What Worries Board Directors?

Here’s some welcome news: strategic initiatives, rather than compliance and regulation, top the list of board directors’ concerns. According to a survey conducted by The National Association of Corporate Directors (NACD), strategy topped the list for the first time, an indication that board members’ forced obsession with regulatory compliance is starting to wane.

“Strategy took a back seat over the past few years as boards grappled with volatile markets, shareholder pressure, and regulations, but directors recognize the need to focus on the longer-term as indicated by their top-three issues to be addressed,” says NACD president and CEO Ken Daly. And now the bad news: While strategic planning, corporate performance, and CEO succession are chief concerns among respondents, they are also the areas in which directors identify themselves as being least effective.

Another survey bolsters these findings. CEOs cite excellence in execution as their top concern out of 121 other possibilities on The Conference Board’s annual “CEO Challenge,” a survey of 769 global chief executives. “CEOs around the world are realizing that strong execution is a critical factor in driving profits and revenues,” says Jonathan Spector, president and CEO of The Conference Board. Sustained and steady top-line growth ranks second, followed by consistent execution of strategy by top management. Profit growth and finding qualified managerial talent rank fourth and fifth.

Too Aligned?

While most will agree that alignment of the concerns of boards and those of CEOs is a good sign, some say they are too aligned. A separate study of high-net-worth investors and financial advisers, released around the same time as the NACD survey, reports that a great majority of both groups believe boards still operate in the interests of management, rather than shareholders. The study, conducted by advisory firm FTI Consulting, shows that 61 percent of financial advisers and 64 percent of high-net-worth investors feel that boards are too beholden to management. Moreover, five years after the passage of Sarbanes-Oxley, which was intended to improve the accuracy and reliability of corporate disclosures in part by mandating director independence, these highly influential groups perceive SOX to have had a limited effect on improving corporate governance. Only 13 percent of financial advisers and 12 percent of wealthy investors feel that governance practices have improved “a great deal,” while 45 percent of advisers and 43 percent of investors think that post-SOX practices have improved “a moderate amount.” Investors and advisers also correlate effective governance with reputation and ascribe significant shareholder value to it.

The perception by investors and financial advisers that boards may be operating in the interest of management represents a significant enterprise risk, FTI notes in its summary of the results. To ignore the connection between the perception of a company’s corporate governance practices and its overall reputation, an FTI analyst concludes, “can be a serious omission.”

“Although boards are putting heavy emphasis on corporate strategy." --Kenneth Daly, NACD

Perhaps the problem is one of communication, since boards admit they don’t communicate well with shareholders. Only a third of the respondents think their boards communicate “very effectively” with shareholders, according to the NACD study. The data shows less than half of the directors surveyed describe their relationship with shareholders as “highly satisfactory.” “Although boards are putting heavy emphasis on corporate strategy,” Daly continued, “shareholders may not be aware of that emphasis.”

Directors’ opinions about their relationship with investors show little year-to-year change even though the number of proxy contests has increased. In 2007, there were 42 proxy contests among the companies analyzed in the proxy database, compared to 27 in 2006 and 17 in 2005. Despite this increase, board directors’ views of their strengths in investor relations remain largely unchanged. In 2007, nearly 52 percent describe their board’s relationship with long-term investors as satisfactory and nearly 44 percent report a satisfactory relationship with individual investors.

More Majority Voting
Most boards identify the problem with shareholder communications and are working to fix it. At least these are the findings of yet another survey, one by the Business Roundtable. Its Survey of Corporate Governance Practices found an increase in the number of independent directors serving on boards. The number of CEOs who report that their boards are at least 80 percent independent increased from 87 percent to 90 percent. It also finds a “significant rise” in the number of companies that have adopted majority voting for directors. The figure jumped from levels too low to report to 82 percent in just two years.