Friday April 18, 2014

2013 Corporate Governance Insights

Best practices in corporate governance—as we have stated before—is not a one size fits all.  What works for one company might not be the solution for another company.  In order to be considered a best in class board, the board should strive to address and have actionable plans for top-of-mind issues and those that are specific to their own situation. A best-in-class board makes sure that what is top of mind is addressed both in short-term and long-term strategic decisions. Here’s a cheat sheet.

The New Year is upon us and it is important to start thinking about the corporate governance issues that will impact decisions this year.  Many issues are not new but continue to be top of mind. Others may have moved down in importance over the last couple of years but are now surfacing as larger concerns. It is important for all companies to take a look back at issues they have faced in the past and try to anticipate what might come to light in the not so distant future.  We are also in a time of hyper-disclosure where every decision, vote and consideration by a board of directors needs to be documented and have the credibility to stand up to shareholder pushback.

Theodore L. Dysart

Theodore L. Dysart

The board of directors of every company has basic responsibilities that should all be a top priority. In reality there is always a prioritization process and some issues inevitably do not get the attention they should except in a crisis. The bevy of concerns include working with management on long-term business strategies, CEO succession planning, audit and compliance oversight, risk assessment and management,  and crisis management to name a few.  Boards have to balance the long-term goals and needs of the company with expected short-term gains and the expectations of the various stakeholders.  Responses and reactions need to be measured, constructive, and timely in order to create a sense of confidence between the board and shareholders.

Below are some issues that will be on the minds of board members in 2013:

Shareholder Activism: The number of campaigns aimed at obtaining board representation or forcing short-term “value-maximizing” actions has significantly increased.  According to a recent overview in The Harvard Law School Forum on Corporate Governance, “the number of companies with a market capitalization of over $1 billion that have been targeted in 2012 through September has increased by 289 percent as compared to the same period in 2009.” Is your board prepared to deal with an activist situation?

Board Leadership: Should the CEO and Chairman roles be split?  This  remains a common issue raised by shareholders of companies that still have a combined Chairman CEO.  It has been noted for years that some shareholders and government officials believe there is a better leadership balance by having these two roles split.  If your company still has a combined role, is the split role part of the CEO succession planning discussion?

CEO Succession Planning: There is no debating that this is one of the most important roles a board has.  No matter how old a CEO is or how long they have been in the role, a succession plan should be developed to deal with the expected and unexpected departure of the CEO.  We have seen many instances in 2012 where companies should have and could have been more prepared for the disruption in the CEO role.

Board Succession, Expansion, Diversification: The board should always be thinking about its own composition and how to plan for the future.  Is the board prepared for future events, do they need to expand in order to be prepared or do they need to further diversify?  All of these issues should be discussed and planned each year.

Say on Pay: As you know, this issue is always top of mind and gets an intense public spotlight shined upon it. Shareholders are still seeing what they believe to be a misalignment between performance and compensation among top company executives. At the same time, we hear frustration from boards that investors and proxy advisors get peer groups wrong and don’t understand the intricacies of the plans they have implemented.  Is your board communicating what the plan and policy is on pay for performance or say on pay in general?

Best practices in corporate governance—as we have stated before—is not a one size fits all.  What works for one company might not be the solution for another company.  In order to be considered a best in class board, the board should strive to address and have actionable plans for all of the topics listed above as well as issues that are specific to their own situation. A best-in-class board makes sure that what is top of mind for directors is addressed both in short-term and long-term strategic decisions.

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