The demographic and expertise-based makeup of public company boards has come under increasing scrutiny from investors as numerous studies continue to correlate elements of diversity with improved company performance.
The National Association of Corporate Directors’ Report of the NACD 2016 Blue Ribbon Commission on Building the Strategic-Asset Board emphasized the essential task of assembling and assessing a board best fit to tackle the challenges of the constantly-changing business environment. At its core, the successful strategic-asset board is a mix of directors with diverse backgrounds who are fit to the purpose of complex oversight. And the demand for diversity is not just about market-based performance—the evidence also shows that diverse boards engage in more robust debates, make decisions that are sounder than they would be otherwise, better understand their customers, and attract higher-performing employees.
For smaller public companies in the U.S., underperformance in board diversity is even more pronounced. In November 2016, Equilar released a report revealing that small public companies lag behind S&P 500 companies when it comes to board diversity. For example, 23.3 percent of Russell 3000 companies in 2016 had all-male boards versus 1.4 percent of S&P 500 boards.
But does this study tell the whole story? Gender diversity on boards understandably receives the most attention because it’s one of the easiest metrics to quantify. However, measuring progress with the broad brush stroke of S&P 500 (or even Russell 3000) gender statistics does a disservice to the full story of diversity on a company’s board. Diversity in the boardroom best serves a corporation when it’s addressed in a holistic manner, taking into account age, experience, race, and skill sets along with gender. In fact, when the U.S. Securities and Exchange Commission (SEC) adopted diversity disclosure rules in 2009, it allowed companies to provide their own definition of diversity.
At Nasdaq, we’ve taken a detailed look at the board composition of listed companies, including those too small to be included in much-publicized diversity studies. In doing so, we found promising signs of progress. For example, 14 Nasdaq companies have reached or exceeded gender parity in the boardroom versus five companies in the S&P 500. In 2016, 75 women were elected to a Nasdaq-listed company board for the first time. Many of these women came from outside the C-suite, recruited from non-corporate professional disciplines such as university administration, government, medicine, public education, and journalism.
We also discovered that many Nasdaq companies have compelling stories to tell with respect to board composition and their own diversity of age, gender, race, and skill sets. Unfortunately, their efforts go largely unnoticed for the simple reason that they aren’t sharing their story. Only a handful of companies highlight board composition in their proxies using charts and graphs to summarize their board profile metrics. Yet these metrics offer stakeholders valuable insights into the board’s ability to oversee and support management and its strategic plan.
At Nasdaq, we see ourselves not just as a public company, but also as a model for our nearly 3,000 listed issuers. One example of this is our 2016 Proxy Statement in which we enhanced board transparency through graphics and statistics on a variety of metrics. This data illustrates not only the gender diversity of our board, but also the diversity of skills and experience present. We believe this information is valuable for shareholders and the market and we will continue to share it.
As the head of the SEC, an agency focused on disclosure to investors, Chair Mary Jo White observed in a recent speech that “A growing number of company proxy statements have recently begun to voluntarily provide an analysis of data, accompanied by pie charts and bar graphs, to describe the state of the board’s gender, race and ethnic diversity composition, sometimes in addition to other categories… This more specific information is clearly more useful to investors.” In fact, we found a number of Nasdaq-listed companies (both small and large) that shared diversity metrics around board composition in their proxy statements in 2016. These companies include:
As companies continue to prepare for the upcoming proxy season, we encourage your board to consider simple report enhancements that increase the transparency around the diversity of boards, including disclosing not only a board member’s gender and age, but also their ethnicity, skills, and experience. Until such transparency of board composition metrics becomes the norm, the full story of corporate board diversity and the valuable insights it provides to investors will remain obscured.
Lisa Roberts is a vice president in Nasdaq’s Legal and Regulatory Group, where she co-leads the Listing Qualifications department and advises on governance matters for our issuer community. She also manages our Governance Clearinghouse website, which includes original articles on a variety of topics relevant to public companies, such as market structure, corporate sustainability, boardroom diversity, legislative advocacy, cybersecurity, and risk management. This site is available to all public companies and their advisors free of charge.
This communication and the content found by following any link herein are being provided to you by Nasdaq, Inc. for informational purposes only. The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular situation and nothing contained herein should be construed as legal advice.
Times sure have changed. Whether a company’s equity is owned by a few venture capitalists or a league of activist investors, investors today want to have their say about where the company is headed and who is leading it.
Perhaps the time has come for companies, both public and private, to consider better use of an underused and under-appreciated asset that many of them already have and others should acquire: the role of the investor relations (IR) professional. Integral to the board’s oversight of corporate asset allocation (i.e., dividend policy, investment in research and development, external growth through M&A and other measures to return value) is a current understanding of how the securities and capital markets work, characteristics and propensities of investor types, investor attitudes and concerns, and relative values of the enterprise.
