Any discussion of compensation must go hand-in-hand with a review of performance for it to be reasonable. Most respondents agree that boards are effective at protecting shareholder interests. The only group in which a majority did not support this statement is the C-suite, where 52 percent disagree that boards protect shareholder interests.
Looking at shareholder protection from a different view, the survey asked participants whether they agreed with the following statement: “Board directors are currently focused on providing oversight of risks that have the greatest impact to shareholder value.” A significant majority of every segment responded in the affirmative, suggesting that most people believe boards are actively engaged in risk analysis and mitigation.
Identifying risk is vital if companies are going to navigate the winding path through the fragile financial recovery. Last year’s survey participants identified ethical lapses, a lack of risk information and management over-confidence as having most strongly influenced the economic crisis. In addition, they pointed to bankers, regulators and politicians as being most responsible for the crisis. In something of a continuation, bankers and politicians were listed by most groups as having the greatest impact on the recovery. While not at the top of anyone’s list, CEOs also featured strongly.
Splitting Leadership Roles
One of the hottest ongoing debates in the field of corporate governance is the separation of the CEO and board chairman positions. The conversation about the ideal leadership structure for U.S. companies is highly charged, which is why the responses to this question are so striking. Every group in the NACD Directorship/Deloitte survey overwhelmingly supported the separation of the two most senior leadership functions. Academics and journalists were the strongest supporters of separation, but 88 percent of C-suite respondents also said that they support the move. The group with the lowest support, at 67 percent, was directors.
Several years of debate, a slow progression toward separation and wider acceptance of the concept could be reasons to support the split. CEOs are realizing that governance and board management are becoming full-time responsibilities and many may prefer to focus on more business-centric issues. There remain, however, strong business and functional arguments for keeping the roles combined.
The Road Ahead
Responsibility for the financial crisis can be fairly laid at the feet of a wide range of individuals and organizations, and it is clear that many of those same organizations are going to be instrumental in the ongoing recovery.
What Society Thinks? shows that confusion remains about the roles performed by most of the key players. What is clear is that directors are working hard to understand the new business environment and gain the skills to ensure management is able to correctly identify and mitigate risks.
Jack Lederer, principal of the human resources consulting firm, Curcio Webb, says, “The results underscore what many of us who work with boards already know: the general public does not have much of an understanding of what directors do. They are given full responsibility for oversight of a company, even though they are part-time. Main Street needs to be better educated that the board’s role is to evaluate the company’s performance, set pay for the CEO and provide financial and risk oversight on behalf of shareholders to whom they are accountable.”
Accountability and transparency have been catchwords of the recent governance reforms, but these principles need to be applied to all market participants. Openness at the board level will improve relations with investors and enhance functioning of the board.
Investors and the wider public also have a responsibility to better educate themselves about the real role played by directors and their relationship with corporate management. Shareholders should understand their divergent needs and work with companies to forego a short-term yield in preference of a more sustainable and less risky approach. Some may say that much of the risk undertaken by management in the past was done in response to pressure from investors demanding unrealistic, short-term profits.
The media and academics also have an important part to play. As was seen in last year’s survey, academic faculty were among the most negative toward boards and management. While their opinions have become more positive this year, the impact was seen by the fact that students were the most consistently negative group this year.
Risks faced by directors will continue to increase along with regulatory and plaintiff bar activity. But there are some solutions. Focusing on transparency and forging a closer relationship with shareholders, establishing and evolving leading practices in board and committee operations, and evaluating board composition to ensure the correct skill sets are all areas to continue to improve upon.
Many of these changes will be fruitless without efficient communication with shareholders, regulators and the broader community. Compensation will continue to be a flashpoint, as will CEO succession and board renewal. Understanding the attitudes and perceptions of investors can help when crafting disclosures and leading the conversation to achieve a positive result.
As used in this article, Deloitte refers to Deloitte LLP, Deloitte and Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP and Deloitte Financial Advisory Services LLP.