warranted. A select group went on a roadshow, visiting significant investors, and creating tailored presentations based on the investor’s particular interests. The group also met with proxy advisory firms by phone.

The meetings proved highly valuable, with these firms ultimately siding with the company. In all of its meetings, the company articulated its strategic plan, introduced its slate of board candidates, and explained in detail why both were better options than those being proposed by the activist.

Lessons learned from Chico’s brush with an activist investor follow.

  • Shareholder relationships are like a vaccine. Maintain robust, ongoing engagement.
  • Be open to change after a vulnerability review. Taking action to address vulnerabilities can result in a stronger defense if one is needed.
  • Be willing to consider settlement but don’t settle if it is not in the company’s best interests.
  • Adopt corporate governance best practices. For example, director independence both by definition and in thinking is critical, and executive pay should be tied to performance. A board must continually hold itself accountable. (It is worth noting that Chico’s FAS is a full board member of NACD.)

What does the future hold for the company? Broader says that interesting times are ahead for retail in general, and innovation and design will be important drivers of her company’s success. While others are taking resources away from brick and mortar stores, Chico’s FAS recognizes the storefront as a key component of its omni-channel approach. No matter the path, the company’s board and management team have now learned a great deal about staying ahead of activists.

NACD Florida would like to thank the team at Chico’s FAS, for hosting the program and the panelists for sharing their experiences with attendees.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

Five Key Steps for Building a Climate-Competent Board

Published by
veenaramani

Veena Ramani

Last month, Exxon Mobil Corp. appointed a leading climate scientist to its board. Exxon’s move underscores the growing pressure shareholders are exerting on the issue of climate-competent boards.

Climate competency of boards—and broader corporate attention to escalating climate change risks—isn’t just a hot topic for one set of shareholders and one oil company. It is a key investor imperative for all sectors of the economy.

Look no further than the new guidelines from the G20’s Task Force on Climate-related Financial Disclosure to understand how profoundly expectations are shifting. The task force, chaired by Michael R. Bloomberg, was created by the Financial Stability Board at the request of the G20 ministers to help companies identify and disclose which climate risks have a financially relevant impact on their business. The task force’s very first recommendation focuses on the governance practices of companies for climate change, including deeper board engagement on the topic.

So what does it mean for boards to be climate competent? Climate competency means much more than just getting one person with expertise on a corporate board. So while we applaud the important step that Exxon has taken, it’s only a first step.

At the end of the day, a climate-competent board is one that can make thoughtful decisions on climate risks and opportunities that a company is facing. When trying to set up a climate-competent board, companies should think holistically about what needs to be done for boards to achieve competent, informed decision-making on this issue.

Based on a recent Ceres report I wrote on this topic, View from The Top: How Corporate Boards can Engage on Sustainability Performance, here are a few key steps boards should take.

1.) Put board systems in place for climate change oversight. Boards need to have a committee that is assigned formal responsibility to oversee climate change. By doing so, companies can ensure that boards oversee how climate risks are integrated into operations and decision-making on an ongoing basis. Numerous companies have dedicated board sustainability or environment committees that can be leveraged for this purpose. Companies like Citigroup, Ford, and PG&E have specifically identified climate change as a key focus area in the charters of their board public affairs or sustainability committees. Having the issue identified in such an explicit manner ensures it will be discussed systematically in committee meetings.

2.) Include directors with expertise in climate change on boards. When climate change is a material risk to a company, boards should recruit directors with expertise on that material issue. Such companies should also explicitly identify climate change expertise as a board qualification. This means making it a part of board skill matrices. It’s worth noting that two of the country’s largest pension funds, CalPERS and CalSTRS, recently amended their global governance guidelines to ask portfolio companies to recruit directors with climate change expertise.

3.) Train the full board on climate change. Boards and management should provide climate-related training opportunities to all board members, or, at a minimum, to relevant committee members. Organizations like The Co-operators have detailed systems in place to train its board on sustainability issues that are crucial to their businesses, including leveraging external experts for this purpose. Certain groups offer education curriculums where issues like climate and sustainability are addressed.

4.) Consult stakeholders and shareholders to inform directors’ understanding of climate change. Internal training sessions are key, but it’s just as important that directors reach out to external stakeholders, including investors, to share firsthand the company’s different approaches to climate change learn from voices outside of management. Investors in particular are critical groups to engage. Having this broader multi-stakeholder perspective can help directors make better-informed decisions. In 2016, shareholders filed a record 172 shareholder resolutions on climate change and sustainability. Given that directors are fiduciaries to investors, director-investor dialogues on climate trends will provide an important context to board discussions on this issue.

5.) Be more transparent. Finally, and perhaps most importantly, we need more transparency on climate-related board decisions. We need to know whether boards are prioritizing climate change as a material issue. Companies have to do a better job of disclosing how climate trends are affecting corporate strategies and risks that are relevant to investors.

Market and shareholder scrutiny of board engagement on climate issues is only going to grow sharper with time. While companies will be impacted differently by these risks, few industries are immune. Climate change affects 72 out of 79 industries and 93 percent of the capital markets, according to SASB’s Technical Bulletin on Climate Risk.

The key for board members now is to ensure that they’re well positioned to exercise informed oversight so that they can make thoughtful decisions on this escalating issue.


Veena Ramani is program director, Capital Market Systems, at Ceres.

Ten Practices for Improving the Risk Assessment Process

Published by
Jim DeLoach

Jim DeLoach

Effective risk assessment is fundamental to the management and oversight of risk. While the risk assessment process must be tailored to the individual needs of each organization, the hallmark of a successful risk assessment is one that helps directors and executive management identify emerging risks and face the future confidently. Rather than shuffle “known knowns” around on a risk map, a risk assessment should help decision makers understand what they don’t know.

To that end, 10 practices are summarized below that will help management and directors maximize the value derived from the risk assessment process.

1. Involve the appropriate people. Surveys we have conducted over the years indicate, without exception, that viewpoints and perspectives about risk often differ across a broad range of senior executives, operating units, and functional leaders. Therefore, it is important to involve appropriate stakeholders across the C-suite and vertically into the organization in the risk assessment process to ensure relevant points of view are heard.

2. Reduce the danger of groupthink. The risk assessment process should encourage an open, positive dialogue among key executives and stakeholders for identifying and evaluating opportunities and risks. As a safeguard against executives forming opinions or reaching conclusions without robust debate or considering dissenting views, management should ensure that all perspectives are heard from the right sources and considered in the process. Accordingly, anything an executive truly fears should be out in the open and any concerns about opportunities missed should be aired. The board should set the tone for this kind of open process.

3. Focus comprehensively on the distinctive dimensions of strategic risk. According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), there are three dimensions to strategic risk: the implications from the strategy; the possibility of strategy not aligning with an organization’s mission, vision and core values; and the risks to executing the strategy. All three dimensions need to be addressed if the company expects to avoid unintended consequences that could lead to lost opportunities or an unacceptable loss of enterprise value.

4. Understand the assumptions underlying the strategy. Boards and executives that are navigating the risk assessment process should consider how the organization’s strategy and risk appetite work in tandem, and how it will drive behavior across the organization in setting objectives, allocating resources, and making key decisions. Are risks evaluated in the context of their impact on the organization’s strategy and operations? Is adequate consideration given to macroeconomic issues? Is there a business intelligence process for monitoring the environment to ensure that critical assumptions remain valid? Is the board informed when assumptions are no longer valid? Are strategic assumptions stress-tested?

5. Consider the impact of disruptive change. The rapid pace of change in the global business environment is risky for entities of all types. Change alters risk profiles. The unique aspect of disruptive change is that it represents a choice: On which side of the change curve does an organization want to be? With the speed of change and constant advances in technology, rapid and innovative responses to new market opportunities and emerging risks can be a major source of competitive advantage. Conversely, failure to remain abreast or ahead of the change curve can place an organization in a position of becoming captive to events rather than charting its own course. The risk assessment process must be dynamic enough to account for significant change.

6. Consider appropriate criteria to assess “high impact, low likelihood” risks. When considering extreme risk scenarios, the operative question is: How resilient is our organization in the event one or more of these scenarios occurs? Velocity of the impact as the scenario evolves, persistence of the impact over time, and the entity’s response readiness are useful risk criteria to consider when answering this question.

7. Understand the sources of risk. One of the most difficult tasks in risk management is translating a risk assessment into actionable steps in the business plan. Risk owners often don’t know what to do to address significant risks based on risk assessments displayed on the traditional two-dimensional graph. Accordingly, it may make sense to source the root causes of the most significant risks to better understand them and design more effective risk responses. Therefore, the process should be designed to identify patterns that connect potential interrelated risk events—risks that are not necessarily mutually exclusive.

8. Inform the board of the results in a timely manner. Directors should agree with management’s determination of the organization’s significant risks and incorporate those risks into the board’s risk oversight process. In addition, significant risk issues warranting combined attention by executive management and the board should be escalated to directors’ attention in a timely manner. A process for identifying emerging risks should be in place to supplement the ongoing risk assessment process.

9. Integrate risk considerations into decision-making. As important as the risk assessment process is, it may be just as important to consider the impact of major decisions on the organization’s risk profile. If risk is understood to be the distribution of possible outcomes over a given time horizon due to changes in key underlying variables, it should be noted that major decisions either create new or different outcomes, some of which may be unintended, or alter previously considered outcomes. Significant decisions, therefore, should involve the board’s understanding of the organization’s appetite for risk and consider how those decisions impact the entity’s risk profile.

10. Never end with just a list. Following completion of a formal or informal risk assessment, management should designate the appropriate risk owners for newly identified risks so that appropriate responses and accountability structures can be designed for their execution. “Enterprise list management” is aimless, loses its novelty over time, and can lead to trouble if risks are identified and nothing is done to address them.

An effective risk assessment process lays the foundation for executives and directors to navigate a changing business environment with confidence. The above practices can assist organizations in defining their most important risks and enable the board to ensure that its risk oversight is appropriately focused.


Jim DeLoach is managing director of Protiviti.