Request Reports From Your IR Professional
It is commonplace today for the corporate IR professional to present quarterly market analysis reports to the C-suite and in particular the CEO and CFO, regarding relative market performance, changes in ownership, and current investor perceptions and concerns. In my opinion, such reports should find their way to the board of directors as well, both in formal, written form, and as in-person presentations, inviting questions and discussion—all in an effort to keep the board up to date regarding pertinent market activity and best prepared for contingencies.
In the current market environment, the IR professional requires special and multi-disciplined skill sets that can help a board. As spokesperson for the company and often the proxy for the CEO and CFO with investors, the IR professional must be thoroughly familiar and conversant with the business plan, financial structure and strategy, and the performance of the company. He or she must be aware of and sensitive to disclosure Regulation FD, securities laws, and other regulatory imperatives.
Intentionally Include IR Experience and Perspective on the Board
In addition, nominating committees should consider seeking an outside director who has IR experience in addition to other useful boardroom skills. Just as public companies are required to have a financial expert on the audit committee, perhaps boards should be urged to have a skilled investor relations professional among their ranks. While the same might be said of other core disciplines (cybersecurity, finance, human resources, law, marketing, technology, and so forth), the domain of IR knowledge seems worthy of particular consideration at this time of market turmoil and uncertainty. Having IR expertise on the board certainly would make the board smarter and better prepared to deal with myriad corporate and financial decisions within its purview.
The corporate IR professional could be an invaluable asset to the board, as he or she must be cognizant of the pulse of the investment community on specific issues, while bringing this critical perspective to bear on the board’s discussion and decision-making process. The corporate investor relations discipline has evolved significantly over the years out of necessity. No longer simply a stockholder relations functionary, the IR professional is the primary, and sometimes the only daily, interface with owners (as well as prospective owners and market influentials) of the enterprise. The IR professional thus has a keen sense of investor interests and concerns, their perceptions of relative value, and of their voting propensities.
Suggesting the addition of an IR skill set on the board is not to be taken lightly. Recognize that there are numerous skilled and experienced IR professionals available, all of whom, in addition to the aforementioned experiences, know how investors think and know all the hard questions and concerns regarding material corporate events, financial performance, prospects and policies—all in a constantly changing economy.
Robert D. Ferris is an investor relations and crisis counselor and commentator, with more than four decades of experience with both domestic and foreign issuers. A former chairman of National Investor Relations Institute’s Senior Roundtable, his ideas on C-suite communications strategies in challenging corporate situations have been widely published.
Shareholder engagement remains highly topical in boardrooms across North America. Issuers are recognizing the benefits of speaking directly with institutional shareholders on a broad range of topics beyond financial results, particularly in today’s environment of increasingly influential proxy advisors and the ever-present specter of activists.
The task of engaging with shareholders used to rest with investor relations and senior management. But recently, directors have become more involved in engagements, particularly on matters related to the board, the CEO and executive compensation.
To provide perspective on the director’s role in engaging with shareholders, Steve Chan and Michelle Tan of Hugessen Consulting spoke with Richard DeWolfe, chair of the board of Manulife Financial Corp., and Margaret Foran, chief governance officer of Prudential Financial and chair of the governance committee of Occidental Petroleum Corp.
The role of directors in shareholder engagement is evolving. Who should lead engagements with shareholders?
DeWolfe: I prefer to engage shareholders on behalf of the board without the presence of management. This allows investors to express any concerns that they may have to the board directly—not filtered by management, not couched in language that management may find concerning or offensive. I have maintained a practice of having the head of investor relations (IR) accompany me for the purpose of listening and taking notes.
Foran: I believe that, as a starting point, the majority of engagements should be led by management, whether the corporate secretary or IR. If you talk with your top investors, most will say that it is not absolutely necessary to have a director involved in an engagement. Obviously, there are certain topics that the board needs to be involved in, including executive compensation, CEO pay, and succession. It’s hard to talk to the CEO or someone who reports to the CEO about their own pay.
Should directors directly engage with shareholders? Why or why not?
DeWolfe: We can find 1001 excuses why directors shouldn’t speak with shareholders. Directors are there to represent shareholders’ interest, so it seems ridiculous that there wouldn’t be an obligation on the part of the board to communicate with shareholders. One of the dangers of ignoring shareholders is hastening the arrival of activists.
I encourage all board members to act as observers in any and all investor presentations, to listen and understand the concerns of shareholders. However, not all directors are the best communicators in the sense of being able to articulate the issues or answer questions from shareholders. There should be a few directors who are designated spokespersons for the board and responsible for leading these discussions. This is one of the skills boards should consider as they recruit directors.
Foran: I go back to what I initially said: a lot of this can and should be done by management. There are some instances and there are some subjects that are harder to [discuss] without a director. Also, some investors want to talk to board members, so I think that to categorically say “never” [directly engage] is probably wrong. I think boards have to keep an open mind. I also agree that if you’re not prepared, then it can be a real negative [experience]. Every one of the institutional investors I know has stories of directors who have just been horrible [to work with]. At the same time, a good director who shows oversight, independence, and knowledge of the issue, and is a good communicator is a real plus. A real negative is having a meeting where the director does not do a good job, and at that point, it would be better to not have a director present at [at a shareholder meeting].
Smaller shareholders tend to rely more heavily on the proxy advisors. How can directors effectively engage with this part of the shareholder base?
Foran: Engagement is not just meetings, be it with management or board members. You engage through your proxy statement, your website, and letters, and I think people underestimate the effect that these venues can have. At Prudential, we have a letter to our shareholders from our board as well as the lead director [in the proxy statement], in addition to a video from the lead director that we embed in the proxy statement on our website. That video has gotten an unbelievable number of hits. For some of the smaller shareholders that may not have time or resources to engage, receiving a letter with the video link [to say], “We can’t engage with everyone, we just wanted you to see this, and if you have any feedback, let us know” can be very powerful.
What are your thoughts on engaging with the proxy advisors?
DeWolfe: We undertook engagement with the proxy advisors this year for the first time and I thought it was really helpful. First of all, we found them very responsive. We wanted to address concerns that they had raised about our proxy, and it gave us an opportunity to better understand how their judgments are formed. It gives you an opportunity to discuss your point of view on those things. And I think it would be helpful if more companies did engage them so that [the proxy advisors] were not simply making these judgments, or publishing opinions, without an opportunity to discuss how that advice was formulated.
Any advice for boards who expect to receive a negative say-on-pay recommendation from a proxy advisor? Can engagement with shareholders and/or proxy advisors help mitigate this?
DeWolfe: What I would say is that you can’t formulate your pay for performance on the basis of what you think the proxy advisor is going to say. You have to design your compensation systems on the basis of the economics of your business and what you believe will fairly reward management while maintaining the best interest of the shareholders.
If you know that your approach is likely to result in a “no,” it makes sense to engage key shareholders in advance. My suggestion is that it’s easier to explain your position up front rather than falling back and being criticized and then having your explanation seem like an excuse.
Foran: Don’t underestimate your disclosure. Proxy advisors and shareholders read proxy statements very closely. It’s like a test. Even though you may fail the multiple choice [section], if you have a good story, then you are probably going to get extra credit on the essays.
It is much better to make the extra effort and do a great job of telling your story in the proxy, and perhaps reinforce that with a meeting with investors and proxy advisors, than have to use a meeting to try to fill in the gaps in your proxy. To me, a good offense is better than a good defense, so figure out what your investors and the proxy advisors look at and address [those items] in the proxy statement.
People like to hate the proxy advisors, but they are just doing their job. If you are really unique, you need to tell that unique story. If you are going to fail on the quantitative tests, then tell that really good story, and that story is a board story, one the board believes in. You need to light the candle instead of cursing the darkness.
Is shareholder engagement an effective tool in dealing with activist shareholders?
DeWolfe: Director-led shareholder engagement allows boards to get ahead of being the subject of an activist attack. If your board knows the expectations of shareholders in advance, you’re on far safer ground than if you decide to hide in the boardroom and ignore shareholder expectations.
How would you describe your general experience with shareholder engagement?
DeWolfe: Going back probably 10 years ago when this really became a question for the board, my view was that having engagement was better than not having any engagement. However, you can’t just say “Well, we are going to have an engagement program,” and then go off and do it. It needs to be carefully planned and orchestrated to ensure that you are talking to the right people, covering the right bases, keeping track of the subjects of interest and ultimately using that as a way of guiding management in terms of meeting shareholders’ expectations. At the end of the day, it’s really using the board to keep management apprised of shareholder expectations and vice versa so people aren’t surprised. The only surprise people like is a birthday present.
Foran: I started doing this years ago when I was at Pfizer, starting with a meeting with the lead director and chairs of the committees with our top 30 investors. We invited them to Pfizer for an afternoon event and cocktails. This was in 2007, and one law firm called it “governance run amuck”. Now look where we are today.
If you talk with the major institutional shareholders, they will tell you that a rapidly increasing number of their engagements involve board members. So you see engagement evolving. People shouldn’t go crazy, but there are certainly companies and instances where it makes a lot of sense.
This article also appears in Director Journal, the official publication of the Institute of Corporate Directors.