As summer nears, directors may have a brief respite from the frenzied proxy season following new financial regulations. However, the rest of the governance community kicks into gear, pushing to digest and summarize the past months. For example, this week on Fortune.com, a contributing post titled “Why corporate directors should thank Dodd and Frank,” examines proxy advisory firm recommendations and director reelections from this season. According to the article:
“The results so far just go to show that the consequences of reform legislation like the Dodd Frank bill can actually go in favor of corporate leaders rather than against them.”
The article praises the Dodd-Frank governance reforms, pinpointing the legislation as the impetus for a decrease in “no” recommendations from Institutional Shareholder Services (ISS). In 2011, ISS voted against 7% of Russell 3000 directors, down from 13% in 2010. Additionally, just seven directors failed to win majority support for reelection, a significant decrease from 107 in 2010.
While this decline is significant, the Dodd-Frank Act brought several additional provisions that the article did not address. As is often the case with legislative governance reforms, these provisions may bring unintended consequences that the boardroom is forced to accept. Although proxy access is still under judicial review, it has the potential to disrupt boardroom composition.
Establishing a boardroom with the “right” directors—those who bring the specific skill sets the board needs strategically and who also function effectively with constructive skepticism—requires a significant effort. This effort is a key responsibility of the board’s independent nominating/governance committee, which seeks to align board composition with the company’s long-term strategy. Directors nominated by shareholder groups, and not the nominating/governance committee may or may not have the experience needed.
The proposed Dodd-Frank whistleblower bounty program has also been subject to boardroom criticism. As NACD president and CEO Ken Daly testified to a House Financial Services Subcommittee last week, implementation of this program should be delayed for modifications. By providing financial incentives to whistleblowers for reporting directly to the Securities and Exchange Commission (SEC), the new bounty program could potentially harm the internal compliance channels required under Sarbanes-Oxley.
Despite boardroom apprehension leading into this year’s proxy season, the season has been relatively uneventful. In addition to the increased support for director reelection, Towers Watson reports that 90% of votes cast have supported companies’ say-on-pay proposals. However, these issues are just the tip of the iceberg, and it’s far too early to determine whether directors should be thankful for the Dodd-Frank legislation.
The governance community is waiting for the other shoe to drop. Amid proxy filings and annual meetings, directors are looking to the SEC for final rules on whistleblower provisions, proxy access, and compensation consultant disclosures. The following is a mid-proxy season recap, or “governance by numbers”:
The U.S. Congress finally came to an agreement on the federal budget. This included funding for the SEC, a topic that has been widely discussed.
$1.19 billion: SEC Budget for 2011 fiscal year
$74 million: Increase in budget over 2010 fiscal year
$1.3 billion: 2011 fiscal year allotment for SEC as requested by Dodd-Frank
For the first time, say-on-pay votes are currently being considered at public companies:
90.7%: Average approval from shareholders on say-on-pay votes, according to ISS
5: Number of companies that have failed to win majority support for say-on-pay votes
10%: Percentage of reviewed management proposals that have received a “no” recommendation from ISS and Glass Lewis
Also for the first time, say-on-frequency votes are up for discussion at public companies:
521: Number of companies recommending an annual vote
440: Number of companies recommending a triennial vote
87%: Percentage of shareholder that support an annual vote, according to Pearl Meyer & Partners
32%: Success rate at companies that recommended annual votes, according to ISS
The recent spotlight on Steve Jobs and Apple’s succession planning—or lack thereof—has created new urgency among investors and shareholders to demand that the companies in which they invest have a clear succession plan. Although boards of directors for numerous Fortune 500 companies see the advantage in succession planning, there are few who take the protocol seriously enough. Investors and observers have criticized Apple for lacking transparency in its long-term plans and have become uneasy about what Jobs’ second leave of absence will mean to the company without a succession plan in place. MarketBeat reported that:
Institutional Shareholder Services said all companies should have succession plans in place, and Apple shareholders would benefit by having a report on the company’s succession plans disclosed annually. “Such a report would enable shareholders to judge the board on its readiness and willingness to meet the demands of succession planning based on the circumstances at that time,” ISS said.
While succession planning is often put off by companies, it shouldn’t be put off.
A survey conducted by The Korn/Ferry Institute, a North Carolina business intelligence firm, reports that 98 percent of the 1,318 executives polled in 2010 agree that CEO succession planning is important in the overall corporate governance process, while only 35 percent are actually prepared for either the unexpected or planned departure of their company’s CEO.
The Securities and Exchange Commission in 2009 and in late 2010 issued rule changes that prevent companies from dodging the succession question. As witnessed by Apple’s example, board succession is more than just a human resources issue, as it was in the past. There is a risk management factor in teeing up the next company CEO. Shareholders understand the associated risk that exists when there is no plan in place. As companies become more accountable, succession planning has shifted from being part of “ordinary business,” to an important component of risk management.
In Apple’s case, the company could have avoided shareholder anxiety by making public its outline of criteria for selection and its development plan. It’s annual report time for the company, and shareholder questions related to Mr. Jobs’ successor will undoubtedly be top of mind.