Though the Dodd-Frank financial reforms were signed into law a year ago, the corporate governance environment remains at a crossroads of uncertainty in many ways. While business leaders continue to adjust to the sweeping legislative reforms that have already been implemented, regulators are still drawing up the details on a host of issues and deciding how to interpret and implement many other pending regulations.
Many other proposed rules are being enacted without delay, including a host of reporting requirements aimed at director and board accountability. What’s more, shareholders continue to exert pressure by questioning the qualifications of individual directors when they are displeased with board performance or compensation decisions.
Evolving regulatory requirements, combined with recent market fluctuations and an increased scrutiny of the board, will put pressures on board leadership and structures, particularly on the board’s nominating and governance committee.
The strategic landscape is also adding complexity to a director’s job description. One of the board’s primary roles is to approve winning strategies and monitor their execution. Major shifts—from an expanding global marketplace to the rapid pace of technology and data creation—must be considered. And by no means should such oversight be considered an amateur’s venture. Today’s directors need to be well versed on the latest trends and developments that impact their specific industries.
That is why it is crucial to continually assess and optimize a board’s composition and ensure that boards have the right people at the right time—competent directors who possess the knowledge, experience and skill sets most closely aligned with the company’s strategies. Equally important is a board’s ability to establish and maintain a set of policies for board recruitment—and ongoing evaluation and education–that will steadfastly guide a corporation through a business climate that may be at times precarious.
This year’s NACD Board Leadership Conference will host a special Nominating and Governance Committee Forum to help directors identify the leading practices they need to navigate the new and evolving business environment. The forum will feature in-depth insights and analysis that will focus on enhancing the value directors can bring to their corporate tables and examine best practices for board and C-suite cooperation and productivity. Combining classroom sessions with confidential peer discussions, the session will also offer techniques that can be put to work immediately to identify and address strategic and operational gaps on a board.
